ALCOHOL LAW ADVISOR
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
Alcohol and Tobacco Tax and Trade Bureau
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So, You’ve Been Sued in a Labeling Class Action. Now What?

by and | Apr 1, 2024 | , , , , , , , ,

Many alcohol beverage industry clients are faced with lawsuits attacking product labels. These lawsuits can be frustrating for clients, particularly when the labels at issue were previously approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB). But approval by the TTB does not insulate a company from a lawsuit under various state consumer protection and unfair trade practices statutes.

Try as companies may, even products that purport to conform with US regulations can still be characterized as “misleading” and “deceptive” by crafty and ambitious plaintiffs’ lawyers across the United States. Making matters worse, these lawsuits are typically styled as putative class actions, meaning the cases are brought by one or two alleged purchasers of the product, suing the company on behalf of all US purchasers of any allegedly deceptive product produced by the company, which makes both the defense of these suits as well as the potential damages quite costly.

An entire cottage industry of plaintiffs’ lawyers in the US focuses on just these types of putative class actions targeting the food, alcohol, beverage and packaged goods industries. Indeed, they file hundreds to thousands of new cases each year. So, what should a company do when facing allegations that a product label is deceptive or misleading?

In this post, we answer that question and provide an overview of the typical process in one of these cases. We also offer some practical tips to best protect your company if you are facing a threat of a lawsuit or if a class action lawsuit is filed against you.

BEFORE THE LAWSUIT IS FILED: PRE-SUIT DEMANDS

Many plaintiffs’ lawyers focused on suing alcohol industry clients send pre-suit demand letters, or letters asking for label changes and lofty payments in exchange for the plaintiff’s lawyer not filing a lawsuit. While one primary purpose of the pre-suit demand letters is to attempt to extort or extract a settlement from a company, there is another common purpose to these pre-suit demands. Many state statutes either require pre-suit notice or otherwise increase the types of recovery a plaintiff can pursue in a lawsuit if the pre-suit notice is served, such as in California.

If you receive a pre-suit notice demanding changes to your product label and/or payment of money, you should immediately engage a lawyer to step in and represent you. Additionally, a pre-suit notice often includes a demand to preserve documentation and evidence related to the allegations in the demand letter. If such documentation is not preserved, that can create significant issues for companies in a lawsuit.

The pre-suit notice period also offers an opportunity to persuade the plaintiff’s lawyer that there is no good faith or valid cause of action based on the allegations in their letter. To the extent those efforts are successful, you may avoid a lawsuit altogether. To the extent there is disagreement about the validity of the allegations, the notice period allows time to negotiate a pre-suit resolution on an individual basis which can be much cheaper than defending [...]

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TTB Ramps Up Tax Audits and Enforcement

by , and | Mar 19, 2024 | , ,

The Alcohol and Tobacco Tax and Trade Bureau’s (TTB) Office of Field Operations is responsible for ensuring industry members comply with the Federal Alcohol Administration Act, the Internal Revenue Code and all related regulations. It is divided into three groups: the Trade Investigations Division (TID), the Tax Audit Division (TAD) and the Intelligence Division.

Many industry members are most familiar with the TID, as it is comprised of investigators who are responsible for enforcing compliance with the trade practice laws and maintaining a level playing field. The TAD may be less familiar, however, as it is comprised of auditors who are responsible for ensuring payments of excise taxes and compliance with the laws and regulations in a manner that protects revenue and prevents unlawful activity in the commodities that the TTB regulates. The TAD works with other areas of the TTB and has the resources to assist in the investigations of underpayment of tax or other financial areas that relate to the laws and regulations enforced by the TTB. The TAD also performs random audits, which means that every industry member is susceptible to an audit.

Over the past year, the TAD has issued tax-related citations for failure to timely file and/or pay taxes, use of inappropriate tax rates (largely stemming from the improper use of reduced tax rates under the Craft Beverage Modernization Act (CBMA) and failure to maintain adequate records, among other violations. In 2023, the TTB resolved these violations by accepting offer-in-compromise (OIC) settlement payments from the targeted industry members, collectively, to the tune of approximately $850,000.

Based on a review of the OICs which are published on the TTB website, there were a wide range of tax-related violations last year, including:

  • Failure to timely file and/or pay taxes and reports. These failures accounted for nearly 70% of all OIC violations. In these common infringements, the permittee submits their reports or taxes late. The causes for a violation can range from (1) a simple late submission, even 1-2 days late; (2) filing the tax return without paying the taxes; (3) late payments due to processing times; or (4) a change in filing frequency. It is important to ensure that industry members’ reports are filed on time (even a day late is sufficient to warrant a violation) and that the taxes are paid promptly.
  • Use of inappropriate tax rates. There are two main categories of tax rate violations: (1) inappropriate use of reduced tax rates or credits, largely through improper use of the CBMA, and (2) inappropriate categorization of the product (commonly wine). An accurate determination of the product’s tax class is crucial to avoiding these violations, as is consideration of your eligibility (and continued eligibility) for CBMA-reduced rates or credits. We saw a significant increase in tax-related enforcement due to violations from acquisitions completed in the first half of 2023 which impacted eligibility of the reduced tax rates for the entity as a new member [...]

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Don’t Assume Nonalcoholic Beverage Ingredients Are OK for Alcoholic Beverages

by and | Feb 5, 2024 | , ,

As we enter 2024, more and more brands are joining the nonalcoholic beverage space. An increasing variety of nonalcoholic, single-serve, ready-to-drink beverages are marketing the innovative use of indigenous botanicals, herbs or novelty ingredients found in other foods. This innovation has led to product development teams exploring the use of those ingredients for their alcoholic beverage products, but in many instances those ingredients have not been used in or approved for alcoholic beverages in the United States by the Alcohol and Tobacco Tax and Trade Bureau (TTB), leading to challenges with obtaining formula approvals.

BACKGROUND

As a reminder, the TTB requires that all ingredients added to an alcoholic product be determined generally recognized as safe (GRAS) for use in alcohol. If the TTB finds that a product’s ingredient is not GRAS, it can cause significant delays for your product’s market launch. Currently, the TTB’s GRAS determination relies directly on the advice and approval of the ingredient’s use in alcoholic beverages by the US Food and Drug Administration (FDA).

In line with the historic Memorandum of Understanding (MOA) between the two agencies, the FDA (not the TTB) is responsible for determining which ingredients are prohibited from use in food and/or beverage products under the US Federal Food, Drug, and Cosmetic Act. These include food additives, such as substances added intentionally to food, and color additives. The TTB is authorized by law to utilize the services of a government department or agency to carry out its powers and duties under the Federal Alcohol Administration Act. Pursuant to its MOA with the FDA, the TTB regularly consults with the FDA regarding the approval of ingredients in alcoholic beverages and the requirements of label disclosure for certain substances. The TTB’s Beverage Alcohol Laboratory also analyzes alcoholic beverage products for limited and prohibited compounds and enforces these restrictions for alcoholic beverages as per FDA guidance.

OUR GUIDANCE

In light of these challenges, we recommend that before submitting your formula, double-check to make sure all the ingredients and substances added are GRAS and allowable for use in alcoholic beverages specifically. This will help streamline the approval process and avoid potential delays. Below are some tips you should consider:

  • Check with the ingredient supplier or manufacturer for the regulatory status of the ingredient and ask for a Technical Data Sheet or Product Specification Sheet that likely contains the relevant information.
  • Refer to the TTB’s Limited Ingredients page, which contains both the “Flavoring Substances and Adjuvants Subject to Limitation or Restriction” and “Flavoring Substances and Adjuvants that are Used Only in Certain Situations.” These list many ingredients that may be used in alcoholic beverages only. It is not an exhaustive list of all substances that have limitations in foods or beverages but useful in determining whether a limit is exceeded in an alcoholic beverage product.
  • Search your ingredient on the FDA’s The Substances Added to Food inventory (formerly called Everything Added to Foods in the United States) to determine [...]

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Contracts Corner: Sponsorship Agreements

by | Jan 10, 2024 |

Sponsorships continue to be one of the alcohol beverage industry’s primary methods of promoting brands to drinkers. In professional sports alone, alcohol beverage brands contributed $480 million in sponsorship revenue across the four major professional sports leagues during the 2022–2023 season, according to a SponsorUnited study. As suppliers look to better target audiences via sponsorships, it’s important for industry members looking to enter into a sponsorship relationship, as well as those hoping to engage an alcohol beverage brand as a sponsor, to understand how the regulation of the alcohol industry impacts these relationships and the contracts that solidify them.

The Federal Alcohol Administration (FAA) Act prohibits an industry member (a supplier or wholesaler of alcohol beverages) from inducing a retailer to purchase a particular product to the exclusion of competitive products. See 27 U.S.C. § 205. An “inducement” may include a partial ownership stake in a retailer, money, free goods or other “things of value” provided to a retailer. The “exclusion” element requires the Alcohol and Tobacco Tax and Trade Bureau to show a potential real-world impact (i.e., the inducement results in a retailer purchasing less of a competing product than it otherwise would have, and the inducement places or threatens to place a retailer’s independence at risk) before a violation is found.

Sponsorships in other industries often involve a commitment that the brand paying sponsorship dollars will be the exclusive offering of a team, venue or event, or at a minimum, require that a particular brand be offered or available to consumers as part of the sponsor benefits. In the alcohol space, an industry member paying a retailer in exchange for the retailer’s commitment to serve the supplier’s brand(s) of alcohol beverages, often called “pouring rights,” typically satisfies both elements necessary to find a violation of the FAA Act: that the sponsorship fee is a thing of value, and it leads to the exclusion of competitive products.

Sponsor benefits should not include a commitment that a retailer purchase or not purchase a particular brand or brands of alcoholic beverages. Because of restrictions on the flow of money from suppliers to retailers, most sponsorship agreements involving an alcohol brand are between an industry member and a third-party unlicensed entity, not the entity holding the license to sell or serve alcohol at an event or within a venue. However, conduct that is prohibited for an industry member to engage in directly is also prohibited if undertaken indirectly using a third party as a pass-through entity. Accordingly, the entity selling sponsorship rights should represent and warrant the following:

  • It does not hold a license to sell alcohol at retail.
  • The funds paid under the terms of the agreement will not be passed on to a retailer.
  • Nothing contained in the agreement is intended to require or prohibit any retailer or concessionaire from purchasing or not purchasing a particular brand or brands of alcoholic beverages.

As we support clients in negotiating sponsorship agreements and understanding the scope of sponsor [...]

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The Tax Implications of Purchasing Craft Producers in the First Half of 2024

by | Dec 19, 2023 | ,

We have republished this August 2023 blog post ahead of the start of 2024.

If a large beverage company is considering purchasing or selling a craft beverage producer, it’s essential to understand how the craft producer may lose its earlier eligibility for reduced tax rates under the Craft Beverage Modernization Act (CBMA) in the first half of a calendar year once it becomes a member of the purchaser’s larger controlled group.

The CBMA provides for certain reduced tax rates on the initial quantities of production and/or removal of beer, wine and spirits. More specifically, it permits a reduced rate of $16 per barrel of beer on the first six million barrels brewed and removed by a domestic brewer, a reduced rate of $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits removed from bond and different, but reduced, tax credits on domestically produced wine credits.

However, to protect against larger manufacturers unjustly benefiting from these reduced tax rates through ownership in different corporate entities, the CBMA made permanent certain controlled group rules. These rules apply the availability of the reduced rates across the overall quantity limitations associated with the greater corporate structure of controlled groups of distilled spirits plants, wine premises and breweries.

The industry has understood the application of these rules for several years. Yet, pursuant to 26 US Code § 1563, it is the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) position that if a company (whether that be a corporation or an LLC) is a member of a controlled group of companies for more than six months (one-half) of any calendar year, that such member is then a component member of the controlled group for the entirety of the calendar year.

So, if a large beverage company purchases a smaller producer in the first two quarters of the year, the reduced tax rates the smaller producer took in the first six months prior to the acquisition may be forfeited based on the larger company’s rates of removal.

Consider this example:

  • Company A is a craft distiller. From January 1 to May 1 of any calendar year, it was eligible for and paid the reduced tax rate of $2.70 on its spirit removals under the CBMA.
  • Company B is a larger distiller. It exhausted its eligibility for the reduced rates within the first two weeks of the same calendar year.
  • If Company B were to purchase Company A on May 1, the two companies would be treated as members of the same controlled group from May 1 to the end of the year. Company A’s eligibility for the reduced rates it lawfully took for the first four months of the year would be forfeited and subjected to either the $13.34 or $13.50 per proof gallon rates for which the combined controlled group would have been eligible depending on the controlled group’s removals.
  • In other words, following a TTB audit, Company A would have underpaid its tax liability to TTB prior to its [...]

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How Industry Members Can Prepare for Alcohol Theft

by and | Nov 30, 2023 |

While there has always been theft in the alcohol industry, there has been a significant uptick in large-scale larceny in recent months. Because of this reality, alcohol industry members should take steps to prepare for missing product. Below are some ideas to consider.

  • Ensure you have adequate insurance coverage: While reviewing your insurance policy is not always top of mind, you should understand what coverage you have and the steps you must take in the event of theft. Many policies have timelines in which theft must be reported and requirements about what steps must be taken to report a claim. Understanding these policy elements will help ensure you do not miss the chance to make a future claim.
  • Review your contractual obligations: Agreements with carriers, shipping companies, storage facilities, third-party manufacturers or other business partners often, or should, have clauses related to each party’s obligations in the event of theft of product. Carefully review facility operation provisions and indemnification clauses to understand each party’s responsibilities in the event of theft, especially if a theft is potentially the result of a party’s negligence or willful misconduct. When negotiating new agreements with a vendor that may store or handle product, ensure the party has sufficient security measures and protocols in place to prevent theft. Some industry members may look for protections and facility security beyond what federal or state regulators look for in order to issue a license to store or handle alcohol.
  • Create an internal policy and training program: Having a clear protocol for employees to follow in the event of a theft will ensure your business doesn’t unintentionally jeopardize its ability to file an insurance claim or to obtain taxes back on lost goods. Because time is typically of the essence, it is crucial that your employees know how to respond to theft.
  • Understand if you can retrieve taxes back for product that has been stolen: The Alcohol and Tobacco Tax and Trade Bureau (TTB) will not pay claims for stolen product if insurance covers excise tax or if you have indemnification from other parties. Alcohol losses due to theft are also not eligible as a disaster claim. However, relief can still be sought if the industry member can demonstrate to the TTB that the loss was not due to fraud or negligence by the member or its agents or employees. The conditions that must be met to determine if a tax refund can be sought, and the process for seeking a claim for remission of tax liability, can be found here:
    • Distillers: 26 USC § 5008; 27 CFR § 19.263; 27 CFR § 70.413
    • Brewers: 26 USC § 5056; 27 CFR § 25.282; 27 CFR § 70.413
    • Wineries: 26 USC § 5370; 27 CFR § 24.265; 27 CFR § 70.413

Due to the sizable uptick of theft, we encourage industry members to ensure not only that their current insurance coverage and contractual obligations provide adequate protection but also [...]

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Alcohol Industry M&A: Common Pitfalls for Founders (and Avoiding Them) Part One: Formulas and Processes

by and | Oct 30, 2023 | ,

Given the continued strength of the US alcoholic beverage market, the alcohol industry presents numerous opportunities for acquisitions, investments and other strategic transactions from a wide variety of players. These range from small craft start-ups to larger strategic buyers, as well as investors of all shapes and sizes. In such a highly regulated industry, however, it is crucial for potential buyers and sellers to understand the complexities of the rules and regulations in order to negotiate and structure such transactions effectively.

In this blog post, the first in a series, we examine one of the common industry pitfalls and the related overlooked issues founders face when growing their alcohol business and positioning the company for a possible future transaction: failure to protect formulas and processes.

It is common for founders to focus on growing revenue during their start-up phase without dedicating time and resources to protecting their trade secrets. Trade secrets are a vital part of any company—they are the information you would not want your competitors to know, such as customer or supplier information, prices, marketing strategies, formulas/processes/recipes and any other confidential business information.

Whether you are an established brand or entering the alcohol beverage space, the ingredients that you choose for the base of your alcohol beverage can have a large impact on many aspects of your business. First, brands should consider working with flavor houses or ingredient sourcing companies who regularly collaborate with alcohol beverage companies. These companies will be the most familiar with the legal prohibitions, restrictions and limitations on certain ingredients added to alcohol beverages. Additionally, working closely with flavor houses will ensure that the ingredients used support the product’s label and advertising material claims. For example, you must avoid making any implied statements that the product contains certain ingredients when it does not. So, if a label or advertising material says, “Made with real fruit juice,” consider directly adding fruit juice or fruit concentrate as an ingredient.

Second, brands should provide any supporting documentation from the flavor houses/sourcing companies to their co-manufacturers (Flavor Ingredient Data Sheets, ingredient specification sheets, and Consejo Regulador del Tequila approvals for Tequila, for example). This will ensure that the product is being produced in accordance with the formula on file with, and approved by, the Alcohol and Tobacco Tax and Trade Bureau (TTB). Experienced alcohol counsel can review your formulas and identify any potential issues to help minimize the risk of a TTB formula rejection.

Formulas and manufacturing processes are not subject to trademark, patent or copyright protection, so how can you protect them from your competitors? Trade secrets are the only practical mechanism. The Uniform Trade Secrets Act defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that:

  1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and
  2. Is the subject of efforts [...]

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Key Takeaways | Seeing Around the Corner: Alcohol Industry Updates

by , , and | Oct 4, 2023 | , ,

In this webinar, Alva Mather, Lesli Esposito, Rachel Gartner and Nichole Shustack teamed up to unpack how recent regulatory shifts will significantly affect alcohol companies and distributors. They discussed product innovation in the spirits industry, “zero-proof” beverage options and how companies are leveraging the benefits of artificial intelligence for advertising and marketing.

Top takeaways included:

  1. Introducing a nonalcoholic beverage may mean getting to know a new federal agency. For alcohol brands looking to launch a zero-proof or nonalcoholic beverage, the Alcohol and Tobacco Tax and Trade Bureau (TTB) may not be the only federal agency regulating your product. The Food and Drug Administration (FDA) oversees the safety and efficacy of various consumer products, including nonalcoholic and conventional beverages. How a product is manufactured (e.g., dealcoholized products versus products that never contain alcohol) will play an important role in determining how a product is regulated. Industry members should be aware of what their obligations are to the FDA, TTB and relevant state agencies before launching a zero-proof or nonalcoholic beverage.
  2. In alcohol advertising, claim substantiation is the key to risk mitigation. Across all industries, we are seeing an uptick in sustainability claims, the use of reviews as part of advertising, claims around diversity, equity and inclusion efforts, and the continued use of social media influencers in marketing. Industry members should understand what constitutes a “claim” in advertising (e.g., what an influencer does with your product may be as important as what they say about it) and ensure they have the evidence to back up those claims.
  3. Keep an eye on the FTC. The Federal Trade Commission (FTC) is busy, both updating guidance for industry and taking sweeping enforcement actions. The FTC is in the process of revising its Guides for the Use of Environmental Marketing Claims (Green Guides). As sustainability claims become more prevalent, and as consumers rely on them more to make buying decisions, these updated Green Guides will be an important tool for industry members. As for enforcement, the alcohol industry has not been spared, and where the FTC’s current investigations ultimately go will be determinative of how the agency, under the Biden administration, views antitrust issues in the alcohol space.
  4. A new wave of direct-to-consumer shipping litigation is here. The familiar debate about direct-to-consumer (DTC) shipping laws returns. The litigation is primarily coming from out-of-state retailers challenging laws that allow in-state retailers to ship DTC but prohibit the same for out-of-state retailers. A new batch of litigants, primarily smaller suppliers, are also challenging laws that allow in-state self-distribution and DTC sales but prohibit the same for out-of-state suppliers.

Access webinar and slides.



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How Alcohol Industry Members Can Prepare for a Government Shutdown

by | Sep 21, 2023 |

With less than a week and a half remaining to avert a government shutdown, Congress appears no closer to finding a solution. This means that a shutdown could occur as early as October 1, 2023. Alcohol industry members should understand what this means for the Alcohol and Tobacco Tax and Trade Bureau (TTB).

While TTB would continue to provide essential services during a shutdown, the agency would not process formula approvals, permit applications or Certificate of Label Approval (COLA) applications. If a shutdown materializes, the length of the shutdown may determine the downstream impacts on the industry, but significant delays and backlogs within TTB are possible (and have occurred with previous government shutdowns).

Industry members should begin to plan for these shutdowns and/or delays as much as possible. For example, we recommend expediting the submission of seasonal labels traditionally submitted later in the fall in order to secure a COLA prior to a shutdown (TTB’s current label processing time is between 3 and 8 days, depending on the commodity).

We also recommend industry members communicate with their trade organizations about the business impacts of a shutdown and urge Congress to fund the government to avoid a shutdown altogether.



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TTB Issues Updated Guidance on Transfers of Beer Between Breweries Under Separate Ownership

by | Aug 28, 2023 |

On July 13, 2023, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published Procedure Number 2023-1, providing brewers with updated guidance on the transfer of beer without tax payment between breweries not of the same ownership.

The Craft Beverage Modernization Act (CBMA) provisions of the Tax Cuts and Jobs Act of 2017 temporarily permitted the transfer of beer between breweries under different ownership without the payment of tax (previously, transfers of beer in bond were limited to breweries under the same ownership). TTB issued Procedure 2018-1 to provide brewers with guidance on how to effectuate these newly approved transfers; however, it stated it was effective only through December 31, 2019.

Although the Taxpayer Certainty and Disaster Tax Relief Act of 2020 made a brewer’s right to transfer beer without the payment of tax to a brewer of different ownership permanent, TTB did not update the Procedure issued in 2018. TTB informally communicated that brewers could continue to rely on Procedure 2018-1 even though it was no longer “effective,” but it has now published updated guidance on such transfers.

Recording and Reporting Transfers

As set forth in Procedure 2021-1, a shipping brewer must prepare an invoice covering the transfer. The invoice must show that the brewer transferred the beer without the payment of tax. It must also feature the following:

  1. The name and address of the shipping brewer;
  2. The date of shipment;
  3. The name and address of the receiving brewer; and
  4. For cases, the number and size of cases and the total barrels; for kegs, the number and size of kegs and the total barrels; for shipments in bulk containers, the type of container, the identity of the container and total barrels.

A shipping brewer should use the transfer invoice to prepare its required daily records and monthly Brewer’s Report of Operations (BROP) or Quarterly Brewer’s Report of Operations (QBROP). A receiving brewer should use the transfer invoice showing beer received from another brewery without the payment of tax in preparing its required daily records and the BROP or QBROP.

Permissible Containers and Labeling Requirements for Transferred Beer

Transfers of beer without the payment of tax may be made in a brewer’s packages or in bulk containers.

Beer transferred in a brewer’s packages from one brewery to another brewery under separate ownership must meet the marking, branding and labeling requirements set forth in 27 CFR § 25.141–25.143. Beer transferred in bulk containers (containers with a capacity larger than one barrel of 31 gallons) from one brewery to another brewery under separate ownership must meet the marking, branding and labeling requirements set forth in 27 CFR § 25.145.

Taking Advantage of Reduced Tax Rates for Transferred Beer

The CBMA establishes a reduced excise tax rate of $16 per barrel on the first 6,000,000 barrels of US-produced beer brewed by a brewer and removed during the calendar year. For brewers producing 2,000,000 barrels or less, an excise tax rate of $3.50 per barrel applies on the first 60,000 [...]

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Nichole D. Shustack

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