Latest Decision in Kona Beer Branding False Advertising Case

The US District Court for the Northern District of California’s recent opinion in Broomfield v. Craft Brew Alliance, Inc., No. 17-cv-01027-BLF (Sept. 1, 2017) represents the latest decision in the now long-line of false advertising cases alleging that beer brands misrepresent their geographic origins.

The Broomfield case involves the marketing of Kona beers, allegedly in a manner that deceptively suggests that the beers are brewed in Hawaii. In fact, all packaged Kona beer and all draft Kona beer sold outside of Hawaii is brewed in Oregon, Washington, New Hampshire and Tennessee. The Kona brands bear names (e.g., Big Wave, Fire Rock) and images (e.g., volcanoes, palm trees, surfers and hula dancers) that evoke Hawaii. The beers’ outer packaging shows a map of Hawaii and the location of the Kona brewery, and encourages purchasers to “visit our brewery and pubs whenever you are in Hawaii.”

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Alcohol and Tobacco Tax and Trade Bureau Announces Joint Operation Targeting Alleged “Pay-to-Play” Activities in Florida

On July 20, 2017, the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) announced a joint operation it conducted with the Florida Department of Alcoholic Beverages and Tobacco (DABT) to investigate potential trade practice violations in the Miami, Florida area. According to a very brief press release issued by TTB, the investigation focused on alleged “pay-to-play” schemes. “Pay-to-play” is an industry term generally used to mean the provision of payments or other “things of value” by an upper-tier industry member (i.e., supplier or wholesaler) to a retailer to secure placement for the industry member’s products in the retailer’s premises.

Although neither TTB nor the DABT has released any specific details of the investigation or the parties involved, the investigation suggests that TTB is acting on prior announcements that it would seek to aggressively enforce its trade practice regulations. TTB’s 2017 budget included a $5 million earmark to enhance trade practice enforcement. As part of this effort, TTB transitioned 11 of its existing investigators to new roles focusing exclusively on trade practice enforcement.

The joint investigation also comes on the heels of other recent enforcement of trade practice laws and regulations—specifically involving allegations of pay-to-play activities—by state alcohol regulators. In just the last few months, the Massachusetts Alcoholic Beverages Control Commission initiated an enforcement action against an Anheuser-Busch InBev (ABI)-owned distributor in connection with an alleged pay-to-play scheme. The California Department of Alcoholic Beverage Control also recently settled an enforcement action against ABI wholesalers for alleged trade practice violations. Also, in June, a New Jersey beer wholesaler agreed to pay a nearly $2 million fine to settle trade practice allegations brought by the Division of Alcoholic Beverage Control.

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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