Mass. beer distributor will pay ‘unprecedented’ fine to settle N.J. case

The company settled charges that it violated state rules by selling draft beer tap systems to numerous bars and restaurants for less than fair market price.Fotolia

For the second time in 15 months, a branch of the Massachusetts-based Sheehan Family Cos. beer wholesaling empire has been hit with a record-setting fine for allegedly using prohibited, anticompetitive practices to rig the market in its favor.

Hunterdon Brewing Co., a Sheehan-owned beer distributor in Whitehouse Station, N.J., agreed this week to pay New Jersey’s Division of Alcoholic Beverage Control $2 million to settle charges that it violated state rules by selling draft beer tap systems to about 150 bars and restaurants for less than fair market price.

New Jersey officials called it the largest penalty ever imposed on a wholesaler by the agency.

Investigators for the ABC said Hunterdon offered the discounts on draft systems — which can cost thousands of dollars — “in a discriminatory manner,” with some retailers paying more or getting worse financing offers than others, then concealed the forbidden sales on invoices under code phrases such as “miscellaneous draft charges.”

“When a wholesaler utilizes [such] discriminatory trade practices, competition among wholesalers is stifled, and consumers lose the benefits which open competition provides,” said Jonathan Orsen, the agency’s acting director.

To avoid a 72-day suspension of its liquor license, Hunterdon pleaded “no contest” to a number of record-keeping and credit-extending violations related to transactions with at least 700 retailers, including the sales of draft equipment. The ABC said it would deduct $250,000 from the fine if the company passes independent audits and isn’t charged with another violation in the next year.

“The improper trade practices allegedly employed by Hunterdon Brewing threatened to disrupt competition and throw the wholesale industry into disarray,” New Jersey Attorney General Christopher S. Porrino said in a statement. “Consumers suffer when these laws and regulations are ignored.”

A spokesman for the Sheehan Family Cos. said the charges stemmed from innocent accounting errors, such as billing bars and restaurants too little for the draft systems, charging the retailers for both the equipment and beer they had ordered on a single invoice, and charging retailers differing amounts for the same equipment, all of which are forbidden under New Jersey alcohol rules.

Stressing that the company cooperated with the investigation, the Sheehan spokesman said the subsidiary has rectified its “sloppy” books and is collecting full payments for the equipment from retailers. Hunterdon, he added, never intended to give away or discount the draft systems and expected nothing in return.

“Hunterdon has taken steps to educate its employees on the laws and regulations of New Jersey and has established improved record keeping practices to ensure compliance,” the company said in a statement.

While the ABC charges against Hunterdon are formally predicated on accounting and credit regulations — and despite the company’s insistence that the discounts were not intentional — two other Sheehan wholesalers have previously acknowledged that markedly similar arrangements were intentional schemes meant to boost their sales.

In those cases, Sheehan Family Cos. subsidiaries gave bars cash, free or discounted equipment, or other incentives in exchange for the bars dedicating some of their limited tap handles to only Sheehan-sold beers and freezing out competitors.

The New Jersey ABC declined to release detailed records of its investigators’ work, leaving it unclear whether any of the hundreds of retailers in the New Jersey case saw the discounts as part of a quid pro quo arrangement.

Craft Brewers Guild, a Sheehan wholesaler in Massachusetts, was fined $2.6 million by state regulators last year for paying five restaurant groups more than $100,000 to reserve taps for its beers. As in New Jersey, alcohol investigators said Craft Brewers Guild tried to disguise the payoffs on invoices as “menu programming” charges and with other euphemisms. The penalty remains the highest ever charged by the state.

And at Union Beer, a Brooklyn distributorship owned by Sheehan Family Cos., executives admitted in depositions that they had plied bars around New York City for years with free equipment — and even checks to charity in the retailers’ names — to increase revenue.

Among the interviews, conducted under oath in 2011 as part of an unrelated lawsuit and later obtained by the Globe, is testimony from a Union salesman who described regularly gifting bars draft equipment worth up to $6,000. Managers at Union hired and paid draft companies to perform the installations, he said.

An assistant manager added that the distributorship gave bars equipment for free “in hopes that they would do business with us.” Asked how many of the bars that received such equipment did business with Union, he replied, “one hundred percent.”

The practice of paying retailers for product placement, known colloquially in the beer industry as “pay-to-play,” is common and perfectly legal between other businesses, such as food suppliers and grocery stores. But it is forbidden in nearly every state’s alcohol industry under longstanding laws intended to prevent large, out-of-state breweries from dominating local distributors and watering holes.

Today, the rules are championed by craft brewers as a way to keep multinational beer conglomerates from buying up tap handles, which would block or bottleneck craft brewers’ access to the retail market.

Recent cases lend credence to such fears: Two wholesalers owned by Anheuser-Busch, part of AB InBev, the world’s largest brewing company, were sanctioned this year by California and Massachusetts regulators for allegedly giving away thousands of coolers to restaurants and package stores on the condition that the retailers stock them with Budweiser and other AB InBev drinks.

Until recently, bans on pay-to-play were rarely enforced; alcohol regulators often regarded the practice as relatively benign compared with potentially deadly conduct such as serving booze to already-intoxicated patrons.

But craft beer companies say pay-to-play is now endemic in many major US beer markets, as an exploding number of breweries jostle for limited tap handles and shelf space at retailers.

In response to those complaints — and perhaps also to the eye-popping fine Massachusetts regulators got from Craft Brewers Guild — regulators are increasingly paying attention. Last fall, for example, the federal Alcohol and Tobacco Tax and Trade Bureau piled on the Sheehan Family Cos. by issuing its own $750,000 fine for the Craft Brewers Guild scheme, and the agency’s top investigator vowed a national crackdown on pay-to-play.