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Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
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Federal Trade Commission Policy Statement on Deceptively Formatted Advertisements

by | Jan 12, 2016 |

On December 22, 2015, the Federal Trade Commission (FTC) published an “Enforcement Policy Statement on Deceptively Formatted Advertisements” (2015 Policy Statement) with unanimous support of the Commissioners.[i]  The Policy Statement applies to advertising and promotion of all goods and services, and it supplements prior FTC guidance that advertisers have relied on since the 1960s.[ii]  Given the FTC’s longstanding interest in alcohol beverage advertising by large and small suppliers, industry members should pay particular attention to the latest guidance on deception.

The 2015 Policy Statement focuses on so-called “native advertising” or “sponsored content,” which reasonable consumers may perceive to be “non-promotional content” such as news, articles, feature stories or educational information.  The FTC provides an example of digital advertising content in a publication that is formatted in the same manner as the publication itself.  The deception standard is summarized as follows:

Regardless of the medium in which an advertising or promotional message is disseminated, deception occurs when consumers acting reasonably under the circumstances are misled about its nature or source, and such misleading impression is likely to affect their decisions or conduct regarding the advertised product or the advertising.[iii]

Extensive guidance is provided for advertisers to avoid consumer deception in online and digital placements using fairly straightforward disclosures or other means of distinguishing ad content from the publication in which the ad content appears.  Recent enforcement actions are also discussed.  The key to compliance and avoiding FTC enforcement actions is to clearly inform consumers that they are viewing or reading advertising content.

The FTC has also prepared further specific guidance with discussions of issues arising in all forms of media and examples of recommended disclosures and formatting.  Guidance supplementing the 2015 Policy Statement is titled, “Native Advertising:  A Guide for Businesses.”[iv]

Over the last 15 years, several FTC special orders have been issued to beer, wine and spirits manufacturers requiring production of virtually all advertising content for a specified period (e.g., six months or a year).  The FTC staff reviewed those materials thoroughly with a focus on (i) voluntary compliance with industry advertising codes and (ii) compliance with federal laws prohibiting deceptive and unfair advertising practices.  The 2012 special orders issued to the top 14 beer, wine and spirits suppliers in the U.S. also requested privacy policies and terms and conditions of web sites and social media pages.[v]

Four detailed reports on alcohol beverage advertising have been issued since 1999 summarizing the FTC’s findings on alcohol beverage advertising.  The 2014 report was one of the first widely publicized reviews of digital advertising practices by a consumer products industry.[vi]

[i] Full statement is available at https://www.ftc.gov/public-statements/2015/12/commission-enforcement-policy-statement-deceptively-formatted

[ii] See, e.g. Statement in Regard to Advertisements That Appear in Feature Article Format, FTC Release, (Nov. 28, 1967), 73 F.T.C. at 1307 and FTC Statement on Deception, 103 F.T.C. 174, 175 (1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)) (“Deception Policy Statement”).

[iii] See, [...]

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Ninth Circuit Opinion Calls into Question Constitutionality of California Tied-House Laws

by | Jan 8, 2016 | ,

On January 7, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Retail Digital Network, LLC v. Appelsmith, overruling longstanding Ninth Circuit precedent concerning the legality of certain restrictions on alcohol beverage advertising under the First Amendment and opening the door to part of California’s tied-house scheme potentially being declared unconstitutional.  The case concerns the legality of sections of California’s tied-house laws, California Business and Professions Code Section 25503(f)-(h), which prohibit manufacturers and wholesalers (and their agents) from giving anything of value to retailers in exchange for advertising their products.  Retail Digital Network, LLC (RDN), which installs advertising displays in retail stores and contracts with parties to advertise their products on the displays, sought a declaratory judgment that Section 25503(f)-(h) violated the First Amendment after RDN’s attempts to contract with alcohol manufacturers failed due to the manufacturers’ concerns that such advertising would violate these tied-house provisions.

The district court found Section 25503(f)-(h) constitutional under a Ninth Circuit case from 1986, Actmedia, Inc. v. Stroh, in which the court upheld Section 25503(h).  The Actmedia court applied the intermediate scrutiny test on commercial speech regulation articulated by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980).  The Central Hudson test looks at whether:  (1) the speech is not misleading and concerns lawful activity; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is not broader than necessary to serve the governmental interest.  RDN argued that subsequent Supreme Court decisions – Rubin v. Coors Brewing Co. (1995), 44 Liquormart, Inc. v. Rhode Island (1996), and Sorrell v. IMS Health, Inc. (2011) – overrule Actmedia.

The Ninth Circuit determined that Actmedia is “clearly irreconcilable” with Sorrell – a difficult standard to meet.  (The court did not find Coors or 44 Liquormart to have undermined the reasoning of Actmedia as these cases involved complete bans on certain commercial speech, which Section 25503 is not.)  Sorrell required “heightened judicial scrutiny” (rather than the intermediate scrutiny applied by the Actmedia court) of restrictions on non-misleading, content- or speaker-based commercial speech about lawful products.

Such heightened scrutiny may be applied using the Central Hudson test, the Ninth Circuit found, but the court must further focus on the consistency between the government’s asserted interest under the second Central Hudson prong and the legislative purposes that “actually animated” the challenged law.  In articulating its decision, the court noted that other federal circuit courts of appeal have agreed that Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech.

The court reversed the lower court’s grant of summary judgment to the California Department of Alcoholic Beverage Control (ABC) and remanded the case to the district court to apply heightened judicial scrutiny to the statute.  Specifically, the court advised the lower court to consider whether the ABC has shown a real danger of paid advertising of alcohol beverages leading to [...]

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TTB Publishes Projected Regulatory Agenda as Part of Government’s Unified Agenda

by | Jan 4, 2016 | , , ,

As it does twice per year, the Alcohol and Tobacco Tax and Trade Bureau (TTB) recently published its projected Regulatory Agenda as part of the federal government’s “Unified Agenda.”  Links to the U.S. Department of Treasury’s portions of the Unified Agenda appear below.

TTB’s latest contribution to the Unified Agenda lists six priority projects that it hopes to publish rulemaking notices on in 2016:

  1. Revise TTB’s import and export regulations to make them compatible with the International Trade Data System (ITDS).  ITDS aims to create a single electronic exchange portal for all import and export activities.  TTB expects to propose these new regulations by March 2016.
  2. Revise TTB’s labeling regulations for wine, distilled spirits, and malt beverages (beer) to eliminate outmoded, ineffective and excessively burdensome regulations.  TTB plans to propose these revised regulations for industry and public comment sometime before the end of 2016.
  3. Finalize new regulations on specially denatured and completely denatured alcohols.  Most notably, the new regulations would re-classify many specially denatured alcohol products as completely denatured alcohols – greatly reducing the amount of regulatory oversight over such products.  The final regulations would build off a Notice of Proposed Rulemaking published in June of 2013, and TTB expects to finalize these regulations shortly.
  4. Propose new regulations to permit the self-certification of flavors and other non-beverage articles as eligible for “drawback.”  By permitting industry self-certification, TTB would greatly reduce the number of regulatory filings required of the flavor, extract and fragrance industries.  TTB expects to publish proposed regulations before June 2016, coupled with a “Temporary Rule” permitting industry members to begin self-certification immediately.
  5. Revise the Distilled Spirits Plant (DSP) regulations to reduce the TTB-mandated monthly reports required by DSP operators from four to two.  $11,000 to $16,000.Already subject to a Notice of Proposed Rulemaking in 2011, TTB plans to press ahead with a “Supplemental” Notice by March 2016.
  6. Make an inflation-adjustment to the civil penalties for violations of the Alcohol Beverage Labeling Act of 1988, which mandated the now-familiar Government Warning on all alcohol beverage labels.  TTB plans to publish a Final Rule in 2016 to raise the maximum penalty for violations from $11,000 to $16,000.

In addition to the six priority items above, TTB’s portion of the Unified Agenda includes dozens of other rulemaking projects, from those completed in the most recent fiscal year to issues expected to be first raised in a rulemaking notice during the following year.  As with prior years, the industry must view TTB’s expected publication and completion dates with a great degree of caution, as resource challenges, political pressure and other factors often delay the rulemaking process.

Click here to view the Statement of Priorities.

Click here to view the All Treasury Agenda.



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Product Recalls

by | Dec 31, 2015 | , , ,

Potential product recall situations rank among the most stressful that a producer can face. Things move fast and decisions must be made with less-than-perfect information. While no preparation will render such situations easy or routine, a producer can reduce the stress level and help navigate this “worst-case” scenario by understanding the process and taking certain steps to prepare. The article linked below aims to familiarize producers with the recall processes and situations while suggesting areas where preparation can help.

Read the full article, originally published in the Winter 2015-16 issue of Artisan Spirit Magazine.



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Update: FDA Extends Comment Period for Input on Uses of “Natural” in Food and Beverage Labeling

by | Dec 30, 2015 | ,

On December 28, 2015, the U.S. Food and Drug Administration (FDA) extended by 90 days the public comment period on the use of the term “natural” in food and beverage labeling.  As discussed in an earlier post, the FDA is interested in receiving comments on the use of the term “natural” for foods that have been genetically engineered or contain ingredients produced using genetic engineering.  In addition to food processing, production and manufacturing methods, the FDA may also consider whether the term “natural” implies any nutritional or health benefit.  The FDA has received over 3,000 comments to date and will accept comments until May 10, 2016.



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FDA Releases Guidance on Voluntary Labeling for Foods Derived from Genetically Engineered Plants

by | Nov 30, 2015 | ,

On November 23, 2015, the U.S. Food and Drug Administration (FDA) issued a guidance to assist food and feed manufacturers that would like to label their plant-derived food products or ingredients as produced with or without the use of genetic engineering.  On a voluntary basis, a manufacturer may choose to label its food as produced with or without genetically engineered plants, as long as the labeling is truthful and not misleading.  The FDA identifies acceptable labeling statements including “not bioengineered,” “not genetically engineered,” “our corn growers do not plant bioengineered seeds,” and declarations such as “genetically engineered” or “some of our growers plant soybean seeds that were developed through modern biotechnology to be drought tolerant.”  The guidance contains specific recommendations on the use of the term GMO for genetically modified organism.

The guidance outlines the types of statements that may be false or misleading.  For example, if a label claims that one ingredient was not bioengineered, but is silent as to whether a different ingredient was bioengineered, the label could be misleading.  The FDA may deem misleading claims that no ingredients were genetically engineered, if an ingredient such as salt could not possibly be bioengineered.  If labeling suggests or implies a food is safer, healthier or more nutritious than a food that was not genetically engineered, the FDA will consider such a statement to be false or misleading. Statements about bioengineered ingredients that indicate an ingredient is functionally improved may be misleading if the amount of the ingredient present in the food is not enough to confer the properties claimed on the labeling.

FDA requires substantiation of a manufacturer’s claim that a food or its ingredients is or is not bioengineered.  The guidance lists several methods by which a statement that a food has not been produced using genetic engineering could be substantiated, including documentation of practices and handling procedures or documentation of compliance with U.S. Department of Agriculture organic certification requirements.  Finally, labels of genetically engineered foods must comply with existing FDA requirements on ingredient labeling and misbranding.  For example, if a genetically engineered food has a different nutritional property or contains an allergen that is not present in a non-bioengineered counterpart, the label must disclose the presence of such properties.



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FDA Seeks Input on Uses of “Natural” in Food and Beverage Labeling

by | Nov 25, 2015 | ,

Earlier this month, the U.S. Food and Drug Administration (FDA) invited public comments on uses of the term “natural” in food and beverage labeling and whether “natural” should apply only to “unprocessed” foods.  The FDA’s definition of “food” includes alcohol beverages.  The FDA’s current policy is not to restrict use of “natural” unless a food has added color, synthetic substances and certain flavors.  The FDA also interprets “natural” to mean that a food does not have anything artificial or synthetic (including colors additives regardless of source) included in, or added to, the food that would not be expected to be in the food.  The U.S. Department of Agriculture (USDA) has a separate policy that defines “natural” with respect to meat and poultry products:  (1) the product does not contain any artificial flavor or flavoring, coloring, ingredient, chemical preservative, or any other artificial or synthetic ingredient and (2) the product and its ingredients are not more than minimally processed.

The agency sought comments in part because the FDA received four citizen petitions on the topic, including one citizen petition requesting consistency across FDA and USDA with respect to the definition of “natural.”  Federal courts also had requested that the agency determine whether food products with certain ingredients–high fructose corn syrup or ingredients produced using genetic engineering–could be labeled “natural.”  The FDA is interested in knowing under what circumstances the use of the term “natural” should be considered false or misleading.  In the notice, the agency indicated it could revise its policy on “natural” to address production practices used in agriculture and food manufacturing processes such as fermenting and pasteurizing.  The FDA has already received over 1,800 comments in less than two weeks.  The docket will remain open until February 10, 2016.



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Labeling and Advertising Gluten-Free Beer

by | Jul 23, 2015 | , ,

In the past decade, millions of Americans have converted to gluten-free diets. Originally a practice dictated solely by the medical needs of those who suffer from celiac disease, gluten-free has entered the mainstream. This article will explore the evolving and somewhat uncertain status of labeling and advertising beer as “gluten-free.”

Read the full article, originally published in the July/August 2015 issue of The New Brewer.



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False Advertising Claims

by | May 26, 2015 | ,

Industry members should take note of several false advertising lawsuits against brewers and distillers. Several industry members are grappling with class action lawsuits, including at least three craft distillers. Compared to national ad campaigns from larger competitors, most small producer advertising is limited. But do not make the mistake of believing that modest advertising efforts eliminate the risk of enforcement actions or other liability. Thousands of industry websites and social media pages make tens of thousands of advertising claims. As companies achieve success, its brands gain visibility and the company will draw more scrutiny from class action plaintiffs’ lawyers, competitors and regulatory bodies.

Read the full article, originally published in the May/June 2015 issue of The New Brewer.



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Maker’s Mark Defeats “Handmade” Class Action Lawsuit

by | May 14, 2015 |

Could consumers have plausibly believed that one of the country’s top-selling bourbon brands is “handmade”?  Not according to one federal district court in Florida, which recently dismissed a class action alleging Maker’s Mark deceived consumers by labeling its whiskey as “handmade.”  The decision by U.S. District Judge Robert Hinkle comes on the heels of a California federal court’s decision not to dismiss outright a similar consumer class action involving Tito’s Handmade Vodka.  Compare Salters v. Beam Suntory, Inc., 14-cv-659, Dkt. 31, (N.D. Fla. May 1, 2015) with Hofmann v. Fifth Generation, Inc., 14-cv-2569, Dkt. 15 (S.D. Cal. Mar. 18, 2015)).  These divergent opinions suggest that courts are still puzzling over just how much credence to grant putative class claims based on allegedly deceptive liquor labels at the motion to dismiss stage, particularly under the U.S. Supreme Court’s decision in Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007).  In Twombly, the Court made clear that plaintiffs must include enough facts in a complaint to make their claim to relief not just conceivable, but plausible—or else face dismissal.

Salters, the Florida case, is part of a wave of recently filed class actions accusing alcoholic beverage producers of violating state consumer protection statutes.  In the typical case, as here, the plaintiffs claim to have purchased the brand in reliance on allegedly deceptive labeling and contend they would not have purchased it or would have paid less otherwise.  The Salters plaintiffs claimed they were damaged because Maker’s Mark sold “their ‘handmade’ Whisky to consumers with the false representation that the Whisky was ‘handmade’ when, in actuality, the Whisky is made via a highly-mechanized process, which is devoid of human hands.”

Judge Hinkle flatly rejected the idea that this could support a claim.  Citing Twombly, he noted that although whether a label is false or misleading is generally a question of fact, a motion to dismiss should be granted if the complaint’s factual allegations do not “render plaintiffs’ entitlement to relief plausible.”  The court observed that taken literally, all bourbon is handmade, because it is not a naturally occurring product; construed less literally, which was apparently the plaintiffs’ approach, “no reasonable consumer could believe” that bourbon could be made by hand, presumably without commercial-scale equipment, “at the volume required for a nationally marketed brand like Maker’s Mark.”  In any event, court found the plaintiffs’ claims implausible under any definition of “handmade,” writing:

In sum, no reasonable person would understand “handmade” in this context to mean literally made by hand.  No reasonable person would understand “handmade” in this context to mean substantial equipment was not used.  If “handmade” means only made from scratch, or in small units, or in a carefully monitored process, then the plaintiffs have alleged no facts plausibly suggesting that statement is untrue.  If “handmade” is understood to mean something else . . . the statement is the kind of puffery that cannot support claims of this kind.

The court appears to have concluded that when applied to a product [...]

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