Approaches to Spirits Direct Shipping

Direct-to-consumer (DTC) sales of alcohol beverages have been a hot topic in the alcohol industry for the last two decades. The wine direct-shipping landscape has changed greatly over the past 15 or so years, most dramatically by the US Supreme Court’s decision in Granholm v. Heald. Today nearly evert state—plus the District of Columbia—allows wineries to ship wine across state lines directly to in-state consumers. The same cannot be said for spirits.

There are, however, a few avenues distillers may consider to get their products delivered to consumers around the country. Further, an initiative is underway to pursue litigation to secure DTC rights for spirits. Although it is far too early to speculate about the outcome of any such litigation, the current effort suggests the potential for interstate distiller-to-consumer sales in the coming years. Of course, lingering ambivalence toward spirits (as opposed to wine) by the public, lawmakers, and alcohol regulators makes the prospect for any legal change uncertain.

Read the full article.

Originally published in Artisan Spirit, July 2017.

Department of Treasury Publishes Request for Information Regarding Regulatory Reform

In keeping with President Trump’s Executive Order (#13771) on regulatory reform, the Department of the Treasury recently published a Request for Information regarding its regulations. The Request covers those regulations administered by TTB under Title 27 of the Code of Federal Regulations.

The Request for Information provides an unusually-clear opportunity to propose reforms to reduce regulatory burdens on the industry. Comments are due on or before July 31, 2017.

FDA’s Delay of the Menu Labeling Rule Challenged

Two consumer advocacy groups recently sued the Food and Drug Administration (FDA) for delaying the compliance deadline for the agency’s 2014 menu labeling rule for a fourth time. The menu labeling rule requires menu items offered for sale in restaurants with 20 or more locations to disclose nutritional information and the number of calories in each standard menu item. FDA and Congress previously extended or delayed compliance with the menu labeling rule three times in 2015 and 2016. Before the latest delay, the most recent “compliance date” for the menu labeling rule was May 5, 2017.

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RICO Madness: Marijuana Operations Face RICO Challenges in Federal Courts

Don’t look now cannabis businesses, but your neighbors may be raising a racket. A June decision by the 10th Circuit Court of Appeals in Denver may have opened the doors to new legal challenges to marijuana operations: civil suits under the Racketeer Influenced and Corrupt Organizations Act (RICO).

RICO was originally intended to go after the mafia and other organized crime, but its broad language means it can be applied in other settings. RICO allows a private citizen to sue “racketeers” for damage to business or property due to the racketeer’s illegal activities or activities that were conducted under his guidance. Since marijuana remains illegal under federal law, the production or distribution of marijuana is considered racketeering.

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Wine, Beer & Spirits Law Conference: September 14-15, 2017

Connect with more than 100 professionals from around the country at the 22nd Annual Wine, Beer & Spirits Law Conference to be held September 14-15, 2017 in Portland, Oregon.  McDermott Partner Marc Sorini will co-chair the event and will speak on alcohol regulatory and distribution issues in the transactional context.  Other conference topics include TTB updates, trade practice developments, crisis management, trends in retailer liability, private label legal issues, and more.  You can view the conference agenda here.

Register today.

En Banc Opinion Could Set Precedent for Tied-House Laws

Yesterday, the en banc (full) Ninth Circuit Court of Appeals issued the attached opinion in the case of Retail Digital Network v. Prieto, No. 13-56069.

As you may recall, the Retail Digital Network 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 (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).  Then in January 2016, a panel of the Ninth Circuit reversed, holding that Actmedia is “clearly irreconcilable” with the Supreme Court’s 2011 opinion in Sorrell v. IMS Health Inc.  The panel accordingly would have remanded the case to the District Court for further proceedings under Sorrell’s allegedly more restrictive First Amendment standard.  But the state requested an en banc (full court) rehearing, which the court granted.

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The Ban on Consignment Sales

Most brewers are at least somewhat familiar with federal and state laws regulating the interrelationships between members of the different industry tiers. The most well-known are the “tied house” laws, which prohibit or severely restrict brewers or beer wholesalers from owning retail establishments (and vice versa), and substantially limit the ability of brewers or beer wholesalers to provide money, free goods, or other “things of value” to retailers.

Until recently, the laws prohibiting consignment sales in the alcohol beverage industry received little attention. But in the past 18 months, the settlement of two federal investigations involving the beer industry’s biggest players has focused new attention on the subject. This article will explain consignment sale laws in an effort to prevent brewers from inadvertently violating them.

Read the full article.

Originally published in The New Brewer, May/June 2017.

Texas Supreme Court Weighs In on Tied House

Late last month, the Texas Supreme Court issued a ruling in Cadena Comercial USA Corp. d/b/a OXXO v. Texas Alcoholic Beverage Commission, finding in favor of the Texas Alcoholic Beverage Commission (TABC) and weighing in for the first time on the application of Texas’ tied house law. In a 6-2 decision, the court upheld the TABC’s denial of a retail permit to a foreign corporation whose parent company also holds a 20 percent ownership interest in a foreign brewer.

Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA) holds both a 20 percent interest in the stock of two Heineken entities, as well as–through intermediate holding companies–100 percent of the ownership of Cadena Comercial USA Corp. (Cadena), a company that operates convenience stores. In 2011, Cadena sought licensing as a beer and wine retailer in Texas.  During the license application process, the TABC discovered FEMSA’s ownership of Cadena and interest in Heineken and rejected Cadena’s permit application on tied house grounds. Texas’ alcohol beverage laws define “tied house” as prohibiting any overlapping cross-tier ownership interest.

Upon the denial of its permit application, Cadena requested and received an administrative hearing before a county judge. At the hearing, the TABC’s director of licensing testified that that the TABC would consider even one overlapping share of stock across tiers to violate Texas’ tied house laws. (This principle is referred to as the “One Share Rule.”) The judge denied Cadena’s retail permit application, finding that because of Cadena’s interests in a brewer/manufacturer, issuance of the permit would violate the tied house laws. On appeal, both the district court and the court of appeals affirmed the denial of the permit.

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ESOPs and Artisan Distilling

With articles about the “magic” of turning employees into company owners popping up in the New York Times and The Atlantic last fall, Employee Stock Ownership Plans are becoming part of the mainstream vernacular. Referred to by those in the know as “ESOPs” (pronounced “ee-SAHP”), these specialty retirement plans are a popular—and tax effective—way for companies to manage succession planning. When structured properly, and ESOP can provide huge financial benefits to companies and their employees alike. According to the National Center for Employee Ownership, there are almost 7,000 ESOPs currently in place. About 10 million people—more people than currently love in the state of Washington—actively participate in an ESOP today.

There have been several craft brewers who have taken advantage of the ESOP structure in the past year and we expect this trend to pique the interest of craft distilleries. This article explores at a very high level some of the issues involved with starting and maintaining a craft distillery ESOP.

Read the full article.

Originally published in Artisan Spirit, Spring 2017.

Permits Moving to the Permits Online System this Fall Could Cause Substantial Delays

The Alcohol and Tobacco Tax and Trade Bureau (TTB) recently notified holders of permits that were originally filed in paper of plans to move all permits to the Permits Online (PONL) system this fall. This could lead to substantial delays due to the volume of permits included.  Industry members who wish to submit requests ahead of that time can send their information (EIN, Permit and Registry Numbers) to Permits.Online@ttb.gov and enter Permits Online Data Load in the subject line of the email. Filing amendments electronically has historically been significantly faster using TTB’s PONL system.

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