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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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TTB Issues Ruling on Category Management under Federal Tied-House Statute

by | Feb 12, 2016 | ,

Today the Alcohol & Tobacco Tax & Trade Bureau (TTB) released TTB Ruling 2016-1 (Ruling), addressing category management practices.  The Ruling seeks to clarify TTB’s position toward category management under the federal tied-house statute and regulations, which generally prohibit an alcohol beverage supplier or wholesaler from providing a “thing of value” to alcohol beverage retailers.

The federal tied-house statute and the TTB regulations implementing that provision require TTB to show both an “inducement” of a retailer leading to “exclusion” of competing products for TTB to find a tied-house violation.  TTB regulations also list specific activities that are exceptions to the general rule that providing anything of value to a retailer constitutes an “inducement.”  Those exceptions include shelf schematics.  See 27 C.F.R. § 6.99(b).

Ruling 2016-1 recites the history of the shelf schematics exception and exhibits an element of “buyer’s remorse,” as the narrative suggests that TTB’s predecessor, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), discounted the possibility of abuses that TTB seems to believe are occurring today.  The Ruling then makes it clear that TTB will strictly interpret the schematics regulation as applying only to the schematics themselves, and not “additional services.”  Current category management practices often involve other activities not directly linked to the provision of shelf schematics, although these other activities (at least arguably) relate to developing, creating and updating shelf plans.  Ruling 2016-1 lists the following examples of “additional services” that may prompt TTB scrutiny:

  1. Assuming a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s product;
  2. Receiving and analyzing confidential and/or proprietary competitor information for a retailer;
  3. Furnishing to a retailer market data from third party vendors;
  4. Providing follow-up services to monitor and revise schematics that involve communicating with a retailer’s stores, vendors, representatives, wholesalers and suppliers concerning daily operational matters; and
  5. Furnishing a retailer with human resources to perform merchandising or other functions, with the exception of stocking, rotation or pricing as permitted by TTB regulations.

Ruling 2016-1 does not provide significant guidance on when category management services may lead to the exclusion of competing products.  Instead, the Ruling generally repeats and/or cites to TTB’s exclusion regulations, which were adopted in the mid-1990s.

In short, Ruling 2016-1 provides only modest specific guidance to the industry.  It does, however, signal quite clearly that TTB will likely direct enforcement resources at current category management practices.



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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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European Court of Justice Rules that a Scottish Law Establishing Minimum Unit Pricing for Alcoholic Drinks May Violate EU Law

by | Dec 29, 2015 |

On 23 December 2015, the Court of Justice of the European Union (ECJ) – Europe’s highest court – ruled that a Scottish law establishing minimum unit pricing for alcoholic drinks may violate European Union law.

The case dealt with the The Alcohol (Minimum Pricing) (Scotland) Act 2012 (2012 Act), which imposes minimum unit pricing (MPU) on the retail sale of alcohol beverages in Scotland.

The stated purpose of the 2012 Act is to protect human life and health by increasing the price of low-cost, high-strength alcohol beverages, with a view to decreasing consumption.  To achieve this objective, the 2012 Act and a subsequent 2013 order prescribed that the MPU for alcohol beverages would be 0.50 GBP. The minimum sale price for alcohol beverages would then be determined by a formula that included the MPU as well as the strength and volume of the alcohol beverage.

The 2012 Act was challenged in court in Scotland, and its implementation has been delayed pending the outcome of the case. In the course of the proceedings, the Inner House of the Court of Session (the Scottish Court) referred to the ECJ certain questions concerning the interpretation of EU law. In particular, the Scottish Court asked whether the effect of the 2012 Act is to restrict the free movement of goods – a cornerstone of EU law – and if so, whether this can be justified in order to protect human life and health.  The Scottish Court also asked whether the 2012 Act can be justified when alternative tax measures are available, which would not impact the free movement of goods to the same extent.

Responding to those questions, the ECJ ruled that:

  • The 2012 Act is likely to impede access to the UK market for alcoholic products produced in other EU Member States, and thus restrict the free movement of goods. Nevertheless, such a restriction may be permissible as long as it is an appropriate means of protecting human life and health and is proportionate to this objective.
  • In this respect, the ECJ ruled that a Member State cannot reject alternative measures (g., taxation measures) that may achieve the same objective and “may be less restrictive of trade and competition within the European Union.” The ECJ observed that a tax measure that increases the overall price of alcohol beverages could also protect human life and health, while still allowing suppliers the freedom to establish their prices. This suggests that the 2012 Act may not be seen as proportionate to its objective.
  • Ultimately, in light of the ECJ’s interpretation, it is for the Scottish Court to determine whether the MPU is justified.

The ECJ’s decision expresses a clear view that the 2012 Act restricts the freedom of goods, and that it may not be justified since other, less restrictive measures – e.g., excise taxes – could achieve the same health of objective, while not impeding trade and competition. This will undoubtedly create hurdles for proponents of the 2012 Act. [...]

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Beyond the Basics: Tied-House Policy and Things of Value

by | Apr 9, 2015 | ,

The Fall 2014 issue of Artisan Spirit introduced readers to the unusual and rather complicated legal concepts arising from the “tied-house” laws.  It covered the general concepts of:

a) separating the retail tier from the upper tiers of the industry
b) federal and state regulation in this area
c) the federal scheme prohibiting “inducements” leading to “exclusion”
d) cross-tier ownership prohibitions
e) restrictions on upper-tier assistance to retailers

This new article, published in the Spring 2015 issue of Artisan Spirit, takes readers a little deeper into the subject of tied-house laws by pondering the policy behind them and examining some hot topics on what constitutes prohibited “thing of value” assistance to retailers.  But remember that tied-house laws exist on the federal and state level, and that each state has the authority to enact its own particular variations on the tied-house concept.  While a few states simply adopt federal law, most have enacted their own statutes and regulations, leading to substantial variations between the laws of different states.  As a result, no article could possibly capture all the complexities involved, and distillers should seek their own counsel before making a particular investment or running a particular marketing program.



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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: Antitrust Case May Impact the Activities of Alcohol Industry Public/Private Organizations

by | Oct 17, 2014 |

On October 14, 2014, the United States Supreme Court heard oral argument in a case that could have significant implications for hybrid public/private “regulatory” bodies.  Many such bodies, like state and local wine commissions, operate in the alcohol beverage space.

In North Carolina State Board of Dental Examiners v. Federal Trade Commission, 717 F.3d 359 (4th Cir. 2013), the Fourth Circuit Court of Appeals held that the actions of a state’s Board of Dental Examiners (Board) were subject to antitrust scrutiny by the Federal Trade Commission (FTC).  North Carolina clothes the Board with considerable authority to enforce the state’s laws concerning the unauthorized practice of dentistry by non-licensed persons.  The majority of the Board, however, consists of practicing dentists and dental hygienists.

The case arose from the Board’s actions to stop non-licensed persons from offering “teeth whitening” services within the state.  Seemingly responding to complaints from established dental practices, the Board issued cease-and-desist letters to numerous non-dentists offering teeth whitening services, effectively driving such over-the-counter services from the state.  The FTC subsequently investigated the Board’s actions, ultimately issuing an order prohibiting the Board from taking further action to restrict competition in teeth whitening services to persons licensed by the Board.

The issue before the Supreme Court is whether the Board’s actions are immune from antitrust scrutiny under the State Action Doctrine.  That doctrine shields from antitrust scrutiny the actions of a state when functioning in its capacity as a sovereign government.  For example, while private parties cannot set or fix prices, the legislature of a state may fix prices free from the restrictions of antitrust law.

The Fourth Circuit, agreeing with the FTC, held that the state action doctrine did not apply.  The Court of Appeals explained that public/private hybrid entities (such as bar associations) remain subject to the antitrust laws to ensure that their private members do not act in their own commercial self-interest.  Relying heavily on the Supreme Court’s 1980 Midcal Aluminum decision that struck down a post-and-hold price posting law in California, the Fourth Circuit required the Board to show “active supervision” by the state government before it would permit the Board’s actions to receive the benefit of state action immunity.  The court then agreed with the FTC that the Board had failed to make that showing.

How the Supreme Court rules in the North Carolina State Board of Dental Examiners case will impact how public/private hybrid entities must operate within the alcohol beverage industry.  A number of states, for example, have established wine boards and commissions consisting primarily or wholly of private participants in the state’s wine industry.  These boards, however, may have the power to shape and implement state policies, such as establishing marketing orders, state wine trails and the like.  Clear national application of the antitrust laws to such bodies’ conduct could restrict current activities or at least require more careful internal policing to avoid potential exposure under the antitrust laws.



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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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Tied-House Basics for Distillers

by | Sep 24, 2014 | ,

Tied-house laws and related trade practice restrictions rank among the most baffling legal issues faced by a newcomer to the spirits industry.  While issues like distribution contracts, labeling requirements, trademarks and taxes all have parallels in other businesses, tied-house laws have few analogs outside the drinks industry.

This article, originally published in the Fall 2014 issue of Artisan Spirit, aims to provide a very general overview of these laws so a newcomer can at least spot potential issues.



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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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Towards Liquor Control: A Critical Analysis

by | Oct 7, 2013 | , , ,

First published in 1933, shortly before passage of the 21st Amendment repealing Prohibition, Raymond Fosdick and Albert Scott’s Toward Liquor Control is still used by many in the industry to support various positions of current alcohol policy.  In his September 19 presentation for CLE International’s Wine, Beer & Spirits Law Conference,  Marc Sorini provides an overview and critical analysis of the impact of this work on alcohol law and regulatory policy, licensing, distribution, taxation, advertising and education.

To view the presentation, click here.



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