Law Offices of John P. Connell, P.C.: With newspaper and other media sources reporting last week on the investigation into the “pay-to-play” allegations surrounding the beer distribution business in Massachusetts, breweries, wholesalers and retail licensees within the Commonwealth should be familiar with some of the general legal issues and laws at play when regulators come to your establishment looking for documents or testimony on what you may or may not know about such allegations.
First and foremost, there is a specific Massachusetts regulation which prohibits “inducements” being made in connection with the sale of alcoholic beverages. 204 CMR 2.08 provides as follows:
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.
(Emphasis added.)
Also, when a supplier of alcoholic beverages or its wholesaler offers for sale or in fact sells a brand of alcoholic beverages at different prices to retailers during the same thirty day period, including offering prohibited “inducements” to some retailers but not others, such a practice is known as “price discrimination” which is prohibited by Massachusetts General Law c. 138, § 25A, which states:
A supplier or wholesaler shall not —
(a) Discriminate, directly or indirectly, in price, in discounts for time of payment or in discounts on quantity of merchandise sold, between one wholesaler and another wholesaler, or between one retailer and another retailer purchasing alcoholic beverages bearing the same brand or trade name and of like age and quality.
All price lists or price quotations made to a licensee by a wholesaler shall remain in effect for at least thirty days after the establishment of such price list or quotation. Any sale by a wholesaler of any alcoholic beverages at prices lower than the price reflected in such price list or quotation within such thirty day period shall constitute price discrimination under this section.
When enacting this “price discrimination” statute codified by G.L. c. 138, § 25A in 1946 as “emergency legislation,” the Massachusetts Legislature stated its strong purposes in the preamble to the legislation:
“Whereas, the practice of manufacturers and wholesalers in granting discounts, rebates, allowances, free goods and other inducements to favored licensees contributes to a disorderly distribution of alcoholic beverages; and
“Whereas, the deferred operation of this act would delay the proper regulation thereunder of the alcoholic beverage industry and be contrary to the interests of temperance, therefore this act is hereby declared to be an emergency law necessary for the immediate preservation of the public convenience.”
St. 1946, c. 304.
Findings that a supplier or a wholesaler provided “inducements” for some retailers, and not all retailers, or differing inducements through a “scheme” during the same thirty day time period in violation of 204 CMR 2.08 above could also be construed also as “price discrimination” pursuant to G.L. c. 138, § 25A. Courts have determined that even offering different credit terms to retailers constitute “price discrimination” if they are not offered to all retailers equally. Miller Brewing Company vs. ABCC, 56 Mass. App. Ct. 801 (2002).
While certain price discounts by wholesalers to retailers – such as a lower price paid for brands that are bought in greater quantities – are expressly permitted under the law pursuant to 204 CMR 6.04, such discounts or inducements are required to be offered equally across the board to all retailers during a calendar month. Otherwise, when such discounts are only offered to some retailers and not others, the wholesaler runs the risk of committing “price discrimination” in violation of G.L. c. 138§ 25A, which can have ramifications beyond just a licensee’s license being in jeopardy of suspension or revocation.
While violations of G.L. c. 138§ 25A can lead to suspension or revocation of the violator’s license pursuant to G.L. c. 138, §23, violation of G.L. c. 138, § 25A also authorizes for the imposition of criminal penalties including imprisonment pursuant to G.L. c. 138, § 2, 22 & 62. Most instances of “price discrimination” in Massachusetts over the years in the alcoholic beverages industry have been limited to the allegations and actions of single wholesalers or isolated circumstances not involving the industry as a whole, and therefore the reported decisions related to G.L. c. 138, § 25A do not indicate that criminal penalties have been handed out for such violations or that any regulatory body or court other than the ABCC has ever needed to be involved in such issues, outside of the occasional case wherein one competitor seeks to sue another competitor in court.
The latest media reports on the so-called “pay-to-play” controversy, however, state that there are alleged “price discrimination” practices occurring in the Massachusetts beer distribution business that are “wide spread” and “endemic,” particularly in Boston, and that such practices, according to some commentators, are putting the growing number of small craft brewers at a disadvantage in the market place against the more established and economically superior big brewing companies. Media reports also indicate that the ABCC, albeit with its limited resources, is conducting a broad investigation into the industry, subpoening documents and interviewing retailers, wholesalers and brewers alike.
Accordingly, in light of such reports, the existing case law that has adjudicated violations of G.L. c. 138, § 25A in the past may be only a partial road map to the law in this area, as the ABCC may not be the only regulatory body to be involved due to the broad based nature of the alleged practices, as the Massachusetts Attorney General and the United States Department of Justice routinely enter into investigations that catch their eye.
Indeed, allegations of “price discrimination” are serious allegations when they are viewed as potentially affecting an entire industry and are not the stand alone actions of a single competitor. The Massachusetts Attorney General has the authority to enforce the Massachusetts Antitrust Act, which provides amongst other prohibited conduct that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce in the commonwealth shall be unlawful.” G.L. c. 93, § 4. Violations of the Massachusetts Antitrust Act may result in both civil and criminal penalties.
At the federal level, the United States Department of Justice may investigate alleged violations of the Federal Trade Commission Act, which in general broadly prohibits “[u]nfair methods of competition . . . and unfair or deceptive acts or practices.” 15 U.S.C. § 45(a)(1). At the Federal level, courts have interpreted and applied § 5(a)(1) of the FTC Act to prohibit price discrimination if that discrimination is outlawed by § 2(a) of the Robinson-Patman Act, 15 U.S.C. § 13 (a). In turn, § 2(a) prohibits certain price discrimination by competing sellers, so-called discrimination at the primary line. See Craig v. Sun Oil Co., 515 F.2d 221, 224 (10th Cir. 1975). The antitrust laws, including the Sherman Act, also provide for criminal penalties where the offender has acted with the knowledge that his or her acts would in all probability hurt competition.
Accordingly, while the ABCC may investigate and determine alleged violations of G.L. c. 138, § 25A, that same conduct may or may not also qualify as “price discrimination” under state and federal antitrust statutes and be the subject of other law enforcement agency investigations. Moreover, as in any regulatory or law enforcement investigation, the truth and accuracy of documents and testimony subpoened by the government can cause issues for the licensee having to provide those documents or testimony if it is alleged that such documents or testimony was not in fact fully accurate and truthful. Licensees at all levels of the industry in Massachusetts should therefore know the legal issues at hand should they become involved in any investigation into these “pay-to-play” allegations.
Contributed by John P. Connell, Esq.