IL House unanimously passes bill that outlaws brewery ownership interest in distributor

abdi logoPress Release:

(Springfield, IL) – Legislation prohibiting manufacturers of beer from owning beer distributorships passed the Illinois House today with a vote of 103 yes – 0 no – 0 present. HB 2606, sponsored by Representative Frank Mautino (D-Spring Valley) with 74 co-sponsors, clarifies that the three-tier regulatory system does not allow vertical integration (ownership in another tier) and reinforces the intent of SB 754 which became law (PA 97-0005) on June 1, 2011.

“This legislation makes it absolutely clear that manufacturers of beer and any affiliate or subsidiary are prohibited from owning an interest in a distributorship,” said Representative Mautino.

The legislation and amendment is the result of meetings initiated by Senate President John Cullerton (D-Chicago), which brought interested parties together including Associated Beer Distributors of Illinois (ABDI), Anheuser-Busch InBev (ABI), MillerCoors (MC), and Wine and Spirits Distributors of Illinois (WSDI). Knowing that there was strong opposition to ABI owning an interest in distributorships (SB 754, passed in 2011, had only one no vote), ABI agreed that they would divest themselves of their interest in City Beverage Illinois LLC, which holds four (4) Illinois distributorships licenses. But they requested some time to find a purchaser and complete the buyout. The divesture must be completed by January 1, 2015. The result was an agreement that accomplished the objectives of all parties.

That agreement became an amendment to HB 2606 which became the bill.

“HB 2606, as amended, requires all manufacturers of beer to divest themselves of any interest in a distributorship and reinforces the three-tier regulatory system in Illinois,” said Bill Olson, President of ABDI. “If brewers had been allowed to hold an interest in distributorships, the ability for new products to enter the market would have been limited. Independent distributors provide a means for all brewers to get their products to market. Brewer-owned distributorships would have no incentive to carry brands other than their own. Without independent distributorships, new products like craft brews, regional brands that want to enter Illinois and new imports would be limited in getting their products to market,” continued Bill Olson.

“It’s extremely important to preserve the three-tier system in Illinois. This post-Prohibition law protects consumers from the threat of large brewers controlling distribution thereby creating vertical integration – a means by which they can create a monopoly in the marketplace,” said David R. Leitch (R-Peoria), chief co-sponsor.

Numerous legislators were shocked that the legislative intent of SB 754 (“…all brewers, in-state and out-of-state, manufacturing beer above the craft brewers limit may not self-distribute or own a distributorship in Illinois”) was ignored by the Liquor Control Commission (Commission) when they ruled on October 31, 2012, that ABI could continue to own 30% of a holding company.

Many legislators believed corrective action should be taken to address the Commission’s Order because the General Assembly‘s legislative intent when it passed SB 754 was ignored by the Commission. “The agreed legislation, SB 754 passed in 2011, was initiated as a result of Judge Dow’s decision in AB v. Schnorf that, among other statements opposing AB’s ability to own distributorships, stated, ‘. . . the regulation of the distribution of liquor is a matter of public policy and a quintessential legislative function,’” continued Olson. SB 754 received overwhelming legislative support with only one negative vote (Senate: 48 yes – 1 no – 3 present, House: 112 yes 0 no – 3 present).

On September 3, 2010, Judge Dow rendered his decision (AB v. Schnorf) that there was discrimination between in-state and out-of-state brewers because two in-state brewers were granted distributorship licenses and ABI, an out-of-state brewer (Non-Resident Dealer), was denied that ability. The discrimination constituted a Commerce Clause violation.

However, Judge Dow denied ABI’s “request to remedy the unconstitutionality of Illinois’ system by extending the self-distribution privilege to out-of-state brewers.” He continued, “That remedy would be more disruptive to the existing statutory and regulatory scheme than the alternative remedy of withdrawing the self-distribution privilege from in-state brewers.” Illinois regulates alcohol through a three-tier regulatory system (which separates manufacturers, distributors, and retailers). Independent distributors are key to effective regulation and competition.

“The Commission’s October 31, 2012, Order created public policy contrary to the public policy created by the General Assembly when passing SB 754,” continued Olson. “The introduction of HB 2606 (and SB 1855) is the General Assembly’s response to the Commission ignoring the General Assembly’s legislative intent in passing SB 754, that no brewer, large or small, can hold a distributorship license or any interest in a distributorship.”

In February 2010, ABI requested the Commission permit the transfer of the licenses of four City Beverage distributorship locations to ABI as part of its purchase of City Beverage – Illinois. ABI (through an affiliate) had a 30% interest in the four locations and wanted to own 100% interest in the licenses.

On March 10, 2010, the Commission held that ABI did not qualify for a distributor license on the grounds that out-of-state manufacturers are prohibited from holding an Illinois distributor license. ABI immediately filed a complaint (AB v. Schnorf) in the US District Court Northern District of Illinois stating that the Commission’s ruling violates the Commerce Clause of the Constitution by permitting in-state brewers to obtain a distributor license while prohibiting out-of-state brewers to do the same. Judge Dow’s decision addressed the discrimination by providing a remedy prohibiting any brewer from holding a distributor license but stayed the ruling to give the General Assembly time to act on legislation.

In passing SB 754, the Illinois General Assembly clearly made it public policy in the state of Illinois that brewers cannot hold a distributor’s license. In addition, SB 754 authorized only small craft brewers, ones that manufacture less than 15,000 barrels of beer annually, to self-distribute their beers, an exception mentioned in Judge Dow’s opinion.

The Liquor Control Commission held a “public meeting” on December 7, 2011, in response to complaints by multiple Illinois liquor license holders and organizations that represent license holders that the City Beverage licenses were in violation of the law. “The Commission had the authority to address the license violation based on the passage of SB 754 but didn’t, thereby causing the complaint to be filed,” said Olson.

The Commission heard testimony on the following questions:

“A. What effect does the enactment of P.A. 97-0005 have on the ability of a Brewer or Non-resident Dealer to hold an ownership interest in an Illinois distributor?

“B. If the law prohibits a Brewer and/or Non-resident Dealer from holding a distributor license, does Illinois administrative law permit the Illinois Liquor Control Commission to grant equitable relief to City Beverage, Illinois, LLC, owner of four distributorships, to allow for the continued 30% ownership interest by a brewer/non-resident dealer affiliated entity (Wholesale Equity Development Corp – WEDCO)?”

Finding F from that hearing stated, “It was the intent of the Illinois General Assembly in 2011 to deny AB the right to own a distributorship. We believe this even though the General Assembly did not amend Section 5/6-4(a) to include brewers as parties specifically prohibited from owning distributorships.”

On June 7, 2012, a year after SB 754 became law, the Commission cited and notified the four City Beverage distributorships to appear before the Commission as to why each liquor license “should not be fined, suspended or revoked for a violation of the Illinois Liquor Control Act….” The citation further indicated that the Legal Division of the Illinois Liquor Control Commission recommended “that the City Beverage … licenses be revoked and that the revocation be stayed pending the divestiture of ownership interests of Anheuser Busch, LLC and its affiliates from City Beverage….”

ABI contested the citation and the Commission held a hearing on October 1, 2012. ABI claimed it could be both a brewer and a distributor, but Commission lawyers argued this dual ownership violates the three-tier regulatory system of Illinois law, which has as one of its purposes, preventing vertical integration in the alcohol beverage industry.

ABI’s effort to be both a licensed brewer and a licensed distributor attempted to allow vertical integration (ownership) in more than one licensing tier.

On October 31, 2012, in a 4-2 decision, the Commission ruled ABI may continue to hold an interest in four Illinois distributorships. The decision by the Commission allows ABI to maintain an interest in City Beverage distributorships through an ABI affiliate, WEDCO. “Even with a 30% interest, ABI could play a substantial role in the day-to-day operations of the four beer distributorships,” said Bill Olson. “Only independent distributors create competition, are easy to regulate, and are a vital part of the local communities they service,” he continued.

Distributors are intended to be an independent licensee separating a brewer from a retailer. Brewer ownership of a distributorship is vertical integration of the three-tier system, thereby creating a two-tier system which negates the purpose of the three-tier system.

The Associated Beer Distributors of Illinois, a not for profit business trade association, represents, maintains, and improves the interests of its Members who distribute beer of all brewers. Distributors are licensed by the State of Illinois to import and distribute beer to licensed retailers. ABDI Members directly employ more than 3,300 people across the state. They collect and pay $63 million each year in excise taxes to the state and pay more than $280 million in direct wages and health care benefits.

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