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Alcohol Law Advisor

Regulatory and Distribution Law Updates for the Alcohol Industry

Supreme Court’s 2014-15 Term: Antitrust Case May Impact the Activities of Alcohol Industry Public/Private Organizations

Posted in Trade Practices

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.

Local Wholesaler-Retailer Dispute Has Federal Implications

Posted in Distribution, Trade Practices

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 a clearly articulated an affirmatively expressed state policy to displace competition.”  And, while Mississippi’s statutory scheme clearly prevents intra-brand competition by requiring exclusive territories, it does nothing to restrict competition between brands, which was the subject of Major Mart’s claims.  Further, no state statute or regulation expressly or impliedly allowed any of Mitchell’s actions.

The court also found that Major Mart had met the interstate commerce requirement because the beer sold by Mitchell had been acquired from breweries outside the state and the restrictions on beer sales affected sales of other products in interstate commerce, such as the tobacco, food and gasoline sold at Major Mart stores.

Regarding Major Mart’s monopolization claim, the court analyzed the elements of that claim under the Sherman Act: that the defendant (1) possesses monopoly power in the relevant market, and (2) has willfully acquired, maintained or enhanced that monopoly power through exclusionary conduct.  Mitchell argued that no evidence showed that it had effectively wielded any monopoly power and that Major Mart had not demonstrated that other wholesalers are so “capacity constrained” as to prevent them from effectively competing with Mitchell. The court disagreed, pointing to Mitchell’s 70-75 percent market share of wholesale beer sales as sufficient evidence to raise a question of fact as to Mitchell’s monopoly power.

On the issue of Mitchell’s exclusionary conduct, Major Mart argued that Mitchell was using its market power to punish Major Mart for selling other brands of beer by slowing or ceasing deliveries, delivering damaged product, and taking other retaliatory actions when Major Mart lowered prices or refused to reconsider allocation of shelf space.  The court ultimately denied Mitchell’s summary judgment motion, finding that the issues presented in Mitchell’s motion required the evaluation of testimony to resolve.

Major Mart’s price discrimination claims centered on Mitchell’s practice of “granting discounts, promotions, special services and rebates to other retailers, but not to Major Mart.” Sections 2(d) and 2(e) of the Robinson-Patman Act protect against suppliers granting promotional benefits in connection with sales to favored customers.  A supplier violates 2(d) if it discriminates by compensating only selected customers for customer-performed promotion and violates 2(e) if it discriminates in performing promotional services for selected buyers.

The court never evaluated these claims, however, as Mitchell successfully contended that Major Mart did not satisfy the “in commerce” requirement for jurisdiction under the Fifth Circuit’s interpretation of the Robinson-Patman Act.  This “in commerce” requirement is interpreted more narrowly than the interstate commerce requirement of the Sherman Act.  Under Fifth Circuit precedent, the “in commerce” requirement “is not satisfied unless the sales actually cross a state line,” which may be met if the goods are sold or resold in interstate commerce or the goods were sold to those who compete in interstate commerce.  Because Major Mart did not buy the beer or resell the beer in interstate commerce—just in Mississippi—nor compete in interstate commerce, since “those who received rebates and coupons from Mitchell are located in Mississippi,” the “in commerce” requirement of Robinson-Patman was not met.  So, while Major Mart satisfied the Sherman Act interstate commerce requirement because its purchase of beer from a wholesaler affected interstate commerce, it could not satisfy the Robinson-Patman Act “in commerce” requirement because its sales of beer did not take place across state lines.

This case serves as a reminder of how regulation can affect the antitrust treatment of beer and other beverage distributors.  Regulation of licensing procedures or territorial restrictions, for example, can erect barriers to entry that practically insulate wholesalers from competition within a brand, but cannot shield a wholesaler from antitrust claims of misuse of market power bestowed by that state-sanctioned “monopoly.”  While distributors of dominant brands who have exclusive rights within a geographic area do not have to worry about losing those rights to competing firms absent rare circumstances, they must be on guard against antitrust claims arising from their dealings.  Conduct toward retailers, manufacturers or other distributors that would otherwise be considered merely “rough dealing” can rise to the level of a federal antitrust violation or invite state and federal regulatory antitrust scrutiny because of that exclusive distribution relationship.

This case also reminds us that state regulatory schemes and franchise laws cannot insulate wholesalers from antitrust scrutiny under state action immunity, even though a wholesaler’s exclusive right to distribute the brands it carries often is conferred by state law.  For a private actor to obtain state action immunity, the state must clearly articulate a policy to displace competition and actively supervise the private actor’s conduct under the statutory scheme.  These types of regulations and laws typically make no such articulation, and in this case, the alleged exclusionary conduct of the wholesaler bore no relation to the regulatory scheme that permitted its exclusive distribution relationship.

Finally, as illustrated by this case, despite the risk of federal antitrust violations for wholesalers of dominant brands articulated above, wholesalers of any brands typically face no risk of violating federal price discrimination laws related to the pricing of beer to retailers because those transactions do not cross state lines.  Perhaps that is small comfort, however, given the existence of state price discrimination laws and the potential for certain pricing schemes by wholesalers of dominant brands to constitute exclusionary conduct in violation of the Sherman Act.

Brewers Association Marketing and Advertising Code

Posted in Advertising and Marketing

Successful advertising and marketing are essential to the continued growth and success of the craft brewing movement.  Brewers’ freedom to advertise in the United States is a privilege that brewers in other nations, and some industries in our own country, do not share.  This article by Art DeCelle, originally published in The New Brewer, discusses the best means of protecting commercial free speech in the brewing industry, including complying with the Brewers Association Marketing and Advertising Code.

Read the full article here.

TTB Issues Expanded List of Allowable Changes to Approved Labels

Posted in TTB COLAs and Formulas

On Monday, September 29 2014, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued Industry Circular 2014-2, which expands the list of Allowable Revisions to Approved Alcohol Beverage Labels.

Industry Circular 2014-2 permits the following changes to already-approved malt beverage, wine and distilled spirits labels without the need for a new certificate of label approval (COLA):

  1. Deletion or revision of sponsorship themed graphics, logos, artwork, events, etc. and/or sponsorship information
  2. Addition, deletion or revision of awards, ratings or recognitions (i.e., “rated as the best 2012 wine by x association”)
  3. Deletion of organic claims (Note: The deletion of a single organic claim is not permitted.  All organic claims must be removed from the label or a new COLA is required to delete individual references.)
  4. Revision of an approved sulfite/sulphite statement according to the formats prescribed in the Industry Circular (“Contains Sulfites/Sulphites,” “Contains (a) Sulfiting//Sulphiting Agent(s),” “Contains [name of specific sulfating/sulphating agent],” “Contains Naturally Occurring and Added Sulfites/Sulphites” or “Contains Naturally Occurring Sulfites/Sulphites”)
  5. Addition, deletion or revision of information regarding the number of bottles made, produced, distilled or brewed in a batch
  6. Addition of instructional statements vis-à-vis how to best consume and/or serve the product specified in the Industry Circular (“Refrigerate After Opening,” “Do Not Store In Direct Sunlight,” “Best If Frozen For ___ to ___ Hours,” “Shake Well,” “Pour Over Ice,” “Best When Chilled,” “Best Served Chilled,” “Serve Chilled,” “Serve at Room Temperature”)

Tied-House Basics for Distillers

Posted in Advertising and Marketing, Trade Practices

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.

New IRS Regulations Affect Brewers

Posted in Alcohol Excise Taxes, Distribution

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.

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

Posted in Advertising and Marketing, Alcohol Excise Taxes, Distribution, Food Safety and FDA, Import/Export, Non-Beverage Alcohol, Trade Practices, TTB COLAs and Formulas

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: http://cle.com/WashingtonDC.

Hard Cider for Brewers

Posted in Advertising and Marketing, Distribution, Food Safety and FDA, TTB COLAs and Formulas

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.

Distilling 101 for Brewers

Posted in Advertising and Marketing, Alcohol Excise Taxes, Distribution, TTB COLAs and Formulas

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.

New TTB FAQs on Sugar Claims

Posted in Advertising and Marketing, TTB COLAs and Formulas

On Tuesday, July 1, 2014, the Alcohol and Tobacco Tax and Trade Bureau (TTB) released new Frequently Asked Questions (FAQs) concerning sugar claims made on labels and in advertising.  The FAQs articulate, for the first time, a clear TTB policy on the subject and apply to all malt beverages (e.g., beer), wines and distilled spirits subject to TTB’s Federal Alcohol Administration Act jurisdiction.

The FAQs are notable in three primary respects:

  1. TTB will permit truthful and non-misleading sugar claims, provided that they are adequately supported by testing.
  2. TTB will consider a sugar claim the same as a carbohydrate claim and, thus, labels and advertisements making such claims must include a statement of average analysis in accordance with TTB Rulings 2004-1 and 2013-2.
  3. TTB will permit products containing less than 0.5 grams of sugar per serving to make the claims “zero sugar,” “no sugar” or “sugar free.”

The new policy does not apply to certain terms applied to wines and related to sugar content (e.g., “late harvest”) that were subject to prior rulings on such terms.