ALCOHOL LAW ADVISOR
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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Local Wholesaler-Retailer Dispute Has Federal Implications

by | Oct 16, 2014 | ,

On August 14, the U.S. District Court for the Southern District of Mississippi issued an opinion finding that state regulations bolstered one antitrust claim and hindered another in an ongoing dispute between a northern Mississippi convenience store chain, Major Mart, and an Anheuser-Busch InBev (ABI, a/k/a “Red Network”) distributor, Mitchell Distributing Company.

In Mississippi, by statute, like those of many other states, beer manufacturers must designate exclusive sales territories for each brand.  Mitchell holds the exclusive right to sell ABI brands to retailers in the counties in which Major Mart operates its 11 convenience stores.

The relationship between Mitchell and Major Mart started to break down in 2010, when Major Mart claimed that it was receiving inaccurate and confusing price information from Mitchell.  Major Mart asked Mitchell for compensation of lost profits due to the incorrect pricing information.  Mitchell denied the request, and Major Mart decided later to remove ABI displays and signs, lower the prices of competitors’ products, and reduce the cooler space allocated to ABI in some of its stores.  According to Major Mart’s complaint, Mitchell retaliated by (1) demanding shelving allocation that represented ABI’s market share of approximately 70 percent, (2) demanding price parity with competing products of ABI, (3) changing its deliveries to Major Mart stores to once a week so as to fill up Major Mart’s coolers and storerooms, leaving no room for competitor products and (4) delivering on Fridays so that Major Mart stores would not have cold beer on the “best selling day of the week.”

After litigation was first initiated, the parties reached a settlement in 2011, agreeing that Mitchell would increase its deliveries to at least twice per week and Major Mart would reconsider shelf space allocation and increase prices on competing brands of beers to the same price as ABI products.  This temporary resolution, however, failed when Major Mart did not reallocate its shelf space.  In response, Mitchell once again cut deliveries to one day per week and thereafter began to provide sales coupons and promotional giveaways exclusively to Major Mart’s competitors.  Major Mart also claimed that Mitchell delivered beer that was close to the end of its shelf-life, replaced fresher beer Major Mart had with older beer and missed deliveries during key dates, including July 4 and just as students were returning to college.  Eventually, Major Mart sued.

Major Mart alleged that Mitchell engaged in monopolization and attempted monopolization in violation of the Sherman Act and price discrimination in violation of the Robinson-Patman Act.  In response, Mitchell filed a motion for summary judgment asserting that the Sherman Act did not apply, as (1) Mitchell’s actions were immunized by the State Action Doctrine—the principle that the Sherman Act does not apply to states acting in their capacities as sovereigns—and (2) Mitchell’s actions, which occurred solely in Mississippi, did not affect interstate commerce—as required for Sherman Act jurisdiction.

Quickly discarding the State Action Doctrine assertion, the court noted that to qualify as a state’s action, conduct must be “undertaken pursuant to [...]

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New IRS Regulations Affect Brewers

by and | Aug 14, 2014 | ,

The Internal Revenue Service (IRS) recently issued final regulations (the Repair Regulations) that determine when taxpayers may deduct costs to acquire, produce or maintain tangible property, including all equipment and buildings.  The Repair Regulations apply to all taxpayers, including brewers of all sizes.  Taxpayers must follow these new rules in 2014, which generally will require them to change their method of accounting with the IRS.

 This article was originally published in the July/August 2014 issue of The New Brewer.



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Join Marc Sorini and Art DeCelle at the Wine, Beer & Spirits Law Conference – September 18-19, 2014

by | Jul 21, 2014 | , , , , , , ,

Wine, Beer & Spirits Law 19th Annual National Conference
The Mayflower Renaissance Hotel
Washington, D.C.
September 18-19, 2014
Click here to register.
View the conference brochure.

McDermott Speakers
Marc E. Sorini, Partner, Program Co-chair
Arthur J. DeCelle, Counsel

Please join McDermott partner and program co-chair, Marc Sorini, at the Wine, Beer & Spirits Law 19th Annual National Conference on September 18-19, 2014.  This year’s program will bring direct access to experts in the alcohol beverage industry, including speakers from the Alcohol and Tobacco Tax and Trade Bureau, Beam Suntory, BLDS, the California Department of Alcohol Beverage Control, Diago North America, Dogfish Head Craft Brewery, E&J Gallo Winery, the Federal Trade Commission, Ippolito Christon & Co., New Belgium Brewing Company, New Jersey Office of the Attorney General, Department of Law and Public, Safety, Division of Alcoholic Beverage Control, Precision Economics, Virginia Department of Alcoholic Beverage Control, Washington State Liquor Control Board, and the Wine Institute, as well as speakers from many of the nation’s leading law firms.

Of particular note, Marc Sorini will make a  presentation titled, Federal Excise Tax Strategies and Tactics.  McDermott counsel Art DeCelle will be moderating a panel of representatives from the industry’s leading national trade associations to discuss “The Future of Federal Regulation of Alcohol.”

To view the full conference brochure, click here.  For more information and to register, please visit: https://cle.com/WashingtonDC.



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Hard Cider for Brewers

by | Jul 15, 2014 | , , ,

Hard cider has shown phenomenal growth in the past several years.  With rising consumer demand, more and more craft brewers are entering this rapidly expanding market. Although hard cider is typically distributed and mar­keted like a beer product, the federal gov­ernment and most states actually tax and regulate cider as a type of wine.  Brewers contemplating the production of cider ac­cordingly must carefully consider the legal issues surrounding cider production and distribution that distinguish cider from beer.  This article outlines some of the most important (though certainly not all) of these issues.

This article was originally published in the May/June 2014 issue of The New Brewer.



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Distilling 101 for Brewers

by and | Jul 3, 2014 | , , ,

The craft distilling movement is growing rapidly. Indeed, the tor­rid pace of new distillery openings and the boundless enthusiasm of new entrants seem strangely reminiscent of craft brewing (then “microbrewing”) in the late 1980s and early 1990s.  Craft dis­tillers even have a simmering product in­tegrity issue (the use of purchased neutral spirits) that splits the new industry like contract brewing divided craft brewers 20 years ago.  There are, no doubt, signifi­cant differences, but craft distilling today seems poised for a period of growth like the one craft brewers have been (mostly) enjoying for the past 25 years.  Not surprisingly, then, a growing num­ber of craft brewers have followed the path of Anchor Brewing (or should I say Anchor Distilling) and expanded their offerings to include distilled spirits.  But as brewers quickly discover, there are numerous legal, regulatory, and tax differences between these related, but distinct, businesses.  While a full exploration of those differences could fill a rather thick book, this article briefly highlights the most important.

This article was originally published in the March/April 2014 issue of The New Brewer.



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Legal Considerations of Warehousing Spirits

by | Jun 27, 2014 | , ,

Warehouses aren’t exciting or sexy.  In fact, they are usually boring to look at and think about.  But a surprising amount of specialized alcohol beverage law surrounds the use of warehouses for the storage of distilled spirits.

This article, originally published in the Spring 2014 issue of Artisan Spirit, will briefly explore some of the basics.



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Franchise Law for the Craft Distiller

by | Jun 12, 2014 |

Mastering distribution is as important to a successful distiller as mastering distilling, packaging or advertising.  In a heavily-regulated industry, this requires knowledge of the applicable laws and regulations.

This article, originally published in the Winter 2013 issue of Artisan Spirit, explores, albeit at a very general level, how to manage one important category of those laws; so-called “franchise” laws.



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Five Common Franchise Law Myths

by | Jun 4, 2014 |

Most people working for a U.S. packaging brewery are aware of so-called beer “franchise” laws.  Such legislation—enacted in some form in most U.S. states—limits or restricts the abil­ity of a brewer to change distributors.  The author leaves for another article any discussion of the fairness and logic of such enactments.  For now, this article explores some impor­tant basics about these laws and how they impact the brewer-distributor relationship.

This article was originally published in the November/December 2013 issue of The New Brewer.



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Recent Alcohol Liability Decision Focuses on Insurance Policy Terms

by | Jan 6, 2014 | , ,

A December 16, 2013 federal appeals court decision on alcohol liability coverage provides an important reminder to industry members to carefully review the terms of their insurance policies.

In 2011, a group of insurance companies filed suit against Phusion Products (Phusion), the manufacturer of Four Loko, a popular flavored malt beverage that contained caffeine and other stimulants.  (Four Loko has since been reformulated without stimulants.)  The insurance companies asked an Illinois federal district court to issue a declaratory judgment that the insurers did not have a duty to defend Phusion in a series of lawsuits involving consumers of Four Loko.  The lawsuits involved persons injured or killed after consuming Four Loko or third parties who were injured or killed in accidents involving persons who had consumed Four Loko.

While many legal issues were raised in the litigation, the U.S. District Court and the 7th Circuit Court of Appeals focused on the language of Phusion’s insurance policy, which included a broad “liquor liability exclusion” that denied coverage for bodily injury or property damage for which Phusion could be liable “by reason of:  Causing or contributing to the intoxication of any person.”

The District Court and the Court of Appeals decided that Phusion’s insurance policy does not cover claims that Phusion’s actions caused or contributed to the injuries of consumers or third parties harmed by intoxication after drinking Four Loko.  The 7th Circuit opinion held that “the supply of alcohol, regardless of what it is mixed with, is the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.”

Both courts reviewed the factual allegations in five lawsuits filed against Phusion.  In four instances, the courts found that the death and injuries resulted from intoxication of an individual who allegedly consumed Four Loko.  The fifth case involved allegations of heart damage from consumption of Four Loko and the district court found that the insurance companies did have a duty to defend Phusion.

The underlying lawsuits against Phusion involve complex claims of negligence, failure to warn, and violations of state consumer protection laws.  The status of those lawsuits is unclear at this point in time, but legal fees and any resulting settlement costs or damages are certain to be costly.  The liquor liability exclusion in Phusion’s insurance policy is common in many commercial insurance policies.  Liquor liability exclusions are common in many commercial insurance policies.  Industry members in all tiers should seek additional coverage beyond standard terms of insurance policies to protect against injuries and lawsuits involving the safety of the alcohol beverages they produce or sell.   Coverage should also be obtained for sales and promotional activities.  Even if an industry member is ultimately absolved of liability, the costs of defending a lawsuit are usually significant.

Decisions:

Netherlands Insurance Company v. Phusion Products, Incorporated, Case No. 12-1355, (7th Cir., decided December 16, 2013).

Netherlands Insurance Co. and Indiana Insurance Company v. Phusion Products, Inc. and Phusion Project, LLC, Case No. 11 C 1253, (U.S. Dist. Ct. N.D. [...]

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Supreme Court of Ohio Clarifies Beer and Wine Franchise Law

by | Nov 8, 2013 |

Last month the Supreme Court of Ohio helped clarify an oft-litigated feature of the state’s beer and wine “franchise” law.  Like most such enactments, Ohio’s franchise law (the “Ohio Alcoholic Beverages Franchise Act”) generally requires a manufacturer or importer to show “cause” in order to terminate an Ohio distributor.  But a provision of the law permits the “successor manufacturer” of a brand to terminate Ohio distributors without cause within 90 days of acquiring that brand.  The successor must compensate the terminated distributor for the value of the distribution rights terminated.

The successor manufacturer provision, Ohio R.C. 1333.85(D), has been the subject of significant litigation in the past decade.  The recent opinion of Esber Beverage Company v. Labatt USA, Ohio S. Ct. No. 2012-0941 (Oct. 17, 2013), clarifies one important question surrounding the application of the law.

The Esber Beverage case arose after KPS Capital Partners acquired Labatt USA after U.S. antitrust authorities required the sale of U.S. Labatt rights following the purchase of Anheuser-Busch by InBev.  KPS/Labatt USA sought to terminate Esber Beverage under the authority of the successor manufacturer provision.  The Ohio trial court, however, held that the law’s successor manufacturer provision only applied if no written franchise agreement existed between the distributor and the former manufacturer.  Because KPS assumed the agreements Labatt USA had with Esber Beverage and other distributors, the trial court reasoned that the successor manufacturer provision did not permit termination.  An Ohio court of appeals reversed, and the Supreme Court of Ohio took the appeal.

Evaluating the question, the Ohio Supreme Court held that the successor manufacturer provision “is clear and unambiguous and permits successor manufacturers to assemble their own team of distributors so long as the successor manufacturers provide timely notice and compensate those distributors who are not being retained.”  Rejecting Esber’s argument that the successor provision should not apply where it held a contract with Labatt, the Supreme Court invoked the franchise law’s provision that prohibits parties from waiving any provision of the law.

While the Esber Beverage case does not resolve every question surrounding Ohio’s successor manufacturer provision, it does settle an important one.  Indeed, just one day before publication of the Ohio Supreme Court’s opinion, a U.S. District Court, applying Ohio law, enjoined a termination under the successor provision partially in reliance on the very contract argument rejected in Esber Beverage.  See Tri Country Wholesale Distributors v. Labatt USA, S.D. Ohio No. 2:13-CV-317 at *35 (Oct. 16, 2013).



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