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Alcohol Law Advisor

Regulatory and Distribution Law Updates for the Alcohol Industry

TTB Permits Online Now Fully Electronic

Posted in TTB COLAs and Formulas

The Alcohol and Tobacco Tax and Trade Bureau (TTB) announcedthat starting on April 28, 2014 industry members will no longer be required to submit original paper copies of bond and power of attorney forms with electronic applications.  Recent changes to TTB’s regulations and Permits Online program will allow electronic receipt of these forms and other required documentation within the Permits Online system.  TTB hopes that this change will not only encourage industry members to take full advantage of the Permits Online system, but also improve application turnaround times as there will no longer be a delay between submission and TTB’s receipt of the paper forms.  Access TTB’s Permits Online Customer Support.

Choice of Forum in Federal Excise Tax Refund Cases

Posted in Alcohol Excise Taxes

To challenge an administrative determination and assessment of federal excise tax, taxpayers in refund cases have a choice of two different federal courts to bring an action:  the U.S. federal district court and the U.S. Court of Federal Claims.  This installment to our regular column describes these fora and provides some practice points.  The choice of forum is one of the most significant decisions that must be made when tax litigation is imminent.

In deciding whether to seek a refund in the District Court or the Court of Federal Claims, a taxpayer should consider several issues in determining the most advantageous forum.  The most important consideration in choosing a forum is the controlling case law.  When the case presents an issue of first impression, the taxpayer should look more generally to the recent tax decisions in these courts as well as other factors, including the potential for a jury trial, whether the cases will be decided on motions for summary judgment and potential for government offsets.

Is There Any Controlling Judicial Precedent?

One of the primary considerations in determining which court to litigate your refund case is the existence of any controlling legal authority.  All courts must follow a controlling decision of the U. S. Supreme Court.  Similarly, each federal district court must follow the legal precedent announced by the U.S. Circuit Court of Appeals to which an appeal would lie.

Can You Litigate By Paying Only Part of the Tax?

Generally, a federal district court or the U.S. Court of Federal Claims does not have jurisdiction over a tax refund suit unless the taxpayer has fully paid the amount of the tax assessment.  Importantly, a different rule applies to a divisible tax.  The taxpayer with a divisible tax is considered to make full payment for purposes of the court’s jurisdiction if the taxpayer pays the tax for a single transaction during the applicable period.

Can the Government Assert Additional Tax Liability?

Once the period for assessment has expired, the government cannot assess additional amounts of tax, but if the taxpayer has filed a refund suit for the same tax period, the government can assert an offset up to the amount of the taxpayer’s refund claim.

What Are the Settlement Procedures?

The Tax Division of the Department of Justice has settlement authority in cases litigated in the Court of Federal Claims and federal district courts.  There is, however, a required additional level of review by the Joint Committee on Taxation for any settlement providing for a refund in excess of $2,000,000.

How Do District Courts and Court of Federal Claims Differ? 

In a suit filed in the federal district court, the taxpayer or the government may ask for a trial by jury.  Juries are not available in suits filed in the Court of Federal Claims.

1.      Place of Trial

A federal district court may present a more convenient forum for the taxpayer because the taxpayer’s principal place of business is located in proximity to the court.  The Court of Federal Claims is located in Washington, D.C.

2.      Discovery

The Court of Federal Claims and the federal district courts permit all typical forms of discovery.  For example, both courts permit the taking of depositions, formal requests for information and documents, and the issuing of subpoenas to third-parties.

3.      Rules of Evidence

Litigants in the Court of Federal Claims are bound by the rules of evidence applicable in the Federal Circuit.  Similarly, the federal district courts follow the Federal Rules of Evidence and the case law stated by the applicable court of appeals with appellate review.

4.      Government Counsel

In cases lying in both the Court of Federal Claims and the federal district courts, attorneys in the Department of Justice Tax Division represent the government.

 

 

 

 

 

 

 

 

 

 

 

 

Proposed FDA Labeling Revisions Would Impact Wines Below 7 Percent ABV and Certain Non-Malt Beers

Posted in Food Safety and FDA, TTB COLAs and Formulas

On March 3, 2014, the Food & Drug Administration (FDA) published a Notice of Proposed Rulemaking (NPRM) that, if and when finalized, would make important changes to the labeling of all foods subject to FDA’s primary labeling jurisdiction.  While most alcohol beverages fall under the primary labeling authority of the Alcohol and Tobacco Tax and Trade Bureau (TTB), wines below 7 percent alcohol by volume (ABV) and beers containing no malted barley or no hops fall within the scope of FDA’s primary labeling authority.

The NPRM seeks to adjust FDA’s labeling and related rules to address certain concerns about the American diet, particularly the so-called obesity epidemic.  As such, it aims to increase and improve the amount of labeling information about critical attributes like calories and the addition of sugars to food.  FDA’s proposed regulations would:

  • Put a greater emphasis—with larger and bolder type—on calories.  FDA believes the number of calories is especially important to maintaining a healthy weight.
  • Place greater emphasis on the number of servings per package and amount per serving.
  • Delete the requirement to list calories from fat; however the quantity (in grams) of total, saturated and trans fat will still be required.  FDA has shifted its focus to the type of fat rather than the total amount of fat.
  • Require the amounts of potassium and Vitamin D on the label, but not the amounts Vitamins A and C.
  • Update certain serving size requirements. These updates would reflect the reality of what people actually eat, according to recent food consumption data.
  • Update Daily Values for various nutrients.  In addition, the Percent Daily Value (%DV) would shift to the left of the Nutrition Facts label.  FDA says it wants to help consumers visually and quickly put nutrient information in context.

Significantly, the NPRM expressly addresses the subject of wines below 7 percent ABV and beer falling within FDA labeling jurisdiction in its proposed rules for added sugar labeling.  As noted above, a proposed regulation would require the mandatory declaration of added sugars as a line item in the familiar Nutrition Facts label required by current regulations.  That declaration would include any brown sugar, corn sweetener, corn syrup, dextrose, fructose, fruit juice concentrates, glucose, high-fructose corn syrup, honey, invert sugar, lactose, maltose, malt sugar, molasses, raw sugar, turbinado, sugar, trehalose and sucrose.  And because (according to FDA) no scientific means permits the measurement of added sugars (as distinguished from sugar intrinsic to the food), the NPRM proposes a new record-keeping requirement to document the addition of sugars to foods subject to the labeling rule.

Fermentation, of course, consumes sugar as yeast converts that sugar into alcohol (and other byproducts like CO2).  The NPRM acknowledges this fact, but indicates that FDA does not possess adequate information to assess the degradation of added sugars during the fermentation of wine and beer.  FDA asks commenters to provide information on this issue.

Notwithstanding FDA’s apparent lack of information on the subject, it proposes a specific regulation for beer and wine (plus certain baked goods) within its jurisdiction in order to address the fermentation of added sugars.  The NPRM speculates that manufacturers of some beer and wine could determine the amount of added sugars in the finished food product through laboratory analysis or by relying on scientific documents (e.g., journal articles or reference books) showing the amount of added sugars typically consumed during fermentation in a specific food.  In the alternative, the NPRM speculates that manufacturers may be able to record the amount of sugars added to beer and wine before and during fermentation and record that information in databases, recipes, formulations or batch records.

The NPRM accordingly proposes a separate record-keeping requirement for producers of beer and wine subject to FDA’s primary labeling jurisdiction.  These manufacturers must keep records of all relevant scientific data and information relied upon that demonstrates the amount of added sugars in the food after fermentation, as well as a narrative explaining why the data and information demonstrates the amount of added sugars declared in the finished beer or wine.  In the alternative, a manufacturer must make and keep records of the amount of sugars added to the food before and during the processing of the beer or wine, and, if packaged as a separate ingredient, as packaged.

As part of the rulemaking process, the NPRM seeks comments from the industry and interested persons on all aspects of the proposed regulations.  Comments are due on or before May 26, 2014, although an extension of time is possible.

Supreme Court Will Rule on Whether Agency-Approved Beverage Label Can Be Challenged as ‘False Advertising’ in Federal Court

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

On January 10, 2014, the U.S. Supreme Court agreed to hear an appeal by Pom Wonderful LLC against The Coca-Cola Company.  The Court will examine whether Pom can bring a federal Lanham Act false advertising claim against a Minute Maid juice product label that had been approved by the U.S. Food and Drug Administration (FDA).  (Pom Wonderful LLC v. The Coca-Cola Co., U.S. Supreme Court case no. 12-761).

At issue in the lawsuit is a Minute Maid label for “Pomegranate Blueberry Flavored Blend of 5 Juices.”  The label presents the words “Pomegranate Blueberry” in larger type than the remainder of the phrase.  Pom claimed that the label was misleading because the product contains 0.3 percent pomegranate juice and 0.2 percent blueberry juice.

A California federal trial court and the 9th Circuit federal appeals court in California both ruled that Pom could not bring a Lanham Act false advertising claim against the label, since it had been specifically examined and approved by the FDA.  Pom has argued that the decisions were contrary to established law in other U.S. courts, and that federal regulations establish a floor –but not a ceiling — on what an advertiser is required to do to avoid a claim that the advertising is false and misleading.  Coca-Cola has argued that product labeling that is specifically authorized by the Food, Drug and Cosmetic Act (FDCA) and approved by the FDA cannot be charged as false or misleading under another federal statute such as the Lanham Act.

Although the question before the Supreme Court is whether a private party can bring a Lanham Act claim challenging a product label regulated under the FDCA, the Supreme Court’s decision could potentially have significant implications for the alcohol beverage industry.  For example:

  • If the Supreme Court rules that a competitor cannot bring a Lanham Act claim against a label that has been approved by the FDA, a natural question is whether the same rule will apply with regard to alcohol beverage labels that have been reviewed and approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB) (by its terms, the Federal Alcohol Administration Act does not preempt the Lanham Act); and
  • If a Lanham Act claim would be barred against labels approved by TTB, a question may arise about whether a Lanham Act claim would be barred on elements of the label that TTB does not specifically review as a matter of policy – such as contrast, size and placement of label elements.

The Supreme Court is expected to hear argument this spring and decide the case by June 2014.  Depending on the decision, alcohol beverage industry members could find they have additional insulation against a federal false advertising claim, but they may likewise be limited in bringing a federal false advertising lawsuit against a competitor’s label that has been approved by TTB.

Recent Alcohol Liability Decision Focuses on Insurance Policy Terms

Posted in Distribution, Food Safety and FDA, Import/Export

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. Ill. E. Div., decided January 17, 2012 ).

Supreme Court of Ohio Clarifies Beer and Wine Franchise Law

Posted in Distribution

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 BeverageSee Tri Country Wholesale Distributors v. Labatt USA, S.D. Ohio No. 2:13-CV-317 at *35 (Oct. 16, 2013).

FDA FSMA Extension of Comment Period Announced

Posted in Food Safety and FDA

The Food and Drug Administration (FDA) has announced that it will soon extend for 60 days the comment period on its proposed rules for (1) Foreign Supplier Verification Programs for Importers of Food for Humans and Animals and (2) Accreditation of Third-Party Auditors/Certification Bodies to Conduct Food Safety Audits and to Issue Certifications.  The current comment period for both proposed rules is scheduled to end November 26, 2013.  The extension will mean the comment period will now end on or about January 24, 2014.  A formal Federal Register Notice is expected shortly.

FDA to Regulate Brewers and Distillers That Sell Waste Grain for Animal Feed

Posted in Food Safety and FDA, Non-Beverage Alcohol

The U.S. Food and Drug Administration (FDA) will publish its Preventive Control Rule for Feed next Tuesday, October 29, 2013.  The FDA’s Fact Sheet about the proposed rule can be found here.  The comment period is 120 days and comments accordingly should be due on or around February 26, 2014.  More information is available on the following FDA webpage: http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm366510.htm.

Quite notably, the FDA rule proposes to cover breweries and distilleries if they sell spent grain to farmers for use in animal feed.  This aspect of the rule could regulate hundreds of breweries, distilleries and ethanol plants as animal feed producers.  The rule does propose exempting smaller companies, suggesting between $.5 and $2.5 million in feed sales as the appropriate threshold for regulation.

Among other things, application of the proposed rule to a facility would require:

  1. a written food safety plan;
  2. hazard analysis;
  3. preventive controls for hazards that are reasonably likely to occur;
  4. recall plan for animal food with a hazard that is reasonably likely to occur;
  5. monitoring;
  6. corrective actions;
  7. verification; and
  8. associated record keeping.

The proposed rule also would establish specific good manufacturing practices (GMP) for animal feed.

Any brewer or distiller currently supplying spent grain for feed should pay attention to these proposed rules.  Participation in the comment period may reduce the impact of these regulations or obtain some exemption for the industry.  If those efforts fail, companies above the regulation’s size threshold (whatever that turns out to be) must either gear up to comply with these rules or consider new ways to dispose of their spent grains.

Towards Liquor Control: A Critical Analysis

Posted in Advertising and Marketing, Alcohol Excise Taxes, Distribution, Trade Practices

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.

Fourth Circuit Holds that ABC Regulation Cannot Prohibit Advertising in All College Newspapers

Posted in Advertising and Marketing

Last week the United States Court of Appeals for the Fourth Circuit (based in Richmond, VA) handed down the attached decision in Educational Media v. Insley, No. 12-2183 (Sept. 25, 2013).   The case underlines the trend to provide commercial speech, even speech about heavily-regulated products like alcohol beverages, with strong protection under the Constitution’s First Amendment.

Educational Media arose when two college student newspapers affiliated with Virginia Tech and the University of Virginia challenged a Virginia Alcoholic Beverage Control Board (ABC) regulation prohibiting the publication of alcohol advertisements in college newspapers.  In 2010, the Fourth Circuit ruled that the Virginia ABC regulations were not unconstitutional on their face.  After a remand to the District Court, which upheld the regulation, the Fourth Circuit’s recent decision struck down the regulation as applied to the newspapers in question.

The Fourth Circuit applied the well-established four-part test for commercial speech first articulated in Central Hudson v. Public Service Commission of New York (Supr. Ct. 1980).  The parties conceded that the speech (the advertisements) at issue was truthful and not misleading, and that Virginia had a substantial state interest in combatting underage and abusive drinking – satisfying the first and second prongs of the Central Hudson analysis.

The Court next examined whether the college newspaper advertising ban directly advanced the state’s interest.  Relying on their earlier (2010) decision examining the ABC regulation on its face, the Fourth Circuit concluded that the advertising ban directly and materially advanced the state’s interest in combatting underage and abusive drinking.

The challenged regulation, however, fell to Central Hudson’s fourth prong – whether or not the regulation was more extensive than necessary (i.e., overbroad).  Rejecting the ABC’s argument that its regulation was reasonably tailored, the Court concluded that the ban was overbroad because it prevented many adults of legal drinking age from receiving truthful information about a product they could legally consume.  Critical to this conclusion was evidence that the majority of both college newspapers’ readership were 21 years of age or older.  Significantly, the court emphatically rejected the state’s fallback argument that the regulations also helped prevent abuse drinking by persons of legal drinking age.  Quoting Supreme Court precedent, the Fourth Circuit explained, “’the First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.’”

Based on the Central Hudson analysis, the Court held that the Virginia ABC regulation was overbroad as applied to the Virginia Tech and University of Virginia student newspapers.  In doing so, the Fourth Circuit aligned itself with the Third Circuit, which decided a very similar case in 2004.