TTB Issues Ruling on Category Management under Federal Tied-House Statute

Today the Alcohol & Tobacco Tax & Trade Bureau (TTB) released TTB Ruling 2016-1 (Ruling), addressing category management practices.  The Ruling seeks to clarify TTB’s position toward category management under the federal tied-house statute and regulations, which generally prohibit an alcohol beverage supplier or wholesaler from providing a “thing of value” to alcohol beverage retailers.

The federal tied-house statute and the TTB regulations implementing that provision require TTB to show both an “inducement” of a retailer leading to “exclusion” of competing products for TTB to find a tied-house violation.  TTB regulations also list specific activities that are exceptions to the general rule that providing anything of value to a retailer constitutes an “inducement.”  Those exceptions include shelf schematics.  See 27 C.F.R. § 6.99(b).

Ruling 2016-1 recites the history of the shelf schematics exception and exhibits an element of “buyer’s remorse,” as the narrative suggests that TTB’s predecessor, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), discounted the possibility of abuses that TTB seems to believe are occurring today.  The Ruling then makes it clear that TTB will strictly interpret the schematics regulation as applying only to the schematics themselves, and not “additional services.”  Current category management practices often involve other activities not directly linked to the provision of shelf schematics, although these other activities (at least arguably) relate to developing, creating and updating shelf plans.  Ruling 2016-1 lists the following examples of “additional services” that may prompt TTB scrutiny:

  1. Assuming a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s product;
  2. Receiving and analyzing confidential and/or proprietary competitor information for a retailer;
  3. Furnishing to a retailer market data from third party vendors;
  4. Providing follow-up services to monitor and revise schematics that involve communicating with a retailer’s stores, vendors, representatives, wholesalers and suppliers concerning daily operational matters; and
  5. Furnishing a retailer with human resources to perform merchandising or other functions, with the exception of stocking, rotation or pricing as permitted by TTB regulations.

Ruling 2016-1 does not provide significant guidance on when category management services may lead to the exclusion of competing products.  Instead, the Ruling generally repeats and/or cites to TTB’s exclusion regulations, which were adopted in the mid-1990s.

In short, Ruling 2016-1 provides only modest specific guidance to the industry.  It does, however, signal quite clearly that TTB will likely direct enforcement resources at current category management practices.

Recent Revisions to Internal Revenue Code Affecting Alcohol Beverages

In December 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).  The PATH Act amends several provisions of the Internal Revenue Code of 1986 (IRC) administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB).  Those amendments relate to alcohol excise tax due dates and bond requirements, the definition of wine eligible for treatment as “hard cider” for tax purposes, and cover over of rum excise taxes imported from Puerto Rico and the US Virgin Islands.  In January 2016, TTB issued an announcement concerning the IRC amendments.

Starting with the first calendar quarter of 2017, taxpayers who anticipate being liable for no more than $1,000 in alcohol excise taxes (for sales of distilled spirits, beer and wine) for the calendar year, and who were not liable for more than $1,000 in such excise taxes the prior year, may make excise tax payments annually (rather than the current quarterly payment requirement).  Further, beginning the first calendar quarter of 2017, taxpayers eligible to pay taxes annually under the new provisions, as well as taxpayers currently eligible for quarterly payments of alcohol excise taxes (i.e., taxpayers anticipating being liable for no more than $50,000 in alcohol excise taxes, and who were not liable for more than $50,000 in such excise taxes the prior year), need not file a bond.

The PATH Act also modifies the definition of wine eligible for the tax rate applicable to “hard cider” by (1) increasing the allowable alcohol content from 0.5 percent to less than 7 percent alcohol by volume (ABV) to 0.5 percent to less than 8.5 percent ABV; (2) increasing the allowable carbonation level from 0.392 grams of carbon dioxide per 100 milliliters of wine to 0.64 grams; and (3) expanding the definition by allowing the use of pears, pear juice concentrate and pear products and flavorings in hard cider.  These changes apply to hard cider removed after December 31, 2016.  The hard cider definition changes do not affect other requirements applicable to ciders above 7 percent ABV under the Federal Alcohol Administration Act, including requirements relating to labeling, advertising and permits.

Another section of the PATH Act extends the temporary increase in the limit on cover over of rum excise taxes to Puerto Rico and the US Virgin Islands from January 1, 2015 to January 1, 2017.  This amendment applies to distilled spirits brought into the US after December 31, 2014.

National Transportation Safety Board Targets Impaired Driving

Industry professionals should remain aware of trends in policy and technology that may lead to changes in our nation’s laws to combat drunk driving.  On January 13, 2016, National Transportation Safety Board (NTSB) Chairman Christopher Hart announced the “2016 Most Wanted Safety Improvements,” a comprehensive set of transportation safety goals that the NTSB will advocate in the year ahead.  One priority is to “end substance abuse in transportation.”[i]  The NTSB is a federal agency charged with investigating serious transportation accidents.  While it is not a policymaking body, its recommendations carry significant weight with members of US Congress, state legislators and law enforcement personnel.

While enormous progress has been achieved in reducing drunk driving deaths in the US since the 1980s, the absolute number of fatalities resulting from drunk driving accidents has hovered around 10,000 over the last three years.  The cost of deaths and injuries is estimated at $37 billion annually by the National Highway Traffic Safety Administration.[ii]  These figures are in part the result of an increase in miles traveled by a growing American population, an improved economy and lower gas prices.  Nevertheless, the human and economic toll is substantial.

A key recommendation on the NTSB’s “Most Wanted” list is adoption of new state definitions of drunk driving covering with a blood alcohol content (BAC) of 0.05 or lower.  The current federally-mandated BAC standard is 0.08.  The NTSB also urges pursuit of technologies to make vehicles safer, which includes development of vehicles that cannot be operated by an impaired driver.  Substantial federally-funded research is devoted to a variety of technologies to immobilize vehicles and to track consumption by individuals with prior drunk driving offenses.

Many practical solutions offered by industry members contributed to the long-term reduction in drunk driving and changes in social norms.  Examples include practical programs, such as encouraging use of designated drivers and providing safe rides for customers.


[i]  See, http://www.ntsb.gov/safety/mwl/Pages/mwl8-2016.aspx

[ii] See, http://www.nhtsa.gov/Impaired.

 

Federal Trade Commission Policy Statement on Deceptively Formatted Advertisements

On December 22, 2015, the Federal Trade Commission (FTC) published an “Enforcement Policy Statement on Deceptively Formatted Advertisements” (2015 Policy Statement) with unanimous support of the Commissioners.[i]  The Policy Statement applies to advertising and promotion of all goods and services, and it supplements prior FTC guidance that advertisers have relied on since the 1960s.[ii]  Given the FTC’s longstanding interest in alcohol beverage advertising by large and small suppliers, industry members should pay particular attention to the latest guidance on deception.

The 2015 Policy Statement focuses on so-called “native advertising” or “sponsored content,” which reasonable consumers may perceive to be “non-promotional content” such as news, articles, feature stories or educational information.  The FTC provides an example of digital advertising content in a publication that is formatted in the same manner as the publication itself.  The deception standard is summarized as follows:

Regardless of the medium in which an advertising or promotional message is disseminated, deception occurs when consumers acting reasonably under the circumstances are misled about its nature or source, and such misleading impression is likely to affect their decisions or conduct regarding the advertised product or the advertising.[iii]

Extensive guidance is provided for advertisers to avoid consumer deception in online and digital placements using fairly straightforward disclosures or other means of distinguishing ad content from the publication in which the ad content appears.  Recent enforcement actions are also discussed.  The key to compliance and avoiding FTC enforcement actions is to clearly inform consumers that they are viewing or reading advertising content.

The FTC has also prepared further specific guidance with discussions of issues arising in all forms of media and examples of recommended disclosures and formatting.  Guidance supplementing the 2015 Policy Statement is titled, “Native Advertising:  A Guide for Businesses.”[iv]

Over the last 15 years, several FTC special orders have been issued to beer, wine and spirits manufacturers requiring production of virtually all advertising content for a specified period (e.g., six months or a year).  The FTC staff reviewed those materials thoroughly with a focus on (i) voluntary compliance with industry advertising codes and (ii) compliance with federal laws prohibiting deceptive and unfair advertising practices.  The 2012 special orders issued to the top 14 beer, wine and spirits suppliers in the U.S. also requested privacy policies and terms and conditions of web sites and social media pages.[v]

Four detailed reports on alcohol beverage advertising have been issued since 1999 summarizing the FTC’s findings on alcohol beverage advertising.  The 2014 report was one of the first widely publicized reviews of digital advertising practices by a consumer products industry.[vi]


[i] Full statement is available at https://www.ftc.gov/public-statements/2015/12/commission-enforcement-policy-statement-deceptively-formatted

[ii] See, e.g. Statement in Regard to Advertisements That Appear in Feature Article Format, FTC Release, (Nov. 28, 1967), 73 F.T.C. at 1307 and FTC Statement on Deception, 103 F.T.C. 174, 175 (1984) (appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)) (“Deception Policy Statement”).

[iii] See, 2015 Policy Statement, p. 2 and p. 10.

[iv] https://www.ftc.gov/tips-advice/business-center/guidance/native-advertising-guide-businesses

[v] Cite 2012 Special Order April 12, 2012; press release and link to order available at https://www.ftc.gov/news-events/press-releases/2012/04/ftc-orders-alcoholic-beverage-manufacturers-provide-data-agencys.

[vi] Because the https://www.ftc.gov/news-events/blogs/business-blog/2014/03/alcohol-advertising-ad-placement-self-regulation

Ninth Circuit Opinion Calls into Question Constitutionality of California Tied-House Laws

On January 7, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Retail Digital Network, LLC v. Appelsmith, overruling longstanding Ninth Circuit precedent concerning the legality of certain restrictions on alcohol beverage advertising under the First Amendment and opening the door to part of California’s tied-house scheme potentially being declared unconstitutional.  The 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, LLC (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).  The Actmedia court applied the intermediate scrutiny test on commercial speech regulation articulated by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980).  The Central Hudson test looks at whether:  (1) the speech is not misleading and concerns lawful activity; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is not broader than necessary to serve the governmental interest.  RDN argued that subsequent Supreme Court decisions – Rubin v. Coors Brewing Co. (1995), 44 Liquormart, Inc. v. Rhode Island (1996), and Sorrell v. IMS Health, Inc. (2011) – overrule Actmedia.

The Ninth Circuit determined that Actmedia is “clearly irreconcilable” with Sorrell – a difficult standard to meet.  (The court did not find Coors or 44 Liquormart to have undermined the reasoning of Actmedia as these cases involved complete bans on certain commercial speech, which Section 25503 is not.)  Sorrell required “heightened judicial scrutiny” (rather than the intermediate scrutiny applied by the Actmedia court) of restrictions on non-misleading, content- or speaker-based commercial speech about lawful products.

Such heightened scrutiny may be applied using the Central Hudson test, the Ninth Circuit found, but the court must further focus on the consistency between the government’s asserted interest under the second Central Hudson prong and the legislative purposes that “actually animated” the challenged law.  In articulating its decision, the court noted that other federal circuit courts of appeal have agreed that Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech.

The court reversed the lower court’s grant of summary judgment to the California Department of Alcoholic Beverage Control (ABC) and remanded the case to the district court to apply heightened judicial scrutiny to the statute.  Specifically, the court advised the lower court to consider whether the ABC has shown a real danger of paid advertising of alcohol beverages leading to vertical or horizontal integration under circumstances existing in the current market (and suggested that the legislative concerns at the time of Section 25503(f)-(h)’s enactment are no longer “an actual problem in need of solving”).  The court also instructed the lower court to consider whether the ABC’s concern is real in the circumstances of the case (where a third party, not a manufacturer or wholesaler, makes payments to retailers).  The district court must consider whether the ABC has shown that Section 25503(f)-(h) “materially advances” its “goals of preventing vertical and horizontal integration and promoting temperance” (and suggested that the ABC has not).  Finally, the district court must find, under the fourth Central Hudson prong, a fit between the legislature’s goals and the means used to accomplish those goals (and suggested that a narrower approach may be possible to achieve the ABC’s goals).

By remanding the case, the Ninth Circuit gives the district court the opportunity to independently determine the constitutionality of the relevant tied-house provisions after applying heightened judicial scrutiny consistent with this opinion.  Nevertheless, based on the Ninth Circuit’s reasoning, we believe it is highly likely that Sections 25503(f)-(h) will be found unconstitutional under the First Amendment.

TTB Publishes Projected Regulatory Agenda as Part of Government’s Unified Agenda

As it does twice per year, the Alcohol and Tobacco Tax and Trade Bureau (TTB) recently published its projected Regulatory Agenda as part of the federal government’s “Unified Agenda.”  Links to the U.S. Department of Treasury’s portions of the Unified Agenda appear below.

TTB’s latest contribution to the Unified Agenda lists six priority projects that it hopes to publish rulemaking notices on in 2016:

  1. Revise TTB’s import and export regulations to make them compatible with the International Trade Data System (ITDS).  ITDS aims to create a single electronic exchange portal for all import and export activities.  TTB expects to propose these new regulations by March 2016.
  2. Revise TTB’s labeling regulations for wine, distilled spirits, and malt beverages (beer) to eliminate outmoded, ineffective and excessively burdensome regulations.  TTB plans to propose these revised regulations for industry and public comment sometime before the end of 2016.
  3. Finalize new regulations on specially denatured and completely denatured alcohols.  Most notably, the new regulations would re-classify many specially denatured alcohol products as completely denatured alcohols – greatly reducing the amount of regulatory oversight over such products.  The final regulations would build off a Notice of Proposed Rulemaking published in June of 2013, and TTB expects to finalize these regulations shortly.
  4. Propose new regulations to permit the self-certification of flavors and other non-beverage articles as eligible for “drawback.”  By permitting industry self-certification, TTB would greatly reduce the number of regulatory filings required of the flavor, extract and fragrance industries.  TTB expects to publish proposed regulations before June 2016, coupled with a “Temporary Rule” permitting industry members to begin self-certification immediately.
  5. Revise the Distilled Spirits Plant (DSP) regulations to reduce the TTB-mandated monthly reports required by DSP operators from four to two.  $11,000 to $16,000.Already subject to a Notice of Proposed Rulemaking in 2011, TTB plans to press ahead with a “Supplemental” Notice by March 2016.
  6. Make an inflation-adjustment to the civil penalties for violations of the Alcohol Beverage Labeling Act of 1988, which mandated the now-familiar Government Warning on all alcohol beverage labels.  TTB plans to publish a Final Rule in 2016 to raise the maximum penalty for violations from $11,000 to $16,000.

In addition to the six priority items above, TTB’s portion of the Unified Agenda includes dozens of other rulemaking projects, from those completed in the most recent fiscal year to issues expected to be first raised in a rulemaking notice during the following year.  As with prior years, the industry must view TTB’s expected publication and completion dates with a great degree of caution, as resource challenges, political pressure and other factors often delay the rulemaking process.

Click here to view the Statement of Priorities.

Click here to view the All Treasury Agenda.

Product Recalls

Potential product recall situations rank among the most stressful that a producer can face. Things move fast and decisions must be made with less-than-perfect information. While no preparation will render such situations easy or routine, a producer can reduce the stress level and help navigate this “worst-case” scenario by understanding the process and taking certain steps to prepare. The article linked below aims to familiarize producers with the recall processes and situations while suggesting areas where preparation can help.

Read the full article, originally published in the Winter 2015-16 issue of Artisan Spirit Magazine.

Update: FDA Extends Comment Period for Input on Uses of “Natural” in Food and Beverage Labeling

On December 28, 2015, the U.S. Food and Drug Administration (FDA) extended by 90 days the public comment period on the use of the term “natural” in food and beverage labeling.  As discussed in an earlier post, the FDA is interested in receiving comments on the use of the term “natural” for foods that have been genetically engineered or contain ingredients produced using genetic engineering.  In addition to food processing, production and manufacturing methods, the FDA may also consider whether the term “natural” implies any nutritional or health benefit.  The FDA has received over 3,000 comments to date and will accept comments until May 10, 2016.

European Court of Justice Rules that a Scottish Law Establishing Minimum Unit Pricing for Alcoholic Drinks May Violate EU Law

On 23 December 2015, the Court of Justice of the European Union (ECJ) – Europe’s highest court – ruled that a Scottish law establishing minimum unit pricing for alcoholic drinks may violate European Union law.

The case dealt with the The Alcohol (Minimum Pricing) (Scotland) Act 2012 (2012 Act), which imposes minimum unit pricing (MPU) on the retail sale of alcohol beverages in Scotland.

The stated purpose of the 2012 Act is to protect human life and health by increasing the price of low-cost, high-strength alcohol beverages, with a view to decreasing consumption.  To achieve this objective, the 2012 Act and a subsequent 2013 order prescribed that the MPU for alcohol beverages would be 0.50 GBP. The minimum sale price for alcohol beverages would then be determined by a formula that included the MPU as well as the strength and volume of the alcohol beverage.

The 2012 Act was challenged in court in Scotland, and its implementation has been delayed pending the outcome of the case. In the course of the proceedings, the Inner House of the Court of Session (the Scottish Court) referred to the ECJ certain questions concerning the interpretation of EU law. In particular, the Scottish Court asked whether the effect of the 2012 Act is to restrict the free movement of goods – a cornerstone of EU law – and if so, whether this can be justified in order to protect human life and health.  The Scottish Court also asked whether the 2012 Act can be justified when alternative tax measures are available, which would not impact the free movement of goods to the same extent.

Responding to those questions, the ECJ ruled that:

  • The 2012 Act is likely to impede access to the UK market for alcoholic products produced in other EU Member States, and thus restrict the free movement of goods. Nevertheless, such a restriction may be permissible as long as it is an appropriate means of protecting human life and health and is proportionate to this objective.
  • In this respect, the ECJ ruled that a Member State cannot reject alternative measures (g., taxation measures) that may achieve the same objective and “may be less restrictive of trade and competition within the European Union.” The ECJ observed that a tax measure that increases the overall price of alcohol beverages could also protect human life and health, while still allowing suppliers the freedom to establish their prices. This suggests that the 2012 Act may not be seen as proportionate to its objective.
  • Ultimately, in light of the ECJ’s interpretation, it is for the Scottish Court to determine whether the MPU is justified.

The ECJ’s decision expresses a clear view that the 2012 Act restricts the freedom of goods, and that it may not be justified since other, less restrictive measures – e.g., excise taxes – could achieve the same health of objective, while not impeding trade and competition. This will undoubtedly create hurdles for proponents of the 2012 Act. The final chapter is not yet written, however, as the Scottish Court will ultimately decide the issue, and its final decision can be appealed to the UK Supreme Court.

TTB Publishes List of Exempt Ingredients

Yesterday, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published Ruling 2015-1. It re-states and supersedes Ruling 2014-4, notably by adding more than 50 new ingredients that a brewer can use in beer without the need to obtain an approved formula (or a pre-import approval for imported beer) from TTB.

With this new Ruling, TTB has exempted the vast majority of flavoring materials added to beer, including many fruits and spices, sugars, chocolate, tea and coffee. It does not (and cannot due to the language of existing regulations) exempt flavorings and extracts, however, which continue to require formula approval prior to use. In other words, while a brewer can add watermelon, watermelon juice, watermelon puree or watermelon concentrate to a beer without obtaining formula approval, adding a watermelon flavor still requires formula approval.

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