State high court rules it doesn’t take two to tango – finds craft beer wholesaler paying money is an “of value” pay-to-play violation, but retailer accepting same money is not
This case involves two decisions of the Massachusetts Alcoholic Beverages Control Commission that resulted in penalties issued against Craft Beer Guild LLC (doing business as Craft Brewers Guild) a beer wholesaler and Rebel Restaurants, a retailer that purchased beer from Craft Beer Guild for sale to its bar and restaurant customers.
The Alcoholic Beverage Control Commission performed an investigation and held an evidentiary hearing and determined that Craft Beer Guild had paid monetary rebates in different amounts on similar craft beer purchases to certain licensed retailers. This practice violates a Massachusetts statute that prohibits wholesalers from discriminating directly or indirectly in price among retailers that purchase the same beverage. The Alcoholic Beverage Control Commission also concluded that both Craft Beer Guild and Rebel violated a commercial bribery statute prohibiting licensees from “giving” or “permitting to be given money or any other thing of substantial value in an effort to induce any person to persuade or influence any other person to purchase … any particular brand or kind of alcoholic beverages” – a classic “of value” regulation intended to forestall brewer/wholesaler control of the retail tier by penalizing pay-to-play practices. Massachusetts is interesting in that it hasn’t changed much from its stultifying 1947 permutation (read on to see how this comes back to bite the Massachusetts Alcoholic Beverages Control Commission) – here’s the full text:
No licensee shall give or permit to be given money or any other thing of substantial value in any effort to induce any person to persuade or influence any other person to purchase, or contract for the purchase of any particular brand or kind of alcoholic beverages, or to persuade or influence any person to refrain from purchasing, or contracting for the purchase of any particular brand or kind of alcoholic beverages.
Craft Beer Guild and Rebel each sought judicial review of the Commission’s decisions.
You’ll remember this case because it involves the 2.6 million dollar fine against the wholesaler by the Alcoholic Beverages Control Commission which was in fact an offer in compromise to settle the matter for the wholesaler in lieu of a 15-month the Commission awarded (reduced to 90 days provided 2 years’ good behavior). The charges against the wholesaler stem from rebate and kick-back practices that the Massachusetts Supreme Judicial Court found substantiated.
You can watch oral argument in the case here (link).
The general scheme involved the wholesaler paying money to third party companies run or owned by people directly affiliated with retailers for things like committed tap lines, or for purchase of kegs of beer. The wholesaler disguised the payments to the third party companies as things like “marketing support,” “printing menus,” and “promotional services.”
This system of payments amounted to price discrimination in violation of the Massachusetts statute against price discrimination because the wholesaler didn’t offer rebates to all retailers, and did not apply the same rebate amount to similarly situated retailers purchasing similar products.
The MA Supreme Court also found it this behavior violated Section 2.08 – that “of value” regulation above.
The retailer’s appeal of its sentence is noteworthy because while the Commission apparently investigated multiple retailers, it only charged one retailer with an of value violation where Rebel was the only retailer for which the Commission found evidence that Craft Beer Guild paid money that was actually received by a retailer. In fining the retailer, the Commission determined that Rebel violated Section 2.8 because Rebel permitted Craft to give it $20 per keg of craft beer that Rebel sold on its licensed premises. In making the determination against Rebel, the Commission proclaimed that the regulation applies to inducements received by retailers. For the violation, the Commission imposed a penalty of an 18-day suspension of Rebel’s license which was commuted to three days to be served and the remaining held in abeyance for 2 years’ good behavior.
In the challenge on appeal the wholesaler tried to argue that it hadn’t violated the laws but the court found that argument unavailing. Interestingly the retailer and the wholesaler challenged the legitimacy of the statute finding the the Commission’s interpretation was improper because the statute did not prohibit rebate programs and lawful inducements. However the Supreme Court looked beyond the argument to the facts of the case and found that while a rebate program may be allowed, the regulation’s prohibition of paying kickbacks – which are bribes – to bartenders or other third parties to get them to purchase alcohol was what the regulation prohibited and what happened here. So the court found the Commission’s argument the better one – that bribes and inducements outside of legitimate rebates can be prohibited by the regulation.
But that’s as to giving the inducement. What the court did next with receiving such an inducement entirely reversed the Commission’s application of the regulation to retailers receiving these monies.
With regard to Rebel, the statutory interpretation relied upon by the lower courts and the Commission found that the language prohibited a retailer to be given money through both active solicitation and inducement by a manufacturer/wholesaler licensee and prohibited the retailer’s passive acceptance of such an inducement. Rebel, the retailer, challenged this notion and contended that the regulation did not envision enforcement against the party receiving the inducement only those giving them. The Supreme Court agreed with Rebel and denied the Commission’s interpretation finding that the regulation did not prohibit the receipt of the inducement only the giving of it by the wholesaler. Thereby finding that the Commission could not enforce the regulation against Rebel solely because it received money as an inducement to purchase certain brands of alcoholic beverages sold by the wholesaler.
As further support for its interpretation the court also noted that the Commission could have easily drafted the regulation to say that it barred not just people giving inducements but also people receiving inducements, but failed to do so. Holding ultimately that “the commission’s failure expressly to prohibit licensees from receiving inducements is consistent with the legislative purpose of the Liquor Control Act, which sought to protect against the undue influence of powerful manufacturers of alcoholic beverages, fearing that their influence would allow them to dominate the wholesale sector and eventually disrupt the business of small retailers. … There is much in the legislative history of the statue to indicate that the Legislature wanted the Commission to exercise its authority to penalize manufacturers or large wholesalers that were using commercial bribery to control the purchasing behavior of … retailers – that is, licensed bars and restaurants; there is nothing to indicate that the Legislature wanted the commission to penalize … retailers that were receiving these commercial bribes.”
The court found that the Commission’s decision against the retailer was premised upon an error of law and reversed it.
The takeaway: Many states have removed this issue by specifically enacting statutes and regulations that expressly make both the giving and the receiving of monies improper. This is an interesting interpretation of a somewhat archaic and antiquated “of value” regulation could be used in similar circumstances in other states where the opportunity presents itself to challenge a commission’s interpretation of its own regulation or statute if suitable language allows for such an interpretation. Those looking to accomplish something in this vein may want to consult this case in further detail as it contains much analysis based on historical statutory interpretation that an advocate may find useful and looking for similar arguments in other jurisdictions.