Will David Slay the Goliaths?
A new lawsuit filed by a David against the two largest wholesaler Goliaths in America shines a light on power, abuse, monopolies and, hopefully, justice.
As Prohibition ended, the great fear was that with the legalization of alcohol sales, producers would once again come to dominate retailers. The solution many states instituted to prevent the “tied house” abuses of the past was to require a wholesaler be placed in between what was imagined to be the dominant producer of alcohol and the vulnerable retailer.
How’s that working out?
On Wednesday, a young company called Provi filed suit in federal court against the two largest wholesalers in America: Southern-Glazers and Republic-National. Their claims are multifaceted. From their complaint filed in federal court in the Northern Division of Illinois Eastern Division:
This case is about the nation’s two dominant wine and spirits distributors unlawfully acting to stifle the growth of Plaintiff Provi, a new online marketplace for alcohol products that threatens Defendants’ control of the nation’s alcohol distribution and undercuts their plan to extend that control to new online markets. Defendants have acted together and individually to boycott, disparage, and tortiously interfere with Provi’s business. Southern has also unlawfully forced retailers to use its own online marketplace, SG Proof (“Proof”), by tying online sales of its alcohol products to use of that specific marketplace.
First, what does Provi offer? Provi is a one-stop online platform that allows restaurants, bars and alcohol retailers to order wholesale products from multiple wholesalers. It takes and transmits the order to wholesalers for their users. It’s very efficient. Recently, individual wholesalers have worked to create their own systems for taking orders. However, many retailers and restaurants have noted that the Provi system is better and more efficient.
When we talk about the power of alcohol wholesalers and particularly the largest, multi-state wholesalers like Southern-Glazers and Republic-National, we generally take note of the power they wield over lawmakers via campaign contributions. We often note that these and other wholesalers are protected by state law from having to compete on a level playing field. And we note that these wholesalers have consistently worked the courts and the legislatures to prevent consumers from receiving wine shipments from out-of-state producers and retailers.
What isn’t often discussed are the other ways by which these large, multi-state companies have become so powerful and so controlling of the marketplace that they feel comfortable attempting to destroy even third-party marketing firms, as Provi is claiming in their federal lawsuit.
I don’t usually encourage readers to read over a legal brief or legal decision. All too often they are dense and filled with legal jargon making them difficult to both read and understand. But I want to encourage my readers to take a look at the complaint filed by Provi and its attorneys at Morrison & Foerster. It alleges a sordid tale of bullying, deception, public humiliation, and coercion all aimed at, according to Provi, harming a competitor that doesn’t even sell wine. All they do is process orders.
The complaint filed in Federal Court against Southern/Glazers and Republic-National is unusually easy to read. There is a distinct narrative to the events laid out in the complaint. But for those of you not inclined to read through the 88 pages, I want to list some of the highlights that have been conveniently listed in a press release issued by Provi on Wednesday:
Southern sent letters to and left voicemails to retailers stating "[Southern] will no longer accept orders transmitted by third-party e-commerce platforms or services, such as Provi, SevenFifty, or others."
Alan Rosenberg, General Counsel of RNDC, conveyed to Provi that: "RNDC will continue to promote and steer our customers towards using our own e-commerce platform and away from Provi."
Tracy Araial, SVP eCommerce & Digital at RNDC, "RNDC will continue to block all incoming email traffic and/or orders sent to RNDC using Provi."
As one National Account put it calling RNDC's position "confus[ing]" since "the only thing Provi is doing is submitting the order to the rep the same [as] has always been done . . . [while] giv[ing] us the ability to place all of our orders from one page rather than having to visit multiple places."
Nathan Mansperger, Southern's Vice President of eCommerce, recently acknowledged that Southern's "goal is to achieve a higher share online vs offline," confirming its intention to extend its longstanding market dominance to online markets with even higher shares of those markets.
A Southern sales representative admitted that Southern's decision to reject orders that retailers communicated through third-party online alcohol marketplaces was "the pinnacle of stupidity" and motivated by "an effort to force our customers to use our poor excuse of [a] software," Proof. That sales representative further characterized Proof as "amateurish and very difficult to navigate" and, more bluntly, "an abysmal failure of epic proportions."
Anyone who works in the alcohol industry and particularly anyone who has ever sold to a wholesaler or bought from a wholesaler understands how the behemoths of the wholesale side of the industry could, if they wanted, move on a smaller company by using their influence among those that often MUST use their services. This is another way of saying that the claims Provi is making are perfectly in line with how many in the alcohol industry understand the power and proclivities of the largest wholesalers.
One thing that is notable about the claims Provi is making in their federal complaint is they are accusing Southern-Glazers and Republic of three separate violations of the Sherman Anti-Trust Act, a 130-year-old federal law aimed primarily at preventing monopolies and unfair trade practices. Take note that in a report on competition in the U.S. wine industry issued by the Treasury Department, not more than a month ago, there was considerable indication given by the feds that they would be taking a much closer look at the anti-trust aspects within the alcohol industry.
I’ve long said that the primary problem with the alcohol regulatory system in the U.S. is not the wholesalers with the anti-competitive and anti-consumer behavior and their massive political influence that they regularly wield. Yes, that is all a problem that hinders competition and the development of a fair marketplace. But the primary problem is with the state laws that require the use of a wholesaler by both the producer and the retailer. It is through these laws that make u the central part of the “three-tier system” that wholesalers have gained significant protection from real competition and allowed a small number of them to grow so large that they can wield power not only over the marketplaces they operate, over the producers that need them and over the retailers that are required to work with them, but also, as Provi claims, over even non-licensed, third party providers.
This case, “Provi v Southern”, is likely to take a good long while to play out. It is likely that the Southern-Glazers and Republic-National will delay as long as they can. By delaying, and in the absence of any immediate remedial action taken against the accused offenders, Provi will continue to feel the harm they claim in the lawsuit. There will be briefs filed, more briefs filed, expert testimony and there will be discovery—which will be fascinating and something that will cause the industry to watch closely. You never can know what a judge will allow to be disclosed in discovery.
In the end, however, this case is about control of the alcohol marketplace by the largest entities playing in that marketplace. It is about power. It is about abuse. And, yes, it is about David vs. Goliath.