Massachusetts Court Upholds Record $2.6M Fine against Beer Distributor

By on October 23, 2017
Posted In Trade Practices

Earlier this month, a Massachusetts state trial court judge issued a decision in the matter of Craft Beer Guild LLC d/b/a Craft Brewers Guild v. Alcoholic Beverages Control Commission. The court upheld a decision by the Alcoholic Beverages Control Commission (ABCC) finding violations of Massachusetts’ trade practice laws by a large beer distributor. The case originated in the Fall of 2014, when a craft brewer alleged on Twitter that a Boston retailer had removed the brewer’s brands from the tap because suppliers and distributors were paying retailers in exchange for those retailers carrying their brands. The ABCC launched an investigation that culminated in administrative charges against Craft Beer Guild LLC d/b/a Craft Brewers Guild (CBG) for violations of Massachusetts’ anti-price discrimination statute (Mass. Gen. Laws ch. 138, § 25A(a)) (the Statute) and an ABCC regulation prohibiting inducements by licensees (204 Code Mass. Regs. § 2.08) (the Regulation).

After a hearing, the ABCC found that CBG violated the Statute and the Regulation based on its alleged implementation of schemes with multiple retailers and third-party management companies working on behalf of the retailers to provide payments in exchange for the retailers committing tap lines to CBG’s brands. The payments allegedly involved fictitious invoices issued by the third-party companies to CBG, as well as CBG’s payment of at least $120,000 to the retailers and/or third-party companies.

In lieu of a suspension, CBG paid a record-setting fine of more than $2.6 million to settle the violations. CBG then appealed the ABCC’s decision in March 2016. In June 2017, CBG filed a motion for judgment on the pleadings. The Massachusetts trial court held a hearing in September 2017, and then a few weeks later issued the order denying the motion, dismissing CBG’s complaint and affirming the ABCC’s decision against CBG.

CBG raised several arguments on appeal, each of which the court rejected.

  1. The ABCC’s finding of a violation of the Regulation was based on errors of law and lacked substantial evidence.

As an initial matter, the Regulation, which was promulgated under the Statute, prohibits a licensee from giving money or any other thing of substantial value to induce a person to influence another person to purchase, or refrain from purchasing, a brand of alcohol beverages. CBG argued that the Massachusetts Legislature withdrew statutory authority for the Regulation in 1970, when it repealed former subsection (b) of the Statute. This subsection had prohibited a supplier from granting a discount, rebate, free goods, allowance or other inducement, except for certain quantity discounts.

The court recognized that the 1970 repeal implicitly withdrew authority for a broad regulation generally prohibiting discounts by a licensee, but stated that the Regulation remains valid, as the Legislature did not intend to preclude the ABCC’s enforcement of the Statute’s anti-discrimination provision. Significantly, the court acknowledged that applying the Regulation to “prohibit discounts regardless of price discrimination” would improperly restate the repealed statutory provision and would exceed the ABCC’s authority. The court also found that the Regulation is currently effective, although its application is limited by the partial repeal of the Statute.

  1. The ABCC’s finding of a violation of the Statute was improper.

CBG argued that the ABCC did not find sufficient facts to establish a violation of the Statute’s anti-discrimination provision. Specifically, CBG argued that in order to violate the Statute, two sales at two different prices must occur at the same time. However, the court found that the sales need not be contemporaneous in order to give rise to a violation.

CBG also argued that its payments to third parties did not support a finding of a violation; Yet the court noted that at least one of the parties that CBG paid was a retailer, so CBG made at least one payment directly to a retailer. Moreover, the court opined, consideration given to a “closely-related third party” in exchange for acts by a retailer constitutes consideration to both parties.

Finally, CBG argued that the payment of rebates does not constitute price discrimination, as the repealed provision of the Statute expressly prohibited rebates (accordingly, the remaining provision of the Statute does not inherently include such a prohibition). In response to this argument, the court broadly construed the concept of price discrimination to include “all aspects of price, including the net price after rebate.”

  1. The ABCC’s exoneration of retailers while finding CBG liable was arbitrary and capricious.

With respect to the retailer that received a direct payment from CBG, the court stated, the ABCC did find a violation on the part of that retailer. With respect to the other retailers, the court found that because those retailers neither paid nor accepted monetary payment—which the regulation requires—they were not liable under the regulation. The court accordingly found that ABCC’s differential treatment of CBG and the retailers was not arbitrary and capricious.

  1. The ABCC committed procedural error in taking administrative notice of certain facts.

The ABCC took administrative notice of certain records in its files without providing notice to the parties or giving them an opportunity to contest the noticed facts, which a Massachusetts statute requires. Although the court acknowledged that the ABCC violated the statute, the court found that CBG cannot obtain relief without a showing of prejudice to its substantial rights, which the court found CBG failed to do.

  1. The 15-month suspension imposed on CBG was a Due Process violation and was arbitrary and capricious.

Citing the ABCC’s broad authority to determine remedies and enforcement and the court’s inability to interfere with this authority in most circumstances, the court found the penalty appropriate.

  1. CBG’s penalty should not have included gross receipts from its operations outside Massachusetts.

CBG challenged the method of calculating the payment it made to the ABCC in lieu of suspension, arguing that it should not have had to include gross receipts from operations outside Massachusetts. CBG apparently included its New Hampshire operations in the penalty calculation on the instruction of the ABCC’s general counsel. CBG did not seek the full ABCC’s view as to whether this calculation was proper. Because there was no final ABCC decision on this issue, the court declined to consider the issue due to lack of jurisdiction. However, the court suggested that a penalty calculation based on a licensee’s ability to pay, including taking into account its business in other jurisdictions, is “rationally related to imposing a sufficiently stiff sanction to deter misconduct.”

Whether CBG will appeal the court’s decision remains to be seen. For now, the decision serves as a strong affirmation of the ABCC’s authority to enforce trade practice restrictions (even by reviving long-dormant regulations to do so) and to impose substantial penalties on alleged violators of those restrictions. The decision also demonstrates the disparate treatment members of different tiers of the industry often receive in trade practice matters. Although the retailers here participated willingly in the “pay-to-play” scheme with CBG, the retailers predominately were let off the hook due to the wording of the applicable statutory and regulatory provisions, which shielded the retailers that received indirect benefits from CBG through third-party management companies.