SB 176-DISTRIBUTORSHIPS    CHAIRMAN RANDY PHILLIPS called the Senate Labor & Commerce Committee meeting to order at 1:37 p.m. and announced SB 176 to be up for consideration. MR. JOHN HAXBY, Waukeshaw Alaska Corporation, said his business is about 30 years old. They have been in the machinery industry all that time and have a number of relationships with manufacturers around the country. They support this bill, he said, "Because it levels the legal playing field between major manufacturers and small businesses in Alaska." MR. HAXBY explained: Some of the key salient points that are good for small businesses are that it keeps manufacturers from forcing unwanted or unordered inventory on the small businesses in Alaska. The second good point is that it allows for the orderly disposition of inventory in the event that the distributor agreement was somehow yanked or canceled. The other thing it allows for is in the event there is the death of a distributor or a distributor principal that there is an orderly and reasonable recovery of the inventory that might be left over as of the date the agreement is yanked. It becomes especially important when, in the case of a death, the IRS comes in to evaluate the value of a business and they evaluate it based upon the past performance of that business assigning a value in a corresponding tax amount. In the event that the distributor agreement is yanked, there may not be any value to the business in the future, however the tax obligation remains. MS. DEBORAH LUPER, Eagle River former small business owner, supported SB 176. She said: There are many reasons why I personally support this bill. One is that I spent approximately two years as a representative of a major small business organization, a national organization, and talked to hundreds of businesses over the course of those two years. Businesses in Alaska have unique challenges as it is, but when they are pitted against the megaforces, represented by manufacturers and wholesalers in the Lower 48, they have fairly shallow pockets in comparison to the deep pockets that these manufacturers have. They cannot afford, just by the nature of being a small business with limited staff and limited finances, to fight legal battles when the playing field is already so uneven. There are three areas of this bill that I think are excellent. One is preventing the manufacturer from using coercion to force a dealer or distributor to carry product or purchase product that they did not want and did not order. Secondly, it sets in place a mechanism where the inventory will be purchased back. In some cases that is in the hundreds of thousands of dollars. It sets in place a mechanism to purchase the inventory back if the distributor agreement is yanked and that can be done for any number of reasons including - in Alaska, a product has not been offered before, the manufacturer is up here looking for someone to distribute it. He finally gets someone to do so. That person, then, develops the market for it. Once that market is established, the wholesaler manufacturer has firmer ground to stand on and at that point, they may decide to go for someone larger or someone who has more offices around the state or something like that. So, they do have the right to yank the agreement, but in a case such as that, when inventory has been purchased to facilitate the agreement that was in existence before that date, this law would require that they purchase it back at the value that was established at the time the inventory was originally purchased. Finally, the portion that is most meaningful to me is the area where, if the dealer dies, that the heirs have some recourse, if the manufacturer or wholesaler declines to allow the heir to carry forward the agreement, which is perfectly within their rights. But in the case where a loved one dies and you're dealing already with the emotional loss, you also have to deal with a significant financial loss in terms of that business, not being able to do anything with that inventory. You might have hundreds of thousands of dollars worth of capital tied up in inventory. It's just simple human interest to set in place a mechanism where the manufacturer, if he declines to further the agreement with the heirs, buys the inventory back. Number 200 MR. RON YOUNG, President, Young's Gear, Inc., supported SB 176. He related: Over the last few years and one particular case about five years ago, as an example, we were a large CD axel supplier in the state. We were a dealership for a major manufacturer in the eastern seaboard. We built up a very large business for this company and the product became very popular and what happened, the company in the eastern seaboard basically went to large chain warehouse wholesale outlets, like Napa. The product got devalued and part of the behind the scenes agreements, which I will never see, was to squeeze out or eliminate the small local representatives. Consequently, they refused to do business short-term; they would not buy back any old stock. Virtually the old stock that I had on the shelf, which was current at the time, I should say, it became old stock, outdated nonsellable. I talked to an attorney, but there is no way to legally force them on the eastern seaboard to come to court for the amount of the money involved, well over $100,000 cash in reality. That is one of the reasons I came here to testify. I strongly believe there is a need for a law of this sort to be passed in the State of Alaska. MS. JANEECE HIGGINS, Alaska Rubber Supply, said: In 1995, we had a distributorship pulled. The corporation was a large corporation. They were given assurances by another company in Alaska that they would be able to triple the business. We were in the top 12 in the nation for three years in their distributorship for organizations. They pulled the distributorship with a 30 day notice, refused to buy back any inventory. We had close to $600,000 worth of inventory on the shelf. They went through our customers and notified them that we were no longer the authorized distributor and they would not get factory support from us and that they should be going with the new distributor. Therefore, we couldn't even sell the product to our customers. We lost a $600,000 customer right off the bat. The fall out from that was close to $2 million in sales. We counter sued and it has been through the Ninth Circuit. They have appealed every decision that has gone our way. We have won in every court battle; they have appealed every one of them. It has cost us over $1 million in legal fees. In hindsight, we probably should have settled, but the owner decided that he didn't have a lot to leave, but he had his word and he was going to go to the grave with it. So, here we are $1.2 million later in legal fees. We still have over $100,000 worth of inventory on the shelf that we have not been able to get rid of. We have other customers that have slowly taken the inventory at a reduced cost. This loss was quite significant to our company. This bill certainly would have been welcome five years ago and I urge you to pass it. MR. KURT WINKLER, Global Services, said he had been in business here for about 20 years. He supported SB 176. "I'd see the far away Alaskans get mistreated by the people in the Lower 48, especially the east coast. We are so far away from them and we're only Alaskans. I'd like to see the mistreatment stop…" MR. DON DUNNAVANT, Owner, Polar Supply Co., said he got his first business license in 1975 and employs 50 - 60 Alaskans currently. He said, "I have plenty of horror stories to tell." He testified on behalf of his employees who work hard on getting trained and bringing technology to Alaska. Their families are dependent on the success of their businesses. He supported this bill, because it would make life a lot less risky for them. MR. CHUCK VANORMER said his is a department manager for a large supply house in Anchorage. He has been in customer service product support in Alaska for about 28 years. He said: As an employee of companies that have had distributorships cancelled, I have been forced to lay off other employees due to loss of business as well as pick up a lot of dead stock inventory as has been alluded to. It suddenly becomes wasted shelf space and is still taxed under the inventory tax system, but is basically worthless. It eventually ends up in a scrap pile. Additionally, most of the products I handle are an engineered product and when there is a change in distributorship, sometimes you can no longer support the products you have sold and you're forced to go to your competition to purchase items to repair those things that you still have under your warranty control and do start ups and service to. There is a major concern of mine on rolling stock equipment. As more and more large firms move into the state of Alaska, especially oil yards, they bring in national agreements of distributorships of equipment from manufacturers that give them basically predatory price due to volume buying against the local Alaskan distributorships. MR. VANORMER said he knew many businessmen who had given up on developing a line because someone else came up from the Lower 48 as a national concern and now has that product available at a cheaper price. He thought this bill was of the utmost importance for the Alaskan distributor and it's going to become more important with the passage of the gas line. SENATOR LEMAN asked if the inventory system required him to pay tax on the original purchase price of the item and if that was true when the value became worthless. MR. VANORMER answered that unless you devalue the product immediately upon cancellation, you're stuck with it at the occurred value. He is not sure how it's depreciated, but you carry it for a couple of years in hopes that you can move it out as good stock or find a wholesaler who's willing to take it off your hands. MR. DUNNAVANT inserted that his bank finances him on the value of his inventory and if that value goes, they are less willing to finance him. So, it does not necessarily work to devalue the product. MR. ED SNIFFEN, Department of Law, said they didn't see too many problems with this bill, but there might be one potential conflict with the definition of distributor if it was intended to include auto manufacturers. CHAIRMAN PHILLIPS asked him to fax the recommendations to him. SENATOR LEMAN asked if he had any other significant comments about this legislation. MR. SNIFFEN replied that he had looked through it and it appears to be good legislation and he didn't see anything that would cause DOL any concern. SENATOR TORGERSON asked which would prevail: two willing parties that enter into a contract for a distributorship - that document or this piece of legislation. MR. SNIFFEN replied: That's a good question and that's why we have lawyers, I suppose. Contract rights between private individuals are hard to disrupt, but the state does have an interest in enacting legislation to further legitimate state interests. I would think if this law were in effect, it would have some authority over a private contract that was entered after the law was on the books that conflicted with this legislation, but I don't' know if we could enact something like this that would take retroactive effect. That might be a problem. There is also an issue that comes up sometimes dealing with some constitutional question about impairment of contracts. I could talk for an hour about what all that entails, but in this case I think that most of the problems that arise under an impairment of contract analysis are not present. SENATOR TORGERSON said he'd had several dealerships and franchises and he didn't have any choice. He signed a deal as it was laid out and it had all kinds of provisions on buying back stock and how to dissolve the contract. He was concerned if the manufacturer outside the state was not aware of this law and someone enters into a willing contract, what was the basis of this law. MR. SNIFFEN replied that the manufacturer is almost presumed to know the laws of the state that it's doing business in. "So, if they're not aware of our law, it's almost shame on them." If two people enter into a contract and the terms are inconsistent with this legislation, he thought it was a gamble on behalf of both parties. He thought in most cases, the statute would prevail. SENATOR TORGERSON asked if he thought this would be detrimental to getting distributorships up here. MR. SNIFFEN replied that he couldn't' answer that. Number 1100 MS. LUPER commented on page 5, number 3, under exceptions, specifically excludes motor vehicle distributors and dealerships and that should take care of the DOL's concerns. Regarding Senator Torgerson's concerns about whether manufacturers would be willing to enter into agreements with Alaskan business, she said, "Alaska is one of the few states that does not have a law that is similar to this. Businesses located in other states are doing fine under laws that are actually more stringent than this. In fact, some states have made some of these provisions rather than being civil, they have actually gone to criminal ramifications." SENATOR LEMAN asked her if she wanted to respond to what prevails, a contract or the statute. MS. LUPER said she wasn't qualified to comment on it. CHAIRMAN PHILLIPS noted that this bill was going to the Judiciary Committee where these questions would be addressed. MR. YOUNG commented that before a person goes into a distributorship with a large corporation, they have to sign hundreds of contracts saying that they are liable for attorneys fees, collection fees, on and on and on. He didn't see that there would be a difference where the large corporation is held liable for a change. CHAIRMAN PHILLIPS said he would hold the bill while he checks out some questions with the Department of Law.