The Biden Administration's Executive Order on Promoting Competition in the American Economy is bringing some unexpected attention to the alcoholic beverages industry. The long-term impact will be determined by what the federal agencies responsible for carrying out the President's edict decide to do in the coming months, but the directive has already put beverages under the microscope.
What the Executive Order Calls For
The Executive Order includes a sweeping directive for the Secretary of the Treasury—in consultation with the heads of the nation's two federal antitrust enforcers, the Federal Trade Commission (FTC) and Department of Justice (DOJ)—to produce a report assessing the "threats to competition and barriers to new entrants" in beer, wine, and spirits. This includes looking at any:
- "[U]nlawful trade practices" that "hinder smaller and independent businesses or new entrants from distributing their products," including "exclusionary, discriminatory, or anticompetitive distribution practices";
- "[P]atterns of consolidation in production, distribution, or retail"; and
- "[U]nnecessary trade practice regulations," including bottle sizes, permitting, or labeling, that "may unnecessarily inhibit competition."
The directive seems to contemplate a comprehensive study of three separate, highly regulated product areas, each of which operates within a complex three-tier distribution system made up of manufacturers (and importers), distributors, and retailers.
How the Federal Agencies Must Respond
The agencies will have to move quickly to conduct their probe of the beverages sectors identified in the Executive Order. The Treasury, in consultation with the DOJ and FTC, has just four months to produce a report that is to be a first step in trying to "improve market access for smaller, independent, and new operations."
Treasury is then to call on the Alcohol and Tobacco Tax and Trade Bureau (TTB) to initiate rulemaking to update its trade practice regulations or to rescind or revise any regulations "that may unnecessarily inhibit competition" or impose "barriers that impede market access for smaller and independent brewers, winemakers, and distilleries." In response to the Executive Order, the TTB has solicited comments on "the current market structure and conditions of competition in the American markets for beer, wine, and spirits, including an assessment of any threats to competition and barriers to new entrants."1 The official comment period expired August 18, 2021, but the TTB is continuing to accept comments.
Where the Executive Order Fits Into the Antitrust Framework of the Alcoholic Beverages Industry
The Executive Order does not indicate whether the DOJ or FTC are to take any specific additional steps beyond perhaps providing some information for the Treasury report. But President Biden's Executive Order is unambiguous in its directional guidance for more rigorous antitrust enforcement, and the issues and conduct flagged in its directives for the beverages industry are directly within both agencies' authority and expertise. To that end, the market report ordered by the Executive Order could identify industry practices and market conditions that trigger more antitrust enforcement by the FTC and DOJ.
In particular, two main types of violations of the antitrust laws are most likely to be on regulators' radars as they probe the beer, wine, and liquor sectors:
- Exclusionary conduct by companies with significant market positions that harms the competitive process by making it more difficult for rivals to compete.2
This often involves interactions between players at different levels of distribution (such as a supplier-distributor relationship). Exclusionary conduct might include exclusive dealing, most-favored-nations (MFN) clauses, or volume-based discounting imposed on a buyer or seller. It could also include bundling or tying of products that customers might otherwise purchase separately. Or it could involve category management, such as category captains influencing retail pricing or promotion of rival brands.
The primary concern with these sorts of activities is that they can make it more difficult for rivals to enter or compete in a market, thereby driving up price or decreasing output. The Federal Alcohol Administration Act and a patchwork of state alcohol laws under the 21st Amendment also prohibit these very types of activity, though—especially in the case of the latter—violations can be difficult to identify and enforcement may be uneven.
- Anti-competitive mergers of competing or vertically positioned companies.
Merger enforcement most often involves so-called "horizontal" mergers among rivals that eliminate head-to-head competition and consolidate already-concentrated markets. The primary concern with such transactions is that they can reduce price competition.
Agencies also look, though much more leniently, at "vertical" or "conglomerate" mergers that involve players at different levels of distribution. In such deals, the concern is that the transaction may increase the incentive for the combined entity to engage in exclusionary conduct along the lines of what is set out above.
Federal antitrust enforcers going after exclusionary conduct and anti-competitive mergers in the beverages industry is nothing new.3 Just earlier this year, the FTC allowed E. & J. Gallo Winery to acquire certain wine assets from Constellation Brands only on the condition that it divest to a third party a handful of brands in markets where the agency believed the combination would eliminate competition.4 Gallo's role as a category captain in many retailers was also investigated.
On the distribution side, Republic National and Breakthru Beverage abandoned a transaction in 2019 that faced opposition from the FTC. The agency expressed concern about both buyers and sellers, noting the deal would have "adversely impacted suppliers of wine and spirits that depend on these distributors to promote and distribute their products" in addition to "retail and foodservice customers that purchase those products from RNDC and Breakthru."5
As for the DOJ, it was just in 2015 that the agency investigated whether Anheuser-Busch InBev had harmed competition in beer markets by buying up some distributors and allegedly entering into exclusive arrangements with others.6 That investigation did not result in an enforcement action. However, it was only the following year that the DOJ required Anheuser-Busch InBev to agree (as a condition for acquiring SABMiller) not to engage in various kinds of exclusionary conduct—including volume-based discounting, exclusive dealing, and most-favored nations arrangements—in their dealings with distributors.7
But while the FTC and DOJ are no strangers to enforcing antitrust laws in beer, wine, and liquor markets, it might be a sign of a more aggressive era to come that the Executive Order singles out harm to "smaller" and "independent" rivals as a primary concern. In recent decades, antitrust has generally been driven by concern for consumers, not rivals. A shift in enforcement priorities towards protection of small rivals could widen the range of cases the agencies bring.
Why the Executive Order Might Have the Agencies Calling
In the coming months, market players small and large might hear from the agencies as they try to get up to speed on market conditions and any potentially problematic practices in the industry. When conducting market studies, the FTC or DOJ will typically conduct phone interviews where government lawyers and economists ask questions about market conditions (whether they are concentrated or competitive, the presence of barriers to entry, etc.), its players (competitors, suppliers, customers) and any problematic conduct (exclusive dealing, rebating and discounting, collusion, etc.).
If contacted by the government as a third party in a market study, it is often entirely up to the company to decide whether to participate.8 Larger organizations may have a few reasons to do so.
For one thing, they are often repeat players with the FTC and DOJ on the M&A side, so they may want to be cooperative and maintain good relations. Secondly, any chance to speak with the agencies is an opportunity to influence its enforcement and policymaking practices—so long as the businesspeople conducting the interviews are thoughtful in their messaging and mindful of the nuances of an antitrust analysis.
The agencies will also often speak to smaller players to get their unique perspectives. This may be especially true in the preparation of the report ordered by the Executive Order, which requires Treasury to consider the interests of smaller players. For smaller manufacturers, distributors, and retailers (including e-commerce platforms), government outreach could present a good opportunity to voice any concerns they have in a confidential setting. An interested party can also submit comments to the TTB or reach out to FTC or DOJ themselves rather than wait to hear from them.
It would be wise to proceed cautiously (and even get outside counsel involved) if government lawyers start asking for anything beyond an informational interview. That is because documents, written statements, and sworn testimony provided to the agencies could potentially become public, which could create problems with key suppliers or customers.
Potential Long-Term Impact of the Executive Order on Antitrust Enforcement and Policy
It is too early to tell whether the Executive Order will translate into more enforcement by the FTC or DOJ in the beer, wine, or liquor sectors. An initial study of the industry and the resulting Treasury report may be only the first of many steps, including further investigations and possibly policy statements or guidelines being released.
But if there is an eventual uptick in enforcement, the most immediate effect might be felt in mergers and acquisitions. Deals filed with the FTC and DOJ that combine competitors in beer, liquor, or wine markets may receive a closer review. Vertical deals, which combine participants at different levels of the distribution chain, may receive more scrutiny than in the past.
Enforcement against exclusionary conduct is likely to be slower to change, with agency guidelines providing advance notice of any major shifts. Depending on how aggressively the FTC moves forward with ramping up enforcement of its relatively untapped powers to go after "unfair methods of competition,"9 exclusionary practices in the beverage industry could be caught in the crossfire.
For now, the beer, wine, and liquor sectors will have to take a wait-and-see approach to the Executive Order, the forthcoming report from the Treasury, and whatever additional FTC and DOJ actions (and TTB rulemaking) may ensue.
1 https://www.ttb.gov/news/treasury-still-accepting-comments-for-report-on-competition; https://www.federalregister.gov/documents/2021/07/28/2021-16115/promoting-competition-in-the-beer-wine-and-spirits-markets.
2 This could be a "monopolization" claim under Section 1 of the Sherman Act if unilaterally imposed by a company with a "dominant" position in a relevant market. Or it could be an "unreasonable restraint of trade" under Section 2 if resulting from an agreement among two or more market participants with "market power" in a relevant market. Both scenarios could involve either head-to-head rivals or dealings between different distribution levels.
3 The FTC and DOJ split up those duties by sectors and, in some instances, the substantive areas of the law.
4 https://www.ftc.gov/news-events/press-releases/2021/04/ftc-approves-final-order-imposing-conditions-e-j-gallo-winerys. In 2020, the DOJ imposed divestiture requirements on Anheuser-Busch InBev as a condition for clearing its acquisition of Craw Brew Alliance, Inc. https://www.justice.gov/atr/case-document/file/1331221/download.
8 This can be a bit more complicated if the agency has compulsory process for its investigation, although even then it would be rare for agency lawyers to force compliance unless they are involved in active litigation of a case.
9 More can be found on the FTC's recent re-discovery of its powers under Section 5 of the FTC Act at https://www.dwt.com/insights/2021/07/biden-ftc-antitrust-initiatives.