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Distribution

The Uncertain Legal Future of Wine Direct Shipping by the Retail Tier

by McDermott Will & Emery | Feb 17, 2017 | Distribution, Legislation

The Supreme Court of the United States’ 2005 decision in Granholm v. Heald, which required states allowing their own wineries to direct-ship to consumers to also grant such privileges to out-of-state wineries, marked the beginning of a new era of wine direct-shipping. With the relaxation of wine shipping laws around the country following Granholm—nearly every state now allows wineries to ship wine directly to in-state consumers—the wine direct-shipping landscape has changed greatly over the past decade. Indeed, wine shipments in 2016 saw double-digit growth in both volume and sales.

At the same time, growth in recent years in the online shopping industry has led to new innovations in the wine retail space: the existence of a multitude of internet wine retailers, wine-of-the-month clubs and mobile wine delivery apps offers consumers greater access to wine. Many states—and courts—though, are now grappling with the legalities surrounding direct shipping of wine by retailers, as well as the role of unlicensed third parties in such transactions. Some states prohibit retailers from directly shipping wine to consumers altogether, while many others give in-state retailers the right to ship wine directly to consumers while withholding the privilege from out-of-state retailers.

Most recently, in January 2017 Michigan enacted legislation allowing in-state retailers to ship wine to in-state consumers, but prohibiting out-of-state retailers from making such shipments. The new legislation, which amends Michigan’s existing statute addressing wine shipments, authorizes a retailer located in Michigan to obtain a “specially designated merchant license” in order to ship wine to in-state consumers. The specially designated merchant license is only available to in-state retailers, so retailers located outside Michigan remain prohibited from directly shipping wine to consumers in the state.

Unsurprisingly, given the requirements of Granholm (which, incidentally, concerned in part a Michigan law), the new legislation retains the right of both in-state and out-of-state wineries to ship wine directly to Michigan consumers upon obtaining a direct shipper license. In fact, the new statute even reduces the burden on wineries shipping to consumers; under the new law wineries will no longer be required to include their direct shipper license number and the order number on each shipping container, or the brand registration approval number for each shipped wine on the accompanying invoice (although label registration requirements will still apply).

The legislation does not go into effect until March 29, 2017, but already litigation involving the new law has commenced. In late January 2017, an Indiana retailer and several Michigan consumers sued Michigan’s governor and attorney general and the head of the Michigan Liquor Control Commission in federal court, alleging the statute violates the US Constitution’s Commerce Clause and Privileges and Immunities Clause. Similar lawsuits are pending in Illinois and Missouri.

Some courts have already interpreted the constitutionality of similar laws that treat in-state and out-of-state wine retailers differently. While the US Courts of Appeals for the Second and Eighth Circuits have interpreted Granholm to apply only to differential treatment of producers and products (and not to wholesalers and retailers), the Fifth Circuit [...]

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Texas Court of Appeals Hands Down Instructive Administrative Law Opinion

by McDermott Will & Emery | Dec 29, 2016 | Distribution, Trade Practices, TTB COLAs and Formulas

A recent Texas Court of Appeals decision, EATX Coffee, LLC v. Texas Alcoholic Beverage Commission, provides an important reminder of how principles of administrative law may check the current trend towards “regulation by Internet.” Ct. of App of Texas, 4th Dist., No. 04-16-00213-CV (Dec. 7, 2016). Like TTB and many other state alcohol beverage authorities, the Texas Alcoholic Beverage Commission (TABC) periodically publishes “Question and Answer” (Q&A) documents purporting to interpret the Texas Alcoholic Beverage Code.

The EATX opinion arose from a challenge of two particular Q&A’s that, in effect, banned the filling of “crowlers” by Texas beer and wine retailers. A crowler is an aluminum can that a retailer can fill with beer and seal for consumers to take away from the retail premises. While TABC has declared that retailers may fill and sell “growlers” of beer (large bottles filled and sealed by retailers), the TABC’s Q&A’s declared the filling of crowlers to constitute manufacturing – an activity that a retailer cannot engage in without a manufacturing license. (And, of course, under state tied house laws a retailer generally cannot lawfully obtain a manufacturing license).

EATX, having invested in crowler equipment and facing disciplinary action over its filling and sale of crowlers, filed a lawsuit against the TABC seeking a declaration that TABC’s Q&A’s were wrong because the filling of a crowler does not constitute manufacturing. EATX also sought an injunction against enforcement. In response, TABC asserted that the Q&A’s were not a “rule” and therefore the trial court lacked jurisdiction to hear a challenge to the Q&A’s, and also asserted that EATX failed to exhaust the administrative remedies it could raise in defense of a TABC disciplinary action against EATX’s retail license.

The Texas Court of Appeals, 4th District, reversed. Reviewing the Q&A’s, the Court of Appeals concluded that: (1) they are of general applicably as they purport to apply to all retail permit holders; (2) they interpret the law and do not simply re-state it; (3) they do not affect only TABC’s internal management or organization. As such, the Q&A’s constitutes a “rule” within the meaning of Texas’ Administrative Procedures Act and the trial court had jurisdiction to hear the case and grant relief. Turning to exhaustion, the Court of Appeals found no authority for the proposition that a litigant aggrieved by the promulgation of a rule must instead wait and raise its arguments in an action brought to cancel, suspend or refuse to renew its license. In short, EATX can have its day in court.

Given the declining use of notice-and-comment rulemaking by TTB and most state alcohol regulatory agencies, the use of Q&A’s, “FAQs,” “advisory bulletins,” “industry memoranda,” and similar informal policy documents has been rising for decades. While such expedients may help move policy forward in a quicker, less resource-intensive (for the agency) manner, the EATX opinion stands as a useful reminder to regulators that this approach has limits.

Exporting Craft Beer to Europe

by Steffen Woitz, Stuart Mathews, Mélanie Bruneau, Veronica Pinotti and McDermott Will & Emery | Dec 7, 2016 | Distribution, Import/Export

Until recently, few would have predicted that US craft beers would find their way into European markets, yet today they are successfully meeting European tastes. Craft beers are increasingly able to compete with other products in Europe, such as wine, and there is increasing market demand in Europe for innovative, rare and exotic beers.

US brewers looking to sell their products in Europe cannot, however, simply apply their US commercial strategies, but should instead adapt distribution models that align with their commercial goals in order to take into account the European legal and regulatory context. In addition, although the US legislative framework has a lot in common with that of the European Economic Area, each EU member state has its own regulatory and distribution peculiarities.

Read the full article, originally published in the November/December 2016 issue of The New Brewer.

US Supreme Court Asked to Clarify the Interaction Between the 21st Amendment and the Commerce Clause

by McDermott Will & Emery | Oct 13, 2016 | Distribution, Trade Practices, Uncategorized

The Texas Package Stores Association has asked the US Supreme Court (via a “Petition of Certiorari”) to hear a case that could clarify the interaction between the 21st Amendment and the non-discrimination between states principle of the “dormant” Commerce Clause.

The case arose in Texas, where the Court of Appeals for the Fifth Circuit ultimately held that the Supreme Court’s Granholm v. Heald (2005) decision did not limit the reach of the Commerce Clause in alcohol cases to situations where a state discriminates against producers or products. Decisions by two other federal Court of Appeal’s Circuits (the Second and the Eight) have expressly limited Granholm’s reach to discrimination against producers and products. Thus, the Texas Package Stores Association would like the Supreme Court to reverse the Fifth Circuit and explicitly limit the non-discrimination principle of Granholm to cases involving alcohol products and producers.

The Supreme Court hears only a small fraction of the cases brought before it on a Petition of Certiorari, so the chances that the Supreme Court ultimately reviews the Fifth Circuit’s decision remain low. Nevertheless, the existence of a “split” of opinion between different federal Courts of Appeal increase the chances of Supreme Court review.

The BA’s Growing Influence on Capitol Hill

by Arthur J. DeCelle and David Ransom | Sep 29, 2016 | Alcohol Excise Taxes, Distribution, Trade Practices, TTB COLAs and Formulas

How is it that the Brewers Association—an organization that has no political action committee, has employed a staff lobbyist for only 18 months, and has only had a strong presence in Washington since 2009—has gained significant traction among policymakers in the nation’s capital?

The BA is now a serious player in Washington. That is not by accident; it’s a carefully conceived strategy implemented by the BA board and senior staff—including president and CEO Bob Pease—over the last seven years that seeks to leverage the inherent strengths of America’s small craft brewers.

Read the full article, originally published in the September/October 2016 issue of The New Brewer.

New TTB Final Rule Released on Denatured Alcohol

by McDermott Will & Emery | Sep 12, 2016 | Distribution, Non-Beverage Alcohol

The new TTB Final Rule that was released in the Federal Register on August 20, 2016 will partially streamline the use of non-beverage alcohol products in the US. While statutory requirements do not permit TTB to completely de-regulate the distribution and sale of denatured alcohol, the attached rule, among other things:

Reclassifies a number of “specially denatured alcohol” (“SDA”) formulas as “completely denatured alcohol” (“CDA”). As the regulatory requirements for distributing CDA are much less stringent than those that apply to SDA, these reclassifications amount to a lessening of regulatory burdens for companies dealing in such products.
Establishes additional “general use formulas,” which permit the production of SDA products without the need for a specific TTB formula approval.
Exempts distilled spirits plant (“DSP”) operators from the requirements to obtain an additional permit to produce and handle SDA products within the bonded premises of a DSP.
Makes a variety of technical changes and deletions to the regulations in order to meet what TTB views as current industry practice.

While the TTB reforms do not deregulate SDA use to the extent that most producers and users would like, the Final Rule represents a welcome step in the direction of deregulation and simplification. A substantially more radical deregulation of such products would require statutory changes and therefore are beyond the realm of what TTB can accomplish on its own.

Texas Court Strikes Down Prohibition on Payments for Brand Rights

by McDermott Will & Emery | Aug 30, 2016 | Advertising and Marketing, Distribution

Late last week, a district judge in Texas declared unconstitutional under the Texas Constitution a provision of the state’s Beer Industry Fair Dealing Law (i.e., the beer “franchise” law) that expressly prohibits a brewer from accepting a payment in exchange for a grant of territorial distribution rights. Section 102.75(a)(7) of the Texas Alcoholic Beverage Code, enacted in 2013, applies generally to “manufacturers,” including both in-state brewers and out-of-state brewers holding nonresident manufacturer’s licenses in Texas. In 2014, three small Texas brewers – Live Oak Brewing Company, Revolver Brewing and Peticolas Brewing Company – sued the Texas Alcoholic Beverage Commission (TABC) and its executive director, Sherry Cook, arguing that Section 102.75(a)(7) violates the Texas Constitution.

In a short summary order, the district court judge agreed. The court found that Section 102.75(a)(7) violates the Texas Constitution’s “Due Course of Law” provision, Texas’ analog to the US Constitution’s Due Process Clause, which states that a Texas citizen may not “be deprived of life, liberty, property, privileges or immunities, or in any manner disfranchised, except by the due course of the law of the land.” Tex. Const. Art. I, § 19.

The court granted the plaintiff breweries’ motion for summary judgment on their Due Course of Law argument and enjoined the TABC and Ms. Cook (and their respective employees, agents and successors) from enforcing Section 102.75(a)(7) against the plaintiffs and any other brewers. The court dismissed the plaintiffs’ claim that Section 102.75(a)(7) amounted to a taking of private property in violation of the Texas Constitution, though, and also dismissed the plaintiffs’ request for attorney’s fees.

Although the judge’s order did not contain any detail regarding her reasoning, the case restores an important opportunity for brewers distributing – or interested in distributing – beer in Texas. Further, although the TABC may appeal, the decision should remind state legislatures that state restrictions on the conduct of private parties in the alcohol industry in the name of protecting the three-tier system must still pass muster under federal and state constitutional principles.

Sixth Circuit Tri County Decision Provides Much-Needed Clarity on “Successor” Provision in Ohio Franchise Law

by McDermott Will & Emery | Jul 12, 2016 | Distribution

I attach a copy of the US Court of Appeals for the Sixth Circuit’s recent decision in Tri County Wholesale Distributors v. Labatt USA Operating Company, Nos. 15-3710/3769 (6th Cir., July 6, 2016). For students of the increasingly byzantine case law interpreting the Ohio franchise law’s “successor” provision, Ohio Rev. Code § 1333.85(D), the opinion provides some much-needed clarity on several points.

While the Tri County decision does not formally bind Ohio state courts on questions of Ohio law, it binds lower federal courts and provides strong persuasive authority to the state courts on the following points under the successor provision:

A supplier-tier entity can qualify as a “successor” where the change-in-control occurred (as it frequently does in modern transactions) at the holding company level several corporate layers above the operating (brewing/winemaking) company. Distributors in Ohio have been arguing that the successor provision requires a new operating company that is, itself, a manufacturer, but the Sixth Circuit rejected this “hyperliteral” approach.
The successor provision, by providing suppliers with a means to terminate without cause upon payment of fair market value compensation, does not constitute an unconstitutional governmental taking of property under the federal and Ohio constitutions. In rejecting the distributors’ contrary argument, the Sixth Circuit characterized Ohio’s beer and wine franchise statute as “an anticompetitive statute that deprives suppliers of their freedom to terminate contracts with distributors,” and the successor provision as “an exception to this anticompetitive scheme.”
Distributors are not entitled to any additional award of damages for lost future income in addition to the fair market value paid to the distributors under the successor provision. The Sixth Circuit characterized this damages claim as “asking for a double recovery” because future profits are directly included in the calculation of fair market value.
Distributors’ fair market value award should be reduced by the amount of profits they earned on selling the brand during the time spent litigating the successor status of the supplier. This final holding may substantially reduce the current incentive of distributors to challenge successor terminations under the Ohio statute, as the profit reaped from continued sales now will be deducted from the fair market value award distributors are due under the statute.

In short, the Sixth Circuit’s Tri County opinion represents a win for supplier-tier companies and clarifies a number of points of Ohio law that have been litigated extensively in the past several years.

Non-Compete Agreements: Friend or Foe?

by McDermott Will & Emery | Jul 5, 2016 | Advertising and Marketing, Distribution

With the boom of craft producers, competition is ever-increasing. If you’re thinking about going into the business or you already have, undoubtedly you have considered how you can best protect your products, recipes, methodologies, and distribution from imitation or recreation. The sale and manufacture of unique craft drinks creates a unique set of issues and considerations.

Read the full article, originally published in the Summer 2016 issue of Artisan Spirit.

The Evolving Alcohol Regulatory System

by McDermott Will & Emery | Jun 2, 2016 | Advertising and Marketing, Distribution

Most participants in the alcohol beverage industry are very familiar with the “three tier system.” What will surprise many, however, is learning that the system did not emerge immediately after Prohibition.

Read the full article, originally published in the May/June 2016 issue of The New Brewer.