Virginia, which prides itself on preserving free market deals, has handed its 95 beer wholesalers a multimillion dollar windfall through a web of state regulations and laws born of skillful lobbying and longtime friendships.
To critics, the story of how the wholesalers carved out a protected position in the marketplace with the help of state officials and lawmakers is an example of the often cozy relationships between Virginia's supposed watchdog agencies and industries they regulate.
"This is an industry that reaches to the grassroots of the country clubs of Virginia," says state Sen. Ray Garland, a Roanoke Republican. "I'll bet there are 20 wholesalers who can call [Lt. Gov.] Chuck Robb by his first name, maybe 30 who can do the same with [Gov. John] Dalton or [Attorney General J. Marsall] Coleman."
The whole subject came to light recently when it was revealed that Coleman abruptly halted a state antitrust investigation of the wholesalers last August after lawyers for the wholesalers complained about it. Coleman denies the calls influenced his decision.
The centerpriece of the wholesalers' success story: a 1972 rule passed by the Virginia Alcoholic Beverage Control Commission that effectively allowed wholesalers to fix their prices and, according to critics, artifically inflate their profits at the consumer's expense.
The wholesalers deny the regulation gave them an unfair advantage, aruging their beer prices are as low or lower than those in neighboring states. But state investigators estimate the measure added as much as a nickel to the price of a six-pack of beer -- or $5 million a year in extra revenue.
There was another victory the next year, and again in 1977, when the wholesalers returned to ask for further restrictive amendments. Each time they got almost exactly what they asked for.
Combined with a law passed by the General Assembly in 1978 that gave them virtual territorial monopolies, critics say the wholesalers today enjoy, thanks to the state, what federal antitrust prosecutor John J. Miles calls "little gold mines."
To its critics, the industry's remarkable record of success suggests that Virginia's traditional regard for free enterprise is suspended when it comes to helping friends in need. Although about 20 states have some form of price-fixing regulation or territorial requirement, Virginia's combination of the two made it among the nation's most restrictive, according to beer industry spokesmen and antitrust laywers.
"It's completely ironic, but the great conservatives of Virginia really believe not in free enterprise but in protected local monopolies insulated from competition," says former Fairfax delegate Raymond E. Vickery.
Coleman's office has since advised the ABC Commission that the 1972 regulation is a likely violation of both federal and state antitrust laws and the commission has suspended the rule pending a hearing this month.
A key figure in the wholesalers success is their chief lawyer, former state Democratic chairman William G. Thomas of Alexandria, who has built a reputation as one of Virginia's most effective and politically well-connected lobbyists.
Thomas argues that the beer industry, unlike most private enterprises, must operate under a structure of state ABC laws and rules and is therefore an exception to antitrust statutes -- an argument the state attorney general's office rejects. He also contends the wholesalers need all the state protection they can get from predatory national breweries that he charges were forcing wholesalers into cutthroat and sometimes illegal business practices before the ABC Commission stepped in.
Thomas contends he has been only partly successful in arguing the wholesalers' case before the ABC Commission, but an examination of agency records and interviews with most of the principals involved suggests otherwise. r
The examination reveals that the 1972 regulation and subsequent amendments were adopted largely as proposed by the wholesalers, that the commission ignored a 1977 warning from then-attorney general Anthony F. Troy that the regulation might be illegal, and that it never made any effort to determine the impact of the rule on the industry or on beer prices.
The wholesalers first began pressuring the ABC Commission for help in the late 1960s, after a similar effort at the General Assembly failed in committee. In August 1971, in a "Dear Rod" letter to commission chairman T. Rodman Layman, lawyer Thomas requested an informal meeting with the commission to go over a draft of a proposed regulation Thomas had written.
Thomas proposed that each wholesaler furnish his price list to the commission and his competitors every six months. During that period wholesalers could raise or lower their prices only after notifying competitors, who could then adjust their prices accordingly but could not reduce them below the new bottom price. The rule also limited discounts to two weeks every six months and ordered wholesalers to inform competitors in advance.
The wholesalers were blunt about why they wanted the rule. As then-association president Jack F. Fick Jr. put it, they were tired of being forced into discounting beer by the large breweries or by the retailers they sold to.
"The situation has degenerated to a point of continual discounts, some of them as much as one dollar per case" complained Fick at a January 1972 commission hearing.
The brewers argued that price-posting would lead to higher beer prices. A Schlitz sales manager testified that beer was 20 cents higher per six-pack in North Carolina, which then had a price-posting statue, than in Virginia.
"This is price-fixing at its worst," argued Alexander Neal, a lawyer for Anheuser-Busch. "And worst of all, to the consumer what this regulation is going to amount to is higher prices for beer."
Neal's words fell on deaf ears. After a second hearing, the commission passed what its offical minutes described as the "amended industry version." It went even further than Thomas' version by outlawing price reductions except during the first 15 days of each six-month period.
"Those boys [the wholesalers] did their homework," recalls Albert Evans, then director of the Virginia Food Dealers Association, which opposed the rule. "They were in there 13 deep. We were outnumbered."
The following year, after another exchange of "Dear Rod" and "Dear Bill" letters between Layman and Thomas, the commission approved four industry-proposed amendments, including one banning discounts to large retailers.
Four years later, over howls of protests from the brewers, the commission approved another amendment requiring brewers to give 30 days written notice of price increases to both the commission and the wholesalers. According to an April 25, 1977, "Dear Bob" letter from Thomas to Robert Garian, ABC deputy for regulation, the amendment was first discussed by the two men at the 1977 shad planking in Wakefield, Va., an annual all-male political picnic.
ABC Commission Chairman Layman denies he and other agency officials have been too cozy with the wholesalers. But Layman says he is reluctant to discuss the reasons for adopting the regulations because of the likelihood that the commission's recent decision to suspend the rule will lead to litigation.
Layman concedes the basic rationale of the regulation was to protect the wholesalers and to "stablize the market." He argues that goal is in line with state policy to control and not overly encourage drinking of beer and other alcohol.
Layman also concedes the commission has never studied the economic impact of the regulation. He says no one had questioned the regulation until recently, and "we don't go out and hire experts and spend public money on matters on which there are no complaints."
Layman notes that then-attorney general Robert Button stated in 1968 that the commission had the authority to adopt a price-posting regulation. He says the agency never heard about Attorney General Troy's misgivings about the rule, even though Troy says all state agencies were routinely cautioned in 1977 about regulations that were potentially "anticompetitive."
The following year, Thomas and the wholesalers went to the General Assembly for more protection. At his request, Del. John Gray, a Hampton lawyer whose practice includes a substantial amount of ABC work and who is considered a member of the legislature's inner circle, introduced a beer franchise bill. The measure, which gave the wholesalers terrtorial monopolies for their particular brands of beer, breezed through a House committee by a vote of 11 to 2 and passed both legislative houses easily.
The wholesalers mounted a full-scale lobbying campaign, registering seven lobbyists and paying Thomas and his law partner, Walter Marston, a former assistant attorney general, $40,810 in legal fees and $5.542 in expenses, according to state records. They also had backing from Layman, who publicly declared himself "sympathetic" to the bill.
"At the time, I had the sense that this was much more complicated than it seemed," recalls Del. Elise Heinz of Arlington, a freshman lawmaker in 1978, who voted for the bill despite misgivings.
Heinz recalls her surprise that the bill had no real opposition. "I had the vague sense that this was something on which the skids had been greased pretty well," she says.
Gray says he introduced the bill because the wholesalers asked him to. As to charges that it was anticompetitive, he says, "Nothing like that was brought up at the time."
The ABC Commission suspended its price-posting regulation in March only after a recent Supreme Court decision striking down a similar California law. Should the commission abolish the rule permanently later this month, many observers believe the wholesalers will forgo a court fight and ask their friends in the legislature to make price-posting a legal statute.
"We've got both alternatives and we'd sure look at both of them," says Thomas.