The ABCC’s Crackdown on “Pay to Play”: Is Sporadic Enforcement Better Than No Enforcement?

by Eric Hawkins

Viewpoint

Last February, the Massachusetts Alcoholic Beverages Control Commission (ABCC) presented an Everett-based beer distributor, Craft Brewers Guild, with a draconian choice: either face a lethal 90-day suspension of licensed activities, or pay an unprecedented $2.6 million fine, equal to half of projected profits for the time of suspension. This “choice” stemmed from admitted-to violations of laws forbidding bribery and price discrimination. In its Chapter 30A suit appealing the fine, however, the Craft Brewers Guild principally claims that (like its competitors) it simply did what was necessary—that “pay to play” is the industry norm, practiced by all or most, necessary for survival. And when viewed in context, this perhaps unusual defense forces the observer to take a second glance at how we regulate the industry and ask again: is this the best way?

First some background. The volcanic growth in the number of U.S. breweries is no secret. In 1978, American beer drinkers were served by an estimated 89 breweries, a post-Prohibition nadir. In line with the oft-dubbed “craft beer revolution,” last year saw an 18% increase over 2014’s record numbers, with the total number of breweries chiming in at 4225. Regardless of whatever paradox lies with choice, the market has permanently and fundamentally changed. And one consequence is simply space: no matter a bartender’s ingenuity, there are only so many actual tap lines in bars available to pour such unprecedented variety and creativity. Resultant competition for those lines is predictably fierce and growing fiercer.

Despite this altered market, these competing actors play on an old stage: an entrenched tapestry of regulation governs the alcohol market. In Massachusetts (like most states), the alcohol industry is artificially divided into three parts. Generally, (i) licensed manufacturers of alcoholic beverages (like a brewery) sell their goods to (ii) licensed distributors (like Craft Brewers Guild), who in turn sell to (iii) licensed retailers, such as a bar or liquor store—which then may serve the consumer. Vertical integration or substantial ownership between these three “tiers” is highly restricted; for the most part, they must operate independently. Notwithstanding its many critics, this tripartite demarcation at least intends to prevent organized and monopolistic crime, increase orderliness in what was once a disorderly market, and artificially inflate prices to bolster temperance.

Further, the Commonwealth extensively regulates the means and methods of business across the borders it erected. For example, if a brewer (one tier) wishes to stop selling beer to a particular distributor (another tier), it may not simply re-negotiate the contract. It must show cause to the satisfaction of the ABCC before doing so.

At issue in the Craft Brewers Guild story, however, is the regulatory decision to restrain the methods these tiers may use to compete.

The statute and regulation at play are G.L. ch. 138, §25A and 204 CMR 2.08. Section 25A forbids brewers and distributors from offering the same product to different purchasers on different terms. What is offered to one—be it price, credit or favor—must be offered to all. In turn, 2.08 forbids paying purchasers to carry a particular brand of alcohol. (For good measure, the federal Alcohol and Tobacco Tax and Trade Bureau forbids the same). Together, these rules intend to eliminate discrimination and prevent monopolization by a single major brand, in theory conserving fertile soil for up-starts and innovators while stifling disorderly conduct throughout the industry.

So on one hand, there’s unprecedented competition among a rapidly growing number of brands seeking increasingly scarce tap lines. On the other, a regulatory framework—codified in a different era—that artificially partitions alcohol distribution among three distinct entities and then attempts to prevent those entities from purchasing an advantage from one another. More players, scarcer resources, and tight restraints: this is context in which the ABCC’s fine of Craft Brewers Guild (and pending investigation into five bars) must be considered.

With that context in mind, this is what happened. Craft Brewers Guild, as part of a “pay to play” scheme, kicked back varying levels of cash and other favors to bars for putting its beers on tap (and thereby taking another distributor’s beer off). Although no brewers were cited in the decision, the ABCC speculated that Craft Brewers Guild would then accept (or demand) reimbursements from the benefited breweries. The legal issue is therefore clear: not all bars received the same kickbacks, and some received none at all, violating Section 25A’s prohibition on price discrimination; and tap space was purchased at the expense of other beer, violating 2.08’s prohibition on bribery. Media coverage reveals that the practice may be (perhaps necessarily) very common. But it was Craft Brewers Guild that was hit with the fine. And that sparks some thoughts.

First, there’sirony in a distributor of mostly craft beers running afoul a law meant in part to protect craft beers from larger market forces. And the irony is compounded by the fact the entire ABCC investigation grew from a seed planted by a series of angry tweets from the owner of the now-closed craft brewery Pretty Things, whose beers were carried by Craft Brewers Guild (but who presumably was not benefitting from the practice). At first blush his anger makes sense—the law should be followed, there’s a large variance in economic power even within the “craft” sector of the beer market, and consumer choice could still be largely inhibited by prices offered (or demanded) for tap lines that burden already-thin profit margins of emerging breweries. Yet, the fact that a craft brewer triggered an investigation into its own craft distributor indicates that a law meant in part to protect small companies from allegedly law-breaking “big guys” may in actuality be causing unintended consequences. One wonders whether emerging entities are most in need of market freedom to purchase space in a crowded field. Further, roles have been reversed: entities that typically resist what they consider byzantine restrictions are now essentially calling for stricter government enforcement. All of which is to say that it’s complicated: a simple pro/anti-regulation dichotomy is, as always, insufficient.

But fundamentally, when presented with a complicated background and a choice between a less-fettered market (with its risks) and rather ironic, sporadic and ineffectual enforcement of old laws with antiquated origins (by an agency that has regulated hesitantly in the past), one is hard-pressed to gleefully embrace the latter. The Suffolk Superior Court’s Chapter 30A review of the ABCC decision will, therefore, make for interesting reading. Arbitrary and capricious? Perhaps.

Eric Hawkins is an associate who works on a diverse range of matters within WilmerHale’s Litigation/Controversy Department. Prior to joining WilmerHale, Mr. Hawkins worked in the Administrative Law division of the Massachusetts Attorney General’s Office, where he researched, drafted and argued motions on behalf of various Massachusetts agencies facing administrative appeals and constitutional challenges. Throughout law school, Mr. Hawkins worked part time as a Brewery Ambassador for the Samuel Adams brewery in Boston.