Massachusetts’ Highest Court Upholds Record Fine Against Beer Distributor for Pay-To-Play Scheme But Overturns Fine for Bar that Accepted Kickbacks
Last week, the Massachusetts Supreme Judicial Court upheld a $2.6 million fine against beer wholesaler Craft Brewers Guild (a Sheehan family-owned company) for violating anti-price discrimination statutes and commercial bribery regulations. In the same decision, the Court overturned a fine lodged against a bar that received such kickback payments, holding that Massachusetts retailers do not violate commercial bribery regulations by accepting kickback payments.
Beginning in 2013, Craft Beer Guild, LLC d/b/a Craft Brewers Guild (CBG), a licensed wholesaler, implemented a “pay-to-play” scheme involving alcohol beverage suppliers, retailers, and various management and marketing companies associated with licensed retailers. CBG paid “rebates” to these third-party companies in exchange for their associated retailers agreeing to sell CBG products at their bars and restaurants. To hide these unlawful payments to retailers, the third-party companies billed CBG for various unperformed services such as “marketing support” and “promotional services.”
CBG did not offer these rebates to all retailers, and rebate amounts differed among the retailers involved. Rebel Restaurants, Inc. d/b/a Jerry Remy’s (Rebel), a licensed retailer, received a $20 rebate for each keg sold in exchange for carrying CBG-distributed brands. Rebel received the payments through its associated third-party company, Rebel Marketing. Rebel Marketing was not a licensed retailer.
In October 2014, the owner of a Massachusetts-based beer supplier posted to his Twitter account allegations of kickback payments by competing suppliers, sparking an investigation by Massachusetts’s Alcoholic Beverages Control Commission (ABCC) of CBG and various retailers. Following a hearing, ABCC determined that CBG’s rebate payments violated 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). In lieu of suspension, CBG agreed to pay a record-setting fine of more than $2.6 million. ABCC also found Rebel in violation of the regulation for receiving the rebate payments from CBG, and imposed an 18-day license suspension—with only three days to be served on condition Rebel commits no further violations of Massachusetts alcohol law or commission regulations. Both CBG and Rebel unsuccessfully sought judicial review of ABCC’s decision in a Massachusetts state trial court and then appealed to Massachusetts’ Supreme Judicial Court.
The Supreme Judicial Court affirmed the trial court’s judgment finding CBG violated the anti-price discrimination statute. The Court rejected three arguments by CBG that ABCC failed to put forth sufficient facts showing a violation of the statute:
The Court found that ABCC offered substantial evidence to show that the discriminatory rebates occurred during the same period, rejecting CBG’s argument that ABCC had to demonstrate “simultaneous sales of the same products at different prices.”
Although ABCC found no evidence that retail licensees—with the exception of Rebel—received the rebates paid to third-party companies, the Court noted that these companies had “the exact same or common group of corporate office holders and beneficial interest holders” as the licensed retailers, and the statute prohibited both direct and indirect price discrimination.
Lastly, the Court swiftly rejected CBG’s claim that it did not “discriminate in price” because it was only accused of giving rebates and “not changing the front-line price paid by retailers.” The court explained that “price” under the statute includes all discounts, rebates, or allowances.
ABCC found both CBG and Rebel in violation of the commercial bribery regulation for their participation in the commercial bribery scheme to induce retailers to supply CBG-distributed brands. The two argued that the regulation is no longer valid following the repeal of subsection (b) of the statute, which prohibited most discounts, rebates, free goods, allowances or other inducements.
The Court rejected the parties’ challenge to the Regulation’s validity, and held that the Regulation’s prohibition against commercial bribery falls “well within the overall purpose of [Massachusetts’] Liquor Control Act,” even after the repeal of subsection (b). The Court noted that ABCC promulgated the Regulation in 1935, eleven years before the enactment of the now-repealed subsection (b) of the statute, pursuant to its authority to “make regulations not inconsistent” with the Liquor Control Act. Thus, the Regulation’s validity was not dependent on subsection (b)’s ban of discounts to all retailers. According to the Court, “the evil of commercial bribery strikes at the core of the Legislature’s purpose in enacting the Liquor Control Act.” The commercial bribery regulation therefore remains valid in Massachusetts despite the repeal of subsection (b).
The Court rejected both of CBG’s challenges to ABCC’s ruling that its conduct amounted to a violation of the regulation.
The Court rejected CBG’s argument that ABCC’s decision finding CBG in violation of the regulation due to its conduct towards several retailers was inconsistent with ABCC’s conclusion that it lacked evidence that any retailers—with the exception of Rebel—ultimately received such payments. The Court held that the regulation prohibits CBG from providing money to induce the purchase of particular alcohol beverages. Thus, once CBG provided money to third-party management and marketing companies in order to persuade retailers to purchase CBG-distributed beers, CBG was in violation of the regulation. CBG’s violation was not dependent on retailers’ receipt of this money.
Additionally, the Court rejected CBG’s due process argument based on ABCC taking administrative notice of its own internal documents after the hearing. The Court held that even if ABCC improperly relied upon these documents, CBG’s rights were not prejudiced because the facts in these documents were stipulated to by CBG in ABCC’s violation report.
The Supreme Judicial Court reversed ABCC’s ruling that Rebel violated the Regulation by merely accepting CBG’s kickback payments. ABCC relied on the language in the regulation providing that “no license . . . permit to be given money,” in concluding that retailers violate the commercial bribery regulation by accepting kickback payments.
The Court rejected ABCC’s interpretation of its own regulation because of the “absurd consequences” that result from ABCC’s approach. ABCC’s interpretation would require proof that a retailer intended to persuade itself to purchase a brand of alcohol beverages. The Court concluded that a more sensible reading of “permit to be given” in the regulation is that it prohibits both a licensee itself providing money as an inducement, and allowing or authorizing someone else to give money as an inducement. Despite the “generous” deference normally given administrative agencies interpreting their own regulations, the Court concluded that it was an error of law to apply the regulation against licensees for merely receiving inducements.
The decision confirms that the state’s commercial bribery regulation remains valid despite the repeal of a provision of Massachusetts’ Liquor Control Act, which banned most discounts, rebates and other inducements. The decision also provides clarity to Massachusetts retailers that they are not guilty of violating the commercial bribery regulations merely by accepting kickback payments from suppliers or wholesalers.