On January 30, 2017, President Trump issued Executive Order No. 13771, entitled “Reducing Regulation and Controlling Regulatory Costs.” A link to Executive Oder 13771 appears here.  The Order provides:

  1. For Fiscal Year 2017 (which ends September 30, 2017):
    1. For each new “regulation” published for notice and comment “or otherwise promulgated,” the agency in question must “identify” two existing regulations to be repealed. Notably, the Order does not require the repeal to be concurrent with the publication or promulgation of the new regulation.
    2. For Fiscal Year 2017, each agency must ensure that the total incremental costs of all new and repealed regulations shall not exceed zero, unless otherwise required by law or as consistent with the advice of the Office of Management and Budget (OMB). The Order does not specify whether the costs in question represent costs to the agency, costs to the government or total societal costs. It also does not provide any guidance on how to calculate such costs.
    3. To the extent permitted by law, the costs of any new regulations shall be offset by the elimination of costs associated with at least two existing regulations. Once again, the Order provides no guidance on what constitute costs of a regulation or how to calculate such costs.
    4. The OMB is directed to provide agencies with guidance on how to implement the Order.
  2. Beginning with Fiscal Year 2018 (which begins October 1, 2017):
    1. The semi-annual Unified Regulatory Agenda for each agency must: (i) identify for each new regulation “that increases incremental cost,” two offsetting regulations; and (ii) provide an approximation of the total costs or savings for each new and repealed regulation.
    2. Each regulation approved by the OMB shall be included in the Unified Regulatory Agenda.
    3. Unless otherwise required by law, agencies may not issue new regulations that were not listed in the most recent Unified Regulatory Agenda.
    4. During the budgeting process, the OMB shall notify agencies of the total costs per agency that will be allowed in issuing and repealing new regulations for the upcoming fiscal year.
    5. The OMB shall provide agencies with guidance on implementing the Order’s requirements.

Executive Oder 13771 applies to each “executive department or agency,” but leaves a number of government regulatory functions outside of its scope. These include agencies involved in military, national security, and foreign affairs functions, as well as any government organization arising from the Legislative or Judicial branches. Nevertheless, the Order applies to a vast swath of the federal bureaucracy.

On its face, Executive Order 13771 could have a significant impact on the pace of federal rulemaking during the Trump Administration. The “two-for-one” requirement, in particular, appears to be a blunt instrument aimed at shrinking the Code of Federal Regulations. Moreover, the explicit requirement for cost estimates and “zero” total costs flowing from the rulemaking process plainly seeks to halt the growth and costs of the federal administrative state.

But the jury remains out on the practical impact of Executive Order 13771. Longstanding observers of the federal bureaucracy will, no doubt, recall that the Paperwork Reduction Act (1980), Executive Order 12866 (1993), the Paperwork Reduction Act of 1995, and other measures all failed to noticeably slow the growth or improve the functioning of the administrative state. In that spirit, President Trump’s Executive Order leaves many questions unanswered:

  1. Much hinges on the interpretation of “costs” referenced throughout the Executive Order. Does this mean the costs to the Agency, the entire federal government or society at large? And, particularly if “costs” are defined broadly, how will agencies and/or the OMB calculate such costs? The OMB presumably must arrive at answers to these fundamental questions.
  2. While a “rule” has a defined meaning in administrative law, a “regulation” does not. While the Order purports to define the term, as every lawyer in an administrative practice knows, individual “sections” within the Code of Federal Regulations are called “regulations” and come in many sizes. Does an agency satisfy the “two-for-one” rule by replacing two one-sentence regulations with a single ten-sentence regulation? The opportunities to “game” the Executive Order’s mandate seem endless.
  3. The Executive Order might not withstand a legal challenge. While the President yields broad authority over most administrative agencies, nothing in current law authorizes a “two-for-one” rule. While a full analysis is beyond the scope of this note, on its face the Order seems to push the boundaries of what a President can mandate by Executive Order.

Finally, the Executive Order may accelerate the unfortunate trend of agencies to make rules through informal documents instead of the notice-and-comment rulemaking process mandated by the Administrative Procedures Act. During the past several decades, many agencies have sought to shortcut the rulemaking process by asserting that any number of substantive rules are mere “interpretations” not subject to notice-and-comment. Too often, the legal costs and potential for relationship damage involved in challenging such rules outweighs the benefit of a challenge. (For example, how willing is a heavily-regulated brewery, winery or distillery to engage in protracted litigation with the Alcohol & Tobacco Tax & Trade Bureau?)  As a result, usually the regulated public tacitly accepts this subversion of Administrative Procedures Act requirements – requirements that flow directly from the Fifth Amendment’s requirement for Due Process of Law. By making formal notice-and-comment rulemaking even more burdensome, Executive Order 13771 will likely accelerate the pace of regulation by internet posting, bottom-drawer regulation, letter ruling and other means that do not provide the regulated public with notice and an opportunity to comment on legal requirements that will affect them.

In the end, then, President Trump’s Executive Order on Reducing Regulations leaves many important questions unanswered and, like other like-minded actions before it (e.g., the Paperwork Reduction Act), may not progress the objective of simplifying and reducing the federal bureaucracy.

On December 23rd, 2016 the federal government published its Fall edition of the “Unified Agenda” – a bi-annual compilation of all ongoing federal rulemaking projects. Attached is a copy of the TTB detail from this latest Unified Agenda. As always, projected future publication dates should be viewed with a very healthy dose of skepticism.

TTB’s portion of the Unified Agenda identifies the following “priority” items:

  1. Final rules implementing the International Trade Data System (ITDS). TTB published these final rules on December 22, 2016 – mission accomplished.
  2. Revisions to TTB regulations to implement the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act). Among other things, the PATH Act amended the Internal Revenue Code definition of “hard cider” and changed the bonding requirements for small excise taxpayers. While listed as a priority for action in late 2016, TTB has shown little ability to quickly amend its regulations to reflect statutory changes enacted by Congress (see Taxpayer Relief Act note below).
  3. Revisions to modify and streamline TTB’s wine, distilled spirits, and malt beverage labeling regulations. This item has appeared in the Unified Agenda for several years, and apparently stems from a January 2011 Executive Order requiring the identification and elimination of outmoded and burdensome regulations. The Unified Agenda lists a December 2016 publication date for a Notice of Proposed Rulemaking (NPRM) on this subject.
  4. Back on the “priority” list of this Unified Agenda is the NPRM permitting the self-certification of nonbeverage product formulas. Projected publication of that NPRM now has slipped to September 2017.
  5. A project to combine the current four forms required for reporting by distilled spirits plants (DSPs) into two report forms now receives priority status. Originally proposed in December 2011, TTB now expects to publish a 2017 “Supplemental NPRM” to gather more comments on the subject.

Among the other TTB rulemaking projects industry members may take an interest in are the following:

  1. TTB’s allergen labeling rulemaking, initiated in April 2005, remains on the Unified Agenda, but under the heading of “Next Action Undetermined.”  This suggests that TTB may walk away from mandatory allergen labeling altogether.
  2. TTB is considering amendments to the “standards of fill” for wine and distilled spirits, with an NPRM projected date of April 2017.
  3. A new item proposes an NPRM to amend the wine labeling regulations in order to better address the labeling of flavored wines.  The project arises from a petition received by TTB and projects an April 2017 publication date.
  4. TTB has withdrawn (and presumably abandoned) the rulemaking project, commenced in 2010, to further define the use of terms like “estate bottled” on wine labels.
  5. TTB continues to plan for a “Supplemental NPRM” to solicit additional comments on the use of an American viticultural area as an appellation on a wine finished in an adjacent state.  TTB now expects to publish the Supplemental NPRM in January 2017.
  6. Final rules arising from the August 2016 NPRM proposal to impose certain Federal Alcohol Administration Act labeling requirements on wines below 7% alcohol by volume are expected in September 2017.
  7. TTB expects to publish an NPRM to permit the labeling of fortified wines in a manner that discloses the addition of grape spirits or brandy to the wine in September 2017.
  8. TTB still promises action to adopt regulations implementing the Taxpayer Relief Act of 1997.  That NPRM now is scheduled to appear in April 2017.

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.

As it does twice per year, the Alcohol and Tobacco Tax and Trade Bureau (TTB) recently published its projected Regulatory Agenda as part of the federal government’s “Unified Agenda.”  Links to the U.S. Department of Treasury’s portions of the Unified Agenda appear below.

TTB’s latest contribution to the Unified Agenda lists six priority projects that it hopes to publish rulemaking notices on in 2016:

  1. Revise TTB’s import and export regulations to make them compatible with the International Trade Data System (ITDS).  ITDS aims to create a single electronic exchange portal for all import and export activities.  TTB expects to propose these new regulations by March 2016.
  2. Revise TTB’s labeling regulations for wine, distilled spirits, and malt beverages (beer) to eliminate outmoded, ineffective and excessively burdensome regulations.  TTB plans to propose these revised regulations for industry and public comment sometime before the end of 2016.
  3. Finalize new regulations on specially denatured and completely denatured alcohols.  Most notably, the new regulations would re-classify many specially denatured alcohol products as completely denatured alcohols – greatly reducing the amount of regulatory oversight over such products.  The final regulations would build off a Notice of Proposed Rulemaking published in June of 2013, and TTB expects to finalize these regulations shortly.
  4. Propose new regulations to permit the self-certification of flavors and other non-beverage articles as eligible for “drawback.”  By permitting industry self-certification, TTB would greatly reduce the number of regulatory filings required of the flavor, extract and fragrance industries.  TTB expects to publish proposed regulations before June 2016, coupled with a “Temporary Rule” permitting industry members to begin self-certification immediately.
  5. Revise the Distilled Spirits Plant (DSP) regulations to reduce the TTB-mandated monthly reports required by DSP operators from four to two.  $11,000 to $16,000.Already subject to a Notice of Proposed Rulemaking in 2011, TTB plans to press ahead with a “Supplemental” Notice by March 2016.
  6. Make an inflation-adjustment to the civil penalties for violations of the Alcohol Beverage Labeling Act of 1988, which mandated the now-familiar Government Warning on all alcohol beverage labels.  TTB plans to publish a Final Rule in 2016 to raise the maximum penalty for violations from $11,000 to $16,000.

In addition to the six priority items above, TTB’s portion of the Unified Agenda includes dozens of other rulemaking projects, from those completed in the most recent fiscal year to issues expected to be first raised in a rulemaking notice during the following year.  As with prior years, the industry must view TTB’s expected publication and completion dates with a great degree of caution, as resource challenges, political pressure and other factors often delay the rulemaking process.

Click here to view the Statement of Priorities.

Click here to view the All Treasury Agenda.

Late last year, the Alcohol & Tobacco Tax & Trade Bureau (TTB) published its semi-annual regulatory agenda in the Federal Register.  The agenda provides useful insights into TTB’s regulatory plans and goals for the coming year.  As in prior years, however, observers should recognize that TTB often announces ambitious regulatory plans and deadlines that it does not meet.

TTB identified five priority projects for 2015.  First, TTB wishes to update and modernize its regulations on the labeling and advertising of wine (Pt. 4), distilled spirits (Pt. 5) and beer (Pt. 7).  In describing the initiative, TTB seems most interested in simplification and streamlining, not in the imposition of significant new labeling and advertising requirements.  Second, TTB seeks to further de-regulate and streamline its oversight of denatured alcohol and rum, a move that could help the competitiveness of U.S. industrial operations that employ alcohol.  Third, TTB wishes to amend its export and import regulations to harmonize them with the International Trade Data System (ITDS), thereby transitioning to an all-electronic import and export environment.  Fourth, TTB hopes to implement self-certification of the formulas for flavors, extracts and other non-beverage products made with alcohol.  Fifth, TTB plans to review its distilled spirits plant regulations (Pt. 19) in order to replace the current four monthly report forms required for reporting with two forms.

Leaving priorities aside, the semi-annual agenda reports on a number of rulemaking initiatives that should attract the interest of regulated industry members.  This note will group the most significant based on the affected industry:

Multiple Alcohol Beverage Categories

  1. TTB pledges to publish a Notice of Proposed Rulemaking (NPRM) to modernize its wine, spirits, and beer labeling and advertising regulations.  As noted above, this is a 2015 priority item for the Agency.
  2. TTB plans to issue an NPRM late in 2015 to explore whether to retain, revise or repeal the current standards of fill requirements for both wine and distilled spirits.
  3. TTB plans to issue a Final Rule requiring the electronic submission of many applications, including those for original and amended basic permits.
  4. TTB expects to issue an NPRM in April 2015 to amend its import and export regulations to make them compatible with ITDS.  This is a 2015 priority item.

Wine Projects

  1. TTB hopes to issue an NPRM on certain wine terms that were first raised to the industry in an Advanced Notice of Proposed Rulemaking published by TTB in 2010.
  2. TTB plans an NPRM in July 2015 to propose authorizing additional treatments for use in winemaking.
  3. TTB expects to publish an NPRM late in 2015 to clarify the labeling of certain flavored wines.

Distilled Spirits Project

  1. TTB hopes to issue a supplemental NPRM late in 2015 to propose replacing the current four monthly forms filed by distilled spirits plant operators with two forms, thereby streamlining distillers’ reporting burdens.  TTB views this project as a 2015 priority.

Non-Beverage and Industrial Alcohol Projects

  1. TTB plans to issue an NPRM on the self-certification of non-beverage product formulas – a 2015 priority item – in July 2015.
  2. TTB believes it will finalize regulations to reclassify many specially denatured alcohol (SDA) formulas as completely denatured alcohol (CDA) and permit the use of more SDA formulas without the submission of an application to TTB.  This is another 2015 priority for the Agency.

Wine, Beer & Spirits Law 19th Annual National Conference
The Mayflower Renaissance Hotel
Washington, D.C.
September 18-19, 2014
Click here to register.
View the conference brochure.

McDermott Speakers
Marc E. Sorini, Partner, Program Co-chair
Arthur J. DeCelle, Counsel

Please join McDermott partner and program co-chair, Marc Sorini, at the Wine, Beer & Spirits Law 19th Annual National Conference on September 18-19, 2014.  This year’s program will bring direct access to experts in the alcohol beverage industry, including speakers from the Alcohol and Tobacco Tax and Trade Bureau, Beam Suntory, BLDS, the California Department of Alcohol Beverage Control, Diago North America, Dogfish Head Craft Brewery, E&J Gallo Winery, the Federal Trade Commission, Ippolito Christon & Co., New Belgium Brewing Company, New Jersey Office of the Attorney General, Department of Law and Public, Safety, Division of Alcoholic Beverage Control, Precision Economics, Virginia Department of Alcoholic Beverage Control, Washington State Liquor Control Board, and the Wine Institute, as well as speakers from many of the nation’s leading law firms.

Of particular note, Marc Sorini will make a  presentation titled, Federal Excise Tax Strategies and Tactics.  McDermott counsel Art DeCelle will be moderating a panel of representatives from the industry’s leading national trade associations to discuss “The Future of Federal Regulation of Alcohol.”

To view the full conference brochure, click here.  For more information and to register, please visit: http://cle.com/WashingtonDC.

The U.S. Food and Drug Administration (FDA) will publish its Preventive Control Rule for Feed next Tuesday, October 29, 2013.  The FDA’s Fact Sheet about the proposed rule can be found here.  The comment period is 120 days and comments accordingly should be due on or around February 26, 2014.  More information is available on the following FDA webpage: http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm366510.htm.

Quite notably, the FDA rule proposes to cover breweries and distilleries if they sell spent grain to farmers for use in animal feed.  This aspect of the rule could regulate hundreds of breweries, distilleries and ethanol plants as animal feed producers.  The rule does propose exempting smaller companies, suggesting between $.5 and $2.5 million in feed sales as the appropriate threshold for regulation.

Among other things, application of the proposed rule to a facility would require:

  1. a written food safety plan;
  2. hazard analysis;
  3. preventive controls for hazards that are reasonably likely to occur;
  4. recall plan for animal food with a hazard that is reasonably likely to occur;
  5. monitoring;
  6. corrective actions;
  7. verification; and
  8. associated record keeping.

The proposed rule also would establish specific good manufacturing practices (GMP) for animal feed.

Any brewer or distiller currently supplying spent grain for feed should pay attention to these proposed rules.  Participation in the comment period may reduce the impact of these regulations or obtain some exemption for the industry.  If those efforts fail, companies above the regulation’s size threshold (whatever that turns out to be) must either gear up to comply with these rules or consider new ways to dispose of their spent grains.

The U.S. Food and Drug Administration (FDA) has issued a final rule that defines what characteristics a food has to have to bear a label that proclaims it “gluten- free,” “without gluten,” “free of gluten” and “no gluten.”  The rule applies to all FDA-regulated alcohol beverages, which include wines (and ciders) below 7 percent alcohol by volume, and malt beverages that are not made with both barley and hops; but does not apply to alcohol beverages regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB), including all distilled spirits, wines that contain 7 percent or more alcohol by volume, and malted beverages that are made with both malted barley and hops.  The notice includes a commitment by the FDA to work with TTB to harmonize labeling issues.  The two agencies consult as needed under an interagency Memorandum of Understanding, and TTB may develop new guidance based on the FDA final rule.

For brewers, FDA intends to issue a proposed rule on gluten-free labeling of hydrolyzed and fermented foods (like beer).  This rule will address compliance when analytical methods are not available because the food is fermented or hydrolyzed or contains fermented or hydrolyzed ingredients.  FDA intends to address the “gluten-free” labeling of beers subject to FDA’s labeling requirements in that proposed rule.

In light of this, FDA will exercise enforcement discretion with respect to the requirements for “gluten-free” labeling for beers subject to FDA labeling requirements.  This will extend to beers that currently make a “gluten-free” claim and that are:  (1) made from a non-gluten-containing grain or (2) made from a gluten-containing grain, where the beer has been subject to processing that the manufacturer has determined will remove gluten.  This enforcement discretion pertains only to these beers subject to FDA labeling requirements that make a “gluten-free” claim as of August 5, 2013 pending completion of the rulemaking process with respect to fermented or hydrolyzed products.  To the extent that a beer manufacturer wants to make a new gluten-free claim that is not present on a label as of August 5, 2013, they should contact FDA regarding the possible expansion of FDA’s consideration for the exercise of enforcement discretion related to such labeling.

FDA expects beer manufacturers using a “gluten-free” claim to take appropriate measures to prevent cross-contact with gluten-containing grains during production, processing, storage or other handling practices.  Last, FDA notes that beer manufacturers whose beers are subject to FDA’s labeling requirements can make claims about the beer being processed to reduce gluten provided such statements are truthful and not misleading.  FDA cites as examples the statements in TTB’s interim policy on gluten content statements (“Product fermented from grains containing gluten and [processed or treated or crafted] to remove gluten.  The gluten content of this product cannot be verified, and this product may contain gluten.”)

For those interested in the application of FDA’s final rule to gluten-free claims about other FDA-regulated products, one of the criteria for using the claim “gluten-free,” is a gluten limit of less than 20 parts per million (ppm) in the food.

Gluten means the proteins that occur naturally in wheat, rye, barley and crossbreeds of these grains and that may cause adverse health effects in persons with celiac disease.

In addition to limiting the unavoidable presence of gluten to less than 20 ppm, FDA will allow manufacturers to label a food “gluten-free” if the food does not contain any of the following:

  1. an ingredient that is any type of wheat, rye, barley or crossbreeds of these grains;
  2. an ingredient derived from these grains and that has not been processed to remove gluten; and
  3. an ingredient derived from these grains and that has been processed to remove gluten, if the use of that ingredient results in the food containing 20 or more parts per million (ppm) gluten.

Labels for foods such as bottled spring water, fruits and vegetables, and eggs can state “gluten-free” if they inherently do not have any gluten.

The FDA regulation also preempts States and subdivisions from establishing any law or regulation that differs from FDA’s requirements for the definition and use of the claim “gluten free,” “no gluten,” “free of gluten” and “without gluten.”   The rule is scheduled to take effect in one year, i.e., in or about August, 2014.

Finally, as noted, FDA has said that it will continue to work with TTB and the U.S. Department of Agriculture (USDA) on the issue of gluten-free food labeling to harmonize the requirements for foods labeled gluten-free among the agencies whenever possible.

 

On June 27, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published a Notice of Proposed Rulemaking (NPRM) on specially denatured alcohol (SDA), completely denatured alcohol (CDA) and related amendments to federal regulations governing non-beverage “industrial” alcohol.  In the NPRM, the TTB makes a host of proposals to reduce regulatory burdens on the industrial alcohol industry and update regulations to align with current practice.

The NPRM contains a great many recommendations that you or someone on your staff should review with care.  Primary among the changes, however, are the following:

  1. Reclassifying two often-used SDA formulas, SDA # 12-A and SDA #35, as CDA formulas.  This change considerably reduces the regulatory burden associated with using these formulas.
  2. Issuing “general use” formulas for articles made with any of 15 SDA formulas.  Again, this change greatly reduces the regulatory burdens associated with using these SDA formulas.
  3. Issuing three new “general use” formulas for uses involving duplicating fluids, ink solvents and certain proprietary solvents.
  4. Authorizing the export of SDA by dealers, instead of only distilled spirits plants as currently authorized.
  5. Authorizing the export of articles that would not qualify for domestic distribution because they are not sufficiently denatured.  This change may substantially impact ethanol export operations, as some other countries’ standards for the denaturing of fuel alcohol are not as stringent as the TTB standard.
  6. Removing from the regulations SDA formulas no longer in use.

Taken together, the proposals represent a significant step towards simplifying TTB’s regulation of industrial alcohol production and distribution.  One can certainly envision a bolder liberalization, but in many instances Internal Revenue Code statutes prevent more radical changes to current regulations and policies.  Although not likely a high priority in today’s political environment, Congress would be wise to revisit those statutes, as many date back to Prohibition or just after repeal.

Current SDA and CDA producers and users should examine their current operations in light of the proposed regulations and should consider submitting comments to TTB, which are due on or before August 26, 2013.