Join McDermott Partners Marc Sorini and Andrew B. Kratenstein at the 21st Annual CLE International Wine, Beer & Spirits Law Conference

The annual Wine, Beer & Spirits Law Conference will be held on September 22-23, 2016 in Colorado Springs, CO to discuss the latest developments in alcohol policy and practice.  Co-Chair and McDermott partner Marc Sorini has again lined up a great program of speakers on legal topics of interest to the industry.  In addition, Marc and McDermott Partner Andrew B. Kratenstein will give the following presentations:

  • Thursday, September 22, 9:30-10:15 am: Marc will help kick off the conference by discussing the intersection of the First Amendment and tied-house law.
  • Thursday, September 22, 3:15-4:30 pm: Andrew will join three other lawyers to explore the strategies and tactics of supplier-distributor disputes, touching on venue, injunctions and other topics.

For more information or to register, please visit http://www.cle.com/Broadmoor.

Sixth Circuit Tri County Decision Provides Much-Needed Clarity on “Successor” Provision in Ohio Franchise Law

I attach a copy of the US Court of Appeals for the Sixth Circuit’s recent decision in Tri County Wholesale Distributors v. Labatt USA Operating Company, Nos. 15-3710/3769 (6th Cir., July 6, 2016). For students of the increasingly byzantine case law interpreting the Ohio franchise law’s “successor” provision, Ohio Rev. Code § 1333.85(D), the opinion provides some much-needed clarity on several points.

While the Tri County decision does not formally bind Ohio state courts on questions of Ohio law, it binds lower federal courts and provides strong persuasive authority to the state courts on the following points under the successor provision:

  1. A supplier-tier entity can qualify as a “successor” where the change-in-control occurred (as it frequently does in modern transactions) at the holding company level several corporate layers above the operating (brewing/winemaking) company. Distributors in Ohio have been arguing that the successor provision requires a new operating company that is, itself, a manufacturer, but the Sixth Circuit rejected this “hyperliteral” approach.
  2. The successor provision, by providing suppliers with a means to terminate without cause upon payment of fair market value compensation, does not constitute an unconstitutional governmental taking of property under the federal and Ohio constitutions. In rejecting the distributors’ contrary argument, the Sixth Circuit characterized Ohio’s beer and wine franchise statute as “an anticompetitive statute that deprives suppliers of their freedom to terminate contracts with distributors,” and the successor provision as “an exception to this anticompetitive scheme.”
  3. Distributors are not entitled to any additional award of damages for lost future income in addition to the fair market value paid to the distributors under the successor provision. The Sixth Circuit characterized this damages claim as “asking for a double recovery” because future profits are directly included in the calculation of fair market value.
  4. Distributors’ fair market value award should be reduced by the amount of profits they earned on selling the brand during the time spent litigating the successor status of the supplier. This final holding may substantially reduce the current incentive of distributors to challenge successor terminations under the Ohio statute, as the profit reaped from continued sales now will be deducted from the fair market value award distributors are due under the statute.

In short, the Sixth Circuit’s Tri County opinion represents a win for supplier-tier companies and clarifies a number of points of Ohio law that have been litigated extensively in the past several years.

Non-Compete Agreements: Friend or Foe?

With the boom of craft producers, competition is ever-increasing. If you’re thinking about going into the business or you already have, undoubtedly you have considered how you can best protect your products, recipes, methodologies, and distribution from imitation or recreation. The sale and manufacture of unique craft drinks creates a unique set of issues and considerations.

Read the full article, originally published in the Summer 2016 issue of Artisan Spirit.

FDA to Hold Public Workshops Addressing Menu Labeling Final Rule

The US Food and Drug Administration (FDA) has announced a series of public workshops about menu labeling to help the industry comply with requirements to provide calorie and other nutrition information to consumers. The workshops will address the menu labeling final rule, which require certain chain restaurants and similar retail food establishments to give consumers nutrition information on standard menu items. The compliance date for these requirements is May 5, 2017.

These workshops are to continue FDA’s dialogue with the industry about implementation of the menu labeling final rule and provide additional clarity on the requirements. Interested parties will have the opportunity to discuss specific menu labeling questions and concerns directly with FDA subject matter experts through pre-scheduled one-on-one sessions. Continue Reading

The Evolving Alcohol Regulatory System

Most participants in the alcohol beverage industry are very familiar with the “three tier system.”  What will surprise many, however, is learning that the system did not emerge immediately after Prohibition.

Read the full article, originally published in the May/June 2016 issue of The New Brewer.

FDA Releases Final Guidance Regarding the Food Labeling Term “Evaporated Cane Juice”

The US Food and Drug Administration (FDA) has released final guidance stating its view that sweeteners derived from sugar cane should not be declared in the statement of ingredients as “evaporated cane juice.”  FDA’s view is that the term “evaporated cane juice” is false or misleading because it suggests that the sweetener is fruit or vegetable juice or is made from fruit or vegetable juice, and does not reveal that the ingredient’s basic nature and characterizing properties are those of a sugar.

FDA’s guidance recommends that ingredients currently labeled as “evaporated cane juice” be relabeled to use the term “sugar,” optionally accompanied by a truthful, non-misleading descriptor to distinguish the ingredient from other cane-based sweeteners.  Such a descriptor could be a coined term, and can be used to distinguish the ingredient from white sugar and other sugars by describing characteristics such as source, color, flavor or crystal size.  FDA would expect such a descriptor to appear before the common or usual ingredient name “sugar.”

FDA Publishes Final Rule for Protection Against Intentional Adulteration as Part of Food Safety Modernization Act

FDA has published as part of the Food Safety Modernization Act (FSMA) a final rule concerning mitigation strategies to protect food against intentional adulteration.  The rule will require domestic and foreign food facilities that are required to register as food facilities under the Federal Food, Drug, and Cosmetic Act (FFDCA) to address hazards that may be introduced with the intention to cause wide scale public health harm.  More specifically, under this regulation, both domestic and foreign food facilities are required to complete and maintain a written food defense plan that assesses their potential vulnerabilities to deliberate contamination where the intent is to cause wide-scale public health harm. Facilities will now have to identify and implement mitigation strategies to address these vulnerabilities, establish food defense monitoring procedures and corrective actions, verify that the system is working, ensure that personnel assigned to the vulnerable areas receive appropriate training and maintain certain records.

FDA to Issue Revised Guidance on Nutrition and Supplement Facts and Serving Size Regulations

This Friday, May 27, 2016, the US Food and Drug Administration (FDA) will publish its revised Nutrition and Supplement Facts and Serving Size regulations. The Serving Size regulation in public inspection view is close to 180 pages and the Nutrition Facts regulation is close to 1,000 pages.

Significantly, for beverages:

  • Serving size will be 12 ounces.
  • The new rules require dual column labeling if the container weighs at least 200 percent (e., 24 ounces) and up to and including 300 percent (i.e., 36 ounces) of the applicable referenced amount commonly consumed (here, 12 ounces).
  • Where dual column labeling is required, the label must show nutrition information listed (a) per serving and (b) per unit.

In addition, the new rules include “added sugar” labeling requirements that will likely prove quite controversial.

Assuming no congressional intervention or court challenges delay implementation (and the requirements for declaring “added sugar” may result in some), the compliance dates for the new rules are:

  • July 26, 2018 for manufacturers with $10 million or more in annual food sales; and
  • July 26, 2019, for manufacturers with less than $10 million in annual food sales.

FDA Announces Availability of Final Guidance on Menu Labeling

On May 5, 2016, the US Food and Drug Administration (FDA) announced the availability of its final menu labeling guidance, “A Labeling Guide for Restaurants and Retail Establishments Selling Away-From-Home Foods – Part II (Menu Labeling Requirements in Accordance with 21 CFR 101.11).” The guidance is designed to help businesses comply with the menu labeling final rule.

Under a law signed late last year, FDA’s enforcement of its menu labeling final rule cannot begin until one year after FDA published this notice of availability. As a result, enforcement of the final Menu Labeling regulations will start on May 5, 2017.

FDA’s guidance responds to many frequently asked questions that it has received. It differs from the draft guidance by providing additional examples and new or revised questions and answers on topics such as covered establishments (pages 6, 12–17), alcohol beverages (pages 50–55), catered events (page 14), mobile vendors (page 16), grab-and-go items (pages 40–41) and record keeping requirements (pages 42–47). Continue Reading

Guidance Provided on Interplay of “Dormant” Commerce Clause and the 21st Amendment

On April 21, the US Court of Appeals for the Fifth Circuit handed down its opinion in Cooper v. Texas Alcoholic Beverage Commission, No. 14-51343.  It provides further guidance, at least within the Fifth Circuit, on the interplay of the “dormant” Commerce Clause and the 21st Amendment following the Supreme Court of the United States’ oft-cited decision in Granholm v. Heald, 544 US 460 (2005).

The case arose when the Texas Package Store Association attempted to revisit the Fifth Circuit’s two-decade old decision in Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1994).  Cooper v. McBeath permanently enjoined the Texas Alcoholic Beverage Commission (TABC) from enforcing certain residency requirements imposed on wholesalers and retailers by the Texas Alcoholic Beverage Code.  In that decision, the Fifth Circuit decided that the residency requirement was a protectionist measure and therefore unconstitutional under the so-called “dormant” Commerce Clause of the US Constitution.

In 2014, the Texas Package Store Association (TPSA) moved for relief from the Cooper v. McBeath injunction, arguing that Granholm and its progeny undermined the earlier decision’s reasoning.  The district court ruled that the TPSA lacked standing to seek relief, although it also suggested that TPSA’s motion for relief should be denied on the merits.

In last month’s Cooper v. Texas Alcoholic Beverage Commission decision, the Fifth Circuit concluded that TPSA had standing to seek relief from the Cooper v. McBeath injunction, but then held that TPSA’s motion should be denied on the merits.  Laying out the standard for relief as whether Granholm and its progeny represent a “significant change in decisional law,” the Fifth Circuit concluded that no significant change had occurred.

The Fifth Circuit begins its analysis by noting that Granholm expressly refused to overrule prior cases holding that the Commerce Clause qualified states’ rights under the 21st Amendment.  TPSA argued that the statement in Granholm labeling the three-tier system “unquestionably legitimate” essentially removed Commerce Clause protections from state laws dealing with the wholesale and retail tiers of the industry.  Characterizing that language in Granholm as “dictum,” the Fifth Circuit rejected TPSA’s argument as “unconvincing.”  Refusing to follow an Eighth Circuit decision that embraced logic similar to the argument advanced by TPSA, the Fifth Circuit instead relied on its own decision in Wine Country Gift Baskets.com v. Steen, 612 F.3d 809 (5th Cir. 2010).  Thus “state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.”  Instead, although the 21st Amendment permits a state to impose a physical-residency requirement that may favor in-state businesses, it may not impose “a durational-residency requirement on the owners of alcoholic beverage retailers and wholesalers.”  (Quoting Cooper v. McBeath, emphasis in original).

The Fifth Circuit accordingly reasoned that nothing in Granholm and its subsequent application represent a significant change in the law.  It therefore reversed the decision of the district court and directed it to enter an order denying on the merits TPSA’s motion for relief.

Cooper v. Texas Alcoholic Beverage Commission represents yet another wrinkle in the federal courts’ ongoing struggle to reconcile the holding of Granholm (a state cannot discriminate between the shipping rights of out-of-state versus in-state wineries) with its dictum that the three-tier system is “unquestionably legitimate.”  By drawing a previously unrecognized distinction between “physical-residency” and “durational-residency” requirements and, perhaps, distinctions based on business location versus owner location, the Fifth Circuit also has introduced significantly more complexity and nuance into the Commerce Clause/21st Amendment analysis.

We expect that the Supreme Court will eventually address this subject again to reconcile what is now a clear “circuit split” between the Fifth and Eighth Circuits.  But the Court will likely allow the issue to further “percolate” in the lower courts, as the case law in this area remains quite new.  We also wonder whether litigants seeking to narrow Granholm, who have scored a number of significant “wins” in the Second, Fifth (Steen) and Eighth Circuits in the decade since Granholm, will put those decisions in jeopardy by seeking Supreme Court review of the Cooper v. Texas Alcoholic Beverage Commission decision.

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