Mississippi has been a "horror story," says Yuengling

FILED APRIL 17, 2017

Dear Client:

There's a lot of finger pointing in Mississippi.

This finger-pointing palooza stems, as you may know, from Rex Distributing's complaint against Anheuser-Busch, Mitchell Distributing, and Yuengling, which claims last year's match and snatch [see BBD 08-26-2016] screwed them out of millions.

A-B responded to Rex late last month, saying don't come at us: Yuengling is the "culprit here."

MITCHELL SEEKS DISMISSAL FROM SUIT. Mitchell followed suit last week when they filed a motion to dismiss Rex's demand of $3.1 million "for rights that were expressly excluded from the contract between Rex and Mitchell Beverage," per filing.

In other words, says Mitchell: "Rex seeks to recoup $3.1 million from Mitchell Beverage for brand rights that Rex could not deliver and Mitchell Beverage did not acquire, and for which it was not contractually obligated to pay," Mitchell said. It was Yuengling who stripped the $3.1 mill from the deal when they "refused to consent to Rex's request to transfer Rex's Yuengling distribution rights to Mitchell Beverage." The brewer also "'unlawfully terminated' its contract with Rex," Mitchell said.

YUENGLING POINTS THE FINGER BACK. And now, Yuengling has answered Rex's complaint saying: no, no, no… this mess is all A-B and Mitchell's doing.

Among its affirmative defenses in the filling, Yuengling says the original complaint "fails to state a claim against Yuengling upon which relief can be granted" and that the Plaintiff's "alleged injuries were caused in whole or in part by the fault of others, for which Yuengling has no liability."

Like Rex, Yuengling demands a trial by jury.

CROSS CLAIMS CRY FOUL OVER A-B, MITCHELL DEALINGS. Indeed, the majority of Yuengling's response is directed at A-B and Mitchell. Yuengling filed six cross claims against A-B and Mitchell, and threw six additional ones at A-B alone.

They basically all hinge on a handful of arguments: One, regarding Yuengling's initial entry into Mississippi, that A-B and Mitchell "knew that Mitchell's unexpected rejection of Yuengling distribution rights in December 2015 would unreasonably impair or eliminate Yuengling's ability to compete" against A-B in Mitchell's territory.

Relatedly, a host of claims speak to A-B's alleged attempt to coerce their affiliated Mississippi wholesalers into rejecting Yuengling when it entered the market. Yuengling claims its business was harmed after a sudden rejection from Mitchell, where it had to cobble together other distribs and enter that part of the market later.

And finally, Yuengling argues that A-B and Mitchell subsequently conspired to redirect the Rex sale from Adams to Mitchell in 2016, knowing that action would "unreasonably impair or eliminate Yuengling's ability to compete against AB within Rex's former sales territory," as Yuengling claims its due diligence unearthed evidence Mitchell did not intend to "expend reasonable efforts and resources to promote the sale and distribution of Yuengling" under their Distributor Agreement.

But before we name those twelve cross claims, let's give you Yuengling's side of the story on how we got here.

HERE'S HOW THIS "HORROR STORY" GOES. Recall: In 2015, Yuengling decided to roll out Mississippi. Yuengling held talks with all the A-B wholesalers in the state (they preferred the Red network in MS because it had "greater scale" than the Blue). By November 2015, Yuengling had accepted all the A-B houses in the state to serve as its distribution network (this includes Mitchell, they say).

Shortly after Yuengling "began business planning with the Mississippi A-B wholesalers," A-B began "threatening those wholesalers not to become Yuengling distributors," per filing. Yuengling alleges that A-B called these wholesalers up to St. Louis to try and talk them out of doing business with Yuengling. Recall that Rex said the same in their complaint.

MITCHELL SUDDENLY REJECTS. In December 2015, Mitchell informed Yuengling that "it would not agree to be a Yuengling distributor after all," making them the only A-B shop in Mississippi to do so. Mitchell said they were unable to take on the brand because it had "significant financial issues with its operations in Maryland," per filing.

This caused a huge headache, Yuengling said, because they "had no distributor in place to cover the territory" assigned to Mitchell. "As a result, Yuengling had to hastily piece together agreements with four different MillerCoors wholesalers to cover what would have been Mitchell's single territory, resulting in inefficiencies, reduced distribution power," and a "two-month" delay into the territory.

REX DECIDES THEY WANT TO SELL. Rex started distributing Yuengling in January 2016, and on June 30 of that year Rex, notified Yuengling of its intention to sell to Adams Beverage. Yuengling says they began negotiating with Adams as a potential Yuengling distributor for Rex's former territory in anticipation of Adams' August 26, 2016 closing date with Rex.

But two days before that deal was supposed to close, A-B informed Rex of its plans to redirect the sale from Adams "to a different, as yet unidentified wholesaler."

Several days later on August 30, A-B allegedly notified Rex that they were redirecting the sale to Mitchell and anticipated closing deal on October 14, 2016.

YUENGLING FINDS OUT REX IS GOING TO MITCHELL. On September 1, Rex advised Yuengling of A-B's plan. "This was the first Yuengling heard of AB's redirection of the Rex sale from Adams to Mitchell," per filing.

DID ABI VIOLATE DOJ SETTLEMENT? Importantly, A-B's decision to redirect the sale of Rex's business to Mitchell, "came approximately one month after ABI reached a settlement with the Antitrust Division of the DOJ to resolve its investigation into ABI's practices and programs… intended to limit the ability and incentives of its beer distributors to market and sell the beers of competitors such as Yuengling."

Yuengling was less than thrilled with the news that Rex was now going to Mitchell, but says they still "requested, received and reviewed due diligence materials submitted by Mitchell and attempted to formulate with Mitchell a business plan for Rex's former territory."

The talks with Mitchell "failed to assuage Yuengling's concerns" of the distrib's potential efforts for the brand, and on October 12, 2016 Yuengling advised Mitchell and Rex that it would not approve the transfer of its distribution rights from Rex to Mitchell.

The next day, Yuengling took it a step further and told Rex that if the deal with Mitchell went through they would terminate its distributor agreement with Rex.

On October 14 the sale from Rex to Mitchell closed. So Yuengling terminated its agreement with Rex and appointed F.E.B. Distributing as its new distributor.

Here are the counts we alluded to above:

COUNTS AGAINST A-B AND MITCHELL.
Count I - Unlawful Trust or Combine
Count II - Unlawful Restraint of Trade
Count III - Unlawful Group Boycott
Count IV - Tortious Interference with Contact
Count V - Tortious Interference with Prospective Business Relations
Count VI - Civil Conspiracy

COUNTS AGAINST A-B.
Count VII - Unlawful Restraint of Trade
Count VIII - Attempted Monopolization
Count IX - Tortious Interference with Prospective Business Relations
Count X - Unlawful Distributor Requirements
Count XI - Unlawful Limitation of Distributors' Right to Sell Other Suppliers' Products
Count XII - Unlawful Refusal to Consent to Transfer of Business

YUENGLING DEMANDS TRIAL BY JURY. Yuengling demands a trial by jury on its crossclaims against A-B and Mitchell. "Accordingly, Yuengling requests entry of judgment in its favor and against AB and Mitchell on each of the crossclaims set forth above." They also seek "damages, statutory penalties, punitive damages, attorneys' fees, costs and expenses, and other reliefs the Court deems appropriate."

YUENGLING TO DOJ: HELLO, ANYONE HOME?

In its filings today, Yuengling wasn't done with just an answer and cross-claim to Rex. The brewer also requested amicus curiae status from the U.S. District Court in D.C. "for the purposes of opposing the Motion by the DOJ for Entry of Final Judgment."

As Yuengling sees it, the proposed final judgment (PFJ) "does not adequately protect the public from anti-competitive practices by the defendants [ABI/SAB] in the distribution of beer products."

As a direct competitor to A-B, as well as the largest and oldest American-owned brewery, Yuengling says they are in the "best position to address the anti-competitive impact that defendant ABI's control of wholesalers has on the public."

They believe their experience in Mississippi has "uniquely positioned" them to "provide insightful, relevant facts to the Court" and explain "the shortcomings in the proposed Final Judgment."

Yuengling says the DOJ's Civil Complaint "alleges, correctly," that ABI "uses a variety of practices and contractual provisions to promote exclusivity from distributors that sell ABI beer." And additionally alleges that "ABI currently encourages ABI-Affiliated Wholesalers to limit their sales of the beers of ABI's high-end rivals through the Equity Agreement and ABI's incentive programs."

Yet the PFJ only "addresses distribution issues only slightly, as if taking steps to prevent the situation from getting worse is a sufficient remedy," according to Yuengling.

So Yuengling is asking the Court "to consider what the proposed settlement will accomplish regarding the specific allegations in the Complaint regarding the ability of ABI to command exclusivity from distributors that sell ABI beer.

"The answer is - not much," says Yuengling. "Apparently excited with the agreed-to divestiture at the brewing level [MillerCoors to Molson]," DOJ dropped the ball on the Complaint's distribution issues.

Our comments have detailed the "havoc" caused by the match and redirect in Mississippi, Yuengling says, but the DOJ doesn't have a "good response to this horror story" so it "simply ignores it." To wit: Mississippi "is not even mentioned in the DOJ's response."

Yuengling says they've reported this "horror story" to the Monitor Trustee overseeing the consent decree, but they have "not been advised on the institution of any claim or further investigation."

They figured Rex's complaint would raise a red flag because it shows that "ABI's conduct disrupted distribution of a Third Party brewer." Still, "no response from DOJ or the Monitoring Trustee."

With no response, "Yuengling is now faced with the additional disruption and costs of defending itself," said Yuengling referring to the complaint from Rex.

The DOJ's attempt to prohibit ABI from preventing distributors from using "'best efforts' to sell, market, advertise or promote any Third Party brewer's beer" sounds "promising," Yuengling said. But the prohibition is "completely gutted" by allowing ABI to require its wholesalers to use "best efforts" towards ABI brands.

"The notion that an Independent Distributor would accept a best efforts duty to ABI and still be in a position to offer best efforts to Yuengling is preposterous. Yuengling is left with hoping to get efforts that are 'pretty good' or maybe 'better,' but certainly not 'best.'"

[Ed. note: This is a good spot to tease our upcoming coverage of the MegaBrew Aftermath panel last week at CBC. Paul Pisano, general counsel for the NBWA, had a hunch that the most controversial section in the PFJ would be the section on "best efforts." That passage is "where the fight is going to be over the next ten years," Paul said. It looks as though he may be right. We'll bring you more from the panel in the following days.]

Yuengling says the DOJ is required by the Tunney Act to first "consider how well the settlement remedies the harms alleged in the complaint." But it is "clear that even though the Complaint expressed concern about ABI's conduct relative to distributors, DOJ essentially tossed in the towel after getting its desired divestiture at the manufacturing level."

"Accordingly, the Court should consider holding hearings on this matter to ensure the public interest is appropriately addressed, whether in the form of an amended Consent Decree or rejection of the proposed merger in its entirety.

"At the very least, the Court should require DOJ to make a supplemental filing to explain in greater detail why it believes brewers such as Yuengling will not be thwarted in their efforts to find capable, reliable distributors in a market where ABI's ability to promote exclusivity from its distributors, and limit their sales of ABI's rivals, has been forcefully alleged in the Complaint, but little changed by the proposed Final Judgment, not only in its text but its enforcement."

Until tomorrow,

Harry, Jenn, and Jordan

"We should be taught not to wait for inspiration to start a thing. Action always generates inspiration. Inspiration seldom generates action." - Frank Tibolt

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