Hughes v. Liquor Control Board of Ontario: 2000 Beer Framework Agreement
The trend of Canadian consumers and licensees challenging how provincial governments regulate, tax, and sell alcohol is alive and well in 2018. The anticipation in advance of the Supreme Court of Canada’s decision in R. v. Comeau, and the widespread media attention following its release, speaks for itself. From coast-to-coast Canadians are dissatisfied with the regimes in place in their respective provinces that tax and restrict the sale of alcohol. The ink spilled over Comeau tells us something else too: very few Canadians actually understand how the liquor licensing and retail regimes in their respective provinces operate.
Fortunately, for readers of Alcohol & Advocacy in Ontario, the recent Superior Court of Ontario decision in Hughes v. Liquor Control Board of Ontario et al, goes a long way to explaining the beer warehousing and retailing environment in Ontario. In doing so the Court dispelled certain widely held myths about the much maligned Beer Store. Hughes is a lengthy (286 paragraphs) decision that provides an unusually detailed account of the business side of the government retail of beer in Ontario. It can be read in full here.
The Hughes decision predates the Comeau decision by about a month but is consistent with the latter. In passing, the Court confirmed that “the provinces have the jurisdiction to regulate and control the sale of liquor within their boundaries and to fix the prices at which, and the conditions under which, liquor may be sold.”
Mr. Hughes and his restaurant The Poacher, both of beautiful Burlington, Ontario, have now joined good (but also unsuccessful) company in challenging provincial alcohol regulation. Recently the now defunct Toronto Distillery Co., and Halifax’s Unfiltered Brewing made similar court challenges over what they perceived to be unfair treatment by their respective provincial regulators.
Mr. Hughes’ lawsuit targeted the Liquor Control Board of Ontario (“LCBO”), Brewers Retail Inc. (which does business as the Beer Store), and the Beer Store’s majority shareholders Labatt Breweries of Canada, Molson Coors Canada, and Sleeman Breweries.
Mr. Hughes in his proposed class action was seeking over $1 billion in damages for various breaches of the Competition Act, civil conspiracy, unjust enrichment, breach of the Liquor Control Act, as well as the freshly-invented tort of “Misconduct by a Civil Authority.”
Needless to say Mr. Hughes’ lawsuit was broad in scope. While legally the proceedings were somewhat complex, for the purposes of this article the thesis was straightforward: Mr. Hughes alleged that the large breweries that own the Beer Store (Labatt, Molson, Sleeman) entered into a clandestine arrangement known as the 2000 Beer Framework with the government of Ontario which permitted the Beer Store to sell beer to licensees at an inflated price and would limit ordinary government liquor stores’ ability to sell beer in quantities greater than a six pack.
Mr. Justice Paul Perell, using colourful language at times, dismissed the action in its entirety.
The genesis of the lawsuit appears to have been a December, 2014 article published by the Toronto Star that purported to have uncovered the 2000 Beer Framework Agreement. The article, rather dramatically (and incorrectly), described the Agreement as a “secret deal” between the LCBO and Brewers Retail, an “inglorious cash grab”, and a “protectionist pact” that gouged both beer drinkers and the food and beverage industry. Three days later Mr. Hughes commenced his lawsuit.
To place Mr. Hughes’ allegations in context, the court summarized the history of Ontario’s beer market in some detail.
The History of Ontario’s Beer Market
Since 1927, when Prohibition was repealed in Ontario, the distribution and sale of alcoholic beverages has been intensely regulated and supervised by the provincial government through the LCBO.
Ontario’s regulatory framework for the sale and distribution of beer is set out in three provincial statutes and their related regulations (the Liquor Control Act, the Liquor Licence Act, and the Alcohol and Gaming Regulation and Public Protection Act) as well as the federal Importation of Intoxicating Liquors Act which, with limited exceptions, bans any inter-provincial or international trade in alcoholic beverages other than as carried out by provincial liquor boards.
The LCBO has never been free to carry on business as if it were a private, profit-maximizing commercial enterprise free of government influence. Rather, the government exercises considerable control over the LCBO and requires it to exercise its powers and to carry on business in a way to implement government polices within the parameters set out by the Liqour Control Act and related legislation.
Under the Liquor Control Act the LCBO is empowered to establish “government stores” for the sale of liquor to the public, and to fix or approve the prices for the goods (being alcohol) sold at these stores.
Around the time that the LCBO was established, the Ontario Government negotiated with the Ontario brewing industry to set up a single distribution-retail system for beer manufactured in Ontario by licensed manufacturers, and Brewers Retail (which prior to 1988 was known as Brewers’ Warehousing Company, Limited) a collective of Ontario brewers, was created for that purpose. Brewers Retail, which carries on business as a government store known as the “Beer Store” operates on a break-even basis and is not an independent profit centre for its shareholders. These are important details in the narrative – the Beer Store is not a recent innovation. For better or worse it’s been a fundamental component of beer distribution and retail in Ontario for almost a century.
Labatt, Molson, and Sleeman are brewers; i.e. beer manufacturers in Ontario. Labatt is a Canadian corporation and a subsidiary of Anheuser-Busch InBev, a Belgium corporation. Molson is a Canadian corporation that is a subsidiary of Molson Coors Brewery Corp., a U.S. corporation. Sleeman is a Canadian corporation. It is a subsidiary of Sapporo Canada Inc., a Canadian corporation, which is a subsidiary of Sapporo International Inc., a Japanese corporation.
Labatt, Molson, and Sleeman are the largest shareholders of Brewers Retail. At the time of the 2000 Beer Framework Agreement Labatt (45%), Molson (45%), and Sleeman (10%) were the only shareholders of Brewers Retail. (More recently the group of shareholders has expanded to add numerous other brewers.)
Save for the beer sold at the LCBO’s “ordinary”, “combination”, and “agency” stores, Brewers Retail is the distributor, wholesaler, and retailer of beer in Ontario. Brewers Retail is also Ontario’s primary container return service (recycling). Since 1927, Brewers Retail has levied and refunded deposits on all empty beer containers purchased in Ontario. In 2007, that service expanded, and Brewers Retail now accepts returns of all alcoholic beverage containers purchased in Ontario.
Brewers Retail was established for the specific purpose of providing Ontario with an efficient and cost-effective channel through which large volumes and packages of beer could be distributed and sold across the province. Ontario made a deliberate decision to focus the business of the LCBO on wine and spirits. Accordingly, the LCBO did not develop the infrastructure necessary to warehouse, distribute and sell beer on a scale necessary to service Ontario’s retail and licensee consumers.
Brewers Retail’s role in Ontario’s beer distribution system is expressly recognized in the Liquor Control Act. The Act provides the LCBO with the power to authorize Brewers Retail to operate stores for the sale of beer to the public, but importantly the LCBO retains the authority to control how the beer is sold, establish specific terms and conditions relating to Brewers Retail’s operation of its stores and determine in what municipalities Brewers Retail may operate these stores. Thus there is an inherent tension between the LCBO and the Beer Store: in some contexts the entities are partners, in other situations competitors, while paradoxically the LCBO remains ultimately in control.
The distribution of beer requires special infrastructure for large scale-refrigeration, a transportation fleet, storage facilities, loading and unloading equipment, and bottle recovery and recycling systems. Currently Brewers Retail operates approximately 450 retail stores and 8 distribution warehouses providing beer to to approximately 20,723 licencees, 650 LCBO retail locations, 141 retail partners, and 71 northern agents. Brewers Retail has approximately 7,000 employees.
Beer is a low margin product that must be sold in significant volumes to be profitable. Brewers Retail’s stores are configured to accommodate high-volume beer sales. Brewers Retail’s stores had, until relatively recently, far greater storage space and refrigeration than LCBO outlets.
The Uniform Price Rule
Historically, beer was priced in Ontario pursuant to the “Uniform Price Rule” which was a manifestation of government policy that alcohol prices should be uniform across the width and breadth of Ontario. Put simply, consumers in the more remote parts of the province should pay the same for alcohol as consumers in the southern more populated parts of the Province (despite the difference in storage, transporation and retailing costs).
Subject to the Uniform Price Rule, the pricing of beer in government stores, whether operated by the LCBO or by Brewers Retail, is governed by regulations promulgated under the Liquor Control Act. The Rule provides that it is the brewer that sets the price of its product, and the LCBO’s role has been to verify that the prices proposed by brewers are above the stipulated minimum prices applicable to particular classes of beer. Brewers Retail does not set the price, and it has no control over the prices at which individual brewers sell their products at the Brewers Retail stores.
There are two distribution channels for beer; i.e., a distribution channel for retail consumers and a distribution channel for licensees. Historically, the pricing for product for retail consumers and licensees has been different because licensees can resell at significant mark-up and licensees have access to draught beer, which provides a less expensive option for high volume sales. Thus, some brewers may charge higher prices in the licensee distribution channel than for the same product in the retail consumer distribution channel. Other brewers may set prices for licensees that are lower than for retail consumers. In either case, it is the brewer not the LCBO or Brewers Retail that determines the price for the product. Thus, brewers like Labatt, Molson, and Sleeman, typically propose two prices to the LCBO for beer: one price that is charged to members of the general public, and another (typically higher) price that is charged to licencees who purchase beer for resale to their patrons.
Differential pricing between licensees and retail consumers in Ontario is not unique to beer products. The price at which wine and spirits are sold to licencees by the LCBO is typically different from the price for consumers.
Returning to the topic of the Uniform Price Rule, since the repeal of Prohibition, it has been Government of Ontario policy to prohibit price competition between the LCBO and Brewers Retail in the retail sale of beer. Since 1972, the Liquor Control Act has required that the price of beer be subject to the Uniform Price Rule and that the retail price of a particular class, variety and brand of beer be fixed and uniform across all retail stores throughout the province. This Uniform Price Rule applies regardless of whether the store in question is owned or operated by the LCBO or by Brewers Retail. The Rule has also been interpreted so that it applies separately to retail sales and sales to licensees. In other words, a beer product to be sold to consumers is priced pursuant to the Rule and then the product is sold at that price across the province. A beer product to be sold to licensees, even the same product, is separately priced pursuant to the Rule and then the product is sold at that price to licensees across the province. This differential pricing is the nub of the Plaintiffs’ unjust enrichment case.
Up until the early 1990’s, the LCBO sold almost exclusively wine, spirits and imported beer. It’s business in the domestic beer trade was negligible – approximately 95% of all domestic beer sold in Ontario was sold through Brewers Retail.
Over the years, the LCBO and Brewers Retail came to an arrangement or understanding about the distribution and sale of beer in Ontario. The distribution scheme, which the defendants in Hughes submitted was in accordance with the Liquor Control Act, and had been followed for decades was as follows:
- In communities where Brewers Retail operated, the LCBO would operate ordinary stores and only sell beer in package sizes of 6 units or less, and Brewers Retail would sell beer in all formats including the larger popular formats such as 12- and 24-pack formats.
- In smaller communities where there were no Brewers Retail stores, the LCBO would operate as a combination store and would sell beer in larger package sizes, including 12- and 24-package sizes.
- If a community with a combination store grew to be of sufficient size to make a Brewers Retail store viable, Brewers Retail would have the opportunity to build a store, in which case, the LCBO’s combination store would revert to an ordinary store.
- The LCBO did not sell to licensees any beer sold by Brewers Retail.
- The LCBO would take first receipt of all foreign beer imported into the province and would sell it to Brewers Retail for sale and distribution to licensees.
- The LCBO would only sell to licensees the beer brands that had not been purchased by Brewers Retail for distribution to licensees.
In 1984, at the request of the Government of Ontario, Brewers Retail’s distribution and retail system became available to all brewers in Ontario on a fee for service basis. This change was made to accommodate the needs of a new wave of small Ontario brewers. The new brewers could not afford or did not want to become part owners of Brewers Retail, but they needed a means of distributing their product.
Under the Intergovernmental Agreement on Beer Marketing Practices, effective January 1, 1991, the Government of Canada and the governments of all Canadian provinces undertook to eliminate any policies, practices, laws or regulations that discriminated against the sale of Canadian beer and beer products based on their province of origin. As a result, the Government of Ontario directed that the LCBO eliminate any discriminatory practices and amended a regulation under the Liquor Control Act to allow the sale through Brewers Retail of beer made in other Canadian provinces.
The March Towards the 2000 Beer Framework Agreement
In the mid-1990’s, there were discussions in the media and by provincial government representatives about the potential privatization of the LCBO and a fundamental reorganization of the liquor and beer retail system in Ontario. The possibility of eliminating the Brewers Retail system was discussed.
Privatization was ultimately not pursued, but the LCBO was encouraged to pursue an expansion of its retail operations and to invest in modernizing its stores. The LCBO responded to the Government’s directives by expanding its retail system, including adding new stores.
This initiative was the cause of some tension, as the LCBO had the regulatory power to approve or deny Brewers Retail’s requests to open new stores in combination store communities that had grown large enough to support a free-standing Beer Store.
In 1995, Brewers Retail applied to the LCBO for permission to open or re-open stores in ten communities that were then being serviced by LCBO combination stores. This was problematic for the LCBO, which had made substantial investments in the stores. With the concurrence of then-Minister of Consumer and Commercial Relations, the LCBO refused all of Brewers Retail’s applications.
Unsurprisingly, Brewers Retail and its shareholders were unhappy with the LCBO’s decisions. The result of these decisions was that Brewers Retail suffered a significant loss in market share and in the volume of its beer sales. It made numerous complaints to the Premier, Cabinet Ministers, and to MPPs representing the communities concerned. The dispute between the LCBO and the private sector brewers became increasingly contentious and increasingly public.
Throughout this period, beginning in or around early 1996, Brewers Retail elected to defer further investments in modernizing it stores because of concerns about potential privatization of the LCBO and about the LCBO’s expansion of its role beyond its traditional focus on spirits and wine. Brewers Retail believed that the expansion of the LCBO threatened the viability of its distribution system and that it could not justify committing the capital for modernization and expansion without have some measure of predictability of expected beer volume and stability in its role as the primary distributor and retailer of beer in Ontario. Brewers Retail wanted a commitment from the Ontario Government that its mandate to operate Ontario’s beer retail system would continue.
It was understood that a resolution would encourage increased investment in the distribution system.
On June 1, 2000 (after years of negotiation), the LCBO and Brewers Retail entered into the 2000 Beer Framework Agreement, under this agreement Mr. Hughes alleged that the parties unfairly re-allocated the Ontario retail beer market between themselves. Justice Perell found otherwise, concluding that the 2000 Beer Framework Agreement did not change the different pricing models of the LCBO and Brewers Retail for the sale of beer to licensees. The court concluded:
- There was no evidence that a purpose of the 2000 Beer Framework Agreement was to increase beer prices, and there was no evidence that the price of beer was discussed by the parties to the agreement
- There was no evidence that the agreement was in any way “secretive”. To the contrary, it was delivered to government officials including the Minister and Deputy Minister of Consumer and Commercial Relations, the Small Brewers Association, the Ontario Public Service Employees, and Restaurants Canada among other entities, including licensees
- The 2000 Beer Framework Agreement did not change much in the way that the LCBO and Brewers Retail each operated. The status quo prevailed. Both before and after the Agreement was adopted, government policy precluded the LCBO from selling 12-packs and 24-packs at ordinary stores and precluded the LCBO from selling to licencees the beer that was exclusively distributed by Brewers Retail. The LCBO would have needed the provincial government’s approval to change this status quo, and the government refused to grant any such approval
A New Framework
In September 2015, Brewers Retail, its shareholders, and the Government of Ontario entered into a new agreement. Effective January 1, 2016, the 2016 Beer Framework Agreement replaced the 2000 Beer Framework Agreement, which was terminated.
The 2016 Beer Framework Agreement mandated changes to Brewers Retail’s ownership structure, corporate governance, retail and marketing practices, and customer retail experience. There are now over 30 shareholders. The 2016 Beer Framework Agreement continued the existing policy, formalized in the 2000 Beer Framework Agreement, of the LCBO not selling beer in its non-combination stores in formats larger than a 6-pack, subject to a new pilot program through which 12-packs are sold by the LCBO in a select number of non-combination Stores.
If your business or establishment requires assistance navigating Canada’s liquor laws, contact Dan Coles at Owen Bird.
*Alcohol & Advocacy publishes articles for information purposes only. They are not a substitute for legal advice, and persons requiring such advice should consult legal counsel.