In the past decade, millions of Americans have converted to gluten-free diets. Originally a practice dictated solely by the medical needs of those who suffer from celiac disease, gluten-free has entered the mainstream. This article will explore the evolving and somewhat uncertain status of labeling and advertising beer as “gluten-free.”
In a Federal Register Final Rule to be published tomorrow (July 10, 2015), the U.S. Food and Drug Administration (FDA) will announce that it has extended by one year (to December 1, 2016) the date by which covered restaurants must comply with FDA’s regulation requiring nutrition labeling of standard menu items. FDA explains that it took this action in response to several requests for such an extension, and FDA believes it needs additional time to provide the industry with further clarifying guidance to facilitate compliance.
In addition, FDA says it will continue discussions with affected businesses and to answer questions about how the rule applies in particular situations. To this end, next month FDA plans to issue draft guidance that answers some of the more frequently asked and crosscutting questions that FDA has received. In accordance with past Agency practice, FDA’s guidance will be a “draft” to reflect FDA’s openness to further public comment and dialogue and to augment the guidance as new questions arise.
FDA also plans to provide educational and technical assistance for affected businesses and for FDA’s state and local regulatory partners to support reasonable and consistent compliance nationwide. FDA says it is committed to being flexible and to working collaboratively with individual companies making a good faith effort to comply with the menu labeling regulations.
Industry members should take note of several false advertising lawsuits against brewers and distillers. Several industry members are grappling with class action lawsuits, including at least three craft distillers. Compared to national ad campaigns from larger competitors, most small producer advertising is limited. But do not make the mistake of believing that modest advertising efforts eliminate the risk of enforcement actions or other liability. Thousands of industry websites and social media pages make tens of thousands of advertising claims. As companies achieve success, its brands gain visibility and the company will draw more scrutiny from class action plaintiffs’ lawyers, competitors and regulatory bodies.
Could consumers have plausibly believed that one of the country’s top-selling bourbon brands is “handmade”? Not according to one federal district court in Florida, which recently dismissed a class action alleging Maker’s Mark deceived consumers by labeling its whiskey as “handmade.” The decision by U.S. District Judge Robert Hinkle comes on the heels of a California federal court’s decision not to dismiss outright a similar consumer class action involving Tito’s Handmade Vodka. Compare Salters v. Beam Suntory, Inc., 14-cv-659, Dkt. 31, (N.D. Fla. May 1, 2015) with Hofmann v. Fifth Generation, Inc., 14-cv-2569, Dkt. 15 (S.D. Cal. Mar. 18, 2015)). These divergent opinions suggest that courts are still puzzling over just how much credence to grant putative class claims based on allegedly deceptive liquor labels at the motion to dismiss stage, particularly under the U.S. Supreme Court’s decision in Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007). In Twombly, the Court made clear that plaintiffs must include enough facts in a complaint to make their claim to relief not just conceivable, but plausible—or else face dismissal.
Salters, the Florida case, is part of a wave of recently filed class actions accusing alcoholic beverage producers of violating state consumer protection statutes. In the typical case, as here, the plaintiffs claim to have purchased the brand in reliance on allegedly deceptive labeling and contend they would not have purchased it or would have paid less otherwise. The Salters plaintiffs claimed they were damaged because Maker’s Mark sold “their ‘handmade’ Whisky to consumers with the false representation that the Whisky was ‘handmade’ when, in actuality, the Whisky is made via a highly-mechanized process, which is devoid of human hands.”
Judge Hinkle flatly rejected the idea that this could support a claim. Citing Twombly, he noted that although whether a label is false or misleading is generally a question of fact, a motion to dismiss should be granted if the complaint’s factual allegations do not “render plaintiffs’ entitlement to relief plausible.” The court observed that taken literally, all bourbon is handmade, because it is not a naturally occurring product; construed less literally, which was apparently the plaintiffs’ approach, “no reasonable consumer could believe” that bourbon could be made by hand, presumably without commercial-scale equipment, “at the volume required for a nationally marketed brand like Maker’s Mark.” In any event, court found the plaintiffs’ claims implausible under any definition of “handmade,” writing:
In sum, no reasonable person would understand “handmade” in this context to mean literally made by hand. No reasonable person would understand “handmade” in this context to mean substantial equipment was not used. If “handmade” means only made from scratch, or in small units, or in a carefully monitored process, then the plaintiffs have alleged no facts plausibly suggesting that statement is untrue. If “handmade” is understood to mean something else . . . the statement is the kind of puffery that cannot support claims of this kind.
The court appears to have concluded that when applied to a product as popular as Maker’s Mark, the word “handmade” is more an unactionable “general, undefined statement that connotes greater value,” like describing a bourbon as “smooth,” than a factual representation easily capable of being false or misleading. Though this may pass the common sense test, it is less clear whether other courts will agree. In the Tito’s case, for instance, the court declined to accept at the motion to dismiss stage an argument similar to the one that persuaded the Maker’s Mark judge, holding that “the representation that vodka that is (allegedly) mass-produced in automated modern stills from commercially manufactured neutral grain spirit is nonetheless “Handmade” in old-fashioned pot stills arguably could mislead a reasonable consumer.”
These cases highlight the need to carefully examine product labeling and advertising claims and consider whether consumers (or plaintiffs’ attorneys) could challenge them as untrue. This is relatively simple when claims involve factual issues such as where a product is produced, but less so with words like “handmade,” which could arguably qualify as either non-actionable “puffery” or a quantifiable claim.
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.
On Wednesday, February 25, 2015, the U.S. Court of Appeals for the Third Circuit issued its opinion in Frank B. Fuhrer Wholesale Co. v. MillerCoors LLC, No. 14-1008 (3d Cir. 2015), finding in favor of MillerCoors LLC (MillerCoors) that the brewer did not violate its contract with Frank B. Fuhrer Wholesale Co. (Fuhrer) or Pennsylvania’s alcohol beverage laws in assigning the distribution rights for several new products to other distributors and attempting to condition the award of future products to Fuhrer on Fuhrer establishing a new entity devoted to MillerCoors products. The case stemmed from Fuhrer’s 1997 distribution agreement (the Agreement) with Coors Brewing Company (Coors). In 2008, Coors and Miller Brewing Company created MillerCoors, a joint venture, and Coors transferred the Agreement to MillerCoors.
The Agreement made Fuhrer MillerCoors’ exclusive distributor of certain specified MillerCoors products in an area of Pennsylvania. The Agreement gave MillerCoors the right, but not the obligation, to grant distribution rights to Fuhrer for additional MillerCoors products. The Agreement also gave Fuhrer the right to acquire distribution rights for other brewers’ brands without MillerCoors’ consent, which Fuhrer has exercised (e.g., in selling certain Anheuser-Busch products). The Agreement required both parties to exercise “good faith and fair dealing” in carrying out its terms.
MillerCoors introduced three new beers in 2012 and 2013 and awarded the distribution rights for the products to Fuhrer’s competitors. Fuhrer sued, alleging that MillerCoors: (1) failed to give Fuhrer the rights to the new products because Fuhrer also sold for Anheuser-Busch; and (2) told Fuhrer it would need to create a new entity dedicated to MillerCoors products in order to obtain future rights to new MillerCoors products. Fuhrer sought a declaratory judgment and asserted claims for breach of contract, violation of the Pennsylvania Liquor Code, unreasonable restraint of trade, and tortious interference. The district court granted MillerCoors’ motion to dismiss and denied Fuhrer’s motion for reconsideration.
On appeal, Fuhrer argued that it objected not to MillerCoors’ assignment of the distribution rights for the new products elsewhere. Instead Fuhrer argued that the process by which MillerCoors undertook this action violated the Agreement’s covenant of good faith and fair dealing. The Third Circuit agreed with the district court that under Pennsylvania law, “the duty of good faith cannot override express contractual terms and convert a permissive contract provision into a mandate.” MillerCoors, the court held, accordingly did not violate its duty of good faith by exercising its contractual right to choose different distributors for the new products.
The Third Circuit also found that because the Agreement placed no obligation on MillerCoors to assign Fuhrer distribution rights to new products, MillerCoors’ proposal to grant Fuhrer such rights in exchange for Fuhrer creating a new entity devoted to MillerCoors did not constitute bad faith performance, but was an “arm’s-length negotiating tactic, offering to barter contractual right for contractual right.” MillerCoors’ proposal did not interfere with Fuhrer’s rights under the Agreement, and accordingly did not constitute a breach of contract. The court also noted that there was no evidence of coercion or intimidation to support Fuhrer’s argument that MillerCoors attempted to force Fuhrer to give up its contractual right.
Few craft brew entrepreneurs contemplate selling their business when they first get started. Unlike, for example, the typical entrepreneur in the software industry, the craft brewers we know were inspired by the love of great beer, a spirit of adventure, and the romance of creating a small manufacturing business. But the life cycle of most businesses eventually requires at least the consideration of a sale or other transaction designed to both recoup the entrepreneur’s lifelong investment and transition the company to the next generation.
From the buy side, the craft beer business has never been hotter, with market share now approaching 8 percent by volume in the U.S. and margins that have gotten the attention of both big brewers and non-U.S. brewers alike. This article, published in the January/February 2015 issue of The New Brewer, will explore at a high level some of the issues involved with buying and selling a craft brewery.
Late last year, the Alcohol & Tobacco Tax & Trade Bureau (TTB) published its semi-annual regulatory agenda in the Federal Register. The agenda provides useful insights into TTB’s regulatory plans and goals for the coming year. As in prior years, however, observers should recognize that TTB often announces ambitious regulatory plans and deadlines that it does not meet.
TTB identified five priority projects for 2015. First, TTB wishes to update and modernize its regulations on the labeling and advertising of wine (Pt. 4), distilled spirits (Pt. 5) and beer (Pt. 7). In describing the initiative, TTB seems most interested in simplification and streamlining, not in the imposition of significant new labeling and advertising requirements. Second, TTB seeks to further de-regulate and streamline its oversight of denatured alcohol and rum, a move that could help the competitiveness of U.S. industrial operations that employ alcohol. Third, TTB wishes to amend its export and import regulations to harmonize them with the International Trade Data System (ITDS), thereby transitioning to an all-electronic import and export environment. Fourth, TTB hopes to implement self-certification of the formulas for flavors, extracts and other non-beverage products made with alcohol. Fifth, TTB plans to review its distilled spirits plant regulations (Pt. 19) in order to replace the current four monthly report forms required for reporting with two forms.
Leaving priorities aside, the semi-annual agenda reports on a number of rulemaking initiatives that should attract the interest of regulated industry members. This note will group the most significant based on the affected industry:
Multiple Alcohol Beverage Categories
- TTB pledges to publish a Notice of Proposed Rulemaking (NPRM) to modernize its wine, spirits, and beer labeling and advertising regulations. As noted above, this is a 2015 priority item for the Agency.
- TTB plans to issue an NPRM late in 2015 to explore whether to retain, revise or repeal the current standards of fill requirements for both wine and distilled spirits.
- TTB plans to issue a Final Rule requiring the electronic submission of many applications, including those for original and amended basic permits.
- TTB expects to issue an NPRM in April 2015 to amend its import and export regulations to make them compatible with ITDS. This is a 2015 priority item.
- TTB hopes to issue an NPRM on certain wine terms that were first raised to the industry in an Advanced Notice of Proposed Rulemaking published by TTB in 2010.
- TTB plans an NPRM in July 2015 to propose authorizing additional treatments for use in winemaking.
- TTB expects to publish an NPRM late in 2015 to clarify the labeling of certain flavored wines.
Distilled Spirits Project
- TTB hopes to issue a supplemental NPRM late in 2015 to propose replacing the current four monthly forms filed by distilled spirits plant operators with two forms, thereby streamlining distillers’ reporting burdens. TTB views this project as a 2015 priority.
Non-Beverage and Industrial Alcohol Projects
- TTB plans to issue an NPRM on the self-certification of non-beverage product formulas – a 2015 priority item – in July 2015.
- TTB believes it will finalize regulations to reclassify many specially denatured alcohol (SDA) formulas as completely denatured alcohol (CDA) and permit the use of more SDA formulas without the submission of an application to TTB. This is another 2015 priority for the Agency.
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.
On December 1, 2014, the United States Supreme Court will hear oral argument in a case that will have significant implications for federal regulatory agencies like the U.S. Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).
The case is Mortgage Bankers Ass’n v. Harris, 720 F.3d 966 (D.C. Cir. 2013). In that decision, the United States Court of Appeals for the D.C. Circuit refined a line of cases involving the Administrative Procedures Act (APA). The APA governs the activities of federal agencies and, among other things, generally requires notice-and-comment rulemaking procedures, including publication in the Federal Register and a period of time for industry and the public to comment on proposed regulations, in order for a federal agency to adopt a new “rule.” These procedural requirements aim to ensure transparency in governmental operations and a public “vetting” process before an agency adopts new regulatory requirements.
Beginning in the 1990s, the D.C. Circuit – which hears a large percentage of the cases involving challenges to federal agency actions – has held that the notice-and-comment rulemaking requirement extends to agency attempts to change a settled agency interpretation of a regulation. In other words, once an agency establishes a position on a particular issue, the D.C. Circuit has required that an agency proceed through notice-and-comment procedures to change its earlier position.
In Mortgage Bankers, the D.C. Circuit held that a person challenging an agency change in policy need not show any reliance on that policy in order to claim that an agency had violated that requirement. The court held that nothing in its prior cases required a showing of reliance.
The Supreme Court has agreed to review the case, see Perez v. Mortgage Bankers Ass’n, No. 13-1041, cert. granted 6/16/14, but on a broader issue than whether a person claiming that an agency changing its interpretation of a regulation must show reliance. Instead, the court agreed to examine whether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation. The court will hear oral argument on December 1, 2014. Thus, the court may be poised to overrule the entire line of D.C. Circuit cases holding that an agency must engage in notice-and-comment rulemaking before changing definitive but un-codified interpretations of regulations.
A reversal of current D.C. Circuit precedent has troubling implications for the alcohol beverage industry. Many policies of the federal agencies that regulate the industry become established through informal decisions never reduced to formal regulations. To take one example, TTB’s policies towards the documentation of exports without payment of tax depart significantly from TTB’s published regulations, and instead rely on well-recognized and followed policies published only in informal Industry Circulars and private letter “variances” from regulations. Consider, too, the dozens of unpublished “policies” TTB applies in the review of alcohol beverage labels, some of which go back decades and have formed the basis of entire brand propositions by the industry. Should the law allow TTB to walk away from such longstanding but informal precedent without any process to let the industry be heard?
One potential solution is to tie a reversal of existing D.C. Circuit precedent with the reversal of the so-called Auer doctrine. In establishing the Auer doctrine, the Supreme Court held that an agency’s interpretation of its rules (as opposed to agency regulations adopted through notice-and-comment procedures) receive deference from the courts unless “plainly erroneous.” See Auer v. Robbins, 519 U.S. 452 (1997). In other words, under Auer an administrative agency receives a substantial benefit of the doubt when its actions are challenged, even if those actions were not subject to the public scrutiny of notice-and-comment rulemaking procedures. Some organizations have argued or implied in friend of the court briefs that, because Auer in effect confers the force and effect of law on agency interpretations of a regulation, the interpretation may not be changed without notice-and-comment rulemaking.
The already-powerful administrative state would receive a substantial boost if, in addition to the deference extended through the Auer doctrine, agency actions to change prior policy positions were not subject to any notice-and-comment requirement. Indeed, such a combination would, no doubt, encourage agencies to avoid notice-and-comment rulemaking altogether, as they would receive all the benefits of such rulemaking under Auer yet could change their decision at will without going through notice-and-comment at all.
Regardless of the outcome, the Supreme Court’s decision in Mortgage Bankers will substantially affect when and why federal agencies must engage in notice-and-comment rulemaking procedures. And, depending on the outcome, the final decision could hand FDA, TTB and other federal agencies far greater latitude to modify, repeal or change longstanding policies without any notice to or consultation with the industry. The stakes are high indeed.