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Bethany (Beth) K. Hatef advises clients on a wide variety of regulatory and distribution issues in the alcohol beverage industry. Beth regularly counsels alcohol industry clients on federal and state requirements relating to the production, marketing, distribution and sale of beer, wine and spirits. Read Beth Hatef's full bio.

Last week, the US Court of Appeals for the Eighth Circuit weighed in on the legality of restrictions on alcohol advertising under the First Amendment, issuing an opinion in Missouri Broadcasters Association v. Lacy that could eventually broaden free speech protections for alcohol beverage advertisements. After the lower court granted defendants’ motion to dismiss and plaintiffs appealed, the Eighth Circuit reversed the district court’s dismissal, finding that plaintiffs’ claim alleging the unconstitutionality of a Missouri statute and two regulations should be heard.

The case concerned three Missouri provisions – two regulations and a statute – that restrict the advertising of alcohol beverages:

  1. a regulation prohibiting retailers from advertising price discounts outside of the licensed premises (but allowing the advertising of discounts by using generic descriptions (e.g., “Happy Hour”), as well as the advertising of specific discounts within the licensed premises);
  2. a regulation prohibiting retailers from advertising prices below cost; and
  3. a statute requiring manufacturers and wholesalers choosing to a list a retailer in an advertisement to exclude the retail price of the product from the advertisement, list multiple unaffiliated retailers and make the listing relatively inconspicuous.

Plaintiffs – a broadcasting industry group, radio station operator, winery and retailer – sued Missouri’s supervisor of liquor control and attorney general, alleging that the three provisions are facially invalid under the First Amendment in that they prohibit truthful, non-misleading commercial speech, are inconsistently enforced by the state and the challenged statute unconstitutionally compels speech.

To state a claim that a statute is facially unconstitutional under the First Amendment, Supreme Court precedent instructs that plaintiffs must show that there are no set of circumstances under which the challenged provision would be valid, or that a substantial number of the provision’s applications are unconstitutional. Alcohol beverage advertisements involve commercial speech, which receives less protection under the First Amendment than other constitutionally protected forms of expression. In Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980), the Supreme Court articulated a four-part test for determining the constitutionality of laws restricting commercial speech:  whether (1) the speech concerns lawful activity and is not misleading; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is no broader than necessary to further the governmental interest.

Applying the third and fourth factors of the Central Hudson test (plaintiffs and defendants agreed on the first two factors of the test), the court found that the facts plaintiffs alleged were “more than sufficient” to state a plausible claim. First, the court opined, plaintiffs made sufficient allegations that the challenged provisions do not directly advance Missouri’s substantial interest in promoting responsible drinking. Although defendants argued that a link exists between advertising promotions and increased demand for alcohol beverages, the court noted that “multiple” inconsistencies in the regulations demonstrate that the regulations do not advance Missouri’s interest in promoting responsible drinking. Likewise, the court determined, plaintiffs pled sufficient facts to support a finding that the statute does not directly advance Missouri’s asserted interests: the court noted that because the statute is an exception to Missouri’s general tied-house law, it “actually weakens,” rather than furthers, “the impact of the overall statutory scheme.”

Second, the Eighth Circuit found that plaintiffs alleged “more than sufficient information” to show that the challenged provisions are more extensive than necessary to further the state’s interests, noting that there are alternatives to the provisions that would be less intrusive to plaintiffs’ rights under the First Amendment. Finally, the court determined that the challenged statute compels speech and association in that it requires manufacturers and wholesalers to both associate with more than one retailer and to list more than one retailer, if they choose to list any in advertisements.

The Eighth Circuit’s decision is timely: last week the Ninth Circuit Court of Appeals held an en banc hearing in Retail Digital Network, LLC v. Appelsmith, a case involving a First Amendment challenge to California’s restrictions on alcohol advertising, which we discussed in more detail last year.  One key issue in Retail Digital Network – but only glossed over in a footnote in the Missouri Broadcasters case – involves the impact of the Supreme Court’s 2011 decision in Sorrell v. IMS Health, Inc., which called for a “heightened” level of judicial scrutiny when determining the constitutionality of restrictions on commercial speech.

In early December 2016, the Council of the District of Columbia (the Council) unanimously passed the Omnibus Alcoholic Beverage Regulation Amendment Act of 2016 (the Act). The Act amends a number of provisions of DC’s alcohol beverage laws, several of which particularly affect DC manufacturers, brew pubs, wine pubs and distillery pubs.

Continue Reading DC Council Passes Amendments to Alcohol Beverage Code

Late last week, a district judge in Texas declared unconstitutional under the Texas Constitution a provision of the state’s Beer Industry Fair Dealing Law (i.e., the beer “franchise” law) that expressly prohibits a brewer from accepting a payment in exchange for a grant of territorial distribution rights.  Section 102.75(a)(7) of the Texas Alcoholic Beverage Code, enacted in 2013, applies generally to “manufacturers,” including both in-state brewers and out-of-state brewers holding nonresident manufacturer’s licenses in Texas.  In 2014, three small Texas brewers – Live Oak Brewing Company, Revolver Brewing and Peticolas Brewing Company – sued the Texas Alcoholic Beverage Commission (TABC) and its executive director, Sherry Cook, arguing that Section 102.75(a)(7) violates the Texas Constitution.

In a short summary order, the district court judge agreed.  The court found that Section 102.75(a)(7) violates the Texas Constitution’s “Due Course of Law” provision, Texas’ analog to the US Constitution’s Due Process Clause, which states that a Texas citizen may not “be deprived of life, liberty, property, privileges or immunities, or in any manner disfranchised, except by the due course of the law of the land.”  Tex. Const. Art. I, § 19.

The court granted the plaintiff breweries’ motion for summary judgment on their Due Course of Law argument and enjoined the TABC and Ms. Cook (and their respective employees, agents and successors) from enforcing Section 102.75(a)(7) against the plaintiffs and any other brewers.  The court dismissed the plaintiffs’ claim that Section 102.75(a)(7) amounted to a taking of private property in violation of the Texas Constitution, though, and also dismissed the plaintiffs’ request for attorney’s fees.

Although the judge’s order did not contain any detail regarding her reasoning, the case restores an important opportunity for brewers distributing – or interested in distributing – beer in Texas.  Further, although the TABC may appeal, the decision should remind state legislatures that state restrictions on the conduct of private parties in the alcohol industry in the name of protecting the three-tier system must still pass muster under federal and state constitutional principles.

In December 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).  The PATH Act amends several provisions of the Internal Revenue Code of 1986 (IRC) administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB).  Those amendments relate to alcohol excise tax due dates and bond requirements, the definition of wine eligible for treatment as “hard cider” for tax purposes, and cover over of rum excise taxes imported from Puerto Rico and the US Virgin Islands.  In January 2016, TTB issued an announcement concerning the IRC amendments.

Starting with the first calendar quarter of 2017, taxpayers who anticipate being liable for no more than $1,000 in alcohol excise taxes (for sales of distilled spirits, beer and wine) for the calendar year, and who were not liable for more than $1,000 in such excise taxes the prior year, may make excise tax payments annually (rather than the current quarterly payment requirement).  Further, beginning the first calendar quarter of 2017, taxpayers eligible to pay taxes annually under the new provisions, as well as taxpayers currently eligible for quarterly payments of alcohol excise taxes (i.e., taxpayers anticipating being liable for no more than $50,000 in alcohol excise taxes, and who were not liable for more than $50,000 in such excise taxes the prior year), need not file a bond.

The PATH Act also modifies the definition of wine eligible for the tax rate applicable to “hard cider” by (1) increasing the allowable alcohol content from 0.5 percent to less than 7 percent alcohol by volume (ABV) to 0.5 percent to less than 8.5 percent ABV; (2) increasing the allowable carbonation level from 0.392 grams of carbon dioxide per 100 milliliters of wine to 0.64 grams; and (3) expanding the definition by allowing the use of pears, pear juice concentrate and pear products and flavorings in hard cider.  These changes apply to hard cider removed after December 31, 2016.  The hard cider definition changes do not affect other requirements applicable to ciders above 7 percent ABV under the Federal Alcohol Administration Act, including requirements relating to labeling, advertising and permits.

Another section of the PATH Act extends the temporary increase in the limit on cover over of rum excise taxes to Puerto Rico and the US Virgin Islands from January 1, 2015 to January 1, 2017.  This amendment applies to distilled spirits brought into the US after December 31, 2014.

On January 7, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Retail Digital Network, LLC v. Appelsmith, overruling longstanding Ninth Circuit precedent concerning the legality of certain restrictions on alcohol beverage advertising under the First Amendment and opening the door to part of California’s tied-house scheme potentially being declared unconstitutional.  The case concerns the legality of sections of California’s tied-house laws, California Business and Professions Code Section 25503(f)-(h), which prohibit manufacturers and wholesalers (and their agents) from giving anything of value to retailers in exchange for advertising their products.  Retail Digital Network, LLC (RDN), which installs advertising displays in retail stores and contracts with parties to advertise their products on the displays, sought a declaratory judgment that Section 25503(f)-(h) violated the First Amendment after RDN’s attempts to contract with alcohol manufacturers failed due to the manufacturers’ concerns that such advertising would violate these tied-house provisions.

The district court found Section 25503(f)-(h) constitutional under a Ninth Circuit case from 1986, Actmedia, Inc. v. Stroh, in which the court upheld Section 25503(h).  The Actmedia court applied the intermediate scrutiny test on commercial speech regulation articulated by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980).  The Central Hudson test looks at whether:  (1) the speech is not misleading and concerns lawful activity; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is not broader than necessary to serve the governmental interest.  RDN argued that subsequent Supreme Court decisions – Rubin v. Coors Brewing Co. (1995), 44 Liquormart, Inc. v. Rhode Island (1996), and Sorrell v. IMS Health, Inc. (2011) – overrule Actmedia.

The Ninth Circuit determined that Actmedia is “clearly irreconcilable” with Sorrell – a difficult standard to meet.  (The court did not find Coors or 44 Liquormart to have undermined the reasoning of Actmedia as these cases involved complete bans on certain commercial speech, which Section 25503 is not.)  Sorrell required “heightened judicial scrutiny” (rather than the intermediate scrutiny applied by the Actmedia court) of restrictions on non-misleading, content- or speaker-based commercial speech about lawful products.

Such heightened scrutiny may be applied using the Central Hudson test, the Ninth Circuit found, but the court must further focus on the consistency between the government’s asserted interest under the second Central Hudson prong and the legislative purposes that “actually animated” the challenged law.  In articulating its decision, the court noted that other federal circuit courts of appeal have agreed that Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech.

The court reversed the lower court’s grant of summary judgment to the California Department of Alcoholic Beverage Control (ABC) and remanded the case to the district court to apply heightened judicial scrutiny to the statute.  Specifically, the court advised the lower court to consider whether the ABC has shown a real danger of paid advertising of alcohol beverages leading to vertical or horizontal integration under circumstances existing in the current market (and suggested that the legislative concerns at the time of Section 25503(f)-(h)’s enactment are no longer “an actual problem in need of solving”).  The court also instructed the lower court to consider whether the ABC’s concern is real in the circumstances of the case (where a third party, not a manufacturer or wholesaler, makes payments to retailers).  The district court must consider whether the ABC has shown that Section 25503(f)-(h) “materially advances” its “goals of preventing vertical and horizontal integration and promoting temperance” (and suggested that the ABC has not).  Finally, the district court must find, under the fourth Central Hudson prong, a fit between the legislature’s goals and the means used to accomplish those goals (and suggested that a narrower approach may be possible to achieve the ABC’s goals).

By remanding the case, the Ninth Circuit gives the district court the opportunity to independently determine the constitutionality of the relevant tied-house provisions after applying heightened judicial scrutiny consistent with this opinion.  Nevertheless, based on the Ninth Circuit’s reasoning, we believe it is highly likely that Sections 25503(f)-(h) will be found unconstitutional under the First Amendment.

On Wednesday, February 25, 2015, the U.S. Court of Appeals for the Third Circuit issued its opinion in Frank B. Fuhrer Wholesale Co. v. MillerCoors LLC, No. 14-1008 (3d Cir. 2015), finding in favor of MillerCoors LLC (MillerCoors) that the brewer did not violate its contract with Frank B. Fuhrer Wholesale Co. (Fuhrer) or Pennsylvania’s alcohol beverage laws in assigning the distribution rights for several new products to other distributors and attempting to condition the award of future products to Fuhrer on Fuhrer establishing a new entity devoted to MillerCoors products.  The case stemmed from Fuhrer’s 1997 distribution agreement (the Agreement) with Coors Brewing Company (Coors).  In 2008, Coors and Miller Brewing Company created MillerCoors, a joint venture, and Coors transferred the Agreement to MillerCoors.

The Agreement made Fuhrer MillerCoors’ exclusive distributor of certain specified MillerCoors products in an area of Pennsylvania.  The Agreement gave MillerCoors the right, but not the obligation, to grant distribution rights to Fuhrer for additional MillerCoors products.  The Agreement also gave Fuhrer the right to acquire distribution rights for other brewers’ brands without MillerCoors’ consent, which Fuhrer has exercised (e.g., in selling certain Anheuser-Busch products).  The Agreement required both parties to exercise “good faith and fair dealing” in carrying out its terms.

MillerCoors introduced three new beers in 2012 and 2013 and awarded the distribution rights for the products to Fuhrer’s competitors.  Fuhrer sued, alleging that MillerCoors:  (1) failed to give Fuhrer the rights to the new products because Fuhrer also sold for Anheuser-Busch; and (2) told Fuhrer it would need to create a new entity dedicated to MillerCoors products in order to obtain future rights to new MillerCoors products.  Fuhrer sought a declaratory judgment and asserted claims for breach of contract, violation of the Pennsylvania Liquor Code, unreasonable restraint of trade, and tortious interference.  The district court granted MillerCoors’ motion to dismiss and denied Fuhrer’s motion for reconsideration.

On appeal, Fuhrer argued that it objected not to MillerCoors’ assignment of the distribution rights for the new products elsewhere.  Instead Fuhrer argued that the process by which MillerCoors undertook this action violated the Agreement’s covenant of good faith and fair dealing.  The Third Circuit agreed with the district court that under Pennsylvania law, “the duty of good faith cannot override express contractual terms and convert a permissive contract provision into a mandate.”  MillerCoors, the court held, accordingly did not violate its duty of good faith by exercising its contractual right to choose different distributors for the new products.

The Third Circuit also found that because the Agreement placed no obligation on MillerCoors to assign Fuhrer distribution rights to new products, MillerCoors’ proposal to grant Fuhrer such rights in exchange for Fuhrer creating a new entity devoted to MillerCoors did not constitute bad faith performance, but was an “arm’s-length negotiating tactic, offering to barter contractual right for contractual right.”  MillerCoors’ proposal did not interfere with Fuhrer’s rights under the Agreement, and accordingly did not constitute a breach of contract.  The court also noted that there was no evidence of coercion or intimidation to support Fuhrer’s argument that MillerCoors attempted to force Fuhrer to give up its contractual right.

Hard cider has shown phenomenal growth in the past several years.  With rising consumer demand, more and more craft brewers are entering this rapidly expanding market. Although hard cider is typically distributed and mar­keted like a beer product, the federal gov­ernment and most states actually tax and regulate cider as a type of wine.  Brewers contemplating the production of cider ac­cordingly must carefully consider the legal issues surrounding cider production and distribution that distinguish cider from beer.  This article outlines some of the most important (though certainly not all) of these issues.

This article was originally published in the May/June 2014 issue of The New Brewer.