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ALCOHOL LAW ADVISOR
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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Guidance Provided on Interplay of “Dormant” Commerce Clause and the 21st Amendment

by | May 4, 2016 | ,

On April 21, the US Court of Appeals for the Fifth Circuit handed down its opinion in Cooper v. Texas Alcoholic Beverage Commission, No. 14-51343.  It provides further guidance, at least within the Fifth Circuit, on the interplay of the “dormant” Commerce Clause and the 21st Amendment following the Supreme Court of the United States’ oft-cited decision in Granholm v. Heald, 544 US 460 (2005).

The case arose when the Texas Package Store Association attempted to revisit the Fifth Circuit’s two-decade old decision in Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1994).  Cooper v. McBeath permanently enjoined the Texas Alcoholic Beverage Commission (TABC) from enforcing certain residency requirements imposed on wholesalers and retailers by the Texas Alcoholic Beverage Code.  In that decision, the Fifth Circuit decided that the residency requirement was a protectionist measure and therefore unconstitutional under the so-called “dormant” Commerce Clause of the US Constitution.

In 2014, the Texas Package Store Association (TPSA) moved for relief from the Cooper v. McBeath injunction, arguing that Granholm and its progeny undermined the earlier decision’s reasoning.  The district court ruled that the TPSA lacked standing to seek relief, although it also suggested that TPSA’s motion for relief should be denied on the merits.

In last month’s Cooper v. Texas Alcoholic Beverage Commission decision, the Fifth Circuit concluded that TPSA had standing to seek relief from the Cooper v. McBeath injunction, but then held that TPSA’s motion should be denied on the merits.  Laying out the standard for relief as whether Granholm and its progeny represent a “significant change in decisional law,” the Fifth Circuit concluded that no significant change had occurred.

The Fifth Circuit begins its analysis by noting that Granholm expressly refused to overrule prior cases holding that the Commerce Clause qualified states’ rights under the 21st Amendment.  TPSA argued that the statement in Granholm labeling the three-tier system “unquestionably legitimate” essentially removed Commerce Clause protections from state laws dealing with the wholesale and retail tiers of the industry.  Characterizing that language in Granholm as “dictum,” the Fifth Circuit rejected TPSA’s argument as “unconvincing.”  Refusing to follow an Eighth Circuit decision that embraced logic similar to the argument advanced by TPSA, the Fifth Circuit instead relied on its own decision in Wine Country Gift Baskets.com v. Steen, 612 F.3d 809 (5th Cir. 2010).  Thus “state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.”  Instead, although the 21st Amendment permits a state to impose a physical-residency requirement that may favor in-state businesses, it may not impose “a durational-residency requirement on the owners of alcoholic beverage retailers and wholesalers.”  (Quoting Cooper v. McBeath, emphasis in original).

The Fifth Circuit accordingly reasoned that nothing in Granholm and its subsequent application represent a significant change in the law.  It therefore reversed the decision of the district court and directed it to enter an order denying on the merits TPSA’s motion for relief.

Cooper v. Texas Alcoholic Beverage Commission [...]

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Join McDermott Partner Marc Sorini at the Annual Craft Brewers’ Conference

by | Apr 26, 2016 | , ,

The annual Craft Brewers’ Conference will be held on May 3-6, 2016 in Philadelphia, PA. McDermott partner, Marc Sorini will give two presentations:

  • Wednesday, May 4, 1:20-2:20 pm: Marc will kick off his annual government affairs presentation by summarizing the results of recent research to be published in The New Brewer proving that no legally-mandated three-tier system existed immediately following the repeal of Prohibition. He then will provide an update on the biggest legal issues facing the industry during the past year, including recent tied-house/trade practice activities, the false advertising class actions and a distribution update.
  • Friday, May 6, 1:55-2:55 pm: Marc will join two other lawyers and moderator Bill Covaleski of Victory Brewing to explore the issue of beer “franchise law” reform.

For more information or to register, please visit https://www.craftbrewersconference.com/.



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A Practical Blueprint for Distribution

by | Mar 22, 2016 | ,

Whether you’re an experienced brewer getting ready to enter a new state, a startup packaging brewery looking to serve your home market, or a brewpub expanding to provide products to local retailers, you need a viable distribution plan. In recent years, individual brewers have deepened their understanding of industry dynamics in the heavily regulated beer distribution system. While many are effectively advocating reforms to accommodate new brewery business models, change occurs slowly in the political process. Those in business today who want to remain in business tomorrow need to deal with the existing realities of the marketplace. The following is a primer of common questions and answers related to distribution.

Read the full article, originally published in the March/April issue of The New Brewer.



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Tied House Laws and Category Management: A Continuing Quandary

by | Mar 18, 2016 | , ,

On March 16, the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) published a list of frequently asked questions expanding further on a ruling issued in February on application of the federal “tied house law” to industry promotional activities, specifically category management practices employed by retailers.

TTB claims that a formal rulemaking to revise its tied house regulations is not necessary: “TTB Ruling 2016-1 merely provides guidance as to the plain meaning of the existing regulation under 27 CFR 6.99(b). It does not change TTB’s longstanding position, nor does it change the meaning of the plain language of this regulatory exception.” So let’s look at the plain language:

The act by an industry member [supplier or wholesaler] of providing a recommended shelf plan or shelf schematic for distilled spirits, wine, or malt beverages does not constitute a means to induce within the meaning of section 105(b)(3) of the [Federal Alcohol Administration (FAA)] Act.

That statement on its face is an open-ended authorization to provide shelf schematics. It says nothing about the products of other industry members or whether the plan is written on a napkin or in a sophisticated IT system that is used for inventory management at hundreds of stores.  (more…)



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Ohio Court of Appeals Upholds a Successor Manufacturer’s Termination of a Distribution Franchise

by and | Mar 3, 2016 |

The “successorship” provision of Ohio’s franchise law for alcohol beverages has spawned much litigation over the past two decades.  Premium Beverage Supply, Ltd. v. TBK Production Works, Inc. represents the latest chapter of this saga, providing further clarity on several issues in the Ohio Alcoholic Beverage Franchise Act (Franchise Act).

In Premium Beverage Supply, the Court of Appeals for the Tenth Appellate District of Ohio considered whether The Brew Kettle Production Works (Brew Kettle) could terminate an agreement appointing Premium Beverage Supply (Premium) as the sole distributor of TBK craft beers after Brew Kettle purchased all of TBK’s assets.  The trial court held that Brew Kettle could not terminate or cause the termination of Premium’s franchise.  The trial court reasoned:  (1) the terms of the distribution agreement controlled, as opposed to a provision in the Franchise Act permitting a successor manufacturer to terminate or fail to renew a distributor’s franchise in certain situations; and (2) Brew Kettle was not a successor manufacturer within the meaning of the Franchise Act.  The Ohio Court of Appeals reversed the lower court and remanded the case to address Premium’s claim for compensation due to the termination of the distribution agreement.

First, the appellate court examined whether the statutory provisions in the Franchise Act permitted Brew Kettle to terminate or not renew Premium’s distribution franchise.  The Franchise Act generally prohibits a manufacturer from terminating or failing to renew a distribution franchise without prior consent unless the manufacturer has “just cause” and provides sixty days prior notice.  The Franchise Act provides an exception to the usual just cause requirement for termination if “a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer through merger or acquisition or acquires or is the assignee of a particular product or brand of alcoholic beverage from another manufacturer.”  In such a case, the successor manufacturer has ninety days to give written notice of termination of the franchise to the distributor.  In Esber Beverage Co. v. Labatt USA Operating Co., the Supreme Court of Ohio upheld this exception to the usual just cause requirement and concluded that a written franchise agreement did not override the statutory exception.  Citing Esber, the Ohio Court of Appeals held that the trial court erred in finding the distribution agreement prevented Brew Kettle from terminating Premium’s franchise.

Second, the Ohio Court of Appeals reviewed the definition of the term “manufacturer” under the Franchise Act, because the act does not define the phrase “successor manufacturer.”  The appellate court held that neither the law nor the asset purchase agreement required Brew Kettle to hold all necessary production licenses in order to be considered a successor manufacturer within the meaning of the Franchise Act.  The court then evaluated Premium’s argument that Brew Kettle was not a successor manufacturer under the provision of the Franchise Act that defines situations that do not constitute “just cause,” because the owner of TBK also owned a minority interest in Brew Kettle.  Noting the asset sale was an [...]

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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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Third Circuit Affirms MillerCoors Victory in Wholesaler Contract Dispute

by | Mar 3, 2015 |

On Wednesday, February 25, 2015, the U.S. Court of Appeals for the Third Circuit issued its opinion in Frank B. Fuhrer Wholesale Co. v. MillerCoors LLC, No. 14-1008 (3d Cir. 2015), finding in favor of MillerCoors LLC (MillerCoors) that the brewer did not violate its contract with Frank B. Fuhrer Wholesale Co. (Fuhrer) or Pennsylvania’s alcohol beverage laws in assigning the distribution rights for several new products to other distributors and attempting to condition the award of future products to Fuhrer on Fuhrer establishing a new entity devoted to MillerCoors products.  The case stemmed from Fuhrer’s 1997 distribution agreement (the Agreement) with Coors Brewing Company (Coors).  In 2008, Coors and Miller Brewing Company created MillerCoors, a joint venture, and Coors transferred the Agreement to MillerCoors.

The Agreement made Fuhrer MillerCoors’ exclusive distributor of certain specified MillerCoors products in an area of Pennsylvania.  The Agreement gave MillerCoors the right, but not the obligation, to grant distribution rights to Fuhrer for additional MillerCoors products.  The Agreement also gave Fuhrer the right to acquire distribution rights for other brewers’ brands without MillerCoors’ consent, which Fuhrer has exercised (e.g., in selling certain Anheuser-Busch products).  The Agreement required both parties to exercise “good faith and fair dealing” in carrying out its terms.

MillerCoors introduced three new beers in 2012 and 2013 and awarded the distribution rights for the products to Fuhrer’s competitors.  Fuhrer sued, alleging that MillerCoors:  (1) failed to give Fuhrer the rights to the new products because Fuhrer also sold for Anheuser-Busch; and (2) told Fuhrer it would need to create a new entity dedicated to MillerCoors products in order to obtain future rights to new MillerCoors products.  Fuhrer sought a declaratory judgment and asserted claims for breach of contract, violation of the Pennsylvania Liquor Code, unreasonable restraint of trade, and tortious interference.  The district court granted MillerCoors’ motion to dismiss and denied Fuhrer’s motion for reconsideration.

On appeal, Fuhrer argued that it objected not to MillerCoors’ assignment of the distribution rights for the new products elsewhere.  Instead Fuhrer argued that the process by which MillerCoors undertook this action violated the Agreement’s covenant of good faith and fair dealing.  The Third Circuit agreed with the district court that under Pennsylvania law, “the duty of good faith cannot override express contractual terms and convert a permissive contract provision into a mandate.”  MillerCoors, the court held, accordingly did not violate its duty of good faith by exercising its contractual right to choose different distributors for the new products.

The Third Circuit also found that because the Agreement placed no obligation on MillerCoors to assign Fuhrer distribution rights to new products, MillerCoors’ proposal to grant Fuhrer such rights in exchange for Fuhrer creating a new entity devoted to MillerCoors did not constitute bad faith performance, but was an “arm’s-length negotiating tactic, offering to barter contractual right for contractual right.”  MillerCoors’ proposal did not interfere with Fuhrer’s rights under the Agreement, and accordingly did not constitute a breach of contract.  The court also noted that there was [...]

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Buying and Selling a Craft Brewery

by | Feb 27, 2015 | , , ,

Few craft brew entrepreneurs contemplate selling their business when they first get started.  Unlike, for example, the typical entrepreneur in the software industry, the craft brewers we know were inspired by the love of great beer, a spirit of adventure, and the romance of creating a small manufacturing business.  But the life cycle of most businesses eventually requires at least the consideration of a sale or other transaction designed to both recoup the entrepreneur’s lifelong investment and transition the company to the next generation.

From the buy side, the craft beer business has never been hotter, with market share now approaching 8 percent by volume in the U.S. and margins that have gotten the attention of both big brewers and non-U.S. brewers alike.  This article, published in the January/February 2015 issue of The New Brewer, will explore at a high level some of the issues involved with buying and selling a craft brewery.

Read the full article.



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South Carolina Court Upholds Constitutionality of Statutory Limitation on Retail Dealer Licenses

by | Jan 15, 2015 | ,

Retail Services & Systems, Inc., dba Total Wine & More v. South Carolina Department of Revenue and ABC Stores of South Carolina

A trial-level court in South Carolina recently issued an opinion upholding the constitutionality of the state’s statutory limitation on the number of retail dealer licenses granted to an individual or corporation.  The plaintiff, Total Wines & More, argued that the state’s limitations on the number of retail dealer licenses it could obtain violated the due process and equal protection clauses of the federal and state constitutions, and exceeded the state’s police powers.  The court’s decision highlights the unlikelihood of success in challenging such alcohol licensing laws on equal protection and due process grounds due to the application of rational basis scrutiny.

In considering the plaintiff’s claims, the court set forth the due process and equal protection tests, which, in the absence of a fundamental right or suspect classification, both require only a reasonable relationship between the challenged law and a legitimate legislative purpose.  In finding the requisite reasonable relationship, the court noted possible purposes of such licensing limitations, including preventing concentration of power within the liquor industry, preventing monopolies, avoiding indiscriminate price cutting and excessive advertising, and protecting small, independent liquor dealers.  The court also held that the licensing laws did not exceed the state’s police powers, as such licensing is a typical exercise of the police power designed to protect the “morals and welfare of the public.”

The court cited copiously to the laws and cases of other jurisdictions, noting that virtually every court has upheld limitations on the number of licenses against due process and equal protection challenges.



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Supreme Court’s 2014-15 Term: Case Will Test an Important Limitation on the Ability to Challenge State Tax Laws

by | Oct 30, 2014 | ,

On December 8, 2014, the United States Supreme Court will hear oral argument in a case that could have significant implications for the ability to use the federal courts to challenge state attempts to tax remote sellers of goods.

In Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 2013), the Tenth Circuit Court of Appeals found that the Direct Marketing Association’s (DMA) challenge to a Colorado revenue statute was barred by the federal Tax Injunction Act (TIA).  Current Commerce Clause precedent bans a state from requiring a retailer with no in-state presence from collecting sales or use taxes, see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), an important shield against state taxation of remote online and catalogue sellers of goods.  This precedent, however, allows states to collect sales and use tax from the buyers of the goods (i.e., citizens) located within the state.

Seeking to reach this significant source of potential tax revenues, in 2010 the Colorado legislature enacted legislation requiring major out-of-state sellers to provide a series of notices and reports related to sales taxes.  First, the selling retailers must notify Colorado purchasers that tax is due on their purchases.  Second, these retailers must send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state.  Third, the law requires these out-of-state retailers to report information on Colorado purchasers to the state’s tax authorities.  Not surprisingly, the law gives retailers the ability to avoid these obligations by simply collecting sales tax from Colorado consumers and providing those collections to the state.

The DMA filed suit, challenging the Colorado law on several Commerce Clause grounds.  The District Court granted summary judgment in favor of DMA, relying on Quill to hold that the law placed an impermissible burden on interstate commerce.

On appeal, the Tenth Circuit did not reach the merits of the Commerce Clause issue.  Instead, the Court held that the TIA barred DMA’s lawsuit and required dismissal.  The Tax Injunction Act prohibits federal courts from interfering with the collection of state taxes.  DMA argued that because it was not a taxpayer subject to the new reporting requirements, the TIA should not apply.  Moreover, TIA reasoned that the Colorado law in question only imposed notice and reporting obligations, and therefore was merely a tax collection method, not an actual tax.  The Tenth Circuit rejected both arguments, concluding that any suit that would hamper a state’s ability to collect a tax falls within the TIA’s jurisdictional bar.

The Supreme Court has agreed to review the Tenth Circuit’s decision.  Its ultimate decision about the reach of the TIA could have implications to operations involved in the direct shipping of wine.

Current state licensing systems for direct alcohol shippers already require the payment of state taxes as a condition of licensure.  Nevertheless, statutes like Colorado’s law, if left unchallenged due to operation of the TIA, could allow states to gain more [...]

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