ALCOHOL LAW ADVISOR

Total Wine Tests the Boundaries of FTC CIDs

By Alva C. Mather, Lesli Esposito and Marisa Poncia on Dec 7, 2023
Posted In General Interest

Total Wine & More (Total Wine) and the Federal Trade Commission (FTC) are currently clashing in federal court over a civil investigative demand (CID) that the FTC issued to Total Wine, a third party in the FTC’s investigation of Southern Glazer’s Wine & Spirits, LLC (Southern Glazer).

Total Wine has fervently resisted producing certain corporate documents and data in response to the FTC’s subpoena. It is rare that companies challenge the FTC’s authority to compel production and take such a strong stance against complying with agency CIDs for information. This dispute could have wide-ranging implications for third-party CID compliance, regardless of the industry. For companies operating in the alcohol industry and following the FTC’s investigation into Southern Glazer, the court’s decision could have a serious impact on the investigation as it will impact the breadth of documents and data to which the FTC will have access to for its case.

Under Section 20 of the FTC Act, 15 U.S.C. § 57b-1, the FTC is empowered to issue CIDs, a type of administrative subpoena, to require any person—including third parties—to produce documents or other information, file written reports or answers and give oral testimony relating to any FTC enforcement investigation. When third-party companies are issued CIDs, they usually negotiate the scope and comply, albeit reluctantly, with the requests, as refusing to comply typically is not advised. As part of the FTC’s investigation into Southern Glazer’s business practices and, specifically, whether the company has engaged in discriminatory practices in its sales to retailers in violation of the Robinson-Patman Act or engaged in other unfair competition practices in violation of Section 5 of the FTC Act, the agency issued a number of CIDs to third parties, as is customary. However, in a rare turn of events, a third party, Total Wine, and the FTC have ended up in a court battle over the subpoena.

After making limited productions, Total Wine filed an administrative petition with the FTC to limit the CID’s scope. This action is rarely taken by third parties, who often focus on negotiating the scope of the requests and limiting the burden of compliance to the extent possible, as opposed to challenging the CID itself. The FTC outright denied Total Wine’s petition, and in October, after four months of Total Wine’s resistance to comply fully, the FTC filed a petition seeking a federal court order to force Total Wine to comply with the CID.

In its petition to the court, the FTC alleged Total Wine “unilaterally narrowed the scope of the CID in a manner inconsistent with the CID’s specifications and refused to search any employee’s custodial files for responsive documents.” Although Total Wine has produced purchase-related transaction data to the FTC, it has persistently refused to produce information relating to email communications, business strategies and competitor assessments, and it has described the scope of the FTC’s demand as “truly alarming.” Despite FTC staff and Total Wine trying to work cooperatively together, the FTC has deemed Total Wine’s CID response severely [...]

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How Industry Members Can Prepare for Alcohol Theft

By Nichole Shustack and Isabelle Cunningham on Nov 30, 2023
Posted In Uncategorized

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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Maine Disclosure Requirements Burden Industry Members

By Michelle Draper on Nov 13, 2023
Posted In Uncategorized

Over the summer, Maine’s Bureau of Alcoholic Beverages & Lottery Operations issued clarification of its ownership disclosure requirements for new applicants and existing license or certificate holders. We understand the significant impact this has on industry members and have summarized the updated guidance below.

Like most states, Maine has a long history of requesting the ownership information for the licensed entity. Maine law 28-A M.R.S. § 651(2)(A) states that an application must contain the entire ownership or any interest in the person or establishment for which a license or certificate of approval is sought. Historically, Maine has issued licenses with disclosure of the applicant and its parent company so long as these entities or individuals met the eligibility requirements discussed in 28-A M.R.S. § 601.

However, Maine’s new enforcement of §651 now focuses on the “entire” ownership structure; it requires disclosure of every level of ownership until the entity identifies everyone with ownership interest in the business or until a public entity is listed. This requirement applies to all applicants and licensees, including holders of a certificate of approval.

This level of ownership disclosure is rare in this heavily regulated industry. It is a burden on current license or certificate holders entering their renewal period as well as on new applicants looking to begin business in the state.

McDermott’s alcohol team is working closely with the state to navigate this new requirement and to discuss legislative changes to best support both industry members and regulators while ensuring our clients are able to continue operations with license extensions. For questions or assistance with Maine’s disclosure requirements, please contact Alva Mather or the alcohol team.

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

By Alva C. Mather and Christine Dower on Oct 30, 2023
Posted In Transactions, TTB COLAs and Formulas

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:

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
Is the subject of efforts [...]

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The Fine Print: Avoiding IP Pitfalls in Unlicensed Fonts

By Shawn Helms and Caitlin Howe on Oct 16, 2023
Posted In Advertising and Marketing, General Interest

When developing a new brand or product, creatives often give considerable attention to avoiding intellectual property infringement. Trademark lawyers are similarly vigilant to avoid infringing another company’s mark. However, when a company creates its labeling and marketing materials, they tend to not give enough thought to the issue of fonts. The fonts that a beverage company uses to create its website, print advertisements, bottling, labeling, and packaging may be protected by copyright and the company may not have appropriately licensed them. If a company uses a font without the permission of the owner of that font, or outside of the scope of that company’s license, that company could be subject to a claim of copyright infringement.

Typeface Versus Fonts

First, we need to draw a distinction between two terms that are often used interchangeably: fonts and typeface. A typeface refers to a set of characters that share the same design or style. Typeface is the collective name of a family of related characters (e.g., Times, Arial and Garamond). It describes the overall look of the characters—their design and aesthetics. A font, on the other hand, is a computer program that is used to create text characters. Fonts are often installed into, and made available through, a word processing program such as Microsoft Word or design programs such as Adobe InDesign. In the digital era, the distinction between these two terms has become blurred, as many people use “font” to refer to what is technically a typeface.

In the United States, typefaces themselves are not protectable under copyright law. Code of Federal Regulations, Ch 37, Sec. 202.1(e) states: “[t]he following are examples of works not subject to copyright. . . (e) Typeface as typeface.” In addition, the Copyright Office’s Compendium of US Copyright Office Practices states that “[t]he Office cannot register a claim to copyright in typeface or mere variations of typographic ornamentation or lettering, regardless of whether the typeface is commonly used or unique.” Typefaces may be eligible for a design patent, which protects new, original and ornamental designs. However, design patents have significant limitations, must meet very specific requirements and are rarely used.

A font, on the other hand, is computer software that is protectable under copyright law because it is an original work of authorship in the form of software code. Typefaces cannot be copyrighted, but the font software used to display them can be. This distinction is crucial because it separates the visual design of characters (typeface) from the underlying code that instructs computers and printers how to reproduce those characters (fonts).

Font Infringement and Enforcement

Type foundries have made available a number of fonts that are free (often referred to as open source fonts) or are otherwise in the public domain. However, if a font is copyright protected, then copyright owners can sue companies and others who use that font without a license for copyright infringement, and a finding of copyright infringement can result in substantial liability. A copyright owner can seek actual [...]

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