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NEW YORK v. ANHEUSER-BUSCH

January 14, 1993

STATE OF NEW YORK by ROBERT ABRAMS, Attorney General Plaintiff,
v.
ANHEUSER-BUSCH, INC., et al., Defendants



The opinion of the court was delivered by: THOMAS C. PLATT

MEMORANDUM AND ORDER

 PLATT, Chief Judge.

 I. DECISION AND PRELIMINARY COMMENT

 A. Decision

 B. Comment

 Were it not for the Second Circuit Court of Appeals decision in Eiberger v. Sony Corp. of America, 622 F.2d 1068 (2d Cir. 1980), we would have granted defendant's motions heretofore made herein for summary judgment on the grounds that the State has been unable to show at any time in this proceeding a relevant geographic market or possession by the defendant of market power as is apparently necessary under Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 53 L. Ed. 2d 568, 97 S. Ct. 2549 (1977) (hereinafter "Sylvania "), and its progeny hereinafter discussed. Eiberger, however, arguably holds that a vertical restraint may be unreasonable without a finding that a plaintiff has shown a relevant geographic market or possession of market power and that there must be a trial to weigh the interbrand benefits against the intrabrand effects of any restraint caused by a restrictive agreement. It is for that reason, even though in the case at bar the defendant clearly articulated and showed on its summary judgment motion some material procompetitive effects of its agreements, that we felt the protracted trial which we held herein to be necessary. There are authorities and suggestions in other cases and articles that a showing of some material procompetitive effects under such circumstances should be sufficient to satisfy the rule of reason and that the balancing otherwise necessarily required herein is not necessary. *fn1" A clarification on this point would not only be helpful but would also save future litigants and the district courts inordinate amounts of time and effort and money.

 II. PROCEDURAL BACKGROUND

 This case concerns an action commenced by the State of New York on July 15, 1986, against four brewers, Anheuser-Busch, Inc. (hereinafter "A-B"); Miller Brewing Company; Stroh Brewery Company; and G. Heileman Brewing Company; four named and an unspecified number of authorized wholesalers; and a beer wholesalers' trade association. The action challenged the brewers' use of wholesaler-assigned exclusive territories to distribute their products.

 In July 1989, by stipulation and order, the Court dismissed all claims with prejudice against G. Heileman and Stroh and the wholesalers' association. A-B, Miller and various wholesalers moved for summary judgment against the State and the State similarly cross-moved. In an Order filed September 19, 1990, the Court denied each summary judgment motion. In September 1991, a stipulation and order dismissing with prejudice all claims against Miller was signed by the Court. Through these stipulations brewers Stroh, Heileman and Miller were permitted to continue utilizing their vertical restraints without alteration and without fear of future State action. Subsequent to the commencement of the trial, all claims againstthe defendant wholesalers were also dismissed with prejudice by stipulation and order. As a result of these settlements, the present matter concerns only the State's claim against Anheuser-Busch. At the close of the State's case, A-B filed a motion for involuntary dismissal pursuant to Fed. R. Civ. Pro. 41(b). This motion was denied on January 2, 1992.

 III. FACTUAL FINDINGS

 A. The National Beer Market

 Anheuser-Busch brews and distributes for sale in New York State (and indeed throughout the country) a number of brands of beer including Budweiser, Bud Light, Bud Dry, Michelob, Michelob Light, Michelob Dry, Michelob Dark, Busch, Busch Light, Natural Light, O'Douls, and King Cobra. Although a major participant in the national beer market for years, (in 1971 A-B accounted for 18.6% of all national beer sales), A-B has developed into the nations's leading producer of beer products and by 1989 it held a 42% share of the national market and a 39% share of the New York State market. (Def.Ex. AB-WB; AB-WC).

 B. Beer Sales in New York State

 In the early 1970s, much of the beer sold in New York State was brewed in this State, under brand names such as Schaefer, Ballantine, Rheingold, and Genesee. By the 1980s, with the exception of Genesee, none of those brands accounted for a significant share of sales. Instead, A-B and Miller, both lesser producers in the early 1970s, together with Genesee, had become the leading brewers, combining for approximately 58% of the sales in New York State in 1982. (Def.Ex. AB-WC). As defendant's expert Myslinski *fn2" and State's expert Bradburd *fn3" testified at trial, A-B's rising popularity and the demise of some of its competitors can be, in part, attributed to divergent attitudes towards producing a quality product. (Tr. 3180-3182, 3189; Def.Ex. AB-EN at 125278; Tr. 3402; Pl.Ex. 378, Busch Dep. at 63; Tr. 1747-49, 2834; Def.Ex. AB-MK; Tr. 3781-3783).

 By 1989, the landscape of the beer market had continued to transform, with each brewer's share of the total beer sales in New York State split as follows:

 A-B: 39% share;

 Miller: 14.6% share;

 Genesee: 7.5% share;

 Coors: 7.1% share;

 Heileman: 6.9%

 Stroh/Schlitz: 5.5%

 Pabst: 4.0%

 Imports: 12.9%

 All Other Domestics: 2.6%. (Def.Ex. AB-WC).

 In addition to the changing fortunes of existing brands, the New York market has witnessed the entry of numerous new brands, most notably Coors, which began selling in the State in 1987 and obtained 7.1% of the State's total beer sales by 1989. During the 1980s, some 10 to 15 new brands of beer were introduced in the State of New York each year. Some of the successful new entrants include: Corona and Amstel Light, as well as micro-brewery products Samuel Adams, New Amsterdam and Brooklyn Lager. (Tr. 2797-2802, 3377-2278). In addition to the new products from other brewers, in the past 15 years A-B has introduced numerous new brands, such as Busch, Busch Light Draft, King Cobra, Michelob Dry, Bud Light, Bud Dry, and O'Douls, while Miller has introduced Miller Lite, Milwaukee's Best, Meister Brau and Miller Genuine Draft. A-B's share of thetotal beer sales in New York State is not, nor has it ever been, consistent throughout different regions of the State. (Uncontested Facts P 132-134). Sales in the New York Metropolitan Area *fn4" account for over 50% of the A-B's total State sales and comprise a higher market share than do A-B's total sales in the rest of the State. For instance, A-B's most popular products, Budweiser and Bud Light, accounted for 30.85% of the total share in the New York Metro area from 1987-1991, but only 18.98% of the total beer sales in Albany, and 10.20% of the sales in Buffalo. (Def.Ex. AB-VE).

 C. Distribution of A-B Beer

 Beer is a perishable product with a shelf-life of up to 105 days. *fn5" Like the vast majority of brewers, A-B utilizes a date coded system to track the freshness of their product. *fn6" Each container is marked in a manner unintelligible to the consumer, leaving the consumerunable to learn the freshness of the product before purchase. This serves to prevent customers from shuffling through stock searching for the freshest product, leaving the older, yet still fresh, beer to sit past its expiration date. (Tr. 2443-2446, 3845-3846). Only one brewer, Samuel Adams, was shown to utilize a consumer-intelligible dating system. (Tr. 2179-2180; Pl.Ex. 474).

 The demand for A-B products varies throughout the year, reaching peaks during the summer months and the holiday season at the end of the year. A-B's brewing capacity is not sufficient to produce the quantity of beer demanded during peak periods of the year. Combined with the perishable nature of the product, this fluctuating demand and limited production capacity makes production and inventory planning and control necessary to insure sufficient product supply during the peak periods. (Tr. 2012-2017).

 Beer is generally distributed through a three-tiered system -- brewer to wholesaler to retailer. In New York, however, due to its unique licensing laws, a layer of sub-distributors (known as "home distributors") exists in certain areas, adding extra tiers to the system. Depending on the type of license obtained, these home distributors may sell beer either at wholesale only or at wholesale and/or retail. Home distributors exist independently of any specific producer and are not contractually obligated to distribute A-B's or any other brewer's product. They are not permitted to purchase beer directly from the brewery and must rely on the brewer's authorized wholesalers or other home distributors for their supply.

 By 1983, with the addition of a new brewing facility in Baldwinsville, New York, A-B had twelve breweries in the United States. As stated above, these breweries do not sell beer directly to retail customers, rather they sell only to A-B authorized wholesalers. Each authorized wholesaler is assigned to a source brewery, from which it obtains the vast majority of its supply. For New York State authorized wholesalers there are two possible source breweries; the A-B brewery in Baldwinsville, New York, services most of A-B's upstate wholesalers and some of the Metro wholesalers and its facility in Newark, New Jersey, services many of the downstate authorized wholesalers. (Uncontested Facts P 11; Tr. 2019, 2022).

 Of their 900 nationwide authorized wholesalers, A-B has 34 located in New York State and six within the New York State and six within the New York Metropolitan Area. Each wholesaler is assigned an area in which to focus its sales. Upon purchasing beer from the brewery the wholesalers sell the beer to retailers and/or home distributors who are located in their assigned areas. In areas with numberous home distributors, it is not unusual for beer to be transferred between two or more home distributors before it reaches the retailer. With home distributors transferring products among themselves, in regions like the New York metropolitan area where home distributors are particularly concentrated, *fn7" beer is often distributed through a four-, five or more tier system before it reaches the consumer. In areas such as upstate New York, which are without home distributors, A-B beer is distributed directly from the wholesaler to the retailer. (Tr. 2339-2340). Retailers, in turn, sell to consumers for consumption on-premise (bars, restaurants, stadiums) or off-premise (supermarkets, delis, convenience stores).

 The activities of the authorized wholesaler do not cease upon completion of a sale. Wholesalers must service each account to which they sell A-B beer. "Servicing" an account involves monitoring the stock rotation and freshness of the A-B beer possessed by the retailer (Tr. 2095-2099); destroying and replacing any overage beer (Tr. 1758; Pl.Ex. 377, Britt Deposition at 28, 187); installing and maintaining "point-of-sale" materials; *fn8" and regularly checking on the account by delivery salesmen and sales supervisors (Tr. 2107-2108). The importance of properly servicing an account is exemplified by the battle among producers to gain optimum shelf space and tap placement in retail establishments. (Tr. 3404-3405, 3334-3335, 3348-3350). Although the amount of a certain brand of beer purchased by the retailer will depend largely on the demand by consumers for that product, through attractive offers of packages and services a wholesaler can make certain beer more desirable for retail purchasers. (Tr. 3404-3405). By inducing its wholesalers to make its product more appealing to retailers, a producer can help increase consumer sales of the product.

 The unique existence in New York of home distributors has also invigorated the practice of "transshipping". In the beer industry, "transshipping" refers to the sale of beer out of the geographic area or territory assigned to an authorized wholesaler. In New York State, this practice arises when an authorized wholesaler sells to an in-territory home distributor which, in turn, sells (transships) the beer to an account located outside the wholesaler's territory. *fn9" Transshipped beer is attractive to retailers because it is often offered at a lower price and transshippers, unlike authorized wholesalers, can deliver brands produced by more than one brewer. (Tr. 139-143, 585-586). However, due to the scarcity of home distributors in much of the State, no appreciable amount of transshipping occurs outside the Metro New York Area. (Tr. 2063-2064, 2422-2423). As of 1982, the only A-B products which were being transshipped were Budweiser, Michelob, Michelob Light and Natural Light, with Budweiser accounting for 90% of the transshipping transactions.

 D. The Equity Agreement

 In 1967, A-B became the first national brewer to enter into a uniform written agreement not just in New York but with all its authorized wholesalers nationwide, replacing a terminable at-will arrangement under which beer was purchased on an order-to-order basis. The stated purpose of this "Equity Agreement" was to promote investment and long-term commitment from the wholesaler by giving them an equity in their business. The agreement was imposed uniformly nationwide and signed by each of A-B's 900 authorized wholesalers. Since 1967, the Equity Agreement has been amended twice, once in 1974 and again in 1982. It is the terms of the 1982 amendments and their imposition of exclusive territories on A-B's wholesalers that New York State contests as an unreasonable restraint of trade. (Complaint P 42).

 A-B amended the 1967 Equity Agreement in 1974. The 1974 amendments assigned each authorized wholesaler a territory of primary responsibility in which to concentrate its selling, servicing and promotional efforts. *fn10" Certain provisions provided sales and merchandizing objectives, and directed the wholesalers to work towards achieving maximum market representation of A-B products in their area.

 Eight years later, in 1982, A-B decided to amend again the Agreement by including, among other new provisions, an exclusive territory provision. A-B was the first brewer in New York to implement exclusive territories. However, presently most other major brewers *fn11" and numerous state legislatures require such a system. New York is one of only nine states without any statute or regulation addressing exclusive territories for beer distribution. The alcoholic beverage control laws of 30 states (i.e., 60% of the states) mandate (i.e., require) exclusive territories and prohibit wholesaler sales outside the brewer-assigned territories. *fn12" Ten more states expressly permit (i.e., a total of 80% of the states) brewer assigned territories for beer distribution. *fn13" Only one State, Indiana, expressly prohibits exclusive territories for beer distribution.

 As with the previous revisions, the 1982 amendments were uniform for all of A-B's authorized wholesalers nationwide. The amendments were unilaterally imposed by A-B, as A-B executives informed the wholesalers of the new policy, explained their reasons for the amendments, and required each authorized wholesaler to sign the new agreement. On its face, the Agreement seemed to prescribe that any wholesaler who violated the terms of the Agreement by selling outside of its assigned territory was subject to termination, although there was no evidence that any wholesaler has been terminated for failure to abide by the terms of the Equity Agreement.

 The exclusive territory clause of the 1982 Agreement provided:

 
"Anheuser-Busch hereby appoints Wholesaler as the wholesale distributor of, and grants to Wholesaler the right to sell, the Products in the territory described in Exhibit 2 ("Territory") and agrees that it will not appoint another wholesaler for the Products sold by Wholesaler in the Territory. . . . Wholesaler hereby accepts said appointment and agrees to exercise its best efforts to promote, sell and service the Products in the Territory. Wholesaler agrees that it will not sell Products directly or indirectly to customers located outside the Territory ; provided, however, that Wholesaler may, subject to the approval of Anheuser-Busch, sell Products to customers located in another wholesaler's territory if that wholesaler is unable for any reason to service its territory. . . ."
 
(Def.Ex. A-A)(emphasis added).

 In addition to the exclusive territory provision, the 1982 Agreement also (1) required wholesalers to have controlled environment warehouses ("CEW"); (2) required beer to "come-to-rest" within the authorized wholesaler's CEW to ensure proper storage and stock rotation; (3) required beer to be shipped out of wholesalers warehouse on a "first in, first out" basis; (4) instituted a successor management procedure to ensure orderly transition in management; (5) revised the procedures followed in event of a contemplated sale of an ownership interest in a wholesalership; and (6) revised the deficiency termination provisions.

 E. The Purpose of the 1982 Amendments

 A-B's purported motive in imposing the 1982 amendments was to foster further wholesaler investment, increase distribution efficiency, enable wholesalers to compete more efficiently with rival brands, and to reduce free-riding by transshippers. *fn14" The amendments also sought to limit the amount of overage beer reaching the consumer. Although the defendant concedes that its wholesalers provided some services and made some investments called for in the previous Equity Agreements, the 1982 amendments mandated wholesaler investment. By entitling each wholesaler to an exclusive territory, A-B not only gave wholesalers the incentive to make the desired investments, but made them better able to afford such investments. (Tr. 2101, 2515, 2856-2857, 3122-3123). Not illogically, like any other business would, A-B says it hoped to increase their profitability by instituting methods to make them more competitive.

 A-B, while conceding its opposition to the transshipping practice, does not concede that a desire to reduce transshipping motivated the implementation of the 1982 amendments. As was shown at trial, its opposition to transshipping stems from the negative effects transshipping had on both A-B's and A-B wholesalers' ability to provide the desired enhanced quality, services and promotions to consumers and retailers. (Tr. 2823-2824, 3407-3408; Pl.Ex. 38, at 168073-168076). Transshippers, having no allegiance to A-B, do not engage in the substantial investments and many of the quality control, product promotion and services that A-B asks of its wholesalers. *fn15" (Def.Ex. AB-AFT, Myslinski Report at 16; Pl.Ex. 38 at 168074).

 Some of the proven detrimental effects of transshipping include:

 
1. Free-riding : Wholesaler effortsto increase demand for A-B products were undermined by transshippers who could reap the benefits of these efforts by selling A-B products in the wholesaler's territory. (Tr. 3406-3408; 3216; Pl.Ex. 38 at 168076; Def.Ex. AB-K, at 107182; Def.Ex. AB-D, Hausman Report at 5).
 
2. Diminution of Wholesaler Efforts : Transshipping put financial strains on wholesalers, diminishing their willingness to engage in advertizing and promotions or community affairs. (Def.Ex. AB-K at ...

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