MillerCoors and Pabst Brewing's bitter legal battle is headed to trial in November

  • MillerCoors currently brews all of Pabst Brewing's legacy beers, including Pabst Blue Ribbon.
  • The contract for that brewing agreement expires in 2020, with two options to renew.
  • The two are at odds over that renewal, and if MillerCoors does not renew it could devastate PBR's business.
Rochelle Brodin Photography | Getty Images
Cans of Pabst Blue Ribbon beer are show at the Burton & Channel Islands store in Los Angeles, May 21, 2015.

MillerCoors and Pabst Brewing are headed to court over a half-a-billion dollar lawsuit Pabst lodged against the Keystone beer maker.

The center of the dispute is a decades-old agreement under which MillerCoors brews all of Pabst's legacy beers, including Pabst Blue Ribbon. The agreement is set to expire in 2020, but it has two options to renew. MillerCoors, facing declining volume in the U.S., has said it may not have the capacity to continue that relationship.

The stakes for Pabst are high. Without that contract renewal, many of Pabst's beer brands will be orphaned. It is expensive to build a brewery and there are not many breweries across the U.S. built for the capacity a company as large as Pabst requires.

Pabst is accusing MillerCoors of breach of contract, breach of anti-competition laws, fraud and misrepresentation. MillerCoors contests those claims, arguing it has the right to determine whether it has the capacity to extend the contract.

In April, a Milwaukee court judge denied MillerCoors' motion for summary judgment, which could have prevented the suit from going to trial. The two are set to go to trial in November of this year.

MillerCoors, owned by Molson Coors, makes beers under labels like Coors, Miller, Blue Moon and Keystone. It last quarter reported a drop in its earnings before interest tax depreciation and amortization (EBITDA) of 12.2 percent and a decline in its volume of 3.8 percent.

Pabst, which also makes brands like Old Milwaukee, is privately held and its finances could not be immediately obtained.

Competition and potential brewery closure

MillerCoors has argued its contract with Pabst is "an arms length agreement which allows the parties to look for their own best interest," according to the judge's April ruling. It has sole discretion to determine whether it has the capacity to brew Pabst beer. Meantime, it argues, offering Pabst a solution to those capacity challenges is optional, not mandatory.

In the judge's April ruling, he refers to accusations that Pabst lobbed against MillerCoors for considering the potential boost to its own business that would come by ending its contract with Pabst.

"There is also evidence that MillerCoors may have also used information relating to the business effects on Pabst of terminating the Brewing Agreement, information which would be improper as it doesn't relate to a sufficient capacity determination," the judge wrote.

MillerCoors has pointed to the rise in competition from everything from wine, spirits to cannabis for its troubles. As part of efforts to regain its footing, it is pushing deeper into cheaper beer to reconnect with the younger generation. That push pits it further against Pabst, whose "PBR" cans are a mainstay in college parties and dive bars.

"We've introduced Two Hats into the economy space, which is a light-bodied lager with a little bit of flavor, which is specifically crafted to attract the 21- to 27-year old and get them to reconsider beers," CEO Gavin D.K. Hattersley recently told analysts.

The judge further raised questions around the potential closing of a MillerCoors brewery in Irwindale, California, after closing one in Eden, North Carolina in 2016. Including Irwindale, MillerCoors operates seven breweries in the U.S.

According to the documents, MillerCoors argued there is a chance that industry pressures may force it to close that brewery. Doing so, in turn, may put it under capacity needed to brew Pabst beers. Knowing there exists that possibility, "they are required to not extend [the contract]," MillerCoors has argued.

The judge, though, noted that the potential brewery closure is at odds with MillerCoors' optimism about turning its business around.

"MillerCoors' current CEO says that the company will be flat by [20]18 and achieving growth by [20]19," the judge wrote. "This raises a question as to whether MillerCoors will have to close the second brewery. There is currently no official decision by the board to close second brewery."

Regarding the potential brewery closure, a MillerCoors spokesperson told CNBC, "We routinely evaluate our brewery footprint, our capacity and our efficiency as a matter of smart business. We are not planning to close Irwindale or any other brewery at this time."

Pabst declined to comment.

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