On September 29, 2017, the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) issued Ruling 2017-2, which updates and supersedes older agency guidance on allowable returns of beer and malt beverage products that contain “pull dates” or other indicators of product freshness.
The Federal Alcohol Administration (FAA) Act includes a general prohibition on “consignment sales,” 27 USC 205(d). Congress believed that all transactions should be “bona fide” sales. Id. The intent was to prevent a wide range of unscrupulous practices that might occur if manufacturers and wholesalers furnishing alcohol beverages to retailers on consignment or with the right of return.
The FAA Act prohibition on consignment sales does not apply to “transactions involving solely the bona fide return of merchandise for ordinary and usual commercial reasons arising after the merchandise has been sold.” Id. TTB regulations provide an extensive list of reasons that a manufacturer or wholesaler can accept returns. 27 CFR, Part 11, Subpart D.
Ruling 2017-2 underscores the challenges that TTB faces in enforcing a law designed to prohibit unscrupulous business practices prior to Prohibition. Fast forward eighty years, and brewers routinely include “pull dates” or codes to disclose the shelf-life of beer and malt beverages. Brewers or beer distributors often exchange fresh product for product that is at or beyond the shelf life established by the brewer. TTB attempts to draw a bright line between legitimate quality control efforts by brewers and practices that are “a subterfuge for disposing of slow-moving products.”
TTB will only allow returns or exchanges of malt beverages for freshness reasons if the brewer adopts and consistently follows a carefully articulated policy with respect to return of products based on pull dates. The products must have markings that correspond to the pull date and products removed from a retailer may not “re-enter the retail marketplace.”
Failure to adhere to TTB guidance on consignment sales carries significant risks. In 2016, TTB accepted offers in compromise from the two largest US brewers for programs that apparently went beyond exchanging or crediting wholesalers for “ordinary and usual commercial reasons.” Anheuser-Busch paid a $300,000 penalty for violations of federal prohibition on consignment sales for offering (publicly) to “buy-back” seasonal brands of Shock Top from wholesalers who removed the brands from retailers. Miller Coors also paid a $450,000 penalty for its “buy-back” program for the Miller Fortune brand.
Ruling 2017-2 does not address a lingering ambiguity. TTB cites existing regulations that exchanges of products that are “seasonal in nature, such as holiday decanters and certain distinctive bottles, do not constitute returns for ordinary and usual commercial reasons.” 27 CFR 11.46. Yet other sections of the consignment sale regulations allow returns for “discontinued products,” 27 CFR § 11.38, and “products changed in formula, label, or container,” 27 CFR 11.37.
In addition to the exceptions discussed above, the FAA Act consignment sale prohibition includes a general jurisdictional limitation.
Federal consignment sale regulations apply only to transactions in malt beverages that (a) take place in interstate commerce and (b) take place in a state where the state law “imposes similar requirements with respect to similar transactions.” 27 USC § 205(d); 27 CFR § 11.24(b). The jurisdictional limitation on transactions in beer and malt beverages is known as the “penultimate clause,” which is based on findings by Congress that most beer industry transactions occurred in intrastate commerce. Legislative History of the Federal Alcohol Administration Act, H.R. 8870, 74th Congress, September 15, 1935, pp. 64-65.