Growing Regulatory Focus on ‘Crossover Alcohol Products’

As more companies – including businesses with and without experience producing alcoholic beverages – move to leverage their brands and brand equity across the beverage spectrum, regulators, trade associations and the companies themselves are focusing on ways to responsibly label, advertise, market and display these products to avoid consumer confusion and potential sales to minors.

Crossover alcohol products are generally categorized as alcohol beverages that use the products and intellectual property (e.g., brand names, logos) of a preexisting non-alcohol brand. While not legally defined (yet), such products include Dunkin’ Spiked Original Iced Coffee, Eggo Brunch in a Jar, Lipton Hard Iced Tea and SunnyD Vodka Seltzer, among others. As illustrated by these examples, products such as Lipton Hard Iced Tea leverage the non-alcoholic Lipton Iced Tea branding for a new product in the alcohol space.

As crossover alcohol products have become more prevalent across the market, state regulators have started taking notice and providing guidance to alcohol producers as to how to assure these products are not “false or misleading,” as defined by alcohol regulations, or tend to induce minors to drink the alcoholic product either through the products’ labels, packaging or store-display locations. The Commonwealth of Virginia, in particular, has taken the lead through the issuance of Circular Letter 23-01, which provides guidelines for alcohol producers as they develop these products. These guidelines focus on the following, among other issues:

  • Ensuring that the crossover product clearly indicates the type of alcohol it contains, with such information visible in at least three to six different locations.
  • Ensuring that the sizes of the alcohol references and warnings are sufficiently large and noticeable in comparison to other writings on the product label.
  • Ensuring that any and all changes to product labels, containers and secondary packaging clearly distinguish the crossover products from the original non-alcoholic products so as to prevent consumer confusion; such changes may involve the color palette, font type, imagery, placement of words, images and descriptions, or background elements.
  • Ensuring that secondary closures, such as foil lids, plastic wrapping, lip guards, stickers or other “child-proof” packaging, are present, to prevent accidental consumption by a minor.

Recently, a coalition including the Distilled Spirits Council of the United States (DISCUS), Wine & Spirits Wholesalers of America (WSWA), FMI – The Food Industry Association, and the National Association of Convenience Stores (NACS) (representing the three tiers of the industry: suppliers, wholesalers and retailers), issued a joint commitment related to the responsible marketing and merchandising of crossover alcohol products. Similar to Virginia’s guidance, the coalition is focused on assuring that these products are not confused for their non-alcohol counterparts and do not appeal to those under the legal purchase age, based on the appeal of the underlying brand. Accordingly, the coalition looks to alcohol producers to commit to responsible production, packaging and marketing of crossover alcohol products by:




US Supreme Court Overturns Chevron Deference

In Loper Bright Enterprises v. Raimondo, the US Supreme Court expressly overruled the doctrine of deferring to an agency’s interpretation of allegedly ambiguous statutory language initially articulated in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.

Under the Chevron doctrine, courts applied a two-step framework interpreting statutes administered by federal agencies. The first step asks whether Congress had “directly spoken to the precise question at issue.” Chevron, 467 U.S. at 842. If the statute is clear as to the interpretive question at issue, courts are bound by and must apply the clear meaning of the statute. If, however, the statute is ambiguous or silent, then courts proceed to the second step where they defer to the agency’s interpretation provided it is “based on a permissible construction of the statute.” Id. at 843.

This doctrine of deference, Loper Bright held, is at odds with the imperative that the Administrative Procedure Act (APA) gives to reviewing courts to “decide all relevant questions of law” and “interpret . . . statutory provisions.” 5 U.S.C. § 706 (emphasis added). Because Chevron required reviewing courts to give “binding deference to agency interpretations” instead of exercising their “independent judgment” as to the best reading of the statute, that doctrine “defies the command of the APA” by ceding the authority to decide some questions of statutory interpretation – those involving ambiguous statutes – to agencies. See Slip Op. 21; see also Slip Op. 14 (observing that § 706 “prescribes no deferential standard” for courts to apply when interpreting ambiguous statutes).

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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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