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Oct 01, 2014

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Magnotta Brewery battles LCBO

A look at the brewery

By Robert Hughey

"It is Magnotta's position that the LCBO, Liquor Control Board of Ontario, uses its regulatory power to support its competitive place in the marketplace with a view to making money," said Arnold Schwisberg, counsel for the Magnotta Brewery.

"The LCBO can't be both a retailer and a regulator," emphatically stated Arnold Schwisberg.

Gabe Magnotta, owner of the Magnotta Brewery, with breweries in Vaughan and Scarborough, has steeled himself for a tough legal battle with the Liquor Control Board of Ontario, LCBO. First up is a court hearing where Arnold Schwisberg, counsel for the Magnotta Brewery, will be attempting to extract documents outlining the supporting arguments for the LCBO case.

Magnotta's original strategy was to open breweries at several of its existing winery outlets, but LCBO policy changes nixed all that. A May 16, 1997 directive from Rowland Dunning, vp Corporate Affairs for the Liquor License Board of Ontario (LLBO), the licensing side of things in Ontario, states: "All beer products sold at an on-site brewery store must be fully manufactured by the brewer at the manufacturing plant adjoining the store."

"The intent of the 100 percent rule was to force Magnotta to not cross-sell within its own company," said Mike Ligas, head brewer at Magnotta.

When Magnotta opened its first brewery, it was under the governance of a regulation which dictated that '50 percent of all beer products sold at an on-site brewery store had to be manufactured at the brewery adjoining the store.'

"At Magnotta, each brewery operates as an integrated whole but it is forced to have duplicative manufacturing facilities. Basically it was a constraint to growth," said Arnold Schwisberg. "We were prevented from selling each other's products."

The Magnotta Brewery had taken an unusual approach to selling its beers in Ontario, choosing to sell only at the brewery's retail store. Magnotta beer cannot be bought at either the Brewers Retail outlets (BR) or at the Liquor Control Board of Ontario (LCBO) stores.

"Movement of beer between Magnotta breweries was an option the company needed to exploit to maximize brewery capacities and efficiencies," said Mike Ligas, head brewer at Magnotta.

But the LLBO/LCBO changed the rules in mid-game. Magnotta neither received confirmation that the board ratified the 100 percent rule, nor was any reason given for the change.

"The LCBO does not allow submissions regarding policy," said Arnold Schwisberg.

Just to keep this in context, a quote from the 'Liquor Licence Act of Ontario':

'Manufacturer's licence to sell to LCBO 22. (1) A manufacturer of spirits, beer or Ontario wine may apply to the Board for a licence to sell the spirits, beer or Ontario wine to the Liquor Control Board of Ontario under the Liquor Control Act.
Issuance (2) The Board may issue a manufacturer's licence to an applicant under this section.
Conditions(3) A manufacturer's licence is subject to such conditions as may be imposed by the Board or prescribed.'

And from the 'Agreement to Purchase Beer for Resale to BRI, (Brewers Retail Inc)':
'The Liquor Control Board of Ontario, LCBO, has the sole and exclusive power and authority to import liquor products, including beer products, into Ontario and to control the sale, transportation and delivery of such liquor products in Ontario.'

When Magnotta applied for a manufacturing license extension for the Magnotta Brewery in Scarborough to encompass the new Vaughan Brewery, they were told of a new LCBO policy regarding a second location. If a brewery was brewing 25,000 hectoliters of beer per year, it would be entitled to a second store, which effectively meant no microbreweries qualified, other than existing breweries already at that level of production, an obvious constraint to growth according to Arnold Schwisberg. As a result, Magnotta was forced to have two separately incorporated breweries.

"It is Magnotta's position that the LCBO appears to do things in anticipation of Magnotta's growth with a view to preventing it," said Arnold Schwisberg, counsel for the Magnotta Brewery.

"The LCBO appears to pass policy different than that which is recommended to it by its policy advisors, and it appears to put forward policy which favors its own profitability while limiting a brewery's ability to self-distribute," said Arnold Schwisberg, Magnotta's lawyer.

"The LCBO pockets more money if products pass through its distribution system than if through a private outlet," said Arnold Schwisberg, taking a final swing at the board before the judicial jousting begins in earnest.

STORIES BY
ROBERT HUGHEY