Law Offices of John P. Connell, P.C.: It appears the Craft Beer Guild has received a notice from the ABCC for potentially violating G.L. c. 138, Section 25A, the law that prohibits “price discrimination” in the sale to retailers of the same brands of alcoholic beverages, and 204 CMR 2.08, the regulation that prohibits wholesalers from “inducing” retailers to buy or not buy particular brands in exchange for something of “substantial value.”
While these two separate laws are worded differently, they essentially prohibit the same practice in the alcoholic beverage industry: selling the same brand of alcoholic beverages to retailers at different prices, as any inducement of “substantial value” will necessarily decrease the sale price of that brand. A hearing is scheduled on these alleged violations against the Craft Brewers Guild for June 23, 2015.
The “price discrimination” laws of today appear to emanate from different public policy concerns including the protection of the market place against monopolies; protection against the vertical integration of the wholesalers and retailers; and the promotion of temperance and public safety.
- Laws Designed Specifically to Protect Competition In The Market Place In General
In 1890, the Sherman Act was adopted to protect against anti-competitive behavior which would tend to create monopolies in any business operating in the United States. In 1936, in furtherance of this goal, the Robinson-Patman Act, 15 U.S.C. § 13 was adopted as a federal law, which states as follows:
“It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States…”
15 U.S.C. § 13 (a). Sections 2(d) and 2(e) of the Robinson-Patman Act protect against suppliers granting promotional benefits in connection with sales to favored customers. A supplier violates 2(d) if it discriminates by compensating only selected customers for customer-performed promotion and violates 2(e) if it discriminates in performing promotional services for selected buyers.
Although the federal government does not regularly enforce this law in many industries, private parties do litigate this statute when they feel they are being discriminated against in being able to purchase a product at the same price being offered to their competitors. In 1994, for example, the American Booksellers Association and independent bookstores filed a federal complaint in New York against Houghton Mifflin Company, Penguin USA, St. Martin’s Press and others, alleging that defendants had violated the Robinson–Patman Act by offering “more advantageous promotional allowances and price discounts” to “certain large national chains and buying clubs.” Eventually, seven publishers entered consent decrees to stop predatory pricing, and Penguin paid $25 million to independent bookstores when it continued the illegal practices.
- The Rockefeller Report And Laws Designed To Promote Competition In The Alcohol Industry And Against “Tied-House” Arrangements
Prior to Prohibition’s demise in December 1933, John D. Rockefeller, Jr. had commissioned a study which released a report in October 1933. Rockefeller’s report, titled “Toward Liquor Control,” written by Raymond Fosdick and Albert Scott, became the Bible for state legislatures that were tasked with enacting state laws that would govern post-Prohibition distribution of alcoholic beverages. Rockefeller’s commissioned work took many issues into consideration when advocating the enactment of certain laws, including the promotion of temperance and public safety, the orderly operation and the protection of competition within the market and the states’ interest in collection of tax revenue from the sale of alcoholic beverages.
In this report, Rockefeller advocated the control state system for post-Prohibition distribution of alcoholic beverages. In the alternative, as Rockefeller recognized that many states would be unwilling to enter the business of selling alcoholic beverages, he proposed the three-tier system which Massachusetts Legislatures adopted in large part in 1933 and 1934. Specifically, one of Rockefeller’s recommendations was that the manufacturing/wholesale tiers be forbidden from providing anything of value to the retail tier.
In 1935, adopting many of Rockefeller’s recommendations, Congress enacted the Federal Alcohol Administration, which was part of the U.S. Department of the Treasury (the “FAA”). The FAA was created to regulate the alcohol industry after Prohibition and its laws still partly continue in force and underpin some of the powers of the current Alcohol and Tobacco Tax and Trade Bureau (TTB). The FAA made it illegal for manufacturers and wholesalers to engage what is called “commercial bribery,” which the statute defines as “a person engaged in the liquor business to induce a retailer to handle his products to the exclusion of the same kind of products offered for sale by other persons in interstate or foreign commerce.” 27 USC § 205(c). This law remains on the books today but is seldom invoked by the federal government when it comes to liquor license compliance matters, as that is generally left to the States.
The federal courts, however, have recognized that the provisions of the FAA prohibiting “commercial bribery” have their policy footings in protecting competition in the market and preventing the vertical integration between wholesalers and retailers. In American Distilling Co. v. Wisconsin Liquor Co., 104 F.2d 582 (7th Cir.1939), for example, the court held that “[t]he vice of conduct labeled ‘commercial bribery,’ as related to unfair trade practices, is the advantage which one competitor secures over his fellow competitors by his secret and corrupt dealing with employees or agents of prospective purchasers.” In Fedway Assoc. vs. US Treasury, 976 F. 2nd 1416, 1423 (1992), the court suggested that, “in passing the ‘tied house’ and ‘commercial bribery’ provisions [of the FAA], Congress’ ultimate objective was to prevent wholesaler control of retailers.”
- The Massachusetts “Price Discrimination” Law
Following Rockefeller’s Report, the Massachusetts legislature adopted in 1933 what is now codified as G.L. c. 138, Section 25, which only prohibited wholesalers and manufacturers from “lending money” to retailers except for providing ninety days credit for goods sold in the usual course of business, as lending money was one common way a manufacturer could leverage control over a retailer as to which brands that retailer would carry. A retailer in debt to a particular brewery, for example, would naturally purchase that manufacturer’s products and perhaps exclude other brands so desired by the lender, an anti-competitive force within the market.
For whatever reason, the Massachusetts legislature did not initially adopt Rockefeller’s suggestion that wholesalers and manufacturers be prohibited from discriminating in price between brands when it came to the sale of identical brands to retailers. By 1946, however, the Massachusetts Legislature did adopt the “price discrimination” law that is now codified as G.L. c. 138, Section 25A, which is at the heart of the so-called “pay-to-play” controversy. This law was specifically requested and petitioned by the Massachusetts Package Store Association, Inc., which apparently felt that some package stores were being favored over other package stores when it came to buying their alcoholic beverages, and specifically sought a law prohibiting “by eliminating certain practices of manufacturers and wholesalers in granting discounts, rebates, allowances, free goods and other inducements.” (Journal Of The House, January 9, 1946, p. 86.)
When enacting this “price discrimination” statute codified by 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.
Accordingly, it appears the purposes of the current Massachusetts’ “price discrimination” laws – as old as they may be in the alcoholic beverage industry – are more financial than having to do with public safety, and appear to be more in step with the 1930’s when the command economy principles of the New Deal/Great Depression were popular and the fear of re-living the ills caused by Prohibition dominated the political landscape. Indeed, when reviewing the prohibition against the “commercial bribery” provisions of the FAA, the court recognized these policy concerns:
Indeed, the legislative history [of the FAA] reveals that preventing wholesaler control (and other similarly undesirable effects) was not Congress’ sole objective in passing the FAA; Congress also intended that the Act would positively promote a competitive alcohol market. See National Distributing, 626 F.2d at 1008 (reviewing the relevant legislative history). The underlying premise is that a genuinely competitive market leads to low prices, and low prices remove any incentive for the creation of a corrupt black market — one of the prime evils of Prohibition.
Fedway Assoc. vs. US Treasury, 976 F. 2nd 1416, 1423 (1992).
As Prohibition and the Great Depression ended about eighty (80) years ago, it may be time to review the Massachusetts’ “price discrimination” laws in the modern market place and within the modern political landscape. What will be sure to occur now as it did in 1946 when this law was enacted, however, is that there will always be the voice of a retailer who feels, rightfully so, that it is unfair that his competitor is getting a cheaper price for the same bottle of beer sold by a wholesaler, if he can buy it all, and based upon that one concept alone our “price discrimination” law may be with us for some time to come.
Submitted by Gregory Birney and John P. Connell, 2015 ©