ALCOHOL LAW ADVISOR
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
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Contracts Corner: Distribution Agreements

by and | May 4, 2023 | ,

Finding the right distributor is critical to the success of an alcohol brand—as is ensuring the agreement appointing that distributor provides ample protection for the supplier or brand owner. At a high level, suppliers should keep the following top of mind when entering into a distribution relationship or negotiating a distribution agreement:

(1) What territory do you wish the distributor to service? Consider the following: Does the distributor call on the accounts/channels that a supplier wishes to target with its brand? Does the distributor have the capability, sales force and reach to cover the entirety of the area assigned, whether it be a portion of a state, a region or the entire country? Where not mandated by franchise law, does assigning exclusive distribution territories make sense, or is dualing the brand a better option?

(2) Whether a state has franchise law applicable to the distribution of its product that will govern the relationship between supplier and wholesaler. With respect to the term and termination provisions of a contract, whether the state(s) where the distributor will handle products have franchise laws may heavily impact what within a distribution agreement is ultimately enforceable. This is particularly important in states that have alcohol franchise protections that make the termination of a wholesaler difficult. Distilled spirits and wine manufacturers should take advantage of the fact that far fewer states have franchise protections for the distribution of spirits than those that have franchise laws applicable to the distribution of malt beverages.

(3) What sales goals or distribution targets do you want the distributor to achieve? You can bake sales goals into a distribution agreement or agree to affix sales goals in annual planning or marketing meetings.

(4) What allocations will be made for marketing, if any? Contemplate the use of a marketing fund in a distribution agreement. These funds are often funded by both parties, with the use of the funds mutually determined by the parties during annual planning meetings. Note that a limited number of states prohibit these funds, or they require participation in them on the part of a wholesaler to be voluntary as opposed to compulsory.

(5) What factors will determine whether the distributor is adequately servicing a brand? Carefully spelling out what the obligations and expectations of a distributor are is critical to creating a successful distribution relationship. Include measurable and specific obligations, particularly in states where good cause must be established in order to terminate a relationship.

(6) What events trigger the termination of the distribution agreement or relationship? Consider both events that may trigger a for-cause termination and not-for-cause termination rights (typically after payment of a termination fee).

(7) How to address a change in control of the parties. Change in control terms in a contract should address a change in control within a wholesaler’s and a supplier’s business. Suppliers should advocate for approval rights and the right to request reasonable information about a new owner or another fundamental change of a wholesaler, even in franchise states. For changes [...]

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The Expanding Landscape of Alcohol Delivery Services

by | May 4, 2022 | , , ,

Following consumer trends and fueled by the pandemic and related loosening of restrictions on in-state retailer alcohol delivery regulations, the marketplace for alcohol delivery services has expanded exponentially over the last several years and shows no signs of slowing down. Industry forecasts predict double-digit growth year-over-year until at least 2025 for alcohol-focused e-commerce platforms. However, like anything in the alcohol beverage space, various avenues of penetration for new or existing companies come with certain restrictions that need to be balanced against opportunities for delivering customer convenience through alcohol delivery services.

Available Models

As alcohol delivery has grown and expanded in nearly every US state, numerous delivery models have developed to bring alcohol to a consumer’s doorstep. Of the various models, three have emerged as the most dominant go-to-market approaches to service this new industry sector.

The first are purely e-commerce platforms that connect consumers directly with a wide variety of licensed alcohol retailers but are themselves unlicensed (such as Drizly). The second are unlicensed white-labeled alcohol delivery services which appear as a branded website but integrate with a network of licensed retailers (like Thirstie). And the third are delivery platforms that themselves hold alcohol licenses (such as Gopuff).

Regulatory Opportunities and Impediments

While each of these models presents growth opportunities to service consumers’ desires to receive alcohol at their doorsteps, they also come with a host of restrictions that entities—and any investors in these companies—need to understand. Chief among these considerations are:

  • “Sale of Alcohol”: If the alcohol delivery service is itself unlicensed, the “sale” of alcohol must be between the consumer and the ultimate retail license holder. This means that the service cannot itself first receive the funds for the sale, take its fee and then pass the monies forward to the license holder. In some states, the provider may, however, be able to direct funds in the first instance to an escrow account or other independent account if the licensee retains a degree of control over the account. The licensed retailer should also always maintain control over the “sale” of alcohol, including setting pricing and accepting or rejecting orders.
  • Fee Structure: While state regulators allow for platforms to charge for their delivery and hard costs related to their services, how that fee is derived can be of particular significance if it is or can be correlated with alcohol sales. This restriction is premised on the fact that only a licensed entity should receive the benefit or privilege of the sale of alcohol. Accordingly, certain states like New York have suggested that if the fee structure is not a “flat fee” for services, receiving more than 10% of the revenue from a retailer as part of the sale of alcohol renders the platform a “Co-Licensee” and subject to the state’s authority and licensee vetting process.
  • Supplier Advertising: The ability of alcohol suppliers to pay to advertise on alcohol delivery platforms is of particular focus to alcohol state regulators. First, if the platform is itself unlicensed, the [...]

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TTB Publishes Phase 2 of Labeling and Advertising Modernization Rule

by and | Feb 22, 2022 | , , ,

On February 9, 2022, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published a final rule that implements Phase 2 of its rulemaking modernizing certain labeling and advertising regulations for malt beverages and distilled spirits. This follows Phase 1, implemented on April 2, 2020, which undertook multiple liberalizing measures, including increasing the tolerance applicable to the alcohol content statements of distilled spirits labels, removing the prohibition against age statements on certain classes and types of distilled spirits, and removing outdated prohibitions on the term “strong.”

Phase 2 is focused on improving the clarity and usability of the regulations regarding labeling and advertising of malt beverages and distilled spirits products. Note that these changes do not require industry members to make changes to labels or advertisements but will allow industry members greater flexibility in labeling and advertising their products moving forward. This final rule is effective March 11, 2022. The below provides a selection of the key changes implemented as part of Phase 2 rulemaking:

  • “Brand label” to “single field of vision.” TTB will no longer require mandatory labeling information appear on the so-called “brand label.” Previously, labeling mandatories had to appear on the “brand label,” defined as the “principal display panel that is most likely to be displayed, presented, shown or examined under normal retail display conditions.” Under the revisions of Phase 2, TTB will allow mandatory information to appear anywhere on the label so long as it appears within the same field of vision—meaning a single side of the container (which for a cylindrical container is 40% of the circumference)—where all the pieces of information can be viewed simultaneously without the need to turn the container.
  • Wholesaler, retailer or consumer information on malt beverage labels. TTB will allow the addition of a label identifying the wholesaler, retailer or consumer to malt beverages, so long as the label does not reference the characteristics of the product, does not violate the labeling regulations and does not obscure any existing labels on the product.
  • “Disparaging” statement prohibitions revised. TTB will prohibit only false or misleading statements that explicitly or implicitly disparage a competitor’s product. TTB does not prohibit statements of opinion or non-misleading comparisons between products.
  • Revised guidance on use of flags and certain US symbols. TTB has removed the blanket ban on the use of flags and other symbols of the United States and Armed Forces. The regulations now reinforce TTB’s existing policy of prohibiting the use of these symbols only when they create a misleading impression that there was an endorsement by, or affiliation with, the governmental entity represented.
  • Adding a “distilled spirits specialty products” class. TTB is adding a “distilled spirits specialty product” class designation for distilled spirits that do not meet one of the other standards of identity. Distilled spirits specialty products must be designated in accordance with trade and consumer understanding, or, if no understanding exists, with distinctive or fanciful name (which may be the name of a cocktail) appearing in the same field of [...]

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Ruling Permits On-Premises Beer and Wine Licenses for New York Movie Theaters

by | Feb 17, 2022 | ,

On January 26, 2022, the New York State Liquor Authority issued a Declaratory Ruling regarding the eligibility of New York movie theaters to apply for and obtain on-premises retail licenses for beer and wine service. This is a value-add for theaters, and it allows businesses to provide a new amenity to customers and increase their revenues. The Authority determined that theaters would be eligible for these licenses provided the following:

  • They can establish the theater will prepare and serve food;
  • The primary source of revenue for the theater will be from the ticket sales and/or snacks; and
  • The revenue from the sales of alcoholic beverages (beer and wine only) will be incidental to revenues from tickets and food offerings.

For questions about this ruling, retail licenses in New York or other alcoholic beverage licensing and compliance matters, please contact Adena Santiago or McDermott’s alcohol regulatory and distribution team.



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Legal Considerations for Ready-to-Drink Cocktails

by and | Jan 21, 2022 | , , , ,

The ready-to-drink cocktail or “RTD” category has exploded in recent years, and it’s occupied by more than merely craft distillers familiar with a carefully made cocktail. Brewers, distillers and even vintners have joined in, capitalizing on consumers’ desires for pre-made, no-fuss beverages. The most unexpected development to emerge with RTDs, however, is the legal complexity surrounding these products—something the industry is only beginning to understand.

Many of these legal issues stem from the fact that the legal regulatory landscape in most states has not caught up with the rapidly evolving alcohol industry. That leaves ready-to-drink cocktails, much like hard seltzers, as not having a specific class or type in certain states. Suppliers looking to enter the space have plentiful options when creating a new product, subject to what licenses the manufacturer holds and what those licenses allow them to produce.

Ready-to-drink cocktails can be spirits, malt, sugar, cider or wine-based. The base of the RTD product, nonetheless, is the key federal factor. It is also an important factor in most states when determining how the product will be treated from a legal perspective in the following areas:

  • Licensing needed to manufacture, distribute and sell the product;
  • Applicable franchise law (Do beer franchise laws apply to low-proof spirits?);
  • Available channels of distribution (Can you sell this product in grocery or convenience store?);
  • Excise tax rate charged to the manufacturer (Does state law have a lower excise tax rate for low ABV products?);
  • Labeling and advertising considerations (Is your product a modified traditional product?); and
  • Trade practice considerations/promotions (Do spirits laws apply?).

Industry members dabbling in a sphere that is relatively new to the market, state regulators and legislatures should be mindful of the patchwork of emerging regulations. Like hard seltzer, ready-to-drink cocktails are not a clearly defined category under existing alcohol law. Meanwhile, states are working quickly to legislate in this domain. New Jersey is considering a reduced alcoholic beverage tax rate on low-ABV liquors to align with the beer tax rate (NJ SB 701), Vermont is considering legislation to define “low alcohol spirits beverage” and treat it as a “vinous beverage” (VT HB 590) and the Washington State Senate has a bill pending that would establish a tax on low-proof beverages (WA SB 5049).

From franchise issues to excise tax, the issues discussed here are only a glimpse of the nuanced and complicated legal landscape that governs the distribution of RTDs and alcoholic beverages across all categories. Consulting with competent legal counsel with experience in the industry is crucial to ensuring compliance with applicable federal, state and local regulations.



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Second Prop 65 Amendment Effective April 1, 2021: New Warnings Required

by and | Mar 26, 2021 | , ,

The Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65 (Prop 65), was enacted as a ballot initiative and requires businesses to inform Californians about exposures to chemicals that are known to cause cancer, birth defects or other reproductive harm. The regulation prohibits knowing or intentional exposure of any individual to a “chemical known to the state to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such individual.” (See: 27 CCR § 25249.6.)

The state maintains and updates a list of chemicals known to cause cancer or reproductive toxicity, with alcoholic beverages being added to the list April 29, 2011, and requiring suppliers to comply with Prop 65’s “clear and reasonable warning” mandate. (Click here for more information.) This includes, without limitation, beer, malt beverages, wine and distilled spirits. (See: 27 CCR § 25607.4(a).) Generally speaking, for alcoholic beverages, it is the responsibility of the manufacturer or its distributors to ensure proper compliance with Prop 65. (See: 27 CCR § 25600.2(a).) Further, any consequences for failure to comply with Prop 65 typically rests with the manufacturer or its distributor, provided that the retailer has not frustrated the manufacturer’s reasonable efforts to properly display the warning.

The warning provided must read: “WARNING Drinking distilled spirits, beer, coolers, wine and other alcoholic beverages may increase cancer risk, and, during pregnancy, can cause birth defects. For more information go to www.P65Warnings.ca.gov/alcohol.” (Id. at § 25607.4(a)(1)-(2).) To comply with Section 25607.3, among other specific requirements, the warning must be made at either point of sale (for off-premises consumption) or on a menu or list identifying the alcoholic beverages sold on-premises. (See: 27 CCR § 25607.4.) Note, however, that a supplier who is a party to a “court-ordered settlement or final judgment, establishing a warning method or content is deemed to be providing a “clear and reasonable” warning for that exposure if the warning complies with the order or judgment,” even if the requirements set forth in the order or judgment differ from the specific requirements set forth in the regulations. (See: 27 CCR § 25600(e).)

Prop 65 is enforced by the California attorney general, any district attorney or city attorney for cities whose population exceeds 750,000 and/or any private individual or group acting in the public interest. (See: 27 CCR § 25249.7.) Penalties for violating Prop 65 can be as high as $2,500 per day. (Id.) The fine is paid to the party that brought the litigation, including individuals or groups acting in the public interest, which creates a powerful incentive for private parties to enforce Prop 65. (Id.)

Prop 65 has undergone multiple amendments, two of which are in direct response to the ever-growing e-commerce market for alcoholic beverages. The first amendment, effective August 30, 2018, required the Prop 65 warning language be displayed on websites and on or in packages containing direct-to-consumer orders sent to California addresses. (Click here for [...]

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Podcast: 2021 Legal Landscape for Brewers

by | Feb 26, 2021 | , ,

Between pandemic-driven changes to shipping and home delivery privileges, the rise of e-commerce and the nebulous definition of hard seltzer for tax and regulatory purposes, there is a lot that brewers need to know to remain on the right side of the law in 2021. Alva Mather, head of the Firm’s Alcohol Regulatory & Distribution Group and Counsel Nichole Shustack join the Brewbound Podcast to break down all the pressing legal issues facing the beer industry.

Listen to the podcast.



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Oregon Issues New Guidance on Hard Seltzer Classification

by and | Jan 11, 2021 | , , , ,

Recently, Oregon issued clarification pertaining to the classification of hard seltzers in the state. The guidance, as summarized below, impacts the majority of hard seltzers in the market. Classification of hard seltzer has a number of impacts, most notably on excise tax (or “privilege tax”) rates and licensing needed to produce, import, distribute and sell hard seltzers in the state. Specifically, Oregon has signaled that should the state’s guidance result in the reclassification of a supplier’s hard seltzer product, there may be retroactive tax liability imposed. This alert should assist those engaged in the production or sale of hard seltzer in Oregon in determining whether reclassification is necessary and the implications thereof. For specific questions on the implications of this guidance on your business, please do not hesitate to reach out to McDermott Will & Emery.

Classifications of Hard Seltzer
“Hard seltzer” must meet the following to be categorized as a malt beverage in Oregon:

  1. 100% of the alcohol by volume (ABV) is obtained through the fermentation of grain and the ABV is more than 0.5% but not more than 14%; or
  2. At least 98.5% of the ABV is obtained through the fermentation of grain and the ABV is more than 6% but not more than 14%. Once those criteria are met, not more than 1.5% of the ABV may be obtained through other flavoring agents containing alcohol; or
  3. At least 51% of the ABV is obtained by the fermentation of grain and the ABV is more than 0.5% and not more than 6%.

Once the criteria above is met, up to 49% of the ABV may be obtained through other flavoring agents containing alcohol.

Oregon relies on the federal definition of “grain” to mean barley, canola, corn, flaxseed, mixed grain, oats, rye, sorghum, soybeans, sunflower seed, triticale and wheat, and the subsequent definition for each grain. This may exclude hard seltzers deriving alcohol primarily through the fermentation of cane sugar from meeting the malt beverage definition in Oregon. The state may require verification that a product claimed to be a malt beverage for tax purposes is in fact produced through the fermentation of grain via the submission of an ingredients list or documentation describing the manufacturing process.

“Hard seltzer” must meet the following to be categorized as a wine in Oregon:

  1. An alcoholic beverage obtained by the fermentation of vinous or fruit juice, or other fermented beverage fit for beverage purposes, and contains more than 0.5% ABV and does not contain more than 21% ABV.
  2. Wine may contain distilled liquor and other “non-traditional” ingredients, provided that it does not contain more than 21% ABV.
  3. “Wine” does not include malt beverage, cider or distilled liquor.

“Hard seltzer” must meet the following to be categorized as a cider in Oregon:

  1. An alcoholic beverage obtained by the fermentation of the juice of apples or pears; contains more than 0.5% ABV but does not contain more than 8.5% ABV.
  2. The juice is not required [...]

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Five Tips for Making Boozy Ice Cream That’s Legal

by | Aug 24, 2020 | , , ,

When you think of the relationship between alcohol and food, the classics come to mind: tiramisu, coq au vin and beer cheese. While there is a long culinary tradition of using alcohol in food, the newest trend is to utilize alcohol in innovative ways in the culinary world. Recently, a popular food/alcohol combo has been in the freezer aisle where alcohol has lent its flavor to ice cream and freezer pops. Fans consider this a win-win…it cools us down in the summer and acts as a little adult refreshment at the same time. As the tasty treats gain popularity, more and more states are approving the manufacture and sale of such items. 

Recently, New York Governor Andrew Cuomo signed legislation that allows ice cream to be mixed with liquor. He stated this would, “help New York’s dairy farmers, liquor and craft beverage producers, dairy processors and manufacturers, food retailers, and restaurants meet the increasing consumer demand for these new and innovative products.” While New York has been able to have beer and wine mixed ice cream, liquor is new. Other states, like Ohio, have created special licenses for the explicit manufacture and sale of ice cream with beer or intoxicating liquor. 

While we believe this is a win-win for adults, this space lends itself to a number of legal hurdles. We suggest the following tips:

1. Advertise specifically to adults. While this is a given in alcohol beverages, it is a good reminder to gear your advertising towards adults only. 

2. Ensure your label is clearly marked with 21+ and the Government Warning Statement. New York specified in its most recent legislation that the label must have warnings and label requirements similar to confectionary products that contain beer, wine and cider.

3. Avoid the risk of unaware consumption. Ensure that the packaging and marketing make it very clear that the product contains alcohol.

4. Check each state to learn its specific laws. For example, in New York the maximum alcohol by volume allowed in ice cream is 5% while Ohio allows up to 6%.

5. Food that has alcohol mixed in requires the submission of a nonbeverage formula to the Tax and Trade Bureau (TTB).   



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Ohio Case Will Likely Determine Whether Other States Use 21st Amendment Enforcement Act

by | Jul 22, 2020 |

As was widely reported in the alcohol trade press, the state of Ohio filed suit against several online retail outlets a week ago after an investigation into direct-to-consumer shipments of wine and spirits into the state. The suit follows an investigation where employees of the Division of Liquor Control ordered wine and spirits online through retail outlets and received the alcohol at the Division’s headquarters. Ohio argues that the online retail outlets did not have a license to ship the alcohol directly to consumers in Ohio, and therefore violated Ohio law. The crux of the suit is that the only way to ship wine to consumers in the state of Ohio is by obtaining an “S Permit”.  Unfortunately for the online retail companies, an “S Permit” can only be obtained by wine manufacturers and importers who produce less than 250,000 gallons of wine per year. The lack of any other license essentially prevents the vast majority of manufacturers, wholesalers and online retail companies from shipping wine to consumers in the state of Ohio directly.

What makes this case special is it marks the first time the 21st Amendment Enforcement Act, passed in 2000 has been utilized by a state. The likely reason it hasn’t been utilized is that when going through Congress the Act was stripped of the ability for states to collect monetary damages and left them with only the ability to seek injunctive relief. That said, Ohio, as a control state for spirits, generates a massive amount of revenue through the sale of spirits and taxation of wine in the state. Online retailers and direct to consumer shipments puts that revenue in jeopardy. The case also hints that Ohio is protecting instate interests of wine retailers and wholesalers who stand to lose the most money with the expansion of direct to consumer shipments. Even though the state can’t seek monetary damages under the 21st Amendment Enforcement Act, this suit is on its face all about money as the state makes no argument regarding the need to protect the public health and safety of Ohio residents.

The interesting part will be if and how the online retailers companies defend their actions. The case seems to go against both the trend of loosening direct to consumer laws across the country (such as neighboring Kentucky’s recent expansion of direct to consumer rights) as well as successful retailer challenges to state laws that run afoul of the ”dormant” Commerce Clause of the U.S. Constitution. The online retailers could use this as an opportunity to test the recent Supreme Court’s holding in Tennessee Wine and Spirits Retailers Assn. v. Thomas reinforcing the “dormant” commerce clause. In the Tennessee Retailers case the Supreme Court held that the two-year residency law implemented by the state was not justified by the public health and safety measures raised and was unconstitutional under the Commerce Clause.  As a reminder the Commerce Clause limits states authorities to regulate economic activity in interstate commerce. Among other things, this has been [...]

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