State Supreme Court Upholds 3-Tier Separation and Limits on Franchise Protections

The case S&H Independent Premium Brands East, LLC v. Alcoholic Beverages Control Commission (SJC-13541) deals with the interpretation of Massachusetts’ alcohol distribution laws and whether protections afforded to in-state entities apply to out-of-state companies holding certain certifications.

S&H Independent Premium Brands East and West, both based outside Massachusetts, held certificates of compliance under Massachusetts General Laws Chapter 138, Section 18B. These certificates allowed them to sell alcohol to licensed wholesalers within the state. Their complaint arose when the Austrian company Stiegl terminated their distribution contract without prior notice, transferring those rights to another distributor, Global Beer Network.

S&H sought protection under Chapter 138, Section 25E, which generally prohibits suppliers from unfairly terminating their relationships with licensed wholesalers. However, the Alcoholic Beverages Control Commission (ABCC) dismissed their petition, ruling that the protections under Section 25E only apply to wholesalers holding a Massachusetts license under Section 18, which S&H did not possess. S&H, holding only Section 18B certificates, were found not to be entitled to these protections.

The Supreme Judicial Court of Massachusetts agreed with the ABCC’s interpretation, affirming that Section 25E protections do not extend to Section 18B certificate holders. Additionally, the court rejected S&H’s argument that this interpretation violated the dormant Commerce Clause of the U.S. Constitution, which governs states’ ability to regulate interstate commerce. The court found that the distinction between in-state licensed wholesalers and out-of-state certificate holders was lawful and did not discriminate against interstate commerce​.

The plaintiffs in S&H Independent Premium Brands East v. Alcoholic Beverages Control Commission went after the idea that their certificates of compliance should entitle them to protections under G.L. c. 138, § 25E, despite not being in-state licensed wholesalers. The Supreme Judicial Court, however, wasn’t convinced. But here’s the rub: the argument might have been better if they had pushed for the ability to actually obtain a wholesaler’s license under G.L. c. 138, § 18. This came up at oral argument and it didn’t get fleshed out. It seems like the justices saw that a more aggressive attack on Massachusetts’ licensing framework, pursued through the dormant Commerce Clause, could have been the better bet, but the plaintiffs potentially had no interest in actually becoming wholesalers in the state. A level playing field would allow certificate of compliance holders to obtain wholesaler licenses on par with in-state wholesalers who can obtain importer licenses and import from overseas. By focusing on their exclusion from the wholesaler licensing scheme, the plaintiffs could’ve made a stronger case that the state’s rules unfairly impede out-of-state entities’ ability to conduct business under the same terms as in-state players.

The franchise protections help distributors preserve the value of the goodwill and sales they develop in a regulatory system that mandates their assistance in creating a separation between suppliers and retailers. The argument in this case was that the system’s protections extend to certificate of compliance importers – those bringing the beverage in to another location, but for all intents, an importer. A task that wholesalers are allowed to accomplish in the state. It wasn’t a bad argument, but it was misplaced. The fact that in-state importers had some protections does not stem from their position as importers, it is because those importers are wholesalers that they have the protections. An in-state importer without a wholesaler license would not have those privileges. The thing that MA does wrong from a DCC perspective is in restricting out-of-state importers from qualifying for wholesaler licenses because they hold certificates of compliance and are performing a task (the importation) outside the state when if they just did it in the state, they would be allowed to hold a wholesaler license and obtain the protections they sought.