While a majority of state and federal courts treat distribution agreements as contracts for the sale of goods that are subject to article 2 of the Uniform Commercial Code (UCC), Massachusetts courts have not yet heard a case that squarely addresses this legal question.[2] Recently, in an unpublished decision, Paper City Brewing Company v. La Resistance,[3] the Massachusetts Court of Appeals signaled the adoption of this majority rule: distribution agreements in which the sale of goods is the predominant factor fall within the scope of the UCC. It is crucial for parties and practitioners to know whether the UCC or the common law governs an agreement because each body of law provides different rights and remedies.[4] The Paper City court suggested that distribution alone does not constitute a service that is subject to the common law. According to this view, distribution is better understood as a transaction in goods that ordinarily falls within the scope of the UCC.
In 2003, Paper City, a local brewery, entered into an oral beer distribution contract with La Resistance, a beer wholesaler. Both parties were licensed by the Alcoholic Beverages Control Commission. This arrangement lasted until October 2009, when La Resistance ceased operations and permanently closed for business.[5] La Resistance owed Paper City nearly $487,000 in unpaid invoices, but Paper City did not demand payment at that time.[6] Five years later, in October 2014, Paper City sued its former business partner for the unpaid invoices.[7] The trial court dismissed this action as being filed beyond the UCC’s four-year statute of limitations.[8] (If the common law governed this contract, however, Paper City would not have been time barred because for contracts that involve services instead of the sale of goods a six-year statute of limitations would apply.)[9] On appeal, Paper City asked the court to determine that its distribution contract involved a substantial number of services that would subject the agreement to the common law rules.
What Test Applies?
Article 2 of the UCC “applies to transaction in [movable] goods,” and the common law applies to all other contracts, such as contracts for service.[10] Because many contracts involve both the sale of goods and the provision of services, courts employ the “predominant factor” test to determine whether the UCC or the common law controls the agreement.[11] Otherwise, the system would prove too “unwieldly” if provisions for services were controlled by the common law and provisions for the sale of goods were controlled by the UCC. While courts recognize that distribution agreements “are more than sales contracts,” they do not hesitate to apply the UCC to such agreements where “the predominant factor, thrust, or purpose of the contract” is for the sale of goods, and the rendition of service is “incidentally involved.”[12] Conversely, where the predominant factor is the rendition of service with the sale of goods incidentally involved, such as a franchise agreement, the common law is applied. Most courts simply apply this predominant factor test to distribution agreements to determine which set of rules apply to the agreement.[13]
Paper City argued for the adoption of the minority rule that distribution itself constitutes a service, and therefore falls under the common law. For example, in a Utah case, Beehive Brick Co. v. Robinson Brick Co., the court determined that distribution agreements are not for the sale of goods, but constitute a service relationship where the primary purpose is “the service of selling [another’s] products.”[14] Under this rule, courts need not weigh the “predominant factor test” because distribution is per se a service. Likewise, the Arizona Supreme Court determined in Apache Trailer Sales, Inc. v. Redman Industries, Inc. that “an exclusive sales agency agreement is more than a mere sales contract,” because “the nature of the arrangement is one of continuation rather than one of several separate buy and sell agreements.”[15] By treating distribution as a service, these states have determined that such contracts are fall outside the UCC.
At the end of the day, the wholesale of beer involves selling a product more than providing a service.
The Massachusetts Court of Appeals, without determining a general rule about distribution contracts, signaled the rejection of this minority rule by concluding that Paper City’s distribution agreement was nothing other than the sale of beer that clearly fell under the scope of the UCC.[16] By determining that this agreement constitute a sale of goods, the court implicitly rejected the rationale underlying Beehive and Apache Trailer because those cases concluded that distribution itself is a service. What does the holding in Paper City mean for parties and practitioners? The outcome of Paper City shows the importance of knowing which body of law applies to an agreement. Of course, not much has likely changed because the “predominant factor” test likely still applies to distribution contracts as it does to all contracts involving services and sales of goods. However, the holding in Paper City that this particular distribution agreement clearly constitutes a sale of goods demonstrates that the Massachusetts courts are likely to reject the argument that distribution by itself constitutes a service.
Lawson & Weitzen attorneys regularly represent individuals and businesses involved in the alcoholic beverages industry on licensing, compliance, and business issues. If we can help you, please be in touch.
[1] Joshua M. D. Segal is a partner at Lawson & Weitzen. Richard Driscoll, Boston University School of Law Class of 2020 served as a law clerk at Lawson & Weitzen in 2018 and 2019.
[2] See, e.g., Specialty Beverages, L.L.C. v. Pabst Brewing Co., 537 F.3d 1165, 1174-75 (10th Cir. 2008) (using “predominant factor” test to determine whether article 2 of the UCC applies to distribution contracts); Gridsmart Techs., Inc. v. Marlin Controls, Inc., 701 Fed. App’x 488, 490 (6th Cir. 2017) (holding UCC applies “because the Distribution Agreement is a contract for the sale of goods”). See also Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 290 n. 8 (1980) (“[C]ourts have applied the Uniform Commercial Code to distributorship agreements even though such agreements have concerned more than the sale of goods”).
[3] Paper City Brewing Co. v. La Resistance, 2019 Mass. App. LEXIS 188 (Mass. App. Ct. Mar. 15, 2019).
[4] Gossels v. Fleet Nat’l Bank, 543 Mass. 366, 370 (2009) (“Where a UCC provision specifically defines parties’ rights and remedies, it displaces the analogous common0law theories of liability”). See also Sarrouf Law, LLP v. First Republic Bank, 2018 Mass. Super. LEXIS 125, at *6-7 (Mass. Super. Ct. Aug. 2, 2018) (“[T]he UCC expressly displaces common law to the extent that its ‘particular provisions’ apply”).
[5] Paper City, 2019 Mass. App. LEXIS 188, at *5.
[6] Brief of Appellant, at 14-15, Paper City Brewing Co., 2019 Mass. App. LEXIS 188 (Mass. App. Ct. Mar. 15, 2019).
[7] Id.
[8] G.L. c. 106 § 2-725; accord U.C.C. § 2-725 (Am. Law. Inst. & Unif. Comm’n 1977).
[9] G.L. c. 260 § 2.
[10] G.L. c. 106 §2-102 (explaining application of UCC); Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 290 (1980) (explaining application of common law).
[11] Zapatha, 381 Mass. at 290.
[12] Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129, 134 (5th Cir. 1979); See Mattoon, 56 Mass. App. Ct. at 141.
[13] Specialty Beverages, L.L.C. v. Pabst Brewing Co., 537 F.3d 1165, 1174-75 (10th Cir. 2008); Watkins & Son Pet Supplies v. Iams Co., 254 F.3d 607, 612 (6th Cir. 2001); Amana Refrigeration, 594 F.2d at 134; Gridsmart Techs., Inc. v. Marlin Controls, Inc., 701 Fed. App’x 488, 490 (6th Cir. 2017).
[14] 780 P.2d 827, 832 (Utah Ct. App. 1989).
[15] 573 P.2d 904, 906 (Ariz. 1977).
[16] Paper City Brewing Co. v. La Resistance, 2019 Mass. App. LEXIS 125, at *5 (Mass. App. Ct. Mar. 15, 2019).
