Liquor Wholesalers & Manufacturers Settle Probe into Illegal Practices

Fifteen national suppliers of wine and liquor and the state’s largest wine and liquor wholesalers have agreed to pay $3.9 million in fines and costs to settle an investigation by the Attorney General’s Office and the State Liquor Authority into illegal marketing practices by New York wholesalers and their national suppliers.

The investigation, begun by the Attorney General’s Office in 2005, sought to determine whether wholesalers were offering unlawful inducements to retail licensees. Incentives, financial and otherwise, are in violation of the state’s Alcoholic Beverage Control law, which explicitly prohibits manufacturers and wholesalers of wine and liquor from favoring select retailers with discounts, rebates, allowances, free goods, and other inducements. The investigation uncovered a total of $50 million from 2003 to 2005 in payoffs, kickbacks, favored treatments, and a pattern of “pay-to-play” practices.

The objective of the settlements is to halt the illegal schemes and establish a level playing field throughout the industry. While most retailers were receiving some benefits from the wholesalers and manufacturers practices (i.e., banners, cocktail napkins, etc.) the vast majority of the inducements were provided to the largest retail licensees putting smaller owners at a competitive disadvantage. Some retailers received cash payments and cash equivalents (gift cards), free trips, iPods, golf clubs, and other similar items.

As part of the settlement announcement Attorney General Spitzer called for a reevaluation of the current law, which was established after Prohibition. The Attorney General noted that many of the practices identified in the investigation are legal in other industries and that the real problem was not the incentives themselves but the fact that those who had disobeyed the law had gained an unfair advantage over those that did not.

Notwithstanding the intent and potential long term benefit a level playing will have for the industry, the immediate effect of these settlements is a complete upheaval in industry practices. There is a great deal of confusion about how to proceed and wholesalers (wine, liquor and beer) are appropriately reluctant to take steps in violation of the “new rules.” The State Liquor Authority is working on publishing a clear set of rules for the industry, but until they do we are all operating on the basis of our own interpretations of the settlement agreements.

And while eliminating $30 – 50 million in illegal inducements should reduce costs for retailers and consumers that has not been the initial result. Wine and liquor wholesalers forced to stop offering discounts in violation of the law have kept the proceeds of these actions rather than legally reducing prices for all retailers. This would seem to thwart the intent of the settlement agreements. We’ve already raised this concern with the Attorney General’s Office and warned them of rumors we’ve heard that price increases are expected on or after January 1st.

We’ve also initiated conversations with several manufacturers and wholesalers about developing recommendations for changes to the Alcoholic Beverage Control law to permit certain purchasing incentives in responses to the Attorney General’s comments about reevaluating the law. Since Attorney General Spitzer will become Governor Spitzer on January 1st its likely we will be able to engage the Governor’s Office on this subject. We will continue to monitor this issue and update you accordingly.