Guest Column by Paul Pisano, NBWA
The Department of Justice (DOJ) has proposed a Final Judgment approving a settlement (Proposed Final Judgment or PFJ) between the DOJ, ABInBev (ABI) and SABMiller (SAB), which allowed the parties to consummate the largest beer industry merger in history. While the deal is already closed, the settlement agreement has not yet been finalized. The proposed settlement is now in the Tunney Act review process where interested parties and members of the public have submitted objections and questions to the DOJ regarding the language in the PFJ. The DOJ is required to respond to all public comments in a court filing with the United States District Court of the District of Columbia. Simultaneously with this filing, the DOJ will urge the court to approve the PFJ. Judge Emmitt Sullivan, the presiding judge over this matter, will ultimately decide whether to enter the final judgment as an order, reject the PFJ or require modifications to the PFJ before approving it. This process will likely play out in December 2016 or January 2017.
After review of comments received during the Tunney Act review process, the DOJ and/or the court could ultimately modify the PFJ, but for purposes of this article it is important for industry participants, local regulators, and the public to understand what the DOJ has done, what the PFJ requires and what the next steps will be.
Results of the DOJ Investigation
In its investigation of the merger, the DOJ looked at both traditional horizontal (supplier vs. supplier/market share) concerns and delved into vertical (distribution) concerns to more fully understand the competitive implications of the merger and how it would harm the U.S. beer market.
Based on the concern that the merger would eliminate head-to-head competition between the two largest beer brewers in the U.S., the PFJ requires ABI to divest all of SAB’s equity and ownership stake in MillerCoors to Molson Coors. The DOJ’s Competitive Impact Statement (CIS) states the “divestiture will not only maintain MillerCoors as an independent competitor, but will protect MillerCoors’ competitiveness by giving MillerCoors…perpetual, royalty-free licenses to products….and ownership of the international rights to the Miller brands of beer.”
The DOJ further examined and highlighted how independent beer distribution helps bring the diversity and variety of consumer selection via independent brewers and how ABI had used its market power to disadvantage rivals through efforts to disrupt distribution. Indeed, the CIS noted, “[e]ffective distribution is important for a brewer to be competitive in the U.S. beer industry.” The Complaint alleges that the elimination of competition between ABI and MillerCoors will increase ABI’s incentive and ability to disadvantage its remaining rivals—in particular, brewers of high-end beers that serve as an important constraint on ABI’s ability to raise its beer prices — by limiting or impeding the distribution of their beers.
As a result, the DOJ proposal includes many remedies to help level the playing field for the benefit of consumers by keeping beer distribution independent. These sections are mostly contained in Section V of the PFJ.
Section V Provisions Supporting Independent Beer Distribution
Section V of the PFJ embodies many important provisions designed to safeguard distributor independence, market access for smaller competitors, and consumer choice and variety. These provisions include:
- Neither ABI nor MolsonCoors can terminate a distributor as a result of the transactions resuling from the acquisitions. This was not a speculative concern as following the 2008 formation of the MillerCoors Joint Venture, MillerCoors attempted to use that transaction to terminate 40 independent beer distributors. The PFJ prohibits any such termination.
- The order provides whistleblower/protective order protection for anyone that cooperates with the DOJ or the Monitoring Trustee. ABI cannot discriminate against, penalize, or otherwise retaliate against any independent distributor because such distributor raises, alleges, or otherwise brings to the attention of the United States or the Monitoring Trustee an actual, potential, or perceived violation of Section V of this Final Judgment.
- ABI cannot acquire any equity interests in or ownership or control assets of an independent distributor if it would result in the distributor becoming an “ABI owned distributor” and would result in more than 10% of ABI’s sales being distributed through “ABI owned distributors” nation-wide. This provision requires ABI to self-report data on its beer volume, via BudNet system, to the DOJ.
- ABI cannot unilaterally or pursuant to any agreement provide any reward or penalty to or in any way condition its relationship with independent ABI distributors based upon the distributors’ sales of third party beer or its marketing advertising promotion or retail placement of such beer. The restrictions on ABI include but are not limited to:
- Conditioning availability of ABI’s beer;
- Conditioning prices, services, product support, rebates, discounts, buy backs, or other terms conditions of ABI’s beer sold to distributor based on distributor’s work for a third party brewer;
- Conditioning any program with distributor based on the fact that distributor sells third party beer outside ABI territory;
- Requiring a distributor to offer ABI the same incentive that distributor offers for selling a third party brewer’s beer;
- Preventing a distributor from using best efforts to sell, market, advertise, or promote a Third Party Brewer’s Beer.
As the CIS notes, “the remedy seeks to preserve and promote competition in the U.S. beer industry by maintaining MillerCoors as an independent competitor and by reducing the influence of ABI on the distribution of beer in the United States.”
One area where the DOJ notes concern is on how ABI interferes with management and ownership of independent beer distributors. Therefore, the PFJ provides that ABI shall not disapprove an independent distributor’s selection of a general manager or successor manager based on a distributor’s sale of a third party brewer’s beer nor interfere with the sale of a business because of a distributor’s relationship with a third party brewer.
Additionally, the PFJ highlights a DOJ concern that ABI was acquiring information about its smaller rivals via distribution mandates and requests. The PFJ prohibits ABI from requesting or requiring an independent distributor to report to ABI, whether in aggregated or disaggregated form, the independent distributor’s revenues, profits, margins, costs, sales volumes, or other financial information associated with the purchase, sale, or distribution of another brewer’s beer. ABI should not compel or request data on other brewers from independent distributors.
According to the PFJ, ABI is required to provide the DOJ with a compliance plan within ten (10) business days after receiving the court approval of the merger. Moreover, ABI shall provide a paper or electronic copy of the Final Judgment, to any Independent Distributor that distributes ABI’s Beer.
While the above referenced provisions of Section V of the PFJ promote competition by protecting distributor independence and level the playing field for third party brewers, there remains confusing “carve out” language that will invariably raise numerous questions.
The language reads:
“Nothing in the final judgment shall prohibit Defendant ABI from entering into or enforcing agreement with any distributor requiring distributor to use best efforts to sell ABI beer which may be defined as to achieve and maintain the highest practicable sales volume and retail placement of Defendant ABI’s beer in a geographic area. ABI may condition incentives, programs, or contractual terms based on an Independent Distributor’s volume of sales of Defendant ABI’s Beer, the retail placement of Defendant ABI’s Beer, or on Defendant ABI’s percentage of Beer industry sales in a geographic area (such percentage not to be defined by reference to or derived from information obtained from Independent Distributors concerning their sales of any Third-Party Brewer’s Beer), provided, however, that any such incentives, programs, or contractual terms may not require or encourage an Independent Distributor to provide less than best efforts to the sale, marketing, advertising, retail placement, or promotion of any Third-Party Brewer’s Beer or to discontinue the distribution of a Third-Party Brewer’s Beer. Defendant ABI may require an Independent Distributor to allocate to Defendant ABI’s Beer a proportion of the Independent Distributor’s annual spending on Beer promotions and incentives not to exceed the proportion of revenues that Defendant ABI’s Beer constitutes in the Independent Distributor’s overall revenue for Beer sales in the preceding year.”
This language seems to conflict with many of the protections outlinered earlier in Section V. Unless the DOJ and the court provide further guidance, there will certainly be disputes in application about the interpretation and reach of the Section V conditions particularly in light of this carve out language.
Monitoring Trustee- New Cop on the Beat?
To help enforce the provisions of Section V of the PFJ, the DOJ has appointed a Monitoring Trustee, Bill Berlin. Mr. Berlin is authorized to investigate the parties, seek information and provide DOJ with requests for sanctions for violating the order. He is a recent veteran of beer mergers having served as a monitoring trustee for the settlement agreement obtained in the DOJ’s review of ABI’s acquisition of Grupo Modelo (the brewer of Corona),which called for the divestiture of brewery assets to Constellation Brands and also regulated some distribution issues.
Anyone with concerns about ABI’s compliance with or the enforcement of provisions in the final judgment that apply to ABI and/or MillerCoors should contact Bill Berlin at (202) 370-9582 or email@example.com
The decision whether the final PFJ changes in substance rests with the DOJ’s and the court’s hands. In the interim, however, the clock is already ticking on compliance. The parties are bound by the current consent order. The Monitoring Trustee has been appointed and is up and running. Industry Members, regulators and the public are encouraged to read the PFJ, espectially Section V, to understand its terms and the impact on daily operations. Once the PFJ becomes final, industry particants and local regulators will have very little time to get up to speed so it important to have a grasp of the issues in the short-term so when the order is final they are prepared to work with the Monitoring Trustee, Bill Berlin, and the DOJ to enforce its terms.