Consolidation Comes with Legal Challenges

As distributors continue to merge, a few face lawsuits

by Andrew Adams
wine distribution warehouse
Mergers among alcohol distributors have taken off during the past few years.
San Rafael, Calif.—The uptick in mergers among U.S. alcohol distributors has been followed closely by another trend: lawsuits. As many major markets have come to be served by just a few companies, their competitors and customers have retaliated with legal push back.

One of the most recent legal fights is taking place in West Virginia, where one of the nation’s largest distributors, Johnson Brothers Liquor Co., and its West Virginia subsidiary Mountain State Beverage are facing a lawsuit from smaller wholesalers.

The Minnesota-based company is the fifth-largest wholesaler in the United States, according to Wines Vines Analytics, and was sued by six smaller distributors in West Virginia. According to a statement by the law firm Bailey & Glasser, which is representing the plaintiffs in the lawsuit filed in early July, Mountain State Beverage used “anticompetitive” practices in an attempt to monopolize the wine market in West Virginia by forcing smaller companies either to sell or go out of business.

The distributors filing suit against Mountain State Beverage include Wine and Beverage Merchants of West Virginia, Atomic Distributing Co., Beverage Distributors Inc., Jo's Globe Inc. and Martin Distributing Co. The companies claim Johnson Brothers and Mountain State operated at a loss to drive competitors out of business, paid fees and used other tactics to induce suppliers to not do business with the plaintiffs and regularly claimed to suppliers and the plaintiffs’ employees that the companies would soon go out of business.  

In March of this year, a judge dismissed a lawsuit filed by New York-based Empire Merchants against Breakthru Beverage Group that was formed following the merger of Wirtz Beverage Group and Charmer Sunbelt.

Empire had alleged Breakthru smuggled millions of dollars’ worth of alcohol into the New York market via a subsidiary company in Maryland. The case was dismissed with prejudice by a U.S. district judge. 

In November of 2016, an owner of several bars in Albany, N.Y., filed a lawsuit against the nation’s largest distributor: Southern Glazer’s. The owners sought $1.25 million in damages and alleged a Southern employee fabricated thousands of dollars of orders of sales and also charged more than $100,000 through the bars’ Southern accounts for alcohol that may have been sold on the side.

According to reports in the The Times Union newspaper, the attorney representing the bars rejected an offer to settle the case because Southern refused to acknowledge such abuses by its staff were widespread.

The company later released a statement to the Albany paper that it plans to “vigorously defend” itself against the “inaccurate” claims in the suit and blamed the wrongful conduct on “a single employee acting independently of company policy and who has been terminated.”

The current status of the case is unclear, and James Linnan, the Albany attorney representing the bars, did not immediately return a call or email for comment by Wines & Vines.

The claims in that case are quite similar to allegations in a lawsuit filed earlier this month. Southern Glazer’s Wine & Spirits is the target of a class-action lawsuit that alleges “unfair, unlawful, deceptive and fraudulent business practices” that run afoul of numerous state and federal laws. 

The lawsuit was filed July 5 in the U.S. District Court of Northern California by the firms Scott Cole & Associates APC and Wakeford Gelini on behalf of San Jose, Calif., resident James C. Nguyen, who holds a liquor license for a San Jose restaurant and bar.

According to the lawsuit, Nguyen learned of Southern’s allegedly deceptive practices after he received a tax bill from the state for liquor he never ordered from the wholesaler.

That’s because his attorneys argue Southern’s management and employees made a habit of using their customers’ account numbers to process fraudulent purchases to either achieve their sales quotas or drive up business for lucrative accounts. The lawsuit also alleges Southern sold alcohol to unlicensed third parties as well as provided full-size liquor bottles with “sample” labels for free or sold alcohol for a penny per bottle as “kickbacks” or as a way to keep retailers and restaurants from reporting any unethical behavior.

Southern is also accused of threatening to cut off supply if a restaurant or retailer didn’t buy sufficient quantities of brands offered by the wholesaler.

The goal, according to the lawsuit, was to maintain exclusive and profitable relations with the top suppliers and extract as much profit as possible from restaurant and retail clients. “Through its unscrupulous, unethical and unlawful schemes detailed herein, Southern has enjoyed increased revenues, profitability and market share from its larger volume of sales,” the lawsuit filing alleges. “These practices have given Southern an unfair competitive advantage over its competition with a resultant disadvantage to the public and class members.”

The company’s practices, as described in the lawsuit, also allegedly helped secure “highly desirable and highly profitable supply relationships” and that, “during the class period, Southern enjoyed numerous exclusive contracts with alcohol manufacturers/producers, with a resultantly larger client base, more orders therefrom and higher profitability.”

A spokesman for Southern did not immediately reply to Wines & Vines’ request for comment but was quoted in other news reports as saying the company was still reviewing the allegations in the lawsuit and did not have any comment on the lawsuit.

In a statement released after filing the lawsuit, attorney Scott Cole said the case, if successful, could “substantially” compensate many of Southern’s customers for several years’ of business. “Southern’s clients trusted they’d be treated right—not charged for liquor they never bought, not forced to buy what they didn’t need,” Cole said. “The sheer number of potential violations is jaw-dropping.”

According to Wines Vines Analytics’ distributor database Southern operates in 44 states and distributes for 1,178 domestic wineries. On its website, the company claims to sell 150 million cases of wine and spirits per year, and Forbes estimated the firm’s total revenue in 2015 at nearly $12 billion. 

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