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Sonoma County brewery in major legal battle with wholesaler amid competition concerns in $9 billion California beer market

A major battle in California’s more than $9 billion beer market is playing out in a San Francisco court with a Sonoma County brewery at center stage.

On one side is Reyes Holdings, the largest beer wholesaler in the country and the eighth-largest private company in the United States with $35 billion in revenue, according to Forbes.

The family-owned, Illinois-based company has gone on a rapid buying spree since 2018. In California, 17 different deals involving Reyes and its subsidiaries have resulted in Reyes having a 55% market share of all beer sold in the state, according to one count. The company’s astounding growth and its implications has been topic No. 1 among beer industry insiders in the state, though it is largely unknown to consumers.

The Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)
The Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)

On the other side is Seismic Brewing of Santa Rosa, which is being sued for allegedly breaching a contract that the brewery entered with a distributor that Reyes later bought. Seismic, which is owned by Christopher Jackson, contends that it exited its contract properly after Reyes sought to impose onerous restrictions not covered by the original deal.

Jackson, a second-generation member of the family that runs Jackson Family Wines, has set out on his own to be a pioneer in the craft beer market since founding the local brewery in 2015. He contends Reyes and its subsidiaries are engaging in anti-competitive practices that have unfairly forced out family distributors, placed onerous terms on small craft brewers and limited availability for consumers in the most populous regions in the state.

The case at its core is a dispute between Reyes and Seismic over termination of a wholesaling contract to sell the brewery’s beer in stores and restaurants in some Northern California markets. But it also has shined a spotlight on massive changes taking place in beer distribution in the state and nationally, changes that some say will hamper the ability for beer lovers in the Golden State to buy their favorite craft beer locally.

“Distributors are the gatekeepers of the beer business,” said Kevin Luckey, executive director of the California Family Beer Distributors, a trade group that has tangled with Reyes. “Beer is as much about access. You got to get beer to a grocery store. You got to get beer to a bar.”

The legal case has taken on heightened importance, coming as the Biden administration is examining anti-competitive practices across the entire economy, including in the wine, beer and spirits industry. Commentators have cited Reyes specifically for criticism in the federal probe, arguing for the need to place more constraints on consolidating beer wholesalers to promote greater competition in the $94 billion U.S. market.

On the state level, there is even more significant movement with Seismic saying in a filing Tuesday that state Attorney General Rob Bonta is conducting his own antitrust investigation of the industry. In its filing, Seismic said the state has subpoenaed the brewery regarding an investigation into “anti-competitive activity in relation to beer distribution and pricing in California.”

Bonta’s office said in a statement it could not comment on the probe, or even acknowledge whether it exists because its subpoenas are confidential.

Austin Brackett, who also makes his own home brew, sipping beers at Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)
Austin Brackett, who also makes his own home brew, sipping beers at Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)

The issue has stayed under the radar so far, given the complex aftermath of Prohibition, when each state was allowed to regulate alcohol under a three-tier system to avoid monopolization. Producers sell their inventory to wholesalers, who in turn market and sell beer, wine and spirits to retailers.

California carves out some exceptions, allowing breweries to sell on site as well as self-distribute or operate their own distribution arms. Stone Brewing Co. of Escondido, for example, has its own wholesaling arm that serves southern California.

The dispute between Reyes and Seismic was sparked when a Reyes subsidiary named Harbor Distributing in 2019 bought DBI Beverage, which operates key distribution companies in areas such as Sacramento, San Francisco and San Jose. DBI formerly served Seismic under wholesaling contracts.

Jackson claims it eventually backed out of those contracts after Reyes would not continue the same terms as originally agreed to by DBI and wanted to impose more onerous policies that would make it “virtually impossible” to switch distributors, according to a Seismic legal filing. In return, DBI — now controlled by Reyes — last year sued Seismic alleging breach of contract.

But unlike other smaller brewers without the resources, Jackson was ready for a fight. He also understood what he was wading into perhaps better than many craft brewery owners. A graduate of UC Berkeley’s law school, Jackson is the son of the late billionaire Jess Jackson, a lawyer who founded Jackson Family Wines and engaged in high-profile legal battles with the U.S. thoroughbred industry as well as his competitors in the wine industry.

Seismic filed a cross complaint against Reyes and its various subsidiaries alleging that because of Reyes’ acquisitions “California’s once robust craft beer industry is in jeopardy.” It noted that in San Francisco, Seismic could not find a replacement distributor for more than a year after it pulled out of DBI and its sales “cratered.”

Korey Smith pouring beers from the taps at Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)
Korey Smith pouring beers from the taps at Seismic Brewing Taproom in The Barlow in Sebastopol, Calif., on Thursday, Oct. 7, 2021. (Photo: Erik Castro/for The Press Democrat)

In a statement, Jackson said “our entire business is now at risk because of Reyes Holdings, which has spent billions of dollars acquiring independent distributors across California and nationally.” He added that “what was once a robust market with lots of options is now dominated by the largest distributor in the U.S. who doesn’t care about smaller breweries like ours.”

For its part, Reyes and its subsidiaries contend that the case is solely about a breach of contract with Seismic: They argue that the DBI companies suffered economic harm with the abrupt loss of the exclusive rights to distribute Seismic after the brewery pulled out and it failed to adhere to termination payments as well as unpaid invoices.

“The claims made in this lawsuit do not accurately represent the way in which Reyes Holdings or Harbor Distributing operates. Any business decisions or actions taken on behalf of either company are in full compliance with federal and state laws, with oversight and approval provided by the appropriate regulatory authorities. The companies will vigorously defend themselves against these baseless allegations,” said Reyes spokeswoman Laurel Patrick in a statement.

Furthermore, Reyes argues that antitrust allegations are in essence a legal red herring as its California deals passed muster with regulators and that there has been no harm as Seismic has been able to find other distributors or self-distribute in those same markets where a subsidiary of Reyes operates.

“ (The) facts as alleged by Seismic show that Reyes and Harbor did not ‘force’ Seismic to do anything: Harbor simply offered Seismic new distribution contracts, and Seismic decided to reject those offers,” Reyes and Harbor said in a Sept. 23 filing. “These were routine business transactions, and Seismic cannot turn them into antitrust violations by using the word 'force' instead of 'offer.'“

But this case does not exist in a vacuum and comes with many hard feelings from Reyes’ actions over the past few years. At the top of the list are other smaller distributors who were so alarmed at the acquisitions that they formed their own trade group, the California Family Beer Distributors, to distance from the main trade group, the California Beer and Beverage Distributors, and its influence from Reyes.

The California beer wholesaling market has shrunk in recent years amid rapid consolidation. Anheuser-Busch InBev announced late last year it would purchase Ace Beverage of Los Angeles. With the acquisition, Anheuser-Busch InBev and Reyes would control an estimated 85% of the wholesale beer market in California, according to Alcohol Justice, a Marin County-based watchdog group. The advocacy group wrote to then-state Attorney General Xavier Becerra in December and urged him to investigate the alcohol distribution sector.

Alcohol Justice said in its letter that the Ace Beverage sale raised concerns over a duopoly in the state distributing market and could violate the consent decree that Anheuser-Busch InBev entered into with the U.S. Justice Department over its purchase of SABMiller.

“This consolidation is effectively reducing the state’s wholesaler market to two distributors, Anheuser-Busch InBev and Reyes. Anheuser-Busch InBev does not typically take smaller brands that may compete with its own offerings, and those smaller brands are also just ignored by Reyes,” the California Family Beer Distributors said in its letter to the federal Alcohol and Tobacco Tax and Trade Bureau, which is conducting the federal probe under the Biden administration.

The field is shrinking in the state sector. There were 51 beer distributors in California before 2018, and now there are 37.

“This one company (Reyes) is gaining incredible market share throughout the state and smaller independent family distributors are kind of in a tough spot. Their business is very much at risk,” Luckey said.

His group also made a serious charge in a letter to the federal government. It alleged that Reyes orchestrated numerous “fire sales” with manufacturers by picking up brand distribution rights from companies such as Constellation Brands, Boston Beer, and Sierra Nevada from smaller distributors at below fair market value.

Beer distribution contracts in California typically allow a brewery to end its wholesaler relationship without cause upon 30 days written notice. During this period, the outgoing wholesaler may sell the distribution rights to another company with the brewery’s approval. The California Family Beer Distributors contend that these smaller distributors were then forced to sell to Reyes at below fair market value after receiving such notices from large beer companies.

Reyes responded by saying the California Family Beer Distributors letter was filled with “inflammatory rhetoric about forced sales” but ignored the individual choices made by brewers “to move their beer distribution rights to a distributor that provides the most efficient and effective service,” wrote Tom Day, chief executive officer of Reyes Beer Division, in a Sept. 30 letter.

Despite its activity, Reyes has so far not acquired any notable North Coast wholesalers, which include Columbia Distributing, Eagle Distribution Co. and Morris Distributing Co.

Still, other parts of the supply chain are also concerned. In June, the San Francisco Bar Owner Alliance, a group of 471 individual bar owners, wrote to Reyes and complained of poor service since one of its subsidiaries took over DBI San Francisco. The group expressed its “vehement dissatisfaction with the corporate policies and customer service we have been experiencing.”

That wariness also applies to Russian River Brewing Co. of Windsor. The beloved craft brewery that makes cult favorite Pliny the Elder had seen four of its six distributors in the state be acquired by Reyes and its subsidiaries in recent years, said co-owner Natalie Cilurzo.

“You lose options when the entire wholesaler is acquired,” she said. Russian River was able to exit their contracts with Reyes and its subsidiaries without any litigation, which typically happens in such cases with a change in ownership if a brewery has the wherewithal to leave a contract.

In one case, Cilurzo said she was forced to buy back her contract for a Santa Cruz wholesaler taken over by Reyes. Russian River had to self-distribute its beer until a new wholesaler came into that local market.

“I had a line of credit that I was able to utilize, but if you are a smaller brewery, you may not have that line of credit,” Cilurzo said of being able to buy her contract back from Reyes.

She added that the rate of consolidation within the state is going to make it harder for craft brewers to get out their beers to customers who don’t live near the brewery.

“You are backed into a corner and don’t have many choices,” she added of wholesaler consolidation. “In my opinion, I think I share this opinion with others, this is anticompetitive by definition.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.

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