https://www.youtube.com/watch?v=22GEvDupWGo&list=RD22GEvDupWGo&start_radio=1

In Chicago, a corrupt mayor never goes to jail — it’s always some low-level schmuck who goes to prison. It is difficult not to develop a cynicism that the federal government harpoons the minnows while letting the dirty whale swim by.

I had the same thought when I learned about the federal government’s settlement with the former Southern Glazer’s Wine and Spirits, now Southern Glazer’s (“Southern”). Southern, the largest liquor wholesaler in the country, entered into a non-prosecution agreement with the federal government where it agreed to pay $12.5 million to settle a federal investigation into allegations of bribery and false invoicing pertaining to wine sales in California. Retailers were accused of accepting bribes such as luxury items, Super Bowl tickets, and golf trips, among many other high-priced items. At the same time, those facing criminal charges included an owner of a third-party marketing company working on this scheme with Southern employees and some former non-C-suite Southern executives.

Southern acknowledged that its personnel used third-party providers to conceal illicit payments through false invoices.

In addition to paying the fine, Southern agreed to strengthen its compliance mechanisms and to continue cooperating in the investigation of former and current employees.

Wayne E. Chaplin, President & Chief Executive Officer of Southern Glazer’s, put it this way: “This conduct does not reflect Southern Glazer’s values, culture, or standards, and it will not be tolerated. Our success has always been built on winning the right way.” [1]

It’s a nice line. It’s also hard to square with a company that used third-party vendors and false invoices to run a bribery scheme, this does not seem like winning the right way.

A joke of a settlement

There is no gray area in these laws — Southern willfully and actively violated the law. The company illegally bribed retailers and developed strategies to conceal its crimes. Yet the federal government decided to give it a pass. The $12.5 million fine[2] is essentially tip money to a company with $25 billion in revenue.[3] Figures aren’t available on how much revenue Southern generated through these illegal programs, but I’m confident crime paid off here. If this had been a smaller distributor, I doubt any settlement offer would have amounted to 0.05% of its revenue.

Ironically, it was Southern’s own “good behavior” that helped mitigate the sanctions. As the Statement of Facts (Attachment A) put it: “in 2019, the Company took steps to mitigate known violations of trade practice regulations by providing written notice to certain third-party marketing companies and terminating their ability to handle incentives and gift cards.” For good measure, the feds even complimented Southern for spending more on compliance.

Although the money doesn’t appear to have been well spent in terms of actually complying with the law, Southern got rewarded for it anyway. It’s hard for me to believe that an organization as sophisticated as Southern didn’t know what was right and wrong, and equally hard to believe this was the work of a rogue sales team out of California acting alone. This seemed like something that went higher up the food chain.

The federal government has laid a soft hand on a major wholesaler that illegally bribed its way into additional shelf space in the largest market in the U.S., at the largest grocery chain in that state. I wonder how Southern’s executive team failed to notice this sudden mass increase in sales. The bribes weren’t cheap — luxury golf outings and Super Bowl tickets — and needed to do more than pay for themselves.

What I do find ironic is the industry’s reaction to this settlement. If people are being honest, they’ll admit it was simply a cost of doing business for Southern. There will be no real outrage, and no call for real reform from the wholesaler acolytes. Southern will make a faux-contrite promise to spend a little more on legal compliance, toe the line for a while, and then quietly return to the same practices.

Contrast this with when Pepsi, through Blue Cloud, tried to get into the alcohol wholesale business. The wholesale industry was up in arms over slotting fees, worried that Pepsi would leverage its Frito-Lay portfolio — where slotting fees are legal — to gain an unfair advantage in alcohol wholesaling. Even though there was no evidence that slotting fees were being indirectly paid to retailers, the regulatory pressure got to Pepsi, and Blue Cloud bowed out as an industry player.

Pepsi never wrote a check to a single retailer. Southern admitted it did — with false invoices to cover the trail — and got a non-prosecution agreement and a fine equal to tip money.

So what happens now?

Southern has admitted, in writing, to paying what amounts to slotting fees. The question isn’t whether the conduct happened — the federal settlement already answers that. The question is what state licensing authorities do with it. Will any state move to deny license renewal, suspend a license, or open its own investigation? Or does a federal non-prosecution agreement quietly become the industry’s floor for accountability?

Southern’s scheme took shelf space away from other producers, and with the company’s resources, it may have put smaller producers or wholesalers out of business. The counterargument is that this is a free market, and Southern was simply using its economic power the way companies do in other industries.

But those who favor the three-tier system — Southern among them — argue that it’s different from the free market of the soft drink industry, that the three-tier structure ensures there’s more on the shelf than just Coke and Pepsi. As Southern’s own website puts it: “The three-tier system creates a level playing field, so smaller players with fewer resources can still compete fairly in the market.”[4] It has, the company argues, been extremely successful in promoting competition, since the beverage alcohol industry carries more SKUs than any other industry.

Will the wholesaler tier now speak out against Southern, which bribed its way into selling more of its own wine products at its competitors’ expense? If the industry truly cares about the threat of slotting fees and the danger of one company bribing its way onto shelves at the expense of product diversity, it should be quick to call for state regulators to sanction Southern. My guess is that the Wine and Spirits Wholesalers of America won’t say a word about this. They’ll keep reciting the same platitudes while playing Nero as the fire burns around them.

For readers looking to get ahead of these issues rather than clean up after them: Gillian Garrett’s Distilling Alcohol Law: California & Federal Unfair Trade Practice Laws is a solid resource for training staff on the nuances of tied-house laws for California and federal purposes.

[1] https://www.businesswire.com/news/home/20260910907283/en/Southern-Glazers-Statement-on-Resolution-with-U.S.-Department-of-Justice

[2] https://www.justice.gov/usao-ndca/media/1461006/dl?inline

[3] https://www.forbes.com/companies/southern-glazers/

[4] https://www.southernglazers.com/insights-hub/partner-resources/What-is-the-three-tier-system-of-alcohol-distribution