Mass. leads the way for a national crackdown on ‘pay-to-play’?

 

Federal regulators have struck a record-high settlement from a Massachusetts beer distributor.

 

Source: Boston Globe

By Dan Adams Globe

November 16, 2016

 

Federal alcohol regulators on Wednesday vowed a national crackdown on “pay-to-play” in the beer industry, taking aim at an illegal practice that came to light last year in Massachusetts when the state caught a distributor paying bars to put its brews on tap.

 

Such schemes, federal officials said, limit consumers’ opportunity to choose from a broader variety of beers by awarding tap handles to the highest bidder. The practice is also harmful to small craft brewers who rely on taps to gain access to the market but can’t afford to outbid larger companies in order to secure them.

 

Officials at the US Alcohol and Tobacco Tax and Trade Bureau issued the warning of a crackdown Wednesday as they announced the settlement of a previously undisclosed six-month investigation of the Massachusetts distributor, Craft Brewers Guild.

 

The Everett-based company already admitted to Massachusetts regulators last year that it paid various Boston bars more than $120,000 to stock its beers and freeze out those offered by competitors, a practice officials ruled was a violation ofstate regulations.

 

But the federal investigators now say those payments to bars also violated US trade practice laws.

 

Faced with the possibility of having its federal license suspended or revoked, Craft Brewers Guild voluntarily paid $750,000 to settle the case, the largest sum the US alcohol bureau has ever collected from a single company for trade practice violations. In a brief statement, the parent company of Craft Brewers Guild, the Sheehan Family Cos., confirmed the deal and said it “fully cooperated” with the investigation.

 

Robert Angelo, director of the bureau’s Trade Investigations Division, characterized the large settlement as a warning to beer distributors everywhere and vowed to take a “hard stand” against pay-to-play.

 

“This is not something I intend to walk away from. You’re going to see further investigations in this area,” Angelo said in an interview. “I don’t want industry members to consider getting caught the cost of doing business. I want them to realize there are significant consequences if we catch you.”

 

Craft brewers have been saying for years that pay-to-play is rampant, especially in crowded urban markets. Angelo acknowledged those complaints and admitted the government has failed to consistently enforce the federal prohibition against so-called slotting fees in the beer industry, or payments from brewers and wholesalers to retailers.

 

“It’s definitely getting a lot more emphasis now,” he said.

 

Greg Koch, founder of Stone Brewing in California, said he had repeatedly raised the issue with members of Angelo’s agency at industry conferences, only to be brushed off. He welcomed the decision to step up enforcement now but questioned why regulators didn’t investigate other distributors, too.

 

“It would be challenging to find a market where just one wholesaler is doing it and the others are not also,” Koch said in an interview. “Enforcement works best when it’s evenly and effectively applied.”

 

Koch and other experts said the decision by the US government to crack down on what has long been a tacitly accepted practice will likely reverberate through the beer industry – if the alcohol bureau can make good on its enforcement threat.

 

But that could prove to be difficult, as the small agency has limited resources and the legal standard for bringing a case is high. And in the Craft Brewers Guild probe, the agency had the luxury of leaning on the earlier Massachusetts Alcoholic Beverages Control Commission investigation into essentially the same set of facts.

 

“It was an easy one for them,” said Marc Sorini, a prominent national alcohol attorney who frequently appears before the bureau. “It will have some deterrent effect, absolutely, but it didn’t take a lot of resources or a crystal ball to piggyback on the state investigation.”

 

The state case similarly resulted in a record settlement, with Craft Brewers paying $2.6 million in February to avoid a months-long suspension of its license. The company is currently contesting that fine in court, arguing that the state regulation banning pay-to-play is legally invalid. Craft Brewers Guild is also defending itself against a lawsuit brought by Shelton Brothers Inc. , a Massachusetts importer that believes the distributor’s pay-to-play tactics resulted in lower sales of its beers.

 

Five Boston restaurant groups were also charged by Massachusetts regulators for accepting the payments from Craft Brewers Guild; one escaped punishment, while a decision by state regulators on the remaining four is pending.

 

Local brewers cheered Wednesday’s news of a federal crackdown, saying they are tired of bar managers telling them no tap handles are available because they’ve been bought up by distributors.

 

“If there’s better enforcement on the big payouts, bars will put on [tap] what people want, not what they’re getting paid to put on,” said Rob Burns, the co-owner of Night Shift Brewing and president of the Massachusetts Brewers Guild industry group. “When distributors are giving away [tons] of money, it’s very tough for brands to grow or even start up in the first place.”

 

But brewers may also be swept up in future pay-to-play probes. In the Craft Brewers Guild case, for example, state regulators uncovered invoices the distributor had sent to its suppliers for the cost of its bribes to bars, disguising the payments under code phrases such as “menu programming.” And some small brewers self-distribute directly to bars.

 

“This doesn’t happen without the implicit cooperation of brewers and wholesalers,” Koch said.

 

Some in the beer industry are skeptical of the ban on pay-to-play. They argue the practice is common and legal in other industries – soda companies routinely pay for prime shelf space at grocery stores, for example – and that regulators trying to stop it will forever be swimming upstream against the “natural” market value of tap handles and shelf space. No serious efforts to repeal state or federal pay-to-play regulations and laws prohibiting the practice have emerged, however.