Last week, in Connecticut Fine Wine and Spirits LLC v. Seagull, the US Court of Appeals for the Second Circuit affirmed a lower court’s motion to dismiss a lawsuit from Total Wine & More challenging parts of Connecticut’s Liquor Control Act and related regulations. Though the decision represents a victory for state alcohol regulatory regimes, the Second Circuit’s ruling was decided on the basis of established antitrust law and did not raise or rely on state regulatory authority under the 21st Amendment. Nonetheless, state alcoholic beverages regulators will embrace the court’s ruling.

In Connecticut Fine Wine, Total Wine challenged three sets of provisions in Connecticut’s alcohol laws. First, Total Wine challenged “post-and-hold” provisions. Under the post-and-hold provisions, state-licensed wholesalers are required to post a “bottle price” and “case price” each month with the Connecticut Department of Consumer Protection. Those prices are then made available to industry participants. During the four days after prices are posted, wholesalers may “amend” their posted prices to match—but not drop below—lower prices offered by competitors. Wholesalers are then obligated to “hold” their prices for a month.

Second, Total Wine challenged the state’s minimum-retail-price provisions. The minimum-retail-price provisions require retailers to sell alcohol beverages to customers at or above a statutorily defined “cost,” which is determined by adding the posted bottle price and a markup for shipping and delivery. Combined with the post-and-hold provisions, the minimum-retail-price provisions bind retailer prices to wholesaler prices.

Third, Total Wine challenged the state’s price discrimination and volume discount provisions. The price discrimination/volume discount provisions preclude wholesalers from offering a given product to different retailers at different prices and from offering discounts to retailers who are high-volume purchasers. Continue Reading Second Circuit Rejects Total Wine Challenge of Connecticut Pricing Laws

Rapid growth in the number of small and independent breweries that rely on taproom sales has received a lot of attention—not all of it positive—across the beer industry. Until this unprecedented growth, taproom sales went largely unnoticed. Competing retailers, beer wholesalers, and even well-established craft brewers were pleased with steadily growing craft beer sales and consumer demand. As demand has leveled out and competition has increased, taprooms are receiving increased scrutiny.

In an article published by The New Brewer, Art DeCelle addresses this disruptive change in a mature market and the unique combination of laws and policies that can oftentimes create confusion. Since each state licensing law authorizing brewery taprooms and brewpubs operations is different, he recommends that brewery owners are best served by gaining a full understanding of their state’s licensing requirements. He notes that some states follow the federal model, treating brewers as manufacturers and authorizing retail sales on the brewery premises. Several states have complex exceptions that permit brewers to operate wholly-owned retail establishments at locations other than the licensed brewery.

Access the full article.

Originally published in The New Brewer, January/February 2019.

In late September 2018, the U.S. Supreme Court granted a petition for a writ of certiorari (i.e. the Court agreed to hear a case) brought before the Court by the Tennessee Wine and Spirits Retailers Association (Tennessee Retailers) in Tennessee Wine and Spirits Retailers Association v. Byrd. The petition requested that the Court review the lower court’s decision upholding a finding that Tennessee’s two-year residency requirement for retail license applicants is unconstitutional. Specifically, the question Tennessee Retailers posed to the Court is whether the 21st Amendment of the U.S. Constitution gives states that authority to, consistent with the so-called “dormant” Commerce Clause of the Constitution, regulate sales of alcohol beverages by imposing residency requirements on retail (or wholesale) license applicants.

In this article, Mar Sorini and Bethany Hatef discuss the legal background of the dormant Commerce Clause, as well as the Byrd case. Particularly, they examined the Sixth Circuit’s opinion in February 2018 which affirmed the district court decision that invalidated Tennessee’s residency requirements, held that “a three-tier system can still function” without the two-year durational residency restriction imposed by the state. This article examines the potential impacts of Byrd, and how the Supreme Court’s review will address the constitutional validity of the Tennessee law imposing residency requirements on retail alcohol beverage license applicants.

Access the full article.

Originally published in Artisan Spirit: Winter 2018.

As you likely have read in the trade press already, on Wednesday, November 28, 2018, the US Court of Appeals for the Seventh Circuit issued its opinion in Lebamoff v. Rauner. The opinion adds three judges of the Seventh Circuit to the collection of legal minds rejecting the notion that the dormant Commerce Clause non-discrimination principles applied by the Supreme Court in Bacchus (1984) and Granholm (2005) should be limited to laws discriminating against producers and products.

Like other cases brought by Lebamoff and its legal team, this case involves a challenge to state laws that prohibit direct-to-consumer wine shipments by out-of-state retailers. Illinois, like many states, permits in-state retailers to deliver wine directly to Illinois consumers located anywhere in the state. The law, however, denies that same privilege to out-of-state retailers. This distinction, according to the plaintiffs, amounts to discrimination against out-of-state economic interests in violation of the Constitution’s dormant Commerce Clause.

The Seventh Circuit opinion rejects the reading of Granholm, embraced by the Second and Eighth Circuits, that the Supreme Court drew an implicit distinction between laws discriminating against producers and products (not permitted) and laws affecting the wholesale- or retail-tiers (immune from Commerce Clause scrutiny). Reading Granholm in its totality, the Seventh Circuit finds such an implied bright-line rule unlikely. Moreover, drawing on the Brown-Forman (1986) and Healy (1989) cases, the Seventh Circuit notes that prior Supreme Court opinions have applied dormant Commerce Clause principles to laws that did not regulate producers or products.

The Seventh Circuit, of course, recognized that its opinion could be substantially affected by the Tennessee Wine & Spirits Retailers Ass’n v. Byrd case now pending before the Supreme Court. Moreover, the Seventh Circuit’s discussion of issues upon remand suggests a number of potential distinguishing facts that could alter the outcome of the case. Nevertheless, should the Supreme Court affirm the Sixth Circuit’s Byrd decision, the state of Illinois will have a hard time defending the discriminatory treatment challenged in Lebamoff.

The recent US District Court for the Eastern District of Michigan opinion strikes down a Michigan statue and authorizes out-of-state retailers to sell and ship wine directly to Michigan consumers. Lebamoff Enterprises v. Snyder, E.D. Mich. Case No. 17-10191 (Sept. 28, 2018). More fundamentally, the Lebamoff decision underscores the stakes in the upcoming (as of September 27) Supreme Court review of the Sixth Circuit’s decision in Byrd v. Tenn. Wine and Spirits Retailers Ass’n.

The Lebamoff case involves 2016 legislation that amended Michigan law to: (1) make it easier for in-state retailers to ship directly to consumers by employing third-party carriers and (2) prohibit completely the sale and shipment of alcohol beverages to Michigan consumers by out-of-state retailers. The plaintiffs include an Indiana retail chain, its owner and several Michigan wine consumers.

The Lebamoff opinion first recaps the familiar dormant Commerce Clause analysis that: (a) asks whether the challenged law discriminates against interstate commerce or favors in-state interests over out-of-state interests; and (b) examines the state’s justifications for the law to see if they advance a legitimate local purpose that reasonable alternatives cannot adequately advance. Not surprisingly, the district court had little trouble concluding that the challenged law—which facially discriminates between in-state and out-of-state retailers—favors in-state interests and discriminates against interstate commerce. Continue Reading Recent Retailer Direct Shipping Opinion Illustrates Stakes in Upcoming Supreme Court Review

The “final word” may be in sight in a long-running dispute over state residency requirements imposed on applicants for retail alcohol beverage licenses as well as more fundamental questions about state powers under the 21st Amendment.

As anticipated last July in the Alcohol Law Advisor blog, a single sentence order of the US Supreme Court issued on September 27 granted a petition for a writ of certiorari filed by the Tennessee Wine and Spirits Retailers Association (Tennessee Retailers) requesting the high court to review lower court decisions that invalidated Tennessee’s two-year residency requirement for retail license applicants.

Earlier this year, the US Court of Appeals for the Sixth Circuit reviewed the Tennessee law at issue and held that, “a three-tier system can still function” without the two-year durational residency restriction imposed by Tennessee. The 6th Circuit quoted a 1984 Supreme Court decision: “The central purpose of the [Twenty-first Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition.” The court went on to analyze the Tennessee restrictions and found that they violate the dormant commerce clause, a legal concept designed to prevent states from engaging in economic protectionism. Continue Reading US Supreme Court to Review State Residency Requirements

Last week, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published a TTB Procedure governing the transfer in bond of beer between breweries of different ownership. See TTB Procedure 2018-1 (July 17, 2018). In bond transfers between breweries of different ownership were authorized by the 2017 tax reform act and like many provisions of that act, the transfer provision is scheduled to sunset at the end of 2019.

Some highlights:

  1. The beer transfers can include both packaged and bulk beer.
  2. Transferred beer can be re-consigned while in transit or returned to the shipping brewery.
  3. Most recordkeeping and recording rules are the same as the current regulations governing transfers between breweries of the same ownership.
  4. Because the 2017 tax reform act’s lower tax rates apply to beer “produced” by the removing brewery, beer transferred in bulk does not benefit from the lower rates if the receiving brewer makes no changes or only de minimis changes to the transferred beer.
  5. For excise tax purposes, a beer is “produced” by a brewer if it is “brewed by fermentation or produced by the addition of water or other liquids during any state of production.” Blending alone does not qualify as “production.”
  6. Packaged beer that was transferred does not receive any lower rate of tax and will be taxed at the $18/barrel rate upon removal.
  7. Absent evidence of theft or diversion, in-transit losses of up to 2 percent are permitted without the need to file a report or a claim with TTB.
  8. Bulk containers used to transfer beer between breweries are subject to certain marking requirements.

The latest development in a lengthy legal challenge to advertising restrictions in Missouri’s tied house laws and regulations raises practical economic issues for the alcohol beverage industry and significant legal and policy issues for legislators and regulators at all levels of government. On June 28, Judge Douglas Harpool of the US District Court for the Western District of Missouri filed a decision in Missouri Broadcasters Association vs. Dorothy Taylor. The Missouri Broadcasters Association (MBA) is a trade association representing media outlets. Two licensed Missouri retailers were also plaintiffs in the lawsuit. Ms. Dorothy Taylor is the Supervisor of the Missouri Division of Alcohol and Tobacco Control (DATC).

The basic issue in the case is whether several Missouri alcohol beverage advertising restrictions violate the plaintiffs’ commercial speech rights protected by the First Amendment to the US Constitution.

The June District Court decision follows a bench trial held in February 2018. The trial occurred as the result of prior legal proceedings culminating in a 2017 decision by the US Court of Appeals for the Eighth Circuit, which found that the MBA’s amended complaint “plausibly demonstrates that the challenged provisions [of Missouri’s tied house law] do not directly advance the government’s asserted substantial interest, are more extensive than necessary and unconstitutionally compel speech and association.”

Perhaps the most important Missouri law challenged in this litigation is an exception in the tied house laws that authorizes a manufacturer to pay for advertising that lists “two or more affiliated retail businesses selling its products” subject to four conditions:

(a) The advertisement shall not contain the retail price of the product;

(b) The listing of the retail businesses shall be the only reference to such retail businesses in the advertisement;

(c) The listing of the retail businesses shall be relatively inconspicuous in relation to the advertisement as a whole; and

(d) The advertisement shall not refer only to one retail business or only to a retail business controlled directly or indirectly by the same retail business.

This language may be familiar to many practitioners and regulators as a nearly identical provision appears in the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) tied house regulations. Laws and regulations of several states include similar express exceptions and TTB regulations are incorporated by reference in the trade practices regulations of other states. Innumerable TTB and state tied house laws and regulations restrict advertising in similar ways and may be invalidated if the analysis in Missouri Broadcasters is applied by other courts and ultimately upheld by federal appellate courts.

Other Missouri laws and regulations that were successfully challenged by MBA in the trial court prohibit (a) media advertising of price discounts, (b) beer and wine coupons, (c) outdoor advertising of discounts by retailers and (d) below cost advertising.

Unlike many cases based solely on theoretical legal arguments and the text of laws and regulations, the trial in the Missouri case resulted in a wide-ranging inquiry that included expert witnesses on advertising and the level of effort invested by the Missouri DATC in enforcing the challenged laws and regulations. The court’s decision suggests that the state struggled to provide any credible evidence that the challenged laws “directly reduce[] overconsumption of alcohol and underage drinking.”

The court found that the plaintiffs’ expert testimony provided substantial evidence “that there is in fact no demonstrative relationship between media advertising of alcohol and overall consumption rates of underage drinking…The State failed to present any evidence contradicting the testimony, empirical studies, and statistical analysis relied on by the Plaintiffs’ expert.”

The court agreed with the plaintiffs and cited language from the 8th Circuit decision that “the multiple inconsistencies within the regulations poke obvious holes in any potential advancement” of the state’s interest, “to the point the regulations do not advance the interest at all.” This finding is a threat to dozens of federal and state alcohol beverage laws that are riddled with exceptions that allow alcohol beverage advertising in one context and expressly prohibit the same advertising in another context (e.g., prohibiting exterior signs and permitting indoor signs).

Because the challenged Missouri laws restrict commercial speech rights protected by the First Amendment, the court also awarded legal fees to MBA and the retailer plaintiffs.

Advertising can be removed from the “marble cake” of state and federal tied house restrictions without dire consequences for regulators. If the reasoning in Missouri Broadcasters survives, the most significant effects will occur in intra-industry negotiations where parties will determine how advertising costs and activities are apportioned across the three-tier system.

Before proclaiming the death of the three-tier system, hundreds of state licensing and tied house laws have nothing to do with advertising. Prohibitions on ownership interests in more than one tier of the alcohol beverage industry are not affected by the recent decision along with substantial restrictions on industry trade practices other than advertising.

Finally, the reasoning in Missouri Broadcasters may have to survive another appeal and must be adopted by other courts to broadly affect house restrictions on advertising throughout the United States. Perhaps a state (or more likely a state with support from interested industry members) will develop credible evidence to support similar laws in other jurisdictions. For example, California aggressively defended analogous laws and regulations, which were ultimately upheld last year by the Ninth Circuit Court of Appeals.

As a craft distiller, getting your products into the hands of consumers is, of course, critical to your business. As a general matter, state alcohol laws separate the alcohol beverage industry into three tiers (i.e., the three-tier system): the supplier tier, the wholesaler tier, and the retailer tier. To get its product to market, a supplier typically must sell to a wholesaler, which then must sell to a retailer.

Of course, state laws today contain a number of expectations to the three-tier system – for example, many states now license pub distilleries, which may produce spirits on-site (typically a function of a retailer). But generally speaking, a distiller must sell its products through wholesalers. This article will explore the terms that govern the relationship between a distiller and its wholesaler.

Read the full article.

Originally published in Artisan Spirit, Summer 2018.

Two recent developments reinforce my expectation that the Supreme Court will need to clarify the scope of its 2005 Granholm v. Heald decision within the next few years.

Granholm struck down state restrictions on the interstate sale and shipment of wine by wineries, where the state permitted in-state wineries to engage in such direct-to-consumer sales activities but withheld that privilege from out-of-state wineries. According to that decision, such facially-discriminatory laws are virtually per se unconstitutional under the so-called “dormant” Commerce Clause, and are not saved by the additional power that states have over alcohol sales under the 21st Amendment. The Granholm court also referred to the three-tier system as “unquestionably legitimate.”

In the years since Granholm, lower federal courts have wrestled with the question of whether or not the Commerce Clause’s non-discrimination principle is limited to state laws imposing different rules on in-state versus out-of-state producers and products. Decisions by several Circuit Courts of Appeal, including the US Court of Appeals for the Second Circuit (Arnold’s Wines, 2009) and the Eighth Circuit (Southern Wine, 2013), have concluded that only those state laws discriminating against out-of-state producers or products face the high level of scrutiny mandated by Granholm. Others, including the Fifth Circuit (Cooper II, 2016) and the Sixth Circuit (Byrd, 2018), have concluded that state laws regulating the wholesale- and retail-tiers remain subject to vigorous Commerce Clause scrutiny. Notably, however, the Fifth and Sixth Circuit opinions also suggest that the outcome of a challenge to a state law regulating the wholesale- or retail-tier may depend on the type of law challenged, and both involved residency requirements for licensees, not laws directly regulating the sale and shipment of alcohol. Continue Reading Son of Granholm Inches Closer