Earlier this month, a Massachusetts Superior Court judge granted beer wholesaler Craft Beer Guild, LLC’s (Craft) motion to dismiss a civil suit, Shelton Bros., Inc. v. Craft Beer Guild, LLC d/b/a Craft Brewer’s Guild, brought against it by beer importer Shelton Brothers, Inc. (Shelton) in connection with Craft’s alleged breach of its distribution agreement with Shelton. Craft distributed beer imported by Shelton throughout Massachusetts.

In November 2016, Shelton filed a complaint alleging that Craft breached a 2009 oral agreement between Craft and Shelton by failing to follow through on its promises regarding pricing and providing two dedicated sales people to support Shelton’s brands. In its complaint, Shelton alleged that sales of its products were in “steep decline” by 2011 due to Craft’s discriminatory pricing of Shelton’s products in the market. Continue Reading Massachusetts Court Dismisses Brand Owner’s Suit against Wholesaler

Direct-to-consumer (DTC) sales of alcohol beverages have been a hot topic in the alcohol industry for the last two decades. The wine direct-shipping landscape has changed greatly over the past 15 or so years, most dramatically by the US Supreme Court’s decision in Granholm v. Heald. Today nearly evert state—plus the District of Columbia—allows wineries to ship wine across state lines directly to in-state consumers. The same cannot be said for spirits.

There are, however, a few avenues distillers may consider to get their products delivered to consumers around the country. Further, an initiative is underway to pursue litigation to secure DTC rights for spirits. Although it is far too early to speculate about the outcome of any such litigation, the current effort suggests the potential for interstate distiller-to-consumer sales in the coming years. Of course, lingering ambivalence toward spirits (as opposed to wine) by the public, lawmakers, and alcohol regulators makes the prospect for any legal change uncertain.

Read the full article.

Originally published in Artisan Spirit, July 2017.

On March 30, eight bills were introduced by senior members of Congress from both parties to legalize, regulate and tax marijuana. The bills were referred to at least five House Committees, as they address federal criminal law, taxation, banking, transportation, immigration, veterans’ affairs, access to federal benefits and other issues. The legislative activity follows establishment of the Congressional Cannabis Caucus in February. Leaders of the new caucus represent four of the eight states where voters have approved recreational use of marijuana by adults.

In the initial press conference held by Cannabis Caucus members and in statements explaining the new legislation, House and Senate members made frequent reference to laws regulating alcohol beverages. Bills introduced earlier in the current session of Congress also call for state-by-state regulation using language similar to the Section 2 of the Twenty-first Amendment, which authorized each state to regulate the delivery and use of “intoxicating liquors” within its borders.

The failure of national Prohibition of alcohol beverages is often cited as a rationale to legalize recreational marijuana use. Before proceeding toward wider legalization, policymakers should gain a deeper understanding of the history of Prohibition and the regulatory scheme that emerged after repeal. Government regulation is necessary in a complex and pluralistic society of 320 million, but effective marijuana regulation is a tall order.

Continue Reading Legal, Political and Practical Challenges in Regulating Recreational Marijuana

Understanding the U.S. market for alcohol beverages, including beer, requires an understanding of the three-tier system. Whether viewed with deep reverence or great scorn, it is a system of distribution that delivers the vast majority of beer to the mouths of thirsty American drinkers. Let’s take a few moments to understand that system a little better.

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Originally published in CraftBeer.com.

The Supreme Court of the United States’ 2005 decision in Granholm v. Heald, which required states allowing their own wineries to direct-ship to consumers to also grant such privileges to out-of-state wineries, marked the beginning of a new era of wine direct-shipping. With the relaxation of wine shipping laws around the country following Granholm—nearly every state now allows wineries to ship wine directly to in-state consumers—the wine direct-shipping landscape has changed greatly over the past decade. Indeed, wine shipments in 2016 saw double-digit growth in both volume and sales.

At the same time, growth in recent years in the online shopping industry has led to new innovations in the wine retail space: the existence of a multitude of internet wine retailers, wine-of-the-month clubs and mobile wine delivery apps offers consumers greater access to wine. Many states—and courts—though, are now grappling with the legalities surrounding direct shipping of wine by retailers, as well as the role of unlicensed third parties in such transactions. Some states prohibit retailers from directly shipping wine to consumers altogether, while many others give in-state retailers the right to ship wine directly to consumers while withholding the privilege from out-of-state retailers.

Most recently, in January 2017 Michigan enacted legislation allowing in-state retailers to ship wine to in-state consumers, but prohibiting out-of-state retailers from making such shipments. The new legislation, which amends Michigan’s existing statute addressing wine shipments, authorizes a retailer located in Michigan to obtain a “specially designated merchant license” in order to ship wine to in-state consumers. The specially designated merchant license is only available to in-state retailers, so retailers located outside Michigan remain prohibited from directly shipping wine to consumers in the state.

Unsurprisingly, given the requirements of Granholm (which, incidentally, concerned in part a Michigan law), the new legislation retains the right of both in-state and out-of-state wineries to ship wine directly to Michigan consumers upon obtaining a direct shipper license. In fact, the new statute even reduces the burden on wineries shipping to consumers; under the new law wineries will no longer be required to include their direct shipper license number and the order number on each shipping container, or the brand registration approval number for each shipped wine on the accompanying invoice (although label registration requirements will still apply).

The legislation does not go into effect until March 29, 2017, but already litigation involving the new law has commenced. In late January 2017, an Indiana retailer and several Michigan consumers sued Michigan’s governor and attorney general and the head of the Michigan Liquor Control Commission in federal court, alleging the statute violates the US Constitution’s Commerce Clause and Privileges and Immunities Clause. Similar lawsuits are pending in Illinois and Missouri.

Some courts have already interpreted the constitutionality of similar laws that treat in-state and out-of-state wine retailers differently. While the US Courts of Appeals for the Second and Eighth Circuits have interpreted Granholm to apply only to differential treatment of producers and products (and not to wholesalers and retailers), the Fifth Circuit Court of Appeals recently struck down as unconstitutional Texas residency requirements burdening out-of-state wholesalers and retailers. The Texas Package Stores Association appealed to the Supreme Court based on the apparent “circuit split” created by the Fifth Circuit’s decision. Although the Supreme Court denied certiorari in November 2016, differing outcomes in the currently pending suits could ultimately bring the issue of wine direct-shipping back to the Supreme Court, providing an opportunity for much-needed clarification of Granholm’s scope.

A recent Texas Court of Appeals decision, EATX Coffee, LLC v. Texas Alcoholic Beverage Commission, provides an important reminder of how principles of administrative law may check the current trend towards “regulation by Internet.” Ct. of App of Texas, 4th Dist., No. 04-16-00213-CV (Dec. 7, 2016). Like TTB and many other state alcohol beverage authorities, the Texas Alcoholic Beverage Commission (TABC) periodically publishes “Question and Answer” (Q&A) documents purporting to interpret the Texas Alcoholic Beverage Code.

The EATX opinion arose from a challenge of two particular Q&A’s that, in effect, banned the filling of “crowlers” by Texas beer and wine retailers. A crowler is an aluminum can that a retailer can fill with beer and seal for consumers to take away from the retail premises. While TABC has declared that retailers may fill and sell “growlers” of beer (large bottles filled and sealed by retailers), the TABC’s Q&A’s declared the filling of crowlers to constitute manufacturing – an activity that a retailer cannot engage in without a manufacturing license. (And, of course, under state tied house laws a retailer generally cannot lawfully obtain a manufacturing license).

EATX, having invested in crowler equipment and facing disciplinary action over its filling and sale of crowlers, filed a lawsuit against the TABC seeking a declaration that TABC’s Q&A’s were wrong because the filling of a crowler does not constitute manufacturing. EATX also sought an injunction against enforcement. In response, TABC asserted that the Q&A’s were not a “rule” and therefore the trial court lacked jurisdiction to hear a challenge to the Q&A’s, and also asserted that EATX failed to exhaust the administrative remedies it could raise in defense of a TABC disciplinary action against EATX’s retail license.

The Texas Court of Appeals, 4th District, reversed. Reviewing the Q&A’s, the Court of Appeals concluded that: (1) they are of general applicably as they purport to apply to all retail permit holders; (2) they interpret the law and do not simply re-state it; (3) they do not affect only TABC’s internal management or organization. As such, the Q&A’s constitutes a “rule” within the meaning of Texas’ Administrative Procedures Act and the trial court had jurisdiction to hear the case and grant relief. Turning to exhaustion, the Court of Appeals found no authority for the proposition that a litigant aggrieved by the promulgation of a rule must instead wait and raise its arguments in an action brought to cancel, suspend or refuse to renew its license. In short, EATX can have its day in court.

Given the declining use of notice-and-comment rulemaking by TTB and most state alcohol regulatory agencies, the use of Q&A’s, “FAQs,” “advisory bulletins,” “industry memoranda,” and similar informal policy documents has been rising for decades. While such expedients may help move policy forward in a quicker, less resource-intensive (for the agency) manner, the EATX opinion stands as a useful reminder to regulators that this approach has limits.

Until recently, few would have predicted that US craft beers would find their way into European markets, yet today they are successfully meeting European tastes. Craft beers are increasingly able to compete with other products in Europe, such as wine, and there is increasing market demand in Europe for innovative, rare and exotic beers.

US brewers looking to sell their products in Europe cannot, however, simply apply their US commercial strategies, but should instead adapt distribution models that align with their commercial goals in order to take into account the European legal and regulatory context. In addition, although the US legislative framework has a lot in common with that of the European Economic Area, each EU member state has its own regulatory and distribution peculiarities.

Read the full article, originally published in the November/December 2016 issue of The New Brewer.

The Texas Package Stores Association has asked the US Supreme Court (via a “Petition of Certiorari”) to hear a case that could clarify the interaction between the 21st Amendment and the non-discrimination between states principle of the “dormant” Commerce Clause.

The case arose in Texas, where the Court of Appeals for the Fifth Circuit ultimately held that the Supreme Court’s Granholm v. Heald (2005) decision did not limit the reach of the Commerce Clause in alcohol cases to situations where a state discriminates against producers or products. Decisions by two other federal Court of Appeal’s Circuits (the Second and the Eight) have expressly limited Granholm’s reach to discrimination against producers and products. Thus, the Texas Package Stores Association would like the Supreme Court to reverse the Fifth Circuit and explicitly limit the non-discrimination principle of Granholm to cases involving alcohol products and producers.

The Supreme Court hears only a small fraction of the cases brought before it on a Petition of Certiorari, so the chances that the Supreme Court ultimately reviews the Fifth Circuit’s decision remain low. Nevertheless, the existence of a “split” of opinion between different federal Courts of Appeal increase the chances of Supreme Court review.

How is it that the Brewers Association—an organization that has no political action committee, has employed a staff lobbyist for only 18 months, and has only had a strong presence in Washington since 2009—has gained significant traction among policymakers in the nation’s capital?

The BA is now a serious player in Washington. That is not by accident; it’s a carefully conceived strategy implemented by the BA board and senior staff—including president and CEO Bob Pease—over the last seven years that seeks to leverage the inherent strengths of America’s small craft brewers.

Read the full article, originally published in the September/October 2016 issue of The New Brewer.

The new TTB Final Rule that was released in the Federal Register on August 20, 2016 will partially streamline the use of non-beverage alcohol products in the US. While statutory requirements do not permit TTB to completely de-regulate the distribution and sale of denatured alcohol, the attached rule, among other things:

  1. Reclassifies a number of “specially denatured alcohol” (“SDA”) formulas as “completely denatured alcohol” (“CDA”). As the regulatory requirements for distributing CDA are much less stringent than those that apply to SDA, these reclassifications amount to a lessening of regulatory burdens for companies dealing in such products.
  2. Establishes additional “general use formulas,” which permit the production of SDA products without the need for a specific TTB formula approval.
  3. Exempts distilled spirits plant (“DSP”) operators from the requirements to obtain an additional permit to produce and handle SDA products within the bonded premises of a DSP.
  4. Makes a variety of technical changes and deletions to the regulations in order to meet what TTB views as current industry practice.

While the TTB reforms do not deregulate SDA use to the extent that most producers and users would like, the Final Rule represents a welcome step in the direction of deregulation and simplification. A substantially more radical deregulation of such products would require statutory changes and therefore are beyond the realm of what TTB can accomplish on its own.