Wholesaler Termination in Delaware
As the second-smallest state in the United States, Delaware’s size generally means that wholesalers sell products throughout the entire State. Given the small market, there are only about twenty (20) licensed wholesalers in the State of Delaware, many of which are also licensed in surrounding states. In the event that a supplier is not satisfied with a wholesaler, termination of that wholesaler’s services can occur by showing that there is “good cause.” See Del. Administrative Code Title 4, Rule 901, Section 7.0, formerly Del. Administrative Code 4-046.
Notably, no statute governs the termination of wholesalers in Delaware. The Delaware regulations do, however, cover the issue. The regulations do not distinguish between the different types of alcoholic beverages for purposes of termination of wholesalers. A supplier can terminate a contract by purchasing the distribution rights from the wholesaler with permission from the State. The amount owed to the wholesaler shall be the average annual gross profits based upon the past three years unless the contract specifies a higher amount. See Del. Administrative Code Title 4, Rule 901, Section 6.1.
Except where waived, the wholesaler shall have sixty days notice and may request a hearing. Aside from the to-be-expected definitions of good cause (i.e. bankruptcy), the Delaware regulations consider the failure to meet “standards of performance” as found in a written contract or defined by the regulation, to be grounds for good cause termination. The wholesaler may attempt to cure certain deficiencies within the sixty days. See Id. at Section 7.3.2.
Although written agreements are not required between wholesalers and suppliers in Delaware, it is always a prudent practice in Delaware to draft a distribution agreement. Investing time and expenses in a well drafted distribution agreement will help defray legal costs when the relationship breaks down. In one case, while Rule 901 did not apply to a supplier who surrendered its Delaware license, the oral agreement caused litigation beyond the Delaware Alcoholic Beverage Control Commissioner’s hearing. See World Class Wholesale, LLC v. Star Industries, Inc., Delaware Superior Court C.A. No. N17C-05-093 MMJ, Decided May 22, 2018.