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Craft Beer Guild, LLC v. Alcoholic Beverages Control Commission

Supreme Judicial Court of Massachusetts, Suffolk

February 28, 2019

CRAFT BEER GUILD, LLC [1]
v.
ALCOHOLIC BEVERAGES CONTROL COMMISSION. REBEL RESTAURANTS, INC.
v.
ALCOHOLIC BEVERAGES CONTROL COMMISSION.

          Heard: December 4, 2018.

          Civil action commenced in the Superior Court Department on March 10, 2016. The case was heard by Douglas H. Wilkins, J., on motions for judgment on the pleadings.

         The Supreme Judicial Court granted an application for direct appellate review. Civil action commenced in the Superior Court Department on January 27, 2017.

         The case was heard by Michael D. Ricciuti, J., on motions for judgment on the pleadings. The Supreme Judicial Court granted an application for direct appellate review.

          J. Mark Dickison (Joshua M.D. Segal also present) for Craft Beer Guild, LLC.

          Thomas R. Kiley (Meredith Fierro also present) for Rebel Restaurants, Inc.

          Kirk G. Hanson, Assistant Attorney General, for Alcoholic Beverages Control Commission.

          Kevin M. Considine, for Beer Distributors of Massachusetts, Inc., amicus curiae, submitted a brief.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Cypher, & Kafker, JJ.

          GANTS, C.J.

         In these cases, we review two decisions of the alcoholic beverages control commission (commission) that resulted in the issuance of penalties against Craft Beer Guild, LLC (Craft), a licensed wholesaler of craft beers doing business as Craft Brewers Guild, and Rebel Restaurants, Inc. (Rebel), a licensed retailer doing business as Jerry Remy's, which purchased kegs of craft beer from Craft for sale to its bar and restaurant customers. After an investigation and evidentiary hearings, the commission determined that Craft had paid monetary rebates in differing amounts on craft beer purchases to certain licensed retailers in violation of G. L. c. 138, § 25A (a.), which prohibits licensed wholesalers from discriminating, directly or indirectly, in price among retailers that purchase the same alcoholic beverage. The commission also concluded that both Craft and Rebel violated a regulation prohibiting a particular scheme of commercial bribery, 204 Code Mass. Regs. § 2.08 (1993), which provides that "[n]o licensee shall give or permit to be given money or any other thing of substantial value in any effort to induce any person to persuade or influence any other person to purchase . . . any particular brand or kind of alcoholic beverages" -- the validity of which Craft and Rebel both challenge. Craft and Rebel each sought judicial review of the commission's decisions; one Superior Court judge affirmed the commission's penalty against Craft, and another judge affirmed the penalty against Rebel.

         We affirm the judgment against Craft, concluding that the commission properly determined that Craft violated both the statute and the regulation, and that the regulation remains valid. But because we conclude that the terms of the regulation do not apply to Rebel's conduct in accepting money derived from kickbacks paid by Craft, we reverse the judgment against Rebel.[3]

         Background.

         Craft is a Massachusetts-based wholesaler and distributor of craft beer, licensed by the commission pursuant to G. L. c. 138, § 18. Craft distributes approximately 200 craft beer brands to its retail customers, which are restaurants and bars licensed under G. L. c. 138, § 12. In October 2014, an owner of a Massachusetts-based beer supplier -- and one of the products distributed by Craft -- posted comments to his Twitter social media webpage, alleging that competing suppliers were making unlawful payments to Massachusetts retailers in exchange for those retailers carrying their Craft-distributed brand. As a result of those complaints, the commission initiated an investigation into Craft's practices in accordance with its mandate of "general supervision of the conduct of the business of . . . selling alcoholic beverages." G. L. c. 10, § 71.

         In April 2015, the commission investigators released an eighteen-page violation report setting forth the results of the investigation. After receipt of the report, the commission issued notices of hearing, alleging violations by Craft of the statute (G. L. c. 138, § 25A [a.]) and the regulation (204 Code Mass. Regs. § 2.08). The commission also issued notices of hearing to Rebel and other restaurant groups involved in the investigation of Craft, alleging violation of the regulation, but deferred hearing on these notices until it rendered its decision as to Craft. After a hearing, where Craft stipulated to the facts in the violation report, the commission in February 2016 issued a written decision finding Craft in violation of the statute and regulation as charged. In June 2016, the commission conducted a hearing regarding the alleged violations by Rebel, and in December 2016, it issued a written decision finding Rebel in violation of the regulation.

         We summarize the facts as found by the commission, which are largely not in dispute but, in any event, which we find to be supported by substantial evidence. See G. L. c. 30A, § 14 (7) (e) (court may set aside agency decision if "[u]nsupported by substantial evidence"). See also Vaspourakan, Ltd. v. Alcoholic Beverages Control Comm'n, 401 Mass. 347, 351 (1987) ("we do not make a de novo determination of the facts or draw different inferences from the facts found by the agency").

         Beginning in 2013, Craft "negotiated and implemented a series of kickback schemes" with various craft beer manufacturers and importers (suppliers), various bars and restaurants (retailers), and various management or marketing companies that "have the exact same or common group of corporate officers and beneficial interest holders as the [r]etailers," but do not themselves hold alcoholic beverages licenses (third parties).[4] One of those retailers was Rebel, whose associated management or marketing company was Rebel Restaurant Group, Inc. (Rebel Marketing).

         Through this scheme, Craft negotiated payments to third parties -- unlicensed management or marketing companies -- in exchange for their associated § 12 retailers selling Craft products at their bars and restaurants. Craft typically paid either $1, 000 to $2, 000 annually for each committed tap line serving a Craft brand, or fifteen to twenty dollars in "rebates" for each keg of beer sold. As a way of disguising these payments, Craft never paid the licensed retailers directly. Instead, the third-party company -- rather than the licensed retailer -- invoiced Craft for services never actually performed, such as for "marketing support," "printing of menus," and "promotional services." After paying the fee, Craft required the supplier of the beer brand to fully or partially reimburse Craft for the kickbacks paid to the third party. Craft did not publicly disclose that it was making these "rebate" payments, and it did not make them available to all licensed retailers.

         Craft paid Rebel Marketing a twenty dollar "rebate" per keg sold in exchange for carrying Craft brands, for a total of $8, 420, which Rebel Marketing passed through to Rebel. Although the commission extensively detailed Craft's dealings with other retailers and third-party management and marketing companies, only Rebel was charged with violating 204 Code Mass. Regs. § 2.08, because the commission found no evidence that money paid from Craft to other third parties was actually received by any other retailers.

         The commission concluded that Craft committed price discrimination in violation of G. L. c. 138, § 25A (a.), because it (1) did not offer rebates to all retailers and (2) did not offer the same rebate amounts to the retailers to which it paid rebates. The commission also concluded that Craft violated 204 Code Mass. Regs. § 2.08 because of its participation in a three-person scheme wherein a licensee gave money to another person to induce a third person to purchase a particular brand of Craft- distributed beer.[5] In so doing, the commission rejected Craft's arguments that § 2.08 had been impliedly repealed, was void for vagueness, or was being selectively enforced. In accordance with its authority under G. L. c. 138, § 23, to revoke licenses "for any violation of this chapter or any regulation adopted by the commission," the commission suspended Craft's license for a period of fifteen months, with ninety days to be served and the remaining suspension to be held in abeyance for two years conditioned on no further violations of G. L. c. 138 or commission regulations. After Craft submitted an offer of compromise and the commission accepted, Craft elected instead to pay a fine of $2, 623, 466.70 in lieu of the suspension, which amount was calculated under the formula set forth in G. L. c. 138, § 23.

         As to Rebel, the commission determined that Rebel was in violation of § 2.08 because Rebel "permitted Craft to give it [twenty dollars] per keg of Craft brands [that Rebel] sold on its licensed premises." In so doing, the commission rejected the same arguments as to the validity of the regulation as it did against Craft, and additionally proclaimed that the regulation "applies to inducements received by retailers" (emphasis added). The commission imposed a penalty of an eighteen-day suspension of Rebel's license, with three days to be served and the remaining balance to be held in abeyance for two years conditioned on no further violations of G. L. c. 138 or commission regulations.[6]

         Craft and Rebel, in separate cases, sought judicial review in the Superior Court pursuant to G. L. c. 30A, § 14. All parties filed motions for judgment on the pleadings, and the judges each granted the commission's motion to approve enforcement of its decisions. Craft and Rebel timely appealed, and we granted their applications for direct appellate review.

         Discussion.

         A final agency decision may be set aside or modified on judicial review under G. L. c. 30A, § 14, where, among other reasons, it is "[i]n violation of constitutional provisions," under § 14 (7) (a.); is "[b]ased upon an error of law," under § 14 (7) (c); or is "arbitrary or capricious, an abuse of discretion, or otherwise not in accordance with law," under § 14 (7) (g) . See Police Pep' t of Boston v. Kavaleski, 463 Mass. 680, 689 (2012). In reviewing an agency decision, we exercise de novo review on questions of law, giving "substantial deference to a reasonable interpretation of a statute by the administrative agency charged with its . . . enforcement." Commerce Ins. Co. v. Commissioner of Ins., 447 Mass. 478, 481 (2006). We also give "due weight to the commission's experience, technical competence and specialized knowledge, as well as to the discretionary authority conferred upon it." Van Munching Co. v. Alcoholic Beverages Control Comm'n, 41 Mass.App.Ct. 308, 309-310 (1996). But deference does not suggest abdication; "[a]n incorrect interpretation of a statute ... is not entitled to deference." Commerce Ins. Co., supra, quoting Kszepka's Case, 408 Mass. 843, 847 (1990).

         Before we address the specific challenges raised by Craft and Rebel to the agency decisions, we discuss the evolution of the statutory and regulatory framework governing the distribution and sale of alcoholic beverages in order to give historical context to the enactment and subsequent amendment of G. L. c. 138, § 25A (a.), and to the promulgation of 204 Code Mass. Regs. § 2.08.

         1. Evolution of the statutory and regulatory framework governing the distribution and sale of alcoholic beverages.

         The ratification of the Twenty-first Amendment to the United States Constitution on December 5, 1933, brought an end to the nationwide prohibition on the manufacture, sale, and transportation of intoxicating liquors. See United States v. Chambers, 291 U.S. 217, 222 (1934). The Amendment conferred upon the individual States "the broad powers ... to regulate the sale of liquor." Cabaret Enters., Inc. v. Alcoholic Beverages Control Comm'n, 393 Mass. 13, 16 (1984), citing New York State Liquor Auth. v. Bellanca, 452 U.S. 714, 717-718 (1981) .

         In anticipation of ratification, the Legislature in July 1933 established a joint special recess committee (committee) to issue a report "determining upon appropriate means and methods of regulating and controlling the manufacture, transportation, importation, exportation and sale of intoxicating liquors." Report of the Special Committee on Liquor Legislation, 1933 Senate Doc. No. 494, at 4 (Report of the Special Committee). In the committee's report and recommendations to the Legislature, submitted in November 1933, it identified as its chief goals in developing new laws and regulations governing alcoholic beverages that "those conditions which lead to intemperance are properly regulated, the illicit traffic in liquor and allied criminal activities made impossible of continuance, [and] the prompt return of a wholesome regard for law [is] assured." Id. at 6. In reaching its conclusions, the committee extensively studied the regulatory systems in place in foreign jurisdictions, as well as recommendations from a separate committee appointed by the Governor. Id. at 6-7.

         The committee called for the creation of the commission and suggested that it have "absolute control . . . over conditions of sale," in order to "obviate the dangerous possibility of politics entering" the business of selling alcoholic beverages. Id. at 9. To that end, the committee recommended that, in the forthcoming legislation that was to become the Liquor Control Act, the commission have "blanket authority to make rules and regulations not inconsistent with the provisions of the [legislation] ." Id. at 13. The committee also sought to strictly limit the number of licenses issued by the commission -- as to "all branches of the liquor traffic," including both retailers and wholesalers -- in order to ensure "closer and safer control" over the industry. Id. at 9, 12, 15.

         Importantly, the committee warned against inviting the corruption that had been widespread in the alcoholic beverages industry before the Prohibition era, particularly "[t]he control of the retail liquor business by breweries or other manufacturers." Id. at 16. Fearing that the industry would be subject to a takeover of control by manufacturers and suppliers, the committee recommended that beer manufacturers not be permitted to "lend money to any licensee[s]." Id.

         In response to the committee's report, the Legislature took action consistent with the committee's recommendations. SeeConnolly v. Alcoholic Beverages Control Comm'n, 334 Mass. 613, 617 n.1 (1956) ("the report of the special recess committee . . . was the basis of most of . . . G. L. c. 138") . In a special legislative session that ended in December 1933, the Legislature enacted the legislation that created the commission, originally established by G. L. (Ter. Ed.) c. 6, § 43, inserted by St. 1933, c. 120, § 2, seePettengellv. Alcoholic Beverages Control Comm'n, 295 Mass. 473, 474-475 (1936), [7] and also enacted the Liquor Control Act, G. L. (Ter. Ed.) c. 138, as appearing in St. 1933, c. 376, § 2, seePettengell, supra, which generally governs the distribution and sale of alcoholic beverages in the Commonwealth. The commission is tasked with "general supervision of the conduct of the business of manufacturing, importing, exporting, storing, transporting and selling alcoholic beverages." G. L. c. 10, ยง 71. Among other things, the Liquor Control Act authorizes the commission to ...


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