Record ‘pay-to-play’ fine on beer distributor upheld by Mass. judge

Keith Bedford/Globe Staff/File

A Massachusetts judge on Monday upheld the state’s ban on so-called pay-to-play payments in the beer industry, rejecting the arguments of a craft beer distributor that had challenged the rule after getting slapped with a record fine for compensating bars to put its products on tap.

The decision is a major boost to the Massachusetts Alcoholic Beverages Control Commission, or ABCC, which has had a mixed record in its three-year crackdown on illegal anti-competitive practices that pervade the state’s alcohol industry.

It is also a setback for Anheuser-Busch; the beer conglomerate was not involved in the case but is facing similar charges for allegedly giving away nearly $1 million in refrigeration equipment to package stores and bars to push sales of Budweiser and other drinks while stifling those of other brewers. With the ruling, a number of potential legal avenues for escaping those charges have been closed off.

The case decided on Monday revolved around Everett-based distributor Craft Brewers Guild. In 2015, state investigators acting on a tip found that it had paid at least $120,000 over two years to bars that put its brews on tap and froze out those sold by competing distributors. Invoices showed the distributor had disguised the payments using code phrases such as “menu programming” for fictitious services.

The ABCC’s three commissioners later affirmed the findings and imposed a 90-day license suspension. Rather than shut down for several months, Craft Brewers Guild opted to pay a $2.6 million fine, the largest in the ABCC’s history.

Craft Brewers Guild filed a lawsuit in March 2016, contesting the fine on technical grounds. In particular, the distributor argued that the regulation prohibiting pay-to-play was rendered invalid decades ago when the Legislature repealed a law that had banned most discounts on wholesale beer purchases by retailers.

Suffolk Superior Court Judge Douglas H. Wilkins rejected the claim, saying that even though discounts were generally legal, a longstanding prohibition on anti-competitive “price discrimination” — distributors offering the same quantity of the same products to different retailers at different prices — remained in force. Since Craft Brewers Guild paid some bars but not others that carried the same beers, he said, the company broke the law.

“The Legislature never intended to preclude regulatory enforcement of the anti-[price] discrimination” law, Wilkins wrote. The ABCC’s “application of the regulation is entirely reasonable and consistent with the statutory prohibition against price discrimination.”

And while Craft Brewers Guild noted that most of its payments were made to marketing firms owned by the bars’ parent companies and not the bars themselves, Wilkins called that tactic a “closed loophole.” The price discrimination statute outlaws even such “indirect” schemes, he said, adding that common contract law also recognizes that “monetary consideration paid to a closely-related third party in exchange for acts by the retailer is still consideration to both.”

The judge dismissed Craft Brewers Guild’s assertion that the ABCC fine was so large it constituted an “extraordinary circumstance” meriting the court’s intervention.

“Craft’s employees initially disclaimed knowledge of the rebates before finally admitting the truth,” Wilkins wrote. “The scheme itself involved invoices for fictitious services. There was no serious question that Craft knew about the illegality of price discrimination and sought to hide it.”

Mark Dickison, an attorney for Craft Brewers Guild in the case, said the company has not decided whether to appeal the ruling, but added, “there are still some serious issues to be reviewed here.”

Dickison noted that four of the five restaurant groups implicated by the ABCC for receiving payments in the scheme had escaped punishment because the payments went to related marketing or parent companies and not the bars themselves. The judge affirmed those decisions in his ruling, Dickison complained, yet upheld Craft Brewers Guild’s punishment for making the payments to those four restaurant groups.

“I don’t believe you can have it both ways,” he said. “It’s a total contradiction, and an argument we’d be seriously looking at taking to the appeals level.”

Craft Brewers Guild is owned by Massachusetts-based Sheehan Family Cos., a network of wholesalers with operations in 13 states that has faced other accusations of pay-to-play.

In a statement, the ABCC said, “Although we haven’t officially received the decision, or had the opportunity to read it thoroughly, we are very pleased the court agreed with our original ruling.”