Good Grape Wine Company

October 23 2007

Chalk One Up for the Little(er) Guy

If you ever want to see drama in the wine industry separate from a grape cluster’s vigorous fight to ripen during veraison, then troll the businesswire occasionally.  You’ll see the occasional scuffle that resembles a high school break-up between the quarterback and the homecoming queen. 

In this case at least, the winery is prettier, more popular and has more friends.

I excerpt this story only because it highlights the occasional absurdity of the three-tier system in delivering wine to our store shelves … and it also highlights how ridiculous some of our human foibles are in the workplace …

Ahem, from the businesswire, I note that Michael-David winery won a lawsuit yesterday against their distributor, Frank-Lin, in a California judgment that validates the rights of wineries.

The press release says in part:

In a verdict that will reverberate through the California wine industry, a jury confirmed on Friday October 12th that California vintners have the right to terminate open-ended agreements with wine distributors at any time upon reasonable notice and for any reason - without the requirement of paying a “termination” fee or any other form of compensation. After an intensely contested trial which spanned five weeks, it took a Stockton jury less than two hours to deliver a verdict resoundingly rejecting distributor Frank-Lin Distiller’s claim that it was entitled to share in the value of the growth of the Michael-David brands because Frank-Lin had represented the winery in California.

Standard issue “We won,” language and I want to be extra careful because I have not been privy to any of the proceedings of the case, just the press release issued by the victors, but it notes further that:

Upon being told by the winery that its distribution agreement was being terminated upon reasonable notice in 2006, Frank-Lin withheld payments in excess of $350,000 for wine purchased. Frank-Lin later sued Michael-David Winery for $8.9 million in damages and asserted that a standard California wine industry practice binding wineries existed.
The standard practice Frank-Lin alleged was that an oral distribution agreement with goals could be terminated only for cause, and then only after written warnings and an opportunity to cure were given. This, Frank-Lin asserted, supported its claims and justified the enormous damages sought.

Frank-Lin also claimed that an “oral contract” was made, after the relationship commenced in 2002 and before it ended in 2006, because Michael-David Winery complimented Frank-Lin personnel from time to time, such as “thanks for the great work” and “we look forward to working with you” – common messages of encouragement. The jury found for the winery on all counts and rejected all of Frank-Lin’s oral contract and “industry practice” claims.

So, how did this thing break down?  I’m speculating, but I don’t think I’m too far from the truth; it probably went a little something like this:

Michael-David Winery signs a contract with the distributor saying a bunch of legal stuff, but basically that either party can terminate the relationship at any time with written notice—probably 60 days.

Michael-David Winery, at the start of the year, has a yearly planning meeting with the distributor and they verbally discuss goals for the year—like, for example, the distributor will move 10,000 cases in a year.

This is a verbal conversation with many non-verbal cues exchanged between the winery and the distributor.  They are sizing each other up.  The distributor makes broad proclamations about how good their sales guys are and all of the accounts they sell to, while not completely committing to moving 10,000 cases.  Meanwhile the winery bluffs the distributor, mentally earmarking them for 10,000 cases, while saying that other markets are anticipating doing 13,000 cases.  It’s a shell game. But, frankly, the distributor is most worried about the cash they have tied up with the 1000 cases they initially bought. Why?  Easy! Because Bob, the distributor’s accountant, is a jerk who’s always twisting a knife on the distributor VP of Sales for making too large of upfront buys, and the VP is cursing the wine’s ugly label that scuffs easily — based on comments that their best customer made to a sales guy, who relayed them to the sales manager, who relayed them up to the VP, who is the only guy in the meeting from the distributor side.  The label scuff thing soon becomes “institutional fact” and the de facto knock against the brand at the distributor. But the distributor nods and smiles and says, “We’ll give it a shot.”

A couple of months later when sales velocity isn’t on a trajectory that comes near 10,000 cases, the winery National Sales Manager, who has a bonus closely tied to case load and can’t stomach any under-performance, because he doesn’t have a distributor in a different market doing significant upside to offset, gets antsy and compares the relationship to other distributors they have put in place in other markets, and they invoke their 60 day contract clause to move to another distributor who is willing to sign up for and commit to 8,000 cases, not the 10,000 originally intended, but better than the winery was going to get from the original distributor who was namby-pamby about actual annual performance, while underperforming in quarterly performance.  This should preserve the National Sales Manager bonus, especially if the 4th quarter goes as planned.

Then, the first distributor, the original guy, gets mad because he wasn’t made aware by the winery that the winery was mad in the first place, even though they are woefully behind the 10,000 case marker that the winery walked away from the January meeting thinking was a commitment and the distributor walked away from thinking, “If we’re lucky and the freaking labels don’t scuff.” And, even so, the distributor thinks, if the winery is mad, they should at least flag the situation so we can try and pacify them.

Despite these gyrations, the winery leaves Distributor A for Distributor B.

So, what does Distributor A do?  He sues the winery because he got the rug pulled out from underneath him on a marquee brand that he passively over-committed to and undersold, and the entire sales team subsequently missed their bonuses because they couldn’t backfill the revenue.  The VP had to use his savings instead of his bonus money to take his family on vacation, and he’s bitter at the winery for hosing him on 30% of his annual compensation by putting his numbers in the dumper.  He convinces the principals to sue.  They claim that they would have sold 18,000 cases a year for the winery if their contract hadn’t been broken and the distributor therefore should receive damages for the next 5 years worth of business plus some extra dough for damage of reputation in the marketplace. A lawyer decides that’s worth $8.9 million.

And, oh, by the way, the first distributor says, we had an oral contract because the winery gave some ‘atta boys’ to the sales guy that handles their premiere account, a retail customer who chronically grouses as a negotiation tactic (“Ah, the labels scuff on you and you can’t sell the damn stuff,” he says), but ended up taking 40 cases on sell-in, at which time the winery says to the distributor sales rep, “Mike, nice work.  I’m looking forward to our ride-along.”

Meanwhile, the winery is galled because they just want somebody who will sell their wine and now they have to deal with a lawsuit from dudes that were buying them rounds of golf just six months ago.

Got all that? 

What is the moral of the story? 

Being a grape, struggling for nutrients, attempting to survive and thrive against a blazing sun, poor soil and no rain, generally harsh elements, to ripen during veraison, might be a touch easier than actually selling the stuff. 

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