Business

A rare glimpse into a beer distributor’s ‘pay-to-play’ tactics

Craig F. Walker/Globe Staff

The owner of the Massachusetts company recently hit with a multimillion dollar fine for paying illegal kickbacks to Boston bars also runs a beer distributor in Brooklyn that gave gifts to New York area bars and retailers to control which beers were available to consumers, according to recently unsealed court documents.

Sales representatives and managers for Union Beer Distributors, which is part of the Sheehan Family Cos. of Kingston, testified in a lawsuit against a competitor that they routinely gave some of the company’s 7,000 retail customers gifts worth as much as $15,000. In return, they said, the shops and bars would stock beers sold by Union and freeze out competitors.

The giveaways, approved by managers, included free beer, high-end draught equipment, maintenance services, signs, televisions, and even donations to charities in retailers’ names, according to the testimony. Sheehan officials insist the practice has been discontinued.

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While the New York testimony dates to 2011, it offers a rare firsthand account of “pay-to-play” tactics used to gain business, the very issue that got Union’s affiliated company in trouble in Massachusetts. The practice is legal and common in other industries — food companies use it to ensure top placement in grocery stores, for instance — but is banned in the alcohol business under Prohibition-era rules intended to prevent large brewers from dominating the market.

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Critics say pay-to-play unfairly freezes small craft breweries and other rule-abiding companies out of the market. Others believe the ban on pay-to-play should be repealed, calling it antiquated and impossible to enforce.

But many alcohol industry executives contend pay to play is rampant in the US beer market, an unseen system that determines which beers are available to consumers by awarding tap handles and shelf space to the highest bidder.

“All ... wholesalers that we compete with engaged in the same activity,” Union Beer assistant general manager Paul Bussiere testified in 2011. “What we did was in response to competition.”

In a statement, the Sheehan Family Cos. — which runs 19 wholesalers in 13 states and is among the country’s largest beer distributors — noted New York is “an extremely competitive market.” It said any pay-to-play activities at Union Beer ended in April 2011 after regulators at the New York State Liquor Authority, or SLA, warned distributors at a meeting they would initiate a crackdown against the practice.

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“Any statements made in the depositions regarding market practices relate only to the period prior to the SLA meeting... and prior to SLA guidance and clarification,” Sheehan Family Cos. said.

In Massachusetts, Sheehan subsidiary Craft Brewers Guild is set to pay a record-setting $2.6 million fine to the Alcoholic Beverage Control Commission. The agency punished the company after investigators found it had paid Boston bars $120,000 in kickbacks over several years to carry Yuengling and various craft beers it distributes.

The New York depositions were recorded in 2011 and 2012 as part of an unrelated lawsuit between Union and a competing wholesaler in Brooklyn. The depositions were sealed until a lawyer for Union Beer’s competitor entered them into the case’s public record last year. The transcripts do not detail particular transactions but instead describe Union’s general practices over the preceding decade.

New York regulators told the Globe they are not investigating Union because the transcripts do not themselves constitute evidence of a violation. Officials at the SLA said they investigated a complaint made around the time of the depositions that Union had installed a draught system at a bar for free but couldn’t substantiate the claim.

But in April 2011, state regulators took the unusual step of calling every beer distributor in the New York City area to a meeting, where they were warned the authority would begin enforcing its longstanding ban on pay-to-play. Bussiere testified officials called the meeting because they knew Union and its competitors routinely offered incentives to bars.

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“It was standard practice, which is why the State Liquor Authority called everyone to a meeting to say that everybody has to put an end to this,” Bussiere said, according to a 144-page transcript of his December 2011 deposition. The SLA “wanted to clarify a number of policies that were previously not being enforced, and that would be going forward.”

The New York Liquor Authority’s general counsel, Jacqueline Flug, said the agency has recently punished wine and liquor suppliers and distributors, but has been unable to prove similar cases against beer companies.

Flug also noted the agency has just three investigators to monitor the state’s 1,300-plus suppliers and wholesalers.

“I wish I had a whole list of beer cases to show you,” Flug said. “It’s not for a lack of trying. We just haven’t been able to prove it. Everyone seems to have nice, neat records about where they’ve obtained their tap lines from.”

Union — technically UB Distributors LLC — distributes Budweiser and other beers from Anheuser-Busch in Brooklyn. It is also a wholesaler of craft beers in much of New York City and on Long Island, including from Allagash Brewing Co., Left Hand Brewing Co., and other breweries.

The depositions of Union’s employees were conducted by Alan Trachtman, an attorney for the wholesaler Union sued in 2009. Union accuses the company of collecting 5-cent deposits from Union on beer cans that had already been redeemed elsewhere; in response, the competitor countered that Union had violated various trade rules. The suit is pending in state court in Brooklyn.

When Trachtman asked Bussiere whether Union gave retailers gifts and services in violation of SLA rules up until the April 2011 meeting, Bussiere replied, “yes.” Asked whether it was clear that SLA rules prohibited that practice, Bussiere also answered, “yes.”

Union salesman Matthew Rogers told Trachtman that giving away beer “was a typical trade practice in New York.”

Rogers testified he gave bars draught equipment worth up to $5,000 or $6,000. Such gifts were approved by Union managers, whom Rogers said “would pick up the phone and call a draught parts company.” The equipment company would then send an invoice to Union — “which, obviously, we paid,” Rogers added.

Andrew McLeod, an assistant sales manager, testified Union gave bars the equipment “in hopes that they would do business with us.” Asked what percentage of the bars that received such equipment did business with the distributor, he replied, “one hundred percent.”

McLeod also said the company would sometimes pay for employees at bars Union Beer supplied to play in charity golf tournaments.

“Do you write checks to the charity for the benefit of the [bar] owner?” Trachtman asked.

“Sometimes, yes,” McLeod said, explaining that some were donations above $1,000, which needed approval from a supervisor.

Union Beer salesmen also testified they would hand their credit cards to bartenders, who would charge the salesmen for phony transactions. Union would then reimburse the salesmen for the charges.

Such credit card swipes were used “typically just for financial support related to draught lines and gaining products,” McLeod testified. “You are not paying for something that you consumed.”

Union salesman Kevin Muller testified he gave bars gifts when he needed to meet sales targets.

“What was the criteria that was used to give free goods?” Trachtman asked.

“I had to hit a Bud Light number,” Muller replied.

The salesmen also testified Union extended credit to retailers for longer than was allowed by New York rules. And they said they would avoid notifying competing wholesalers when they displaced those companies’ products from store displays — which Union managers and salesmen said they knew was required by state law.

Union managers testified that money for the incentives came from a marketing budget set by Sheehan executives in Massachusetts and was substantially funded by its suppliers, including Anheuser-Busch InBev.

The records do not indicate whether the brewers knew their money was being spent on the gifts; an Anheuser-Busch spokesman emphatically denied the company was aware of Union’s banned practices.

Dan Adams can be reached at dadams@globe.com. Follow him on Twitter @DanielAdams86.