Comment: In Defense of the Sheehans

FILED FEBRUARY 12, 2016

Dear Client:

As reported in Craft Business Daily this morning, the Massachusetts ABC handed down an unprecedented 90 day license suspension to the Sheehan's Craft Brewers Guild (the sister company to their A-B distributorship, L. Knife & Co, which is unaffected). Craft Brewers Guild is their craft distributorship in the state. The license suspension is for paying various bars between a grand and two grand per tap handle, per Boston Globe. The Sheehans can appeal to state court which could reduce or remand the decision or send it back to the ABC for reconsideration. The Sheehans have said they are weighing their options, but there won't be a disruption in service (they can also pay a fine in the amount of three month's worth of revenue, which we think could be as much as $25 million or more, ouch). The ABC isn't done either: it is investigating the bars and other cases of pay-to-play. The Sheehan's defense with the ABC was, basically, the laws weren't enforced and everybody's doing it.

In my 20 years in this business I've never seen a distributor's license revoked for so long, or even at all. Revocation of a license to distribute is serious business -- it invokes termination clauses in most supplier contracts for one thing.

The dirty little secret is that trade practice violations are indeed pretty widespread, and it's not just the Sheehans and not just in Boston. They just got caught due to a few tweets which initiated an investigative report by a prominent paper. State ABCs across the country as well as the federal TTB have had their budgets slashed, and lax enforcement has inevitably created an environment where, if just one bad apple starts shenanigans, everybody else has to follow suit to compete. I'm not defending Craft Brewers Guild's pay-to-play, but we hear these practices are fairly common in certain markets.

A NEW ERA OF ENFORCEMENT. With the TTB ruling yesterday which was a shot across the bow to Kroger and Southern's scheme to provide one stop category management shopping (which was a quick turnaround for the TTB), we may be entering an era of more stringent enforcement by regulators. Not only that, but there is an effort in several states to relax trade practice laws. For instance, A-B is reportedly backing legislation in Missouri regarding providing refrigeration equipment via an interest free lease to retailers, which has divided distributors there.

A WAKE UP CALL. The TTB news yesterday and this Massachusetts ruling should send alarm bells through the industry -- for brewers, distributors, and retailers alike -- to be careful and play by the rules. Ignorance of what your employees are doing is not an excuse. (It's like Brito saying A-B has never asked a distributor not to take on a competing brand). If I were a distributor principal, on Monday morning I would have a meeting with my managers and stress how important it is to stand by your state laws. Because you can be sure that this Mass news is being read by ABC directors across the country and will invigorate them -- based on the exorbitant fines they can collect if nothing else -- to start their own investigations of trade practices. The Mass ABC has set a precedent which I would imagine will be followed elsewhere as the state ABC agents are a pretty tight group and talk to each other. The NCSLA, the state ABC association, is meeting in Chicago in June. You can bet this will be the top topic of conversation there.

WHEN A BUTTERFLY BEATS ITS WINGS. And remember, this whole thing was started in 2014 by Dan Paquette of tiny Pretty Things Beer and Ale Project, which isn't even in existence anymore, with a Twitter tirade which then sparked the Boston Globe investigation. (Investigators later obtained bills Craft Brewers Guild had sent to Pretty Things for the cost of illegal payments the distributor made to bars that agreed to stock Pretty Things beer). Dan later wrote: "We hope this ruling will be the beginning of a wider investigation into illegal pay-to-play practices in the alcohol industry in Massachusetts."

No doubt it will, and not just in Massachusetts.

Until Monday, Harry

"Talent does what it can; genius does what it must."
- Edward George Bulwer-Lytton

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