DOJ Proposes to Reschedule Marijuana (Cannabis) to Schedule III

On May 21, 2024, the US Department of Justice (DOJ) published the highly anticipated notice of proposed rulemaking (NPRM) to reschedule marijuana (cannabis) from a Schedule I controlled substance to Schedule III, taking the first step to easing federal restrictions on cannabis and potentially opening up the door for further cannabis research and development. This regulatory change could have far-reaching implications for the cannabis, pharmaceutical and banking industries if promulgated in a final rule. Stakeholders interested in submitting comments to the DOJ must do so by July 22, 2024.

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Labor Law Update: Union Certification Without Winning the Employee Vote

As reported throughout the trade press, alcohol beverage companies are facing escalating pressure from unions and the National Labor Relations Board (or NLRB, the federal agency that enforces labor laws against both unionized and non-unionized companies). As recently as last month, an NLRB administrative law judge ordered Woodford Reserve Distillery to recognize and bargain with a union even though that union lost the election (45 employees voted against the union and only 14 in favor). This case reflects an aggressive tack at the NLRB that, across numerous fronts, poses increasing risk to operations, maneuverability and brand. But these risks are navigable.

BACKGROUND

For context, across all industries, union election petitions are up 35% over last year, and unfair labor practice investigations are up 7%. This follows consecutive years of spikes including a 53% jump in union election petitions in 2022 and a 19% increase in unfair labor practice investigations.

Behind this data are historic changes in law on how unions form. In an August 2023 decision, the NLRB now offers a path to union certification without unions having to win secret ballot elections. A union with signed majority support from their target “bargaining unit” can demand recognition, and have that imposed if the employer does not file a petition for election in two weeks or if it commits unfair labor practices. Where a union files for an election, or the employer does and it is granted, even then the union can be certified without the union actually winning majority employee support.

RECENT DEVELOPMENTS

In a notable example of this development, in an April 2024 NLRB administrative law judge decision against Woodford Reserve, the company was ordered to recognize a union and bargain with it even after employees voted against unionizing. Prior to a November 2022 election, the company announced market-based raises, changed a few work policies for consistency, and provided bottles of whiskey after production targets were reached as it had done in the past on various occasions. The union filed objections to the election result and alleged unfair labor practices. Despite evidence that the company’s actions were for legitimate business purposes and practices and unrelated to the election, the NLRB administrative law judge found that the “timing and circumstances surrounding these actions” were “more than sufficient to infer unlawful motivation.” The employees’ votes and the entire election has been set aside pending potential appeal.

In another case, over 60% of employees at Creature Comforts Brewing Company voted against joining a union in October 2023. But the union filed objections and alleged unfair labor practices by the employer during the nine-month union organizing campaign. The NLRB is investigating, and if the agency finds violations, it may issue a union recognition and bargaining order.

DEVELOPING A RESPONSE PLAN

Despite the NLRB’s trajectory in these cases and in many others, courts that can overrule the NLRB have long recognized the rights of employers to run their businesses, express their views on unionization, and expect due process in investigations and hearing processes. There [...]

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Preparing for Evolving Cybersecurity Threats

The recent ransomware attack against the Duvel Moortgat Brewery demonstrated the very real risk that cybersecurity incidents pose to the alcohol industry, reportedly halting operations for several days at four of Duvel Moortgat’s facilities in Europe and the United States. This attack comes after other major alcohol producers experienced disruptive ransomware attacks in the last several years. Incidents like these can be devastating for a company’s business and reputation, and hackers’ strategies are constantly evolving to maximize their damage. But companies can be prepared with an information security program designed to prevent successful attacks and quickly respond if one occurs. Experienced partners such as McDermott are critical resources throughout this process, enabling companies to better update and fortify their security programs.

THE GROWING THREAT OF ATTACK

Hackers have extorted companies through ransomware attacks for decades, but hacker strategies have evolved to increase the risks to companies, often resulting in a larger ransom for the hacker. A “ransomware” attack traditionally refers to a strategy in which a hacker gains access to a victim’s computer system, encrypts the information on those systems and demands a ransom payment to unlock that information. Victims may try to avoid paying the ransom by restoring most of their systems from backups, but hackers have recently introduced additional strategies that can complicate that recovery. Today, hackers often try to steal the victim’s information before encrypting it on the victim’s system, so that they can sell or publish the information if the victim refuses to pay the ransom. Hackers also may try to “corrupt” backups so that the victim cannot effectively restore its system without the hacker’s assistance. One ransomware group, AlphV, says that it also reports its publicly traded victims to the US Securities and Exchange Commission if they don’t pay the ransom.

Determining whether to pay a ransom is a complicated decision, with either choice presenting notable risks. The ransom will likely be expensive and must be paid without any guarantee that the hacker will make good on its promises. The decryption software or key may not work, or the hacker may not delete information. One hacking group, LockBit, is believed to save victims’ information after their ransoms are paid despite promising to delete it. The hacker may be willing to negotiate a lower payment amount, but doing so takes valuable time while the victim’s systems likely remain nonfunctional. The hacker may be under sanctions, in which case paying the ransom would be illegal and could result in a fine for the victim. Paying the ransom rewards the hacker, which may increase the risk that the hacker targets the victim again. There is rarely a clear path back to safety after a successful breach, so it is important that the victim make an efficient, informed decision.

OPPORTUNITIES FOR PREPARATION AND PREVENTION

Companies can minimize these risks by maintaining a security program designed to prevent incidents from occurring and to effectively respond if they do occur. The security program should utilize administrative, technical and physical security policies [...]

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So, You’ve Been Sued in a Labeling Class Action. Now What?

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

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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