Bar Wars
Is the Indiana General Assembly attempting to pass a bill that would create an illegal and possible unconstitutional monopoly when it comes to alcohol sales in the state? It depends on who you ask. A coalition of alcohol-related businesses say “yes” others say it’s a way to protect Hoosier jobs.
Under current Indiana law, alcohol is sold and distributed through a three-tier system of suppliers, wholesalers and retailers. Suppliers are companies like Jack Daniels or Anheuser-Busch InBev. Wholesalers are companies like National Wine and Spirits. Retailers are your local bar or liquor store. Because of laws dating back to the end of prohibition, a supplier can’t sell directly to a retailer; they can only sell to a wholesaler who then sells to a retailer.
The largest wholesale distributor in the state is National Wine and Spirits which controls between 60-70% of the wholesale market. However there are other companies that want to get in on the action and have been talking to suppliers about picking up their business and distributing their product. And that’s where the controversy starts.
This week lawmakers are slated to hear in committee HB 1191. The legislation would, among other things, require a wholesaler who gets a contract with a supplier to pay the previous holder of that contract “fair market value” for the rights to distribute alcohol within the state. In other words if a supplier has an agreement with one wholesaler, another wholesaler comes along and offers a better deal, the second wholesaler must reimburse the first wholesaler for any money it will lose because of the new contract.
Critics say not only does the legislation prohibit a supplier from contracting with a second wholesaler, but it could also create a virtual monopoly for a wholesaler. Unless a second wholesaler can meet their price for breaking the contract, the first wholesaler is guaranteed the supplier’s business and that would lead to higher prices for the consumer because now the wholesaler can raise prices with no fear of repercussion. Supporters of the measure will argue that such a bill is needed to protect jobs. They say if a wholesaler has invested the time and money in building a business, they should not have to suffer a loss simply because a supplier wants a better deal.
This is all very similar to what happened in my home state of Illinois more than 10 years ago. Illinois has a similar alcohol distribution system to Indiana. Back then lawmakers passed a bill prohibiting a supplier from canceling, failing to renew or terminating an alcohol agreement with a wholesaler without “good cause”. The legislation led to a more than 20% increase in the price of alcohol and things got so bad a federal judge put an injunction on the law saying it violated both the Commerce and Contract Clauses of the U.S. Constitution. Illinois lawmakers eventually had to repeal the law. Similar laws have been repealed, vetoed or declared unconstitutional in Arizona, Texas, Massachusetts and Nebraska.
There has been a fierce battle taking place behind the scenes at the General Assembly with thousands of dollars being spent and virtually every lobbyist who is available being gobbled up for this fight. It’s unclear what the outcome of the measure will be. I frankly have a hard time seeing how it would stand up to Constitutional muster if it passes. It is one thing for two parties to have a clause in a contract where if one commits a breech, the breeching party pays damages. It’s an entirely different matter when the government steps in and mandates the winner of an agreement reimburse the loser.
HB 1191 is scheduled to be heard on Wednesday in the House Policy Committee.
