Joint Comment of the FTC Staff and DOJ Antitrust Division Staff to the California State Assembly Concerning California Assembly Bill 1541

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FEDERAL TRADE COMMISSION
Washington, DC 20580
DEPARTMENT OF JUSTICE
Washington, DC 20530
March 20, 2020
The Hon. Jim Wood
California State Assembly
State Capitol
P.O. Box 942849
Sacramento, CA 94249-0002
Dear Assembly Member Wood:
The staff of the Federal Trade Commission’s (“FTC” or “Commission”) Office of
Policy Planning, Bureau of Economics, and Bureau of Competition,1 and of the Antitrust
Division of the U.S. Department of Justice (the “Division”), (together, the “Agencies”) are
pleased to respond to your invitation for comments on the likely competitive effects of
California Assembly Bill 1541 (“A.B. 1541” or “the Bill”), a proposal to further restrict
contracting between beer manufacturers and beer wholesalers.2 In particular, the Bill
would make it more difficult for a beer manufacturer to terminate a distribution
relationship with a wholesaler, which can harm competition in several ways that will be
discussed below. Among other things, you have asked “to receive input specifically
regarding the potential competitive impact on members of California’s craft brewing
industry.”3
A.B. 1541 is likely to diminish competition between California beer wholesalers
and increase manufacturers’ costs of obtaining distribution services from wholesalers;
these effects, in turn, are likely to raise the costs of beer distribution. For these reasons, if
enacted, the Bill would likely lead to higher beer prices for California consumers; and it
may reduce the variety of beers available to California consumers and impede innovation
in the beer industry overall.
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics, and of the Antitrust Division of the U.S. Department of Justice. The letter
does not necessarily represent the views of the Federal Trade Commission (“Commission”) or of any individual
Commissioner. The Commission has, however, voted to authorize us to submit these comments.
2 Letter from the Hon. Jim Wood, California Assembly, to Bilal Sayyed, Director, Fed. Trade Comm’n Off. Pol’y
Plan. (Dec. 12, 2019).
3 Id.

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In 2005, the California legislature considered, and rejected, similar restrictions.4
Recent changes in the industry provide all the more reason for the legislature to reject
them again. The Bill’s restrictions are likely to burden members of California’s large, and
growing, craft brewing industry especially, as smaller, developing brewers might find it
hard to bear the costs of the proposed restrictions, and might be ill-equipped to enforce,
alter, or decline to renew distribution agreements, especially in dealing with large
distributors, or with distributors owned by large manufacturers.5 Moreover, we see no
evidence that the costs of these proposed restrictions would yield any countervailing
consumer protection benefits. We therefore recommend that California reject the
proposed restrictions, just as it has in the past.
I. 	Background
a. 	Interest and Experience of the Federal Antitrust Agencies
Competition is the core organizing principle of America’s economy,6 and vigorous
competition among sellers in an open marketplace gives consumers the benefits of lower prices,
higher quality, and greater access to goods and services, and innovation. The Agencies work to
promote competition through enforcement of the antitrust laws, which prohibit conduct that
harms competition and consumers, and through competition advocacy (e.g., comments on
legislation, discussions with regulators, and court filings.)
Both the FTC and the Division have extensive knowledge about the competitive
dynamics of the alcoholic beverage industry. The Commission has investigated proposed
4 FTC staff comments at that time raised competition concerns regarding potential amendments to California A.B.
417. FTC Staff Comment to the Hon. Wesley Chesbro, California Senate, Concerning the Proposed California
Franchise Act to Govern Contractual Relationships Between Beer Manufacturers and Wholesalers (2005),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-wesley-
chesbro-concerning-proposed-california-franchise-act-govern/050826beerfranchiseact.pdf (regarding proposed
amendments to California Assembly Bill 417). The Assembly ultimately adopted a far more limited A.B. 417, which
simply modified “the definition of beer to include any alcoholic beverage that qualifies as a malt beverage under a
specified federal law.” California Assembly Bill 417 (2005-06) (enrolled Sept. 14, 2005),
http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=200520060AB417; see also Cal. Bus. & Prof.
Code § 23006 (2020).
5 See, e.g., California Craft Brewers Ass’n, Number of Breweries in California Reaches New Record (2018),
https://www.californiacraftbeer.com/number-breweries-california-reaches-new-record/ (number of California craft
breweries tripling from 2012 to 2017); see also California Craft Brewers Ass’n, Craft Beer Statistics (2019),
https://www.californiacraftbeer.com/ca-craft-beer/craft-beer-statistics/ (noting “1,039 craft breweries in operation
across the state”). As explained below, the actual number may be higher if one considers both the holders of the
1,036 California “small beer manufacturer” licenses and some significant number – greater than 3 – of the 85
California “beer manufacturer” licenses to be “craft brewers.” See text accompanying notes 19 - 20, infra. Tripling
from 2012-2017, https://www.californiacraftbeer.com/number-breweries-california-reaches-new-record/
6 See, e.g., N.C. State Bd. Of Dental Exam’rs v. FTC, 135 S. Ct. 1101, 1109 (2014) (“Federal antitrust law is a
central safeguard for the Nation’s free market structures.”); Standard Oil Co. v. Fed. Trade Comm’n, 340 U.S. 231,
248 (1951) (“The heart of our national economic policy long has been faith in the value of competition.”).

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mergers between distributors7 and manufacturers8 of alcoholic beverages; and the Commission
and its staff have considerable experience in analyzing, in particular, the competitive impact of
regulations affecting the industry. For example, in 2003, FTC staff released a report on the
competitive effects of bans on direct shipments of wine;9 and in 2010 the FTC’s Bureau of
Economics published a working paper on the effects of “post-and-hold” laws.10 On several
occasions, FTC staff, at the request of state lawmakers, have commented on bills involving
direct shipment of wine to consumers.11 FTC staff have also commented on proposed
restrictions on the vertical relationships in the beer industry, including restrictions on
contracting between producers and wholesalers.12
7 Fed. Trade Comm’n, Press Release, Statement of the FTC’s Bureau of Competition Regarding Announcement that
Republic National Distributing Company and Breakthru Beverage Group have Terminated Their Acquisition
Agreement (Apr. 8, 2019), https://www.ftc.gov/news-events/press-releases/2019/04/statement-ftcs-bureau-
competition-regarding-announcement-republic.
8 Fed. Trade Comm’n, In the Matter of Pernod Ricard, S.A., Docket No. C-4224 (Decision & Order) (Oct. 17,
2008).
9 F ED. TRADE C OMM’ N, P OSSIBLE A NTICOMPETITIVE B ARRIERS TO E-COMMERCE : W INE, FTC STAFF REPORT
(2003), https://www.ftc.gov/sites/default/files/documents/reports/possible-anticompetitive-barriers-e-commerce-
wine/winereport2_0.pdf; cf. Granholm v. Heald, 544 U.S. 460 (2005) (citing the FTC staff report extensively at 544
U.S. 466-68, 489-92).
10 James C. Cooper & Joshua D. Wright, State Regulation of Alcohol Distribution: The Effects of Post & Hold Laws
on Alcohol Consumption and Social Harms, Fed. Trade Comm’n Bureau of Economics Working Paper No. 304
(2010), https://www.ftc.gov/sites/default/files/documents/reports/state-regulation-alcohol-distribution-effects-post-
amp-hold-laws-consumption-and-social-harms/wp304_0.pdf (a revised version of the paper was published as James
C. Cooper & Joshua D. Wright, Alcohol, Antitrust, and the 21 st Amendment: An Empirical Examination of Post and
Hold Laws, 32 I NT. J. LAW & ECON. 379 (2012).
11 FTC Staff Comment to the Hon. Paula Dockery Concerning Florida Senate Bill 282, a Bill to Allow Direct
Shipment of Wine to Florida Consumers (2006),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-paula-
dockery-concerning-florida-senate-bill-282-bill-allow-direct/v060013ftcstaffcommentrefloridasenatebill282.pdf;
FTC Staff Comment to the Hon. Eric D. Fingerhut Concerning Ohio S.B. 179, to Allow Direct Shipment of Wine to
Ohio Consumers (2006), https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-
honorable-eric-d.fingerhut-concerning-ohio-s.b.179-allow-direct-shipment-wine-ohio-
consumers/v060010commentreohiosb179directshipmentofwine.pdf; FTC Staff Comment to the Hon. William
Magee et al., Concerning N.Y. A.B. 9560-A, S.B. 606-A, and S.B. 1192, to Allow Out-of-State Vendors to Ship
Wine Directly to New York Consumers (2004),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-william-
magee-et-al.concerning-new-york.b.9560-s.b.606-and-s.b.1192-allow-out-state-vendors-ship-wine-directly-new-
york-consumers/v040012.pdf.
12 See FTC Staff Comment to the Hon. Wesley Chesbro, supra note 4; FTC Staff Comment to the Hon. Bill Seitz
Concerning Ohio H.B. 306, to Amend the Operation of Wine Wholesale Franchises (2005),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-bill-seitz-
concerning-ohio-h.b.306-amend-operation-wine-wholesale-franchises/051212cmntohiolegiswinefranchis.pdf; FTC
Staff Comment to the Honorable Dan Cronin Concerning Illinois S.B. 15, the Illinois Wine and Spirits Industry Fair
Dealing Act of 1999 (1999), https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-
honorable-dan-cronin-concerning-illinois-s.b.15-illinois-wine-and-spirits-industry-fair-dealing-act-1999/v990005.pdf; FTC
Staff Comment to the Honorable Hamilton C. Horton and George W. Miller Concerning An Act to Amend the Wine
Franchise Law to Provide for Exclusive Territories in North Carolina (1999),
https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-hamilton-
c.horton-and-george-w.miller-concerning-act-amend-wine-franchise-law-provide-exclusive-territories-north-
carolina/v990003.pdf.

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The Division has extensive experience analyzing competition in the beer industry through
its investigations of important industry mergers. In the course of those investigations, the
Division analyzed the crucial competitive role of distribution. For example, in 2016 the Division
required a number of remedies before allowing a merger between two of the largest brewers
worldwide—Anheuser-Busch Inbev (ABI) and SAB Miller. In addition to requiring the
divestiture of SABMiller’s ownership interest in MillerCoors, the settlement prohibits ABI from
engaging in certain practices that limit the ability and incentives of independent beer distributors
to sell and promote the beer of ABI’s rivals.13 The Division has reviewed all of ABI’s major
acquisitions, requiring significant divestitures as a condition of allowing each of those major
transactions to proceed.14
b. 	The Chain of Beer Distribution
California beer distribution typically follows a so-called “three-tier” system: brewers
or “manufacturers”15 (the first tier) sell to licensed wholesalers16 (the second tier) who, in
turn, sell to retailers17 (the third tier). California consumers typically purchase beer for off-
site consumption from retailers. This Bill primarily addresses the interaction between the
first two tiers.
In addition to the large brewers that are familiar from national advertising
campaigns, the past twenty years have also seen substantial growth in the craft brewing
industry in California. The California Craft Brewers Association reports that there are
1,039 craft brewers in California today, up from 200 in 2000.18 Although craft beer
manufacturers are not a distinct category of licensed beer manufacturer under California
law and regulations, it appears that large numbers of craft breweries are holders of the
1,036 California “Type 23 – small beer manufacturer” licenses, while others are among the 85
13 United States v. Anheuser Busch InBev, Case 1:16-cv-01483, Competitive Impact Statement, 3 (2016).
14 E.g., United States v. Anheuser-Busch InBev, Case 1:13-cv-00127, Competitive Impact Statement (2013); United
States v. InBev NV/SA, Case 1:08-cv-1965, Competitive Impact Statement (2008).
15 Beer manufacturers, licensed under Cal. Bus. and Prof. Code § 23357, include both larger holders of “Type 01 –
Beer Manufacturers” licenses, producing over 60,000 barrels of beer per year, and holders of “Type 23 – Small Beer
Manufacturer” licenses, which produce less than 60,000 barrels per year. California Dep’t of Alcoholic Beverage
Control, License Types, https://www.abc.ca.gov/licensing/license-types/ (last checked 02/10/20). Holders of Type
75 – Brewpub-restaurant” licenses also have limited brewing privileges, but are not considered true
“manufacturers.” Id. (citing Cal. Bus. & Prof. Code § 23396.3)
16 Distributors or wholesalers are holders of “Type 17 – Beer and Wine Wholesaler” licenses, California Dep’t of
Alcoholic Beverage Control, License Types, https://www.abc.ca.gov/licensing/license-types/, under Cal. Bus. &
Prof. Code § 23378 et seq.
17 Retailers (“retail package off-sale beer and wine license” holders) are licensed under Cal. Bus. & Prof. Code §
23393, and may sell “to consumers only and not for resale . . . in quantities of 52 galls or less per sale, for
consumption off the premises where sold.”
18 CCBA, Craft Beer Statistics (2018), https://www.californiacraftbeer.com/ca-craft-beer/craft-beer-statistics/
(reporting 1,039 craft brewers and more than 61,000 full-time employees) (last checked 02/19/20); CCBA History of
Craft Beer in California (2017), https://www.californiacraftbeer.com/ca-craft-beer/history-craft-beer-ca/ (reporting
fewer than 70 craft breweries in 1990, and 200 in 2000).

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holders of California “Type 01 – beer manufacturer” licenses, as reported by the California
Department of Alcoholic Beverage Control.19 Holders of such “Type 01” and “Type 23”
licenses do not include either brewpubs or home brewers.20
A 2016 Department of Justice investigation observed that craft brands “are increasingly
gaining market share,” and that “[t]his market trend is increasing the competition faced by
ABI,” and affecting the choices available to consumers.”21 We note, too, that Anheuser Busch
owns and continues to acquire diverse manufacturers, including craft breweries.22
Wholesalers are responsible for storing and delivering a brewer’s beer in a manner
that maintains the beer’s quality.23 Additionally, wholesalers establish retail networks to
sell the brands of beer that they carry. Although brewers typically are responsible for
providing national and regional advertising, wholesalers often provide point-of-sale
promotion like enhanced product placement, setting up displays, conducting in-store
events, and supplying retailers with information on the brands they represent.
Recent years have seen substantial changes in the chain of beer distribution, both
nationally and in California. For example, the “second-tier” wholesalers now include both
large vertically integrated firms, such as distributors owned by Anheuser Busch,24 and
large horizontally integrated firms, such as the six California wholesale firms that are part
of the Reyes Beer Division of Reyes Holdings, Inc. (“Reyes”), which claims to be the
largest distributor of beer in the United States.25 With recent California acquisitions, Reyes
is estimated to distribute nearly 100 million cases of beer per year in California—
approximately one third of all the beer sold in California.26
19 California Dep’t of Alcoholic Beverage Control, License Summary Count – State Totals,
https://www.abc.ca.gov/licensing/licensing-reports/license-summary-counts-for-fy-2018-19/license-summary-count-
state-totals/ (last checked 02/10/20).
20 See note 15, supra.
21 United States v. Anheuser Busch InBev, Case 1:16-cv-01483, Competitive Impact Statement, 7 (2016).
22 Id. at 4-5 (reporting that Anheuser Busch owned 19 US breweries and over 40 brands of beer sold in the US,
representing approximately 47% of beer sold nationally); see also, e.g., Kimberly Chin, Anheuser-Busch InBev to
Buy Out Craft-Brewing Company, Wall St. J., updated Nov. 12, 2019 (reporting on AB InBev’s acquisition of Craft
Brew Alliance); Ashlee Kieler, Here Are The 8 U.S. Craft Brewers Bought By Anheuser-Busch Since 2011,
Consumerist, Consumer Rep., Apr. 13, 2016, https://www.consumerreports.org/consumerist/here-are-the-8-u-s-
craft-brewers-bought-by-anheuser-busch-since-2011/ (reporting on acquisition of California’s Golden Road
Brewing, among others) (last checked 02/19/20).
23 For an overview of wholesaler services under the “three-tier” system, see FTC staff comments, supra note 4, at 3.
24 See, e.g., United States v. Anheuser Busch InBEV, supra note 21, at 9-10.
25 “Reyes Beer Division is the largest beer distributor in the United States.” Reyes, https://reyesbeerdivision.com/
(last checked 02/19/20).
26 Bryan Roth, So Shiny RN – America’s Largest Distributor Makes Its Own Gold in Latest California Acquisition,
Jul. 9, 2019, https://www.goodbeerhunting.com/sightlines/2019/7/9/so-shiny-rn-americas-largest-distributor-makes-
its-own-gold-in-latest-california-acquisition (last checked 02/19/20) (estimating 98 million cases per annum in
California). Reyes’s own website suggests similar scale across its six California distributors: Harbor Distributing,
LLC, Gate City Beverage, Crest Beverage, Allied Beverages, Golden Brands, and High Desert Distributing. Links to
each distributor’s web site can be found at https://reyesbeerdivision.com/our-distributors (last checked 02/19/20).

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These tiers are not wholly isolated under California law. For example, while
wholesalers may sell “only to persons holding licenses . . . authorizing the sale of alcoholic
beverages,”27 under certain conditions, consumers may purchase beer, for consumption on
the premises, at a brewery.28 California law expressly provides that beer manufacturers “may
[also] hold retail . . . licenses,”29 and we understand that California law also permits
manufacturers to hold ownership interests in distributors. For example, Anheuser Busch, the
largest beer manufacturer in the United States, also owns and holds ownership interests in
beer wholesalers, including in California.30
c. 	Assembly Bill 1541
A.B. 1541 would substantially limit the ability of a beer manufacturer to “cancel,
terminate, reduce, not renew, or cause any of the same, an agreement with a beer wholesaler for
the distribution of beer and malt beverage products.”31 No similar restrictions would be placed
on beer wholesalers.
According to the Bill:
• 	Except under special circumstances,32 a beer manufacturer cannot cancel or alter an
agreement—or even decline to renew an agreement—unless the beer manufacturer acts
According to a 2018 report by the National Institute on Alcohol Abuse and Alcoholism, California beer
consumption totaled 687,240,000 gallons in 2016; that is, roughly 305,000,000 cases. Nat’l Inst. on Alcohol Abuse
and Alcoholism, Div. of Epidemiology and Prevention Res. Alcohol Epidemiologic Data System, APPARENT PER
CAPITA ALCOHOL CONSUMPTION: NATIONAL, STATE, AND REGIONAL TRENDS, 1977–2016, Table 2
(2018). Hence, Reyes wholesalers alone appear to distribute approximately one third of all the beer sold in
California.
27 Cal. Bus. & Prof. Code § 23378.
28 At the “licensed premises of production,” manufacturers may sell beer directly to either a holder of a
“license authorizing the sale of beer” or to consumers, “for consumption on the manufacturer’s licensed premises
or on premises owned by the manufacturer that are contiguous to the licensed premises and which are operated by
and for the manufacturer.” Cal. Bus. & Prof. Code §23357(a)(1) – (2).
29 Cal. Bus. & Prof. Code § 23357(b).
30 See, e.g., United States v. Anheuser Busch InBev, Case 1:16-cv-01483, Competitive Impact Statement, 4, 9
(2016); see also Chris Furnari, Consolidation Continues as A-B Invests in 2 California Wholesalers, Brewbound
(Sept. 2, 2015), https://www.brewbound.com/news/consolidation-continues-as-a-b-invests-in-california-wholesalers
(last checked 02/19/20).
31 Proposed Cal. Bus. and Professions Code § 25000.3(b).
32 Some, but not all, of the notice requirements would not apply if, for example, a beer wholesaler’s insolvency or “a
petition by or against the beer wholesaler under any bankruptcy or receivership law,” fraud by the wholesaler, or
“[r]evocation of the beer wholesaler’s license by the department or of the beer wholesaler’s basic permit by the
Alcohol and Tobacco Tax and Trade Bureau of the United States Department of the Treasury.” [Proposed
25000.3(f)(1)-(7)]. In addition, the manufacturer would still bear the burden of showing its compliance with
remaining notice requirements, and of showing “good faith” and “good cause.” 25000.3(g).

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“in good faith” and “with good cause” and has satisfied numerous “notice and
opportunity to cure” and “notice of termination requirements.”33
• 	The burden falls on the beer manufacturer to show that “it has acted in good faith, that it
has or had good cause . . . and that it complied with the notice requirements [of the
Bill].”34
• 	To meet the “good cause” requirement, the beer manufacturer would be required to
demonstrate that:
(1) There is a failure by the beer wholesaler, without reasonable excuse or
justification, 	to 	comply 	substantially 	with 	essential 	and 	commercially
reasonable requirements of the agreement. . . .
(2) The beer wholesaler was given written notice by the beer manufacturer of
failure 	to 	comply 	with 	the 	agreement, 	including 	reasonable 	supporting
documentation.
(3) The beer manufacturer first acquired knowledge of the failure described in
paragraph (1) not more than ____ months before the date notification was given
to the beer wholesaler.
(4) The beer wholesaler has been afforded ____ days in which to submit a plan of
corrective action to substantially comply with the agreement, and an additional
____ days to cure such alleged noncompliance in accordance with the plan of
corrective action or, at the beer wholesaler’s election, to sell its distribution
business or the affected part of its distribution business.35
A manufacturer, including a craft brewer, could not even decline to renew a contract with
a distributor whose performance it found unsatisfactory, without satisfying all of the Bill’s “good
cause” requirements. As noted above, except under special circumstances, a manufacturer would
bear the burden of demonstrating its compliance with all of these notice requirements.36 A beer
manufacturer that fails any of these requirements would—for either a “violation or threatened
violation” —be subject to “a temporary restraining order, and preliminary and permanent
injunctions” from a California court.37 Moreover, a beer manufacturer would be required “to
compensate the injured beer wholesaler for all reasonable damages sustained,” in addition to
“any other statutory, legal, or equitable remedy available to the beer wholesaler.”38
33 Proposed Cal. Bus. and Professions Code § 25000.3(b)(1)-(3).
34 Proposed Cal. Bus. and Professions Code § 25000.3(g).
35 Proposed Cal. Bus. and Professions Code § 25000.3(d)(1)-(4). The proposed notice requirements do not yet
specify the number of days or months that would be required.
36 Proposed Cal. Bus. and Professions Code § 25000.3(g).
37 Proposed Cal. Bus. and Professions Code § 25000.3(h).
38 Id.

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To issue an order or injunction against a brewer, the court would be required to
“consider the disruption to the wholesaler’s business operations and its employees that may
result” from the “violation or threatened violation.”39 But the Bill does not stipulate that the
court should similarly consider impact on the beer manufacturer’s operations or its
employees; neither does the Bill stipulate that the court should consider the impact on
competition or California consumers.
II. 	The Likely Competitive Effects of A.B. 1541
The Bill proposes to add significant regulatory burdens to contracting between
beer manufacturers (breweries) and beer wholesalers. These would add to the substantial
provisions of California’s Business and Professions Code, and would in many respects
supplant requirements under California’s generally established body of contract law.40
The Bill would make it more difficult—and more costly—for a brewer to enforce
contractual arrangements designed to reduce wholesale prices or increase wholesaler
incentives to provide demand-enhancing services. It would also make it more difficult—
and more costly—for a brewer to alter a contract, or simply decline to renew one, with an
under-performing wholesaler. Its economic burdens are asymmetric: it places no such
costs on wholesalers. The Bill therefore is likely to raise brewers’ costs of distribution and
to damage competition among both wholesalers and brewers. Accordingly, if enacted,
A.B. 1541 would likely lead to higher beer prices for California consumers and may lead
to less variety, and less innovation.
When similar restrictions were proposed in 2005, they were purported to “foster
vigorous and healthy inter-brand competition in the beer industry.”41 As FTC staff
explained at that time, the proposed restrictions were likely to have the opposite effect.42
Changes in the industry render these restrictions even more likely to cause harm today. As
explained below, many of California’s craft beer manufacturers may be ill-equipped to
enforce, alter, or decline to renew distribution agreements, especially in dealing with large
distributors, or with distributors owned by large manufacturers. Adding numerous and
costly regulatory impediments, and increased exposure to liability, would put such craft
brewers at a further disadvantage. Moreover, when forming distribution agreements, new
and developing brewers may be less well positioned than established ones to anticipate
their future distribution needs.
A. The Bill Would Reduce Competition Among Wholesalers
The Bill likely would reduce competition among wholesalers for brewers' business.
As discussed above, A.B. 1541 would make it difficult—if not impossible—for a brewer to
39 Id.
40 See generally, e.g., Cal. Civ. Code § 1549 et seq.
41 FTC Staff Comment, supra note 4, at 3 (citing Proposed Cal. Bus. and Professions Code § 25000.3(c)(13)).
42 Id.

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terminate a wholesale contract in order to switch to a competing wholesaler offering more
attractive terms. Even declining to renew a contract with a poorly performing wholesaler
would require a brewer to undertake numerous, time-consuming, and costly steps, and
would expose the brewer to additional liability.43 Such costs and risks may be especially
onerous for small craft brewers and entrants into the market. Knowing this, new and existing
wholesalers would have little incentive to compete to distribute a brewer’s brands. Absent a
threat of competition, incumbent wholesalers’ incentives to improve performance or to
lower costs are diminished, likely leading to higher wholesale beer prices, and ultimately
higher retail beer prices in California.
B. The Bill Would Likely Reduce Competition Among Brewers
The Bill also may lessen competition among brewers. As noted above, its
provisions may affect smaller brewers to a greater extent than larger brewers, because
larger brewers may be in a better position to incur the legal and regulatory costs of
termination, and may thus have a greater ability to exercise control over wholesalers.
Established brands that advertise heavily, moreover, may not rely as much on wholesaler
effort; and established brands that own or hold interests in wholesalers will be able to
exercise such control directly, without the same administrative and legal burdens and
exposure. Against the backdrop of reduced competition among wholesalers, small
brewers—who face relatively high impediments to contract enforcement, and depend more
heavily on wholesalers’ marketing efforts—may find it relatively difficult to market new
products. California consumers, as a result, may find the variety available to them
diminished. In addition, other dimensions of competition, such as innovation, would also
likely be dampened, as both established brewers and would-be entrants may be less
willing to invest in developments that their wholesalers might not promote.
Further, as noted above, craft brands “are increasingly gaining market share,” and “[t]his
market trend is increasing the competition faced by [Anheuser Busch].”44 To the extent that
larger brewers have large or small brands that compete with small brewers’ brands, and to
the extent the Bill raises small brewers' distribution costs more than it raises large brewers’
distribution costs, A.B. 1541 may reduce the aggressiveness of large brewers’ pricing for
those brands that compete with small brewers’ brands, thus raising the price that California
consumers pay for those brands of beer.
C. The Bill Would Reduce Wholesaler Incentives to Increase Sales
The Bill is likely to make it more difficult for brewers to ensure that wholesalers
take actions to increase demand for their product, and therefore is further likely to deprive
California consumers of more intense competition among brewers.
1. 	Brewers’ and Wholesalers’ Incentives to Increase Sales are Likely to Differ
43 See text accompanying notes 32 - 38, supra.
44 See text accompanying note 21, supra.

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A consumer who discovers a brewer’s brand due to wholesaler effort (for example,
the provision of point-of-sale information, or negotiation of better product placement), will
continue to purchase the brand no matter which wholesaler supplies it to his or her retailer.
The brewer has gained a new customer, but that customer has no particular allegiance to
the wholesaler. Because the wholesaler might not capture all the returns on its efforts, its
incentives to undertake those efforts in the first place are diminished.45 That is, brewers
and wholesalers both care about sales, but wholesalers typically care less about stimulating
sales of particular products than the individual brewers with whom they contract.46
Because some of the returns from a wholesaler’s efforts accrue to individual brewers, not
the wholesaler, the wholesaler’s incentives may be to supply fewer of the demand-
enhancing services than a brewer would seek.
In addition, because a wholesaler does not reap the full benefit of a brewer’s
reputation, it has less incentive than the manufacturer to maintain a level of quality
associated with a particular brand. When this happens, consumers can receive less quality
than they pay for, and might thus be less likely to purchase the brand's product again.47
For example, when a consumer does not enjoy a beer that has not been stored at the
correct temperature, and decides not to purchase that brand again, the brewer loses all of
that customer’s potential future purchases, wherever they would have been made. The
wholesaler, on the other hand, loses only those future sales through retailers that the
wholesaler supplies, and even then, only those that are not offset by sales of other brands
through the same wholesaler.
Competition helps align brewer and wholesaler incentives: in a competitive market,
beer wholesalers must vie with each other to secure and maintain brewers’ business,
competing on price, the range of services they offer, and the quality and consistency of
their services. If a wholesaler’s bid or performance seems unsatisfactory, a brewer can
choose a competing offer. But the Bill would diminish this type of competition, making it
far more difficult for brewers to switch to alternative wholesalers.
45 See Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & ECON. 86 (1960). Suppliers
also may have an incentive to act opportunistically when wholesalers have made large investments to increase
the demand of a particular brand, for instance, by threatening to terminate its relationship with the incumbent
wholesaler and turn over the business to a competing wholesaler (who could free-ride on the incumbent
wholesaler's efforts) unless it receives price concessions. Of course, private contractual solutions often are
employed by parties to eliminate or mitigate such opportunistic behavior. See, e.g., Benjamin Klein, Exclusive
Dealing as Competition for Distribution "on the Merits," 12 GEO. MASON L. REV. 119 (2003).
46 See Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J.L.
& ECON. 265 (1988).
47 For example, a brewer may insist that its beer be stored and transported in a certain way to preserve the
beer's quality. Without proper storage, total demand for the beer (i.e., not merely demand at the one retail
location) would be lower because consumers would likely associate the poor quality not with the retailer's
inadequate storage, but with the manufacturer's product. See, e.g., Adolph Coors Co. v. FTC, 497 F.2d 1178
(10th Cir. 1974). Similarly, a fast food franchisee that uses inferior products at his restaurant does not
internalize the full costs of his actions, because consumers will associate the bad experience with the
franchisor's brand name, not a particular franchisee. See Benjamin Klein, The Economics of Franchise
Contracts, 2 J. CORP. FIN. 9 (1995); Paul H. Rubin, The Theory of the Firm & the Structure of the Franchise
Contract, 21 J.L & ECON. 223 (1978).

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These various differential incentive effects for manufacturers and wholesalers
might be muted or skewed when the two tiers are vertically integrated.48
2. 	Contracts Can Mitigate Misaligned Incentives
Contracts also help to align brewer and wholesaler incentives, as manufacturers
and wholesalers can enter into formal agreements that require wholesalers to take certain
actions on behalf of the brewers with which they contract. For example, contracts may
include quality standards and maximum resale prices or sales quotas to limit wholesaler
markups. They also may include exclusive territory provisions designed to provide
wholesalers with additional incentives to provide sales-generating effort.49 As many
economic studies have found, such provisions tend to benefit consumers in the form of
higher output, lower prices, and improved services,50 although they can, under particular
circumstances, raise competition concerns.51 As the U.S. Supreme Court has noted on
numerous occasions, vertical contracts can intensify interbrand competition,52 which
benefits consumers with lower prices and improved quality.53
Typically, the threat of termination—or non-renewal—provides wholesalers an
incentive to abide by their contractual commitments. But, as explained above, the Bill
48 Vertical integration – like vertical restraints – can, depending on the facts and circumstances, be competitively
beneficial, benign, indeterminate, or harmful (anticompetitive). See generally, James C. Cooper et al., Vertical
Antitrust Policy as a Problem of Inference, 23 J. I NDUS. O RG. 639 (2005). For a more recent review of empirical
work on vertical restrictions, transaction costs, and inter-firm contracts, see Francine Lafontaine & Margaret E.
Slade, Transaction Cost Economics and Vertical Market Restrictions, 55 A NTITRUST B ULLETIN 587 (2010).
Supplemental remedies imposed on Anheuser Busch acquisitions of, and dealings with, distributors are, presumably,
designed to guard against anticompetitive arrangements that might be entered into by a particular manufacturer.
49 See, Tim R. Sass & David S. Saurman, Mandated Exclusive Territories and Economic Efficiency: An
Empirical Analysis of the Malt-Beverage Industry, 36 J.L. & ECON. 153 (1993) (finding that in states where
exclusive territories are mandated for beer wholesalers, prices tend to be higher and demand tends to be higher,
consistent with exclusive territories leading beer wholesalers to provide more sales-generating effort).
50 Papers reviewing the empirical literature on vertical restraints find that most studies' results are consistent
with vertical restraints commonly (not always) being procompetitive. See Lafontaine & Slade, supra note 48;
Cooper et al., supra note 48; see also, e.g., Tasneem Chipty, Vertical Integration, Market Foreclosure, and
Consumer Welfare in the Cable Television Industry, 91 AM. ECON. REV. 428 (2001); Michael G. Vita,
Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline Divorcement
Policies, 18 J. REG. ECON. 217 (2000); Margaret E. Slade, Beer and the Tie: Did Divestiture of Brewer-
Owned Public Houses Lead to Higher Beer Prices?, 108 ECON. J. 565 (1998); Jan B. Heide, Shantanu Dutta
& Mark Bergen, Exclusive Dealing and Business Efficiency: Evidence from Industry Practice, 41 J.L. &
ECON. 387 (1998); Michael G. Vita, Must Carry Regulations for Cable Television Systems: An Empirical
Analysis, 12 J. REG. ECON.159 (1997).
51 See supra note 48.
52 See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977); Monsanto Co. v. Spray-Rite Service
Co.,465 U.S. 752 (1984); Business Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717 (1988); State Oil Co. v.
Khan, 522 U.S. 3 (1997). Vertical agreements challenged under Sherman § 1 are subject to rule of reason
treatment and can violate the antitrust laws when they, on net, reduce interbrand competition.
53 See Nat'l Soc'y of Prof. Eng'rs v. United States, 435 U.S. 679, 695 (1978) ("ultimately competition will
produce not only lower prices, but also better goods and services.") (citation omitted).

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would diminish, and sometimes practically eliminate, this threat of termination: the Bill
would impose numerous, time-consuming, and costly requirements on the termination,
or even non-renewal, of such contracts,54 impeding a brewer’s ability to ensure that
wholesalers take actions to increase the demand for their products, and decreasing the
wholesaler’s incentive to do so.55 Even in circumstances where a wholesaler breaches
the terms of its contract, or loses its license, the Bill would likely cause a brewer to
incur substantial legal costs to switch wholesalers. The burden of proof (or
“demonstration”) would still fall with the brewer, and the brewer would still be exposed
to a restraining order or a temporary or permanent injunction, as well as a risk of money
damages, for a “violation or threatened violation” of its various regulatory burdens.56
As noted above, the Bill’s burdens fall asymmetrically on brewers, as A.B. 1541 imposes
no such costs, or heightened liability, on wholesalers. Hence, the Bill is likely to exacerbate,
rather than resolve, misaligned incentives in the chain of distribution. Moreover, for the same
reasons described above, smaller brewers could suffer greater harm than larger ones. On both
counts, consumers are likely to suffer the consequences.
III. 	Conclusion
A.B. 1541 is likely to reduce wholesalers’ incentives to provide important demand-
enhancing services; and it is likely to reduce competition among wholesalers to carry
brewers’ brands. Further, the Bill may disproportionately increase the distribution costs of
smaller brewers, potentially reducing competition among certain beer brands.
Consequently, if the Bill is enacted, California consumers would likely pay higher prices for
beer and may enjoy less variety.
Nothing in the Bill directly addresses the interests of California consumers.
Moreover, the differential burdens the Bill would impose upon brewers do not seem
calibrated to address any particular bargaining asymmetries between brewers and
wholesalers, and we are pessimistic that they could. Indeed, as discussed above, the notion
of a systematic bargaining imbalance between brewers and distributors has become more
problematic than ever. California beer manufacturers are many and diverse, as are
California wholesalers. While there are small distributors and large brewers doing business
in California, there are also some very large distributors, distributors owned by very large
manufacturers, and a large number of licensed craft breweries holding “small manufacturer”
licenses.
54 See supra notes 33 - 38, and accompanying text.
55 See James A. Brickley et al., The Economic Effects of Franchise Termination Laws, 34 J.L. & ECON. 101,
113 (1991) (analysis of case law supports the premise that termination laws increase the cost of termination
and non-renewal); see also Tracey A. Nicastro, How the Cookie Crumbles: The Good Cause Requirement for
Terminating a Franchise Agreement, 28 VAL. U. L. REV. 785, 796-98 (1994) (cataloging several courts'
interpretations of "good cause" that limit a franchisor's ability to terminate franchisees).
56 See notes 36 - 38, supra.

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We believe that the Bill is likely to impede competition in California beer
distribution, to the detriment of California consumers. We see no countervailing consumer
protection benefits in evidence. Hence, we urge the California legislature to reject A.B.
1541, just as it has rejected similar proposals in the past.
Sincerely,
Bilal K. Sayyed, Director
FTC Office of Policy Planning
Andrew Sweeting, Director
FTC Bureau of Economics
Ian Conner, Director
FTC Bureau of Competition
David Lawrence, Chief
Competition Policy and Advocacy Section
U.S. Department of Justice, Antitrust Division
Eric D. Welsh, Acting Chief
Healthcare and Consumer Products Section
U.S. Department of Justice, Antitrust Division
Elizabeth Armington, Chief
Economic Regulatory Section
U.S. Department of Justice, Antitrust Division