FTC Staff Comment to the Hon. Alice H. Peisch, Massachusetts House of Representatives, Concerning Legislation Imposing Additional Restrictions on Malt Beverage Suppliers and Supplier-Wholesaler Relationships

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Economics
Bureau of Competition
May 16, 2011
The Honorable Alice H. Peisch
Representative, 14th Norfolk District
The Commonwealth of Massachusetts
House of Representatives
State House, Room 473G
Boston, MA 02133-1054
Dear Representative Peisch:
The staffs of the Federal Trade Commission’s Office of Policy Planning, Bureau
of Economics, and Bureau of Competition1 are pleased to respond to your invitation for
comments on Massachusetts House Bill 1871 (“H.B. 1871” or “the Bill”).2 The Bill will
add new administrative requirements when the ownership of a malt beverage supplier
changes and the new malt beverage supplier wants to terminate a wholesale distribution
agreement that existed with the prior supplier. In addition, the Bill will require
wholesalers brought in by a successor supplier to pay terminated wholesalers for the
value of the distribution rights, including the value of any goodwill associated with the
distribution of the discontinued brand. If adopted, the Bill would further impede
competition in the distribution of malt beverages, and thereby harm competition and
consumers. The Bill appears to provide no countervailing consumer benefits that might
justify such competitive restrictions. Thus, FTC staff urge that the Massachusetts
legislature not pass H.B. 1871.
FTC staff also note you have introduced alternative legislation, H.B. 1897. This
Bill would maintain much of the current regulatory structure imposed under
Massachusetts law, which already places significant constraints on the ability of suppliers
to deal in a competitive manner with wholesalers. However, because H.B. 1897 avoids
the additional restrictions on successor suppliers and would provide some relief for
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Economics, and Bureau of Competition. The letter does not necessarily represent the views of the Federal
Trade Commission or of any individual Commissioner. The Commission has, however, voted to authorize
staff to submit these comments.
2 Letter from Hon. Alice Peisch, Massachusetts House of Representatives, to Susan DeSanti, Director,
Office of Policy Planning, Federal Trade Commission (Apr. 4, 2011) [hereinafter Peisch Letter]. A copy of
H.B. 1871 may be accessed at http://www.malegislature.gov/Bills/187/House/H01871.

“small brewer relationships,”3 it likely would be an improvement over the current
regulatory environment.
Interest and Experience of the Federal Trade Commission
The FTC is charged with enforcing the FTC Act, which prohibits unfair methods
of competition and unfair or deceptive acts or practices in or affecting commerce.4
Effective competition is at the core of America’s economy;5 vigorous competition among
sellers in an open marketplace gives consumers the benefits of lower prices, higher
quality products and services, more choices, and greater innovation.6
Under this statutory mandate, the Commission seeks to identify business practices
that impede competition or increase costs without offering countervailing benefits to
consumers. The FTC has considerable experience in analyzing the competitive impact of
regulations affecting the alcoholic beverage industry, including in circumstances similar
to this one involving restrictions on the relationships between alcoholic beverage
suppliers and wholesalers.7 In addition, FTC staff conducted an empirical study of a
wine market in a state that banned interstate direct shipping, and the results of that study
were included in a FTC staff report addressing anticompetitive barriers to electronic
commerce in the wine industry.8
3 H.B. 1897 would amend Mass. Gen. Law, Ch. 138 § 25E, and is available at
http://www malegislature.gov/Bills/187/House/H01897.
4 Fed. Tr. Comm’n Act, 15 U.S.C. § 45.
5 See National Society of Professional Engineers v. United States, 435 U.S. 679, 695 (1978) (“The heart of
our national economy long has been faith in the value of competition.”).
6 See Goldfarb v. Virginia State Bar, 421 U.S. 773, 787 (1975).
7 See, e.g., Letter from FTC Chicago Regional Office Staff to Ill. State Sen. Dan Cronin (Mar. 31, 1999)
(where the Illinois legislature proposed a bill that would impose regulatory restraints similar to those
contained in H.B. 1871, FTC staff strongly discouraged adoption of the bill), available at
http://www ftc.gov/be/v990005.htm; Letter from FTC Staff to Florida State Sen. Paula Dockery (April 10,
2006) (supporting a proposed bill that would allow direct shipment of wine from manufacturers to
consumers), available at http://www ftc.gov/os/2006/04/V060013FTCStafCommentReFloridaSenate
Bill282.pdf; see also Letter from FTC Staff to Ohio State Rep. Bill Seitz (Dec. 12, 2005), at
http://www ftc.gov/os/2005/12/051212cmntohiolegiswinefranchis.pdf; Letter from FTC Staff to Cal. State
Sen. Wesley Chesbro (Aug. 24, 2005), at http://www.ftc.gov/os/2005/08/ 050826beerfranchiseact.pdf;
Letter from Atlanta Regional Office Staff to North Carolina State Sen. Hamilton C. Horton, Jr. (Mar. 22,
1999), at http://www.ftc.gov/be/v990003 htm; Statement of Phoebe Morse, Dir., Boston Regional Office to
the Mass. Alcoholic Beverages Control Comm’n (June 26, 1996), at http://www.ftc.gov/be/v960012 htm.
8 FTC S TAFF R EPORT, P OSSIBLE A NTICOMPETITIVE BARRIERS TO E-COMMERCE: W INE (2003); available at
http://www ftc.gov/os/2003/07/winereport2.pdf.
Page 2 of 6

I. 	Background
A. 	The Current Law
Presently, Chapter 138, Section 25E of the Massachusetts general laws governing
alcoholic beverages prohibits an alcohol beverage supplier from discontinuing sales to a
wholesaler unless it demonstrates “good cause” for doing so.9 Under the law, “good
cause” is limited to cases where the wholesaler: (1) disparages the product so as to impair
the reputation of the brand owner or the name of any product; (2) shows unfair preference
in sales efforts for brand items of a competitor; (3) fails to exercise best efforts in
promoting the sale of any brand item; (4) engages in improper or proscribed trade
practices; or (5) fails to comply with the terms of sale agreed upon by the supplier and
wholesaler.10 Before discontinuing sales, the supplier must provide 120 days’ notice to
the wholesaler, file such notice with the Alcohol Beverages Control Commission
(ABCC), and state specifically the grounds supporting the “good cause” for its
decision.11 Either party may appeal to the ABCC, which then must order the supplier t
continue selling to the affected wholesaler pending the outcome of the ABCC’s
o
roceedings.
B. 	H.B. 1871
ld
good cause as defined under
ent,
p
H.B. 1871 does not change any of the existing requirements or obligations of
Section 25E. It broadens the scope of Section 25E, however, by adding new obligations
when one malt beverage supplier acquires another supplier and seeks to install its own
wholesalers and terminate any of the prior supplier’s wholesalers. H.B. 1871 wou
require the ABCC to conduct a hearing each time a successor supplier decides to
terminate existing wholesalers subsequent to a transaction. First, the ABCC must
determine whether the wholesale distribution obligations of the previous supplier are
imputed to the new supplier. If so, then that successor supplier becomes bound by the
provisions of Section 25E.12 Thus, if the previous supplier’s wholesale agreement is
imputed to the successor supplier, the ABCC must find
Chapter 138, Section 25E to terminate the agreement.
If the existing wholesale agreement does not impute existing distribution
obligations to the successor supplier, the successor supplier may terminate the agreem
but the Bill would require a successor wholesaler (i.e., the new wholesaler that will
9 See Mass. Gen. Law, Ch. 138 § 25E.
10 Id. Although the current law is silent on what, if anything, a supplier can do to terminate a wholesaler if
the ABCC does not find “good cause,” we understand that in practice a supplier, its new wholesaler, or
both would offer an incumbent wholesaler compensation for the distribution rights.
11 Id.
12 The proposed legislation is silent as to how the ABCC will determine that the existing obligations can be
“imputed” to the new supplier. The uncertainty of the method of imputation in this new legislation is likely
to add an additional layer of costs to transactions in this industry.
Page 3 of 6

receive the distribution rights) to pay the affected wholesaler the fair market value of the
distribution rights, including the loss of goodwill.13 The process of determining the value
of the old wholesaler’s rights begins when the new supplier gives notice of refusal to sell
to the old wholesaler. If, after thirty days, the affected and successor wholesalers cannot
agree on the fair market value of the distribution rights, they are required to undergo and
share th 	costs of binding arbitration.
C. 	H.B. 1897
ip
inate a
e determined by the parties, or
they cannot reach agreement, by binding arbitration. 15
. 	Likely Effects on Competition and Consumers
A. 	H.B. 1871
plier can
for by
the new supplier. Thus, the Bill would raise distribution costs for malt beverage
e
H.B. 1897 would exempt from the provisions of Section 25E “small brewer
relationships,” which are defined as the relationship between a supplier and a wholesaler
“if: (i) the annual global sales of such supplier does not exceed six million barrels of malt
beverages; and (ii) the sales of products to the wholesaler by the supplier do not exceed
20% of the wholesaler’s total sales in the prior calendar year preceding any refusal to
sell.”14 H.B. 1897 would allow suppliers and wholesalers in a small brewer relationsh
to set by contract the terms under which the supplier could terminate the wholesaler.
Moreover, H.B. 1897 would allow a supplier in a small brewer relationship to term
wholesaler regardless of the contractual terms as long as the supplier’s successor
wholesaler compensates the terminated wholesaler in an amount equal to the fair market
value of the distribution rights. Fair market value would b
if
II
H.B. 1871 would require a successor supplier’s new wholesaler to buy the
distribution rights from the former supplier’s wholesaler unless the successor sup
prove to the ABCC that it has good cause for terminating the existing wholesale
agreement. This requirement adds a new distribution cost that must be accounted
13 See H.B. 1871. Nothing in existing law appears to require any payment when one supplier purchases a
brand from another supplier and the wholesale agreement is not part of the purchase agreement. Thus, it
appears, absent settlements resolving legal disputes, no payment would be made to the affected wholesaler.
Under H.B. 1871 a successor wholesaler is only exempt from making a payment to the affected wholesaler
when the ABCC finds that the successor supplier demonstrated “good cause” as described in Mass. Gen.
Law, Ch. 138 §§25E (a)-(e), which is limited to conduct where the wholesaler: (a) disparaged the brand,
(b) showed unfair preference for a competitor, (c) failed to exercise best efforts to promote sales,
(d) engaged in improper or proscribed trade practices, or (e) failed to comply with the terms of sale, such as
timely pay for product pursuant to the supply agreement.
14 H.B. 1897, available at http://www.malegislature.gov/Bills/187/House/H01897. According to the
Brewers Association, the following definitions are used to describe the different-sized brewers: a
Microbrewery is one that produces less than 15,000 barrels per year; a Regional Brewery is one that
produces between 15,000 and 6,000,000 barrels of beer per year; and a Large Brewery is one that produces
over 6,000,000 barrels a year. Brewers Association, Market Segments, available at
http://www.brewersassociation.org/pages/business-tools/craft-brewing-statistics/market-segments.
15 H.B. 1897.
Page 4 of 6

suppliers, discourage efficient business decisions, and potentially hinder competition
among wholesalers and suppliers.
Consumers benefit when suppliers are free to choose distribution channels that
offer the best combination of price and service quality. 	H.B. 1871 makes it more
difficult for malt beverage suppliers to switch wholesalers, which could result in higher
prices and lower quality services. Moreover, to the extent that suppliers are unable to
select their preferred wholesalers, such restraints could increase barriers to entry for new
wholesalers who may be willing to offer a more attractive combination of price and
services.
In particular, H.B. 1871 imposes new costs on a successor supplier who wants to
create a different, and perhaps, more efficient wholesale distribution channel. These
costs include a hearing before the ABCC, the payment to the terminated wholesaler for
distribution rights and, if the parties cannot agree on the fair market value of the
distribution rights, the cost of binding arbitration.16 Moreover, these additional costs may
have a greater impact on smaller suppliers because they likely are less able to absorb the
costs related to terminating wholesalers. Thus, these requirements may make it
especially difficult for smaller suppliers to seek more efficient wholesale distribution
arrangements.
Moreover, because H.B. 1871 would increase a successor supplier’s costs to
switch malt beverage wholesalers, incumbent wholesalers could have reduced incentives
to lower costs or provide better services because they know there is a low risk they will
lose a supplier’s business. If suppliers are reluctant to change wholesalers, incumbent
wholesalers will be shielded from competition, and may provide a lower level of quality
in their services.
Finally, by reducing competition among wholesalers, H.B. 1871 also may hinder
competition among suppliers. In addition to their own efforts, suppliers rely on
wholesalers to take actions that increase demand for their products. Wholesalers and
suppliers typically have different incentives to take these actions, however, and the threat
of termination may help motivate wholesalers to provide more services in support of a
particular supplier’s brands.17 Because H.B. 1871 makes it more difficult for a supplier
to terminate a wholesaler, wholesalers’ incentives to take actions to help their suppliers
compete more effectively with rival brands likely are reduced.
16 The Bill offers no guidance as to how the “fair market value” of the distribution rights should be
determined, thus increasing the uncertainty, and potentially the costs, of reaching this determination. In
addition, although the Bill specifies that the new wholesaler must compensate the terminated wholesaler,
presumably the associated costs would be reflected in the financial arrangement between the supplier and
the new wholesaler and both likely would share in these costs.
17 See Ralph A. Winter, Vertical Control and Price Versus Non-Price Competition, 108 Q.J. ECON. 61
(1993).
Page 5 of 6

Page 6 of 6
B. 	H.B. 1897
H.B. 1897 is likely to reduce some of the inefficiencies that exist in
Massachusetts’ alcohol distribution markets as a result of the current regulatory system.
Although H.B. 1897 retains some provisions governing the relationship between
suppliers and wholesalers that we believe are unnecessary and hinder a competitive
market, we believe H.B. 1897 is an improvement over the current regulatory regime. In
particular, H.B. 1897 would allow “small brewer relationships” more flexibility to
respond to market conditions and likely would inject some additional competition into the
market.
Conclusion
For the reasons discussed above, FTC staff urge that the Massachusetts
Legislature not pass H.B. 1871. H.B. 1871 likely will reduce competition and harm
consumer welfare, without any countervailing benefits to consumers. FTC staff also
suggest that the Massachusetts Legislature adopt H.B. 1897, which would provide some
regulatory relief to smaller brewers and help them be more competitive in the
marketplace.
We appreciate your consideration of these issues.
Respectfully submitted,
Susan S. DeSanti
Director, Office of Policy Planning
Joseph Farrell
Director, Bureau of Economics
Richard A. Feinstein
Director, Bureau of Competition