On October 4-5, CLE International will host the 23rd Annual Wine, Beer & Spirits Law Conference in Chicago, Illinois. Those attending will include the alcohol beverage industry’s leading practitioners, including in-house counsel for producers, distributors and retailers, as well as industry attorneys, and federal and state regulators. Conference topics include:

  • Updates on TTB developments and trends
  • An overview of recent developments in alcohol trade practice and trademark law
  • How consolidation in both tiers is making antitrust law relevant to distribution
  • Tough ethical issues that frequently confront in-house and outside counsel to companies in the alcohol beverage industry

McDermott partner Marc Sorini serves as co-chair for the event and will also present. Other McDermott presenters will be Jon Dubrow and Bill Schuman.

Click here for the full agenda and registration information.

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

On May 16, 2018, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued Industry Circular 2018-3, allowing proprietors of distilled spirits plants (DSPs), bonded wine cellars (BWCs) and breweries to submit a request for a variance to the typical method for storing tax-determined and non-tax-determined products. Under TTB regulations, a proprietor designates areas of the premises as bonded and non-bonded. With few exceptions, tax-determined products can only be stored on non-bonded areas of the premises and non-tax-determined products can only be stored in bonded areas.

Under Industry Circular 2018-3, proprietors may request a variance to the bonded/non-bonded designations established in existing regulations. This variance would allow an “alternation” of a specific area or multiple areas between a bonded and non-bonded designation. An “alternation” allows two practices (e.g., brewing and winemaking) statutorily prohibited from occurring at the same premise to occur through the creation of a legal fiction. The premise “alternates” between one type of premise to accomplish one task and reverts to another type of premise to accomplish another task. Continue Reading TTB to Allow Proprietors to Request Alternating Premise Variances for Storage of Tax- and Non-Tax-Determined Commodities

On May 17, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued an Industry Circular, No. 2018-1A, clarifying that under the recently-enacted tax reform legislation (Tax Act), wineries may tax determine and tax pay wine they produce and that is stored untaxpaid at another bonded wine cellar or bonded winery as if the wine were removed from the producing winery’s bonded premises.

Among the Tax Act’s many changes to the Internal Revenue Code, the new legislation (which went into effect on January 1, 2018) prescribed new tax credits for wine and suspended (through 2019) the previous tax credit. The Tax Act also suspended the prior law’s transfer provision, which allowed small wineries eligible for tax credits to transfer their credits to another bonded winery. This threatened to leave small wineries transferring their wines to larger bonded wineries without their tax credits. To apply the tax credits to such wines under the Tax Act, the producing winery would need to physically bring the wine back to its premises and remove and tax pay the wine. Continue Reading TTB Announces Extension of Tax Credits for Wines Stored at Bonded Wine Cellars and Bonded Wineries

The Agricultural Marketing Service of the US Department of Agriculture (USDA) recently published a proposed rule containing regulations to implement the National Bioengineered Food Disclosure Standard mandated by Congress in 2016. See 83 Fed. Reg. 19860 (May 4, 2018). The proposed regulations would govern the labeling of raw agricultural products and packaged foods whose labeling is governed the federal Food, Drug & Cosmetics Act, including wines below 7 percent alcohol by volume and non-malt beer (e.g., “hard seltzers”). The proposed regulations would not directly apply to alcohol beverages whose labeling is governed by the Federal Alcohol Administration Act, including all distilled spirits, wines containing 7 percent alcohol by volume or greater, and beer containing malted barley and hops. Nevertheless, the Alcohol and Tobacco Tax and Trade Bureau may look to the bioengineered food disclosure regulations as persuasive guidance in developing its own policies towards the disclosure of bioengineered ingredients (often called “genetically modified organisms” or “GMOs”). Continue Reading USDA Publishes Proposed GMO Labeling Regulations

On Friday, April 13th, Senator Cory Gardner (R-CO) announced that President Trump assured him that the Department of Justice’s decision to rescind the Obama-era guidance on marijuana enforcement would not affect Colorado’s legal marijuana industry. President Trump also promised Senator Gardner that he would support a federal legislative fix that takes into account state decisions to legalize marijuana. In turn, the senator lifted holds on all Department of Justice nominees, ending an intra-GOP standoff over the Department’s cannabis policy.

In January, Attorney General Jeff Sessions rescinded guidance that outlined eight marijuana enforcement priorities, heightening the possibility of a federal crackdown in states that legalized recreational and medical cannabis. Pro-legalization advocates feared that Sessions’ announcement granted federal prosecutors broader discretion to pursue criminal charges against marijuana businesses operating legally under state law in states like Colorado, Washington, California and elsewhere. Sen. Gardner immediately responded that he would block all DOJ nominations over the new policy. Continue Reading President Trump Commits to Protect Colorado’s Legal Marijuana Industry

TTB Industry Circular 2018-2, dated March 26, 2018, expanded the list of allowable revisions for approved Certificate of Label Approval (COLA) applications. The three new allowable revisions are to:

  1. Add, delete, or change between TTB approved responsibility statements;
  2. Add, delete, or change between TTB approved sustainable farming/environmental/eco-friendly claims; and
  3. Add, delete, or change between TTB approved food pairing recommendations.

The Industry Circular also expanded the TTB approved statements under the allowable revision regarding how to best consume or serve the product. For a complete list of approved statements for these new and expanded allowable revisions, please see the full Industry Circular located here.

On February 21, 2018, the US Court of Appeals for the Sixth Circuit published its opinion in Byrd v. Tennessee Wine and Spirits Retailers Association, No. 17-5552. The decision, which includes a partial dissent, affirms a Middle District of Tennessee decision finding that the “durational-residency” (residency) requirements imposed by Tennessee law for alcohol beverage retail licensees are unconstitutional under the “dormant” Commerce Clause.

Tennessee law requires an applicant for a retail license to have been a resident of Tennessee for at least the two-year period immediately preceding the submission of the license application. For corporate license applicants, the two-year requirement applies to any officer, director or stockholder of the corporation. Moreover, to renew such a license the law requires Tennessee residency for at least ten consecutive years.

Two prospective retail applicants that did not meet the two-year residency requirement, notably including the Tennessee affiliate of Total Wine Spirits & Beer, sought licenses. Expecting litigation, the Tennessee Attorney General filed a declaratory judgement action in state court seeking to have the residency requirements declared constitutional. The action was removed to federal court, and the Middle District of Tennessee found the requirements unconstitutional.

Continue Reading Durational-Residency Requirements for Alcohol Beverage Retail Licensees Held Unconstitutional