Update: This story was updated to clarify distribution agreement.
A Greensboro-based company told a North Carolina brewer he could get out of his distribution contract if he paid the distributor 16 times more than it cost to get in, an affidavit in a lawsuit filed by a group of North Carolina brewers says.
Dustin Canestorp of Beer Army Combat Brewery in Jones County entered into an agreement in which Freedom Beverage Co. paid $25,000 for the right to distribute Canestorp’s beer. Things were fine at first, but after a few months sales began to decline.
Canestorp appealed to FBC, which maintained a “focus list” of brands it wanted sales reps to push, the affidavit says.
“I was personally troubled by the notion of the ‘Focus List,’ because I didn’t understand how that could be fair to the brands that were not on the ‘Focus List.’”
Hoping to expand to neighboring states, Canestorp hired Global Beverage Group.
His distribution and sales in North Carolina, he says in the affidavit, then fell even further.
Canestorp, a Marine Corps and war veteran, first set up his beer operation as a nonprofit benefiting charities, including those that help veterans.
“I started the company with a $20,000 credit card,” the court document says.
Tensions grew between Canestorp and FBC, to the point the brewer, based on positive conversations with FBC early on, asked to be released from the contract.
That was possible, FBC said.
As long as Beer Army paid FBC $400,000.
The affidavit is part of a lawsuit filed by the brewers against the state of North Carolina seeking to end enforcement of the state’s distribution cap and franchise laws on breweries.
The complaint — filed last year in Wake County Superior Court by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. — says the distribution cap and franchise laws injure and threaten to impose additional damage on the brewers. They can produce no more than 25,000 barrels of beer each year without contracting with a distributor.
Canestorp’s concerns aren’t related to the distribution cap but instead on what he considers the one-sided relationship between distributors and brewers.
Superior Court Judge Allen Baddour on May 15 found for the plaintiffs in the lawsuit, allowing the case to proceed toward a trial. He denied a motion filed by the state saying the complaint should be dismissed with prejudice, and that the challenge, according to statute, must be heard by a three-judge panel of the Superior Court.
Discovery will continue, subpoenas will be issued, and members of the N.C. Beer and Wine Wholesalers will be deposed.
“Our initial discovery has already uncovered illegal activity,” says Drew Erteschik, a lawyer for the plaintiffs. “Now that we have the right to conduct full discovery, we expect to uncover even more evidence of illegal activity.
“The court’s decision allows the case to move forward, closer to a trial, where we are confident we will prevail.”
The complaint tackles two state laws — the distribution cap, “which punishes craft breweries for their own success by forcing them to hand over the rights to distribute their own beer to private distributors if they sell more than 25,000 barrels” — and the franchise law. That law, says the complaint, “forces craft breweries to enter into oppressive, one-sided contracts with distributors that literally last forever, and which require the breweries to give those distributors control of their product — including decisions about pricing.”
The plaintiffs’ brief also included a deposition by N.C. ABC Commission Administrator Robert Hamilton, as well as the Canestorp affidavit, which may offer some insight into Baddour’s thinking and the resultant decision.
Canestorp served in Afghanistan and Iraq and took part in Operation Iraqi Freedom, Operation Enduring Freedom, and Operation Swift Freedom.
“The catalyst for creating Beer Army ultimately arose from the experience of our small group of Marines in Iraq,” the affidavit says. “On Feb. 16, 2007, in Ramadi, Iraq, my fellow Marine and friend, Captain Todd Seibert, was in a vehicle that took a direct hit from an enemy mortar. Todd was killed. I had lost friends to combat before Todd, and I have lost friends to combat since Todd, but Todd’s loss had a profound impact on me.
“Shortly after Todd was killed, I promised myself that if and when I made it back to the United States, I would move on from the Marine Corps, be an ordinary citizen, and pursue the American Dream.”
Canestorp returned to the U.S. via Camp Lejeune in Jacksonville, where he met with fellow Marines to play cards.
To talk about what happened. About feelings of survivors’ guilt. About struggling to overcome PTSD.
Trying to acclimate.
A home brewer, Canestorp often brought beer to the meetings, which morphed into gatherings of the “Beer Army.” That evolved into the nonprofit, which, on April 21, 2013 — Patriots Day — evolved into the brewery.
The beer did well in Craven County, and Canestorp expanded to Wake, as well as Carteret, Pitt, and Onslow. It did well enough the company decided to hire a distributor, although it kept the right to self-distribute in Craven.
After 90 days, the court document says, sales declined. Canestorp asked why?
“We heard various excuses from FBC — for example, it was just the particular time of year, we needed to be packaged in bottles, etc. Notably, however, at this same time in Craven County, the one county in which Beer Army Combat Brewery continued to self-distribute, we were still extremely successful. It was a mystery to us that the one portion of our business that was self-distributing was so successful, while the remaining portions of our business that were using a third-party distributor were not.”
Beer Army hired Global, and, says the affidavit, “FBC’s distribution of Beer Army Combat Brewery’s beers in North Carolina fell even further. Apparently, there had been some ‘bad blood’ between the leadership at FBC and the leadership at Global. As FBC’s manager Greg Leone explained, FBC was not using its best efforts to distribute Beer Army Combat Brewery’s beers as punishment for our decision to engage Global. In May 2014, Mr. Leone at FBC sent me an email saying that FBC’s President, Tim Booras, was ‘very angry’ about Beer Army’s engagement of Global and, as a result, had directed that Beer Army’s brands be removed from the Focus List.
“By the following month, the divide between FBC and Beer Army Combat Brewery had deepened further. In June 2015, Mr. Booras sent me an email saying that he believed Beer Army ‘shot the first round when [it] hired Global.’ In that same email, Mr. Booras further stated that he did not need Beer Army’s beer for their portfolio, stating, ‘We don’t need your [excrement]. … We really don’t need your beer.’”
Beer Army wanted to terminate the contract. In North Carolina, it’s not that easy. As Canestorp explains, the contracted brewer must repurchase from the distributor self-distribution rights for, says Canestorp, “fair market value,” defined as “the highest dollar amount at which a seller would be willing to sell and a buyer willing to buy at the time the self-distribution rights revert back to the brewery[.]”
Erteschik and co-counsel Bob Orr argued in court the law amounts to economic protectionism and interferes with the plaintiffs’ constitutional right to earn a living, which the N.C. Supreme Court has called inalienable.
The rules enrich one party in lieu of another, they say.
“This is an economic protectionism scheme that enriches one private party at the expense of another,” Erteschik said.
“These laws not only violate the N.C. Constitution, but they are also wrong for North Carolina as a matter of policy. If our General Assembly were to vote with its conscience and embrace its conservative free-market ideals, it would change these laws proactively, rather than wait for the courts to strike them down.”
Canestorp met with Booras in a Jacksonville restaurant Sept. 18, 2014. Canestorp recorded the “roughly” 40-minute conversation, and it’s part of the court record.
“I questioned him about whether Beer Army Combat Brewery’s decreasing distribution sales were the result of decreasing consumer demand, or whether, instead, the decreasing sales were actually the result of FBC punishing us for personal reasons. As the recording reflects, the following exchange then occurred:
[ME]: “That, to me, seems punitive in nature, you know and that …”
[BOORAS]: “Oh, absolutely.”
[ME]: “We are being punished because . . .”
[BOORAS]: “(laughter) Absolutely.
[ME]: “But why are we being punished? You know, I mean …”
[BOORAS]: “(laughter) It was, it was definitely punitive. And you know it was just … I’m a, I’m um … ”
[ME]: “You know I have kids, man. …”
[BOORAS]: “I’m a mercurial guy, you know? My temperature goes hot and cold.”
The affidavit attributes the following statement to Booras: “This Franchise Law … a beer wholesaler wrote it, and it’s quite frankly biased.”
Canestorp turned in his brewers’ license April 30, 2015.
He continues with his philanthropic work and has opened a craft-beer-themed burger restaurant in New Bern. He hopes to again open a brewery.
“If we do,” he says in the affidavit, “we will never use a distributor so long as the State of North Carolina enforces its misguided beer distribution laws.”
“For years,” Erteschik said in an email, “distributors have been telling our General Assembly and the public that they don’t engage in certain behavior, and for years, craft brewers have known otherwise. Now, in this recording, we have a distributor who is caught on tape, cackling with laughter as he admits to inflicting ‘punitive’ measures (in his words) on a two-time veteran, family man, and small-business entrepreneur — a man who started his brewery to raise money for veterans charities and to honor the memory of his friend and fellow Marine who was killed in Iraq. It is truly disgusting and sad.
“If you’re a person who cares at all about veterans, small businesses, economic freedom, craft beer, or all of the above, this recording will be enough to make you sick. What is worse, our state’s unconstitutional laws actually encourage and reward this type of disgusting behavior.”
Booras failed to immediately respond to an email seeking comment.