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.

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

In an article published by The New Brewer, Marc Sorini discusses five issues most likely to have a meaningful impact on craft brewers in the coming years, including:

  1. The Craft Beverage Modernization and Tax Reform Act’s (CBMTRA) new tiered excise tax rate structure, its extending benefits to foreign producers, and its authorization for brewers to transfer beer in bond between breweries of different ownership.
  2. The Sixth Circuit’s published opinion in Byrd v. Tennessee Wine and Spirits Retailers Association, affirming a decision finding that the “durational-residency” requirements imposed by Tennessee law for alcohol beverage retail licensees are unconstitutional under the “dormant” Commerce Clause.
  3. The TTB’s creation of a new unit within its Trade Investigations Division to focus on trade practice enforcement.
  4. The opinion in Mission Beverage Co. v. Pabst Brewing Co. from the California Court of Appeals, which found that “an existing distributor’s receipt of the ‘fair market value of the affected distribution rights’ under [the California statute] does not necessarily make that distributor whole.”
  5. The US District Court for the Northern District of California’s decision in a putative class action alleging that the labeling and marketing of a successful California-based craft brewery was false and deceptive.

Access the full article.

Originally published in The New Brewer, May/June 2018.

The Food and Drug Administration (FDA) is extending the compliance dates for updating the familiar Nutrition Facts labels, from July 26, 2018 to January 1, 2020, for manufacturers with $10 million or more in annual food sales. Manufacturers with less than $10 million in annual food sales will receive an extra year to comply – until January 1, 2021.

FDA explained that after considering a range of stakeholder comments, there was a need for manufacturers to have additional time to make required label changes. The approximately 18-month extension accomplishes this goal and will provide sufficient time to transition to the new version of the Nutrition Facts label. Finally, FDA said it is committed to ensuring that all manufacturers have guidance to help implement the required label changes by the upcoming compliance dates and the additional time will help FDA achieve that objective.

This month, the United States District Court for the Northern District of California issued an opinion in Arena Restaurant and Lounge, Inc. v. Southern Glazer’s Wine and Spirits, No. 17-CV-03805-LHK. The Arena case, also called Nguyen after its original named Plaintiff, seeks to certify a class action against Southern Glazer’s for a wide range of allegedly fraudulent, deceptive, and otherwise illegal acts related to the sale and distribution of wine and spirits in California. The court’s recent order, issued on April 9 and amended on April 16, 2018, dismisses all claims brought by the Plaintiffs in their Second Amendment Complaint (SAC). Significantly, however, the court will allow the Plaintiffs to file an amended complaint within 30 days in an attempt to cure defects in many of the SAC’s claims.

At the center of the Arena case are allegations that Southern Glazer’s engaged in practices such as selling to unlicensed persons and hiding such sales by recording them as sales to licensed retailers like the Plaintiffs. These “phantom” sales, in turn, allegedly created tax problems for the Plaintiff retailers. The SAC also alleges price discrimination between different retailers, selling to retailers without delivering the inventory in order to meet sales quotas, engaging in giveaways of free product to retailers, engaging in illegal “tie-in sales” practices, and a host of other alleged wrongs. The SAC packages these wide-ranging allegations into no fewer than eleven claims for relief.

Continue Reading District Court Dismisses Pending Trade Practice Case, With Leave to Amend

Changes in Administration and other political shifts can have subtle and, occasionally, not-so-subtle influences in the Alcohol and Tobacco Tax and Trade Bureau (TTB) policies and priorities. In the article, “TTB in a Deregulatory Mood” published by Artisan Spirit, Marc Sorini explores how the Trump Administration’s desire to reduce regulatory burdens on business has already influenced TTB’s regulatory priorities. Particularly, in the most recent “Unified Agenda,” a bi-annual compilation of federal regulatory initiatives, TTB placed a priority on deregulatory projects, several of which would alter the regulatory environment for the industry. Marc discusses how the change in administration appears to have an effect on TTB’s rulemaking efforts.

Access the full article.

Originally published in Artisan Spirit, Spring 2018.

On March 20, 2018, a federal district court in Texas issued an opinion in Deep Ellum Brewing, LLC, et al. v. Texas Alcoholic Beverage Commission. The court delivered a blow to Texas craft brewers, upholding Texas’ prohibition on sales of beer by brewers to consumers for off-premises consumption.

Texas authorizes the manufacture and sale of beer by persons holding a: (1) brewer’s permit (allowing the production of beer of more than 4% alcohol by weight (ABW)); (2) manufacturer’s license (allowing the production of beer of 4% ABW or less); or (3) brewpub license. Like many states, Texas’ alcohol beverage laws mandate separation among the three tiers of the alcohol industry: manufacturing, wholesaling and retailing. The three-tier laws generally require alcohol beverages to be sold from manufacturers to wholesalers, from wholesalers to retailers, and finally from retailers to consumers.

Continue Reading Federal District Court Rejects Craft Brewers’ Equal Protection and Due Process Challenge of Texas’ Ban on Brewer Off-Premises Retailing

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

Two sections of Craft Beverage Modernization and Tax Reform Act (CBMTRA) that were dropped from the 2017 federal tax reform law were subsequently added to the Bipartisan Budget Act of 2018, signed into law by President Trump on February 9, 2018.

The new law mandates a temporary (two year) change in tax recordkeeping requirements for domestic breweries to eliminate duplicate reports and accounting obligations for breweries that have pub and sampling areas. The intent of the new law is to allow brewers to keep one set of books covering (a) beer removed from brewery for sale for distribution to retailers and (b) beer sold or provided for sampling to consumers at a brewery. Existing regulations and policies led to unnecessary complexity in accounting for brewers and for auditors from the Alcohol and Tobacco Tax and Trade Bureau (TTB). While the recordkeeping changes are required for calendar years 2018 and 2019, TTB may be able to make changes in regulations and policies that will provide permanent relief from unnecessary administrative burdens. Continue Reading 2018 Federal Budget Legislation Provides Breweries with Administrative Relief and Acknowledges 21st Amendment

On November 7, the US Food and Drug Administration (FDA) published the latest in a series of industry draft guidance documents to help implement menu labeling and nutrient disclosure regulations applicable to chain restaurants (Draft Guidance). FDA guidance documents are advisory in nature and represent the views of the FDA at a given point in time. Accordingly, guidance is subject to change, but is useful for developing a compliance plan for retail establishments covered by the menu labeling regulations. Changes are usually incremental and based on agency experience and input from regulated industry members.

The FDA established a 60-day period for comments on the draft menu labeling and nutrient disclosure guidance. The comment period ends on January 6, 2018.

The current compliance date for menu labeling and nutrient disclosure regulations is May 7, 2018.

Implementation of federal menu labeling and nutrient disclosures by chain restaurants is a study in modern American political and administrative processes. For those who already tried to comply with the formal FDA regulations and prior guidance, an explanatory note about delays in the administrative process appears at the end of this post.

Two sections of the Draft Guidance explicitly address alcohol beverages.

  • Guidance is offered for beer lists on menus and the discussion has broader application to wine and spirits products and cocktails that are standard menu items on chain restaurant menus.
  • Sources of nutrient information for beer, wine and spirits are also discussed to provide an alternative to expensive laboratory testing for each brand that a manufacturer offers.

The Draft Guidance also:

  • Includes several plain-language explanations of key terms in FDA regulations with useful distinctions between regular menu items and season or special items;
  • Displays a number of graphics designed to assist retailers with standardized formats to communicate calorie content of various foods to consumers and to distinguish menus from marketing materials;
  • Directs manufacturers and retailers to reliable sources and methods to prepare and display compliant nutrient disclosures; and
  • Provides information on presentation of mandatory standard menu notices alerting consumers to the federal government’s recommended 2,000 calorie diet and availability of nutritional information for standard menu items upon request to a server or manager at a retail establishment.

The FDA guidance and the formal regulations use subjective terms about legibility (e.g., contrasting, clear and conspicuous). Those terms aim to ensure that information is consumer-friendly, but they could lead to nuisance complaints from regulators. FDA regional personnel and local inspectors under contract with the FDA will monitor compliance with menu labeling regulations. Since chains will, by nature, have locations in multiple jurisdictions, consistency in enforcement poses a challenge to industry and government.

To mitigate regulatory risks, a conservative approach is advisable to mandatory disclosures. All aspects of calorie and nutrient disclosure should be reviewed by counsel or a knowledgeable compliance professional. The review should start with the manner used to ascertain calories and nutrients and continue through preparation and publication of new and easy-to-read menus and nutrient disclosures. While the regulations will inevitably lead to a standardized portion of chain menus, the Draft Guidance does not inhibit traditional point-of-sale marketing materials, graphics and other creative elements in a menu or associated marketing materials.

Why has menu labeling taken so long?

  • Menu labeling and nutritional disclosure requirements for chain restaurants are mandated by Congress in the Affordable Care Act of 2010 (better known as Obamacare).
  • A four-year rulemaking process on menu labeling ended with publication of a final rule on December 1, 2014. That rule is unchanged as of November 2017, and is found at 21 CFR 101.11.
  • A protracted debate occurred over the complexity of the rule and practical issues for food retailers who are responsible for compliance.
  • In 2015, Congress enacted an appropriations bill, which included a “policy rider” ordering the FDA to not to spend money on implementation and enforcement of the final rule until one-year after publication of a guidance document. Because appropriations bills deal with funding and not substantive policy, Congress provided no additional guidance to the FDA to clarify issues raised in the rulemaking and public controversies surrounding menu labeling.
  • The FDA published a “final guidance document” on May 5, 2016, with a new compliance date of May 5, 2017. Controversy continued, and the FDA extended the implementation date again to May 7, 2018.
  • The November 2017 draft FDA guidance document discussed above could be revised again following the 60-day comment period.
  • The compliance date remains May 7, 2018 unless extended again by the FDA or delayed by additional Congressional action.