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Trade Practices

Eighth Circuit Hints at Unconstitutionality of Missouri Restrictions on Alcohol Advertising

by McDermott Will & Emery | Jan 24, 2017 | Advertising and Marketing, Trade Practices

Last week, the US Court of Appeals for the Eighth Circuit weighed in on the legality of restrictions on alcohol advertising under the First Amendment, issuing an opinion in Missouri Broadcasters Association v. Lacy that could eventually broaden free speech protections for alcohol beverage advertisements. After the lower court granted defendants’ motion to dismiss and plaintiffs appealed, the Eighth Circuit reversed the district court’s dismissal, finding that plaintiffs’ claim alleging the unconstitutionality of a Missouri statute and two regulations should be heard.

The case concerned three Missouri provisions – two regulations and a statute – that restrict the advertising of alcohol beverages:

a regulation prohibiting retailers from advertising price discounts outside of the licensed premises (but allowing the advertising of discounts by using generic descriptions (e.g., “Happy Hour”), as well as the advertising of specific discounts within the licensed premises);
a regulation prohibiting retailers from advertising prices below cost; and
a statute requiring manufacturers and wholesalers choosing to a list a retailer in an advertisement to exclude the retail price of the product from the advertisement, list multiple unaffiliated retailers and make the listing relatively inconspicuous.

Plaintiffs – a broadcasting industry group, radio station operator, winery and retailer – sued Missouri’s supervisor of liquor control and attorney general, alleging that the three provisions are facially invalid under the First Amendment in that they prohibit truthful, non-misleading commercial speech, are inconsistently enforced by the state and the challenged statute unconstitutionally compels speech.

To state a claim that a statute is facially unconstitutional under the First Amendment, Supreme Court precedent instructs that plaintiffs must show that there are no set of circumstances under which the challenged provision would be valid, or that a substantial number of the provision’s applications are unconstitutional. Alcohol beverage advertisements involve commercial speech, which receives less protection under the First Amendment than other constitutionally protected forms of expression. In Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980), the Supreme Court articulated a four-part test for determining the constitutionality of laws restricting commercial speech: whether (1) the speech concerns lawful activity and is not misleading; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is no broader than necessary to further the governmental interest.

Applying the third and fourth factors of the Central Hudson test (plaintiffs and defendants agreed on the first two factors of the test), the court found that the facts plaintiffs alleged were “more than sufficient” to state a plausible claim. First, the court opined, plaintiffs made sufficient allegations that the challenged provisions do not directly advance Missouri’s substantial interest in promoting responsible drinking. Although defendants argued that a link exists between advertising promotions and increased demand for alcohol beverages, the court noted that “multiple” inconsistencies in the regulations demonstrate that the regulations do not advance Missouri’s interest in promoting responsible drinking. Likewise, the court determined, plaintiffs pled sufficient facts to support [...]

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Texas Court of Appeals Hands Down Instructive Administrative Law Opinion

by McDermott Will & Emery | Dec 29, 2016 | Distribution, Trade Practices, TTB COLAs and Formulas

A recent Texas Court of Appeals decision, EATX Coffee, LLC v. Texas Alcoholic Beverage Commission, provides an important reminder of how principles of administrative law may check the current trend towards “regulation by Internet.” Ct. of App of Texas, 4th Dist., No. 04-16-00213-CV (Dec. 7, 2016). Like TTB and many other state alcohol beverage authorities, the Texas Alcoholic Beverage Commission (TABC) periodically publishes “Question and Answer” (Q&A) documents purporting to interpret the Texas Alcoholic Beverage Code.

The EATX opinion arose from a challenge of two particular Q&A’s that, in effect, banned the filling of “crowlers” by Texas beer and wine retailers. A crowler is an aluminum can that a retailer can fill with beer and seal for consumers to take away from the retail premises. While TABC has declared that retailers may fill and sell “growlers” of beer (large bottles filled and sealed by retailers), the TABC’s Q&A’s declared the filling of crowlers to constitute manufacturing – an activity that a retailer cannot engage in without a manufacturing license. (And, of course, under state tied house laws a retailer generally cannot lawfully obtain a manufacturing license).

EATX, having invested in crowler equipment and facing disciplinary action over its filling and sale of crowlers, filed a lawsuit against the TABC seeking a declaration that TABC’s Q&A’s were wrong because the filling of a crowler does not constitute manufacturing. EATX also sought an injunction against enforcement. In response, TABC asserted that the Q&A’s were not a “rule” and therefore the trial court lacked jurisdiction to hear a challenge to the Q&A’s, and also asserted that EATX failed to exhaust the administrative remedies it could raise in defense of a TABC disciplinary action against EATX’s retail license.

The Texas Court of Appeals, 4th District, reversed. Reviewing the Q&A’s, the Court of Appeals concluded that: (1) they are of general applicably as they purport to apply to all retail permit holders; (2) they interpret the law and do not simply re-state it; (3) they do not affect only TABC’s internal management or organization. As such, the Q&A’s constitutes a “rule” within the meaning of Texas’ Administrative Procedures Act and the trial court had jurisdiction to hear the case and grant relief. Turning to exhaustion, the Court of Appeals found no authority for the proposition that a litigant aggrieved by the promulgation of a rule must instead wait and raise its arguments in an action brought to cancel, suspend or refuse to renew its license. In short, EATX can have its day in court.

Given the declining use of notice-and-comment rulemaking by TTB and most state alcohol regulatory agencies, the use of Q&A’s, “FAQs,” “advisory bulletins,” “industry memoranda,” and similar informal policy documents has been rising for decades. While such expedients may help move policy forward in a quicker, less resource-intensive (for the agency) manner, the EATX opinion stands as a useful reminder to regulators that this approach has limits.

US Supreme Court Asked to Clarify the Interaction Between the 21st Amendment and the Commerce Clause

by McDermott Will & Emery | Oct 13, 2016 | Distribution, Trade Practices, Uncategorized

The Texas Package Stores Association has asked the US Supreme Court (via a “Petition of Certiorari”) to hear a case that could clarify the interaction between the 21st Amendment and the non-discrimination between states principle of the “dormant” Commerce Clause.

The case arose in Texas, where the Court of Appeals for the Fifth Circuit ultimately held that the Supreme Court’s Granholm v. Heald (2005) decision did not limit the reach of the Commerce Clause in alcohol cases to situations where a state discriminates against producers or products. Decisions by two other federal Court of Appeal’s Circuits (the Second and the Eight) have expressly limited Granholm’s reach to discrimination against producers and products. Thus, the Texas Package Stores Association would like the Supreme Court to reverse the Fifth Circuit and explicitly limit the non-discrimination principle of Granholm to cases involving alcohol products and producers.

The Supreme Court hears only a small fraction of the cases brought before it on a Petition of Certiorari, so the chances that the Supreme Court ultimately reviews the Fifth Circuit’s decision remain low. Nevertheless, the existence of a “split” of opinion between different federal Courts of Appeal increase the chances of Supreme Court review.

The BA’s Growing Influence on Capitol Hill

by Arthur J. DeCelle and David Ransom | Sep 29, 2016 | Alcohol Excise Taxes, Distribution, Trade Practices, TTB COLAs and Formulas

How is it that the Brewers Association—an organization that has no political action committee, has employed a staff lobbyist for only 18 months, and has only had a strong presence in Washington since 2009—has gained significant traction among policymakers in the nation’s capital?

The BA is now a serious player in Washington. That is not by accident; it’s a carefully conceived strategy implemented by the BA board and senior staff—including president and CEO Bob Pease—over the last seven years that seeks to leverage the inherent strengths of America’s small craft brewers.

Read the full article, originally published in the September/October 2016 issue of The New Brewer.

Guidance Provided on Interplay of “Dormant” Commerce Clause and the 21st Amendment

by McDermott Will & Emery | May 4, 2016 | Distribution, Trade Practices

On April 21, the US Court of Appeals for the Fifth Circuit handed down its opinion in Cooper v. Texas Alcoholic Beverage Commission, No. 14-51343. It provides further guidance, at least within the Fifth Circuit, on the interplay of the “dormant” Commerce Clause and the 21st Amendment following the Supreme Court of the United States’ oft-cited decision in Granholm v. Heald, 544 US 460 (2005).

The case arose when the Texas Package Store Association attempted to revisit the Fifth Circuit’s two-decade old decision in Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1994). Cooper v. McBeath permanently enjoined the Texas Alcoholic Beverage Commission (TABC) from enforcing certain residency requirements imposed on wholesalers and retailers by the Texas Alcoholic Beverage Code. In that decision, the Fifth Circuit decided that the residency requirement was a protectionist measure and therefore unconstitutional under the so-called “dormant” Commerce Clause of the US Constitution.

In 2014, the Texas Package Store Association (TPSA) moved for relief from the Cooper v. McBeath injunction, arguing that Granholm and its progeny undermined the earlier decision’s reasoning. The district court ruled that the TPSA lacked standing to seek relief, although it also suggested that TPSA’s motion for relief should be denied on the merits.

In last month’s Cooper v. Texas Alcoholic Beverage Commission decision, the Fifth Circuit concluded that TPSA had standing to seek relief from the Cooper v. McBeath injunction, but then held that TPSA’s motion should be denied on the merits. Laying out the standard for relief as whether Granholm and its progeny represent a “significant change in decisional law,” the Fifth Circuit concluded that no significant change had occurred.

The Fifth Circuit begins its analysis by noting that Granholm expressly refused to overrule prior cases holding that the Commerce Clause qualified states’ rights under the 21st Amendment. TPSA argued that the statement in Granholm labeling the three-tier system “unquestionably legitimate” essentially removed Commerce Clause protections from state laws dealing with the wholesale and retail tiers of the industry. Characterizing that language in Granholm as “dictum,” the Fifth Circuit rejected TPSA’s argument as “unconvincing.” Refusing to follow an Eighth Circuit decision that embraced logic similar to the argument advanced by TPSA, the Fifth Circuit instead relied on its own decision in Wine Country Gift Baskets.com v. Steen, 612 F.3d 809 (5th Cir. 2010). Thus “state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.” Instead, although the 21st Amendment permits a state to impose a physical-residency requirement that may favor in-state businesses, it may not impose “a durational-residency requirement on the owners of alcoholic beverage retailers and wholesalers.” (Quoting Cooper v. McBeath, emphasis in original).

The Fifth Circuit accordingly reasoned that nothing in Granholm and its subsequent application represent a significant change in the law. It therefore reversed the decision of the district court and directed it to enter an order denying on the merits TPSA’s motion for relief.

Cooper v. Texas Alcoholic Beverage Commission [...]

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Join McDermott Partner Marc Sorini at the Annual Craft Brewers’ Conference

by Emily Townsend | Apr 26, 2016 | Advertising and Marketing, Distribution, Trade Practices

The annual Craft Brewers’ Conference will be held on May 3-6, 2016 in Philadelphia, PA. McDermott partner, Marc Sorini will give two presentations:

Wednesday, May 4, 1:20-2:20 pm: Marc will kick off his annual government affairs presentation by summarizing the results of recent research to be published in The New Brewer proving that no legally-mandated three-tier system existed immediately following the repeal of Prohibition. He then will provide an update on the biggest legal issues facing the industry during the past year, including recent tied-house/trade practice activities, the false advertising class actions and a distribution update.
Friday, May 6, 1:55-2:55 pm: Marc will join two other lawyers and moderator Bill Covaleski of Victory Brewing to explore the issue of beer “franchise law” reform.

For more information or to register, please visit https://www.craftbrewersconference.com/.

Tied House Laws and Category Management: A Continuing Quandary

by Arthur J. DeCelle | Mar 18, 2016 | Advertising and Marketing, Distribution, Trade Practices

On March 16, the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) published a list of frequently asked questions expanding further on a ruling issued in February on application of the federal “tied house law” to industry promotional activities, specifically category management practices employed by retailers.

TTB claims that a formal rulemaking to revise its tied house regulations is not necessary: “TTB Ruling 2016-1 merely provides guidance as to the plain meaning of the existing regulation under 27 CFR 6.99(b). It does not change TTB’s longstanding position, nor does it change the meaning of the plain language of this regulatory exception.” So let’s look at the plain language:

The act by an industry member [supplier or wholesaler] of providing a recommended shelf plan or shelf schematic for distilled spirits, wine, or malt beverages does not constitute a means to induce within the meaning of section 105(b)(3) of the [Federal Alcohol Administration (FAA)] Act.

That statement on its face is an open-ended authorization to provide shelf schematics. It says nothing about the products of other industry members or whether the plan is written on a napkin or in a sophisticated IT system that is used for inventory management at hundreds of stores. (more…)

TTB Issues Ruling on Category Management under Federal Tied-House Statute

by McDermott Will & Emery | Feb 12, 2016 | Advertising and Marketing, Trade Practices

Today the Alcohol & Tobacco Tax & Trade Bureau (TTB) released TTB Ruling 2016-1 (Ruling), addressing category management practices. The Ruling seeks to clarify TTB’s position toward category management under the federal tied-house statute and regulations, which generally prohibit an alcohol beverage supplier or wholesaler from providing a “thing of value” to alcohol beverage retailers.

The federal tied-house statute and the TTB regulations implementing that provision require TTB to show both an “inducement” of a retailer leading to “exclusion” of competing products for TTB to find a tied-house violation. TTB regulations also list specific activities that are exceptions to the general rule that providing anything of value to a retailer constitutes an “inducement.” Those exceptions include shelf schematics. See 27 C.F.R. § 6.99(b).

Ruling 2016-1 recites the history of the shelf schematics exception and exhibits an element of “buyer’s remorse,” as the narrative suggests that TTB’s predecessor, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), discounted the possibility of abuses that TTB seems to believe are occurring today. The Ruling then makes it clear that TTB will strictly interpret the schematics regulation as applying only to the schematics themselves, and not “additional services.” Current category management practices often involve other activities not directly linked to the provision of shelf schematics, although these other activities (at least arguably) relate to developing, creating and updating shelf plans. Ruling 2016-1 lists the following examples of “additional services” that may prompt TTB scrutiny:

Assuming a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s product;
Receiving and analyzing confidential and/or proprietary competitor information for a retailer;
Furnishing to a retailer market data from third party vendors;
Providing follow-up services to monitor and revise schematics that involve communicating with a retailer’s stores, vendors, representatives, wholesalers and suppliers concerning daily operational matters; and
Furnishing a retailer with human resources to perform merchandising or other functions, with the exception of stocking, rotation or pricing as permitted by TTB regulations.

Ruling 2016-1 does not provide significant guidance on when category management services may lead to the exclusion of competing products. Instead, the Ruling generally repeats and/or cites to TTB’s exclusion regulations, which were adopted in the mid-1990s.

In short, Ruling 2016-1 provides only modest specific guidance to the industry. It does, however, signal quite clearly that TTB will likely direct enforcement resources at current category management practices.

Ninth Circuit Opinion Calls into Question Constitutionality of California Tied-House Laws

by McDermott Will & Emery | Jan 8, 2016 | Advertising and Marketing, Trade Practices

On January 7, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Retail Digital Network, LLC v. Appelsmith, overruling longstanding Ninth Circuit precedent concerning the legality of certain restrictions on alcohol beverage advertising under the First Amendment and opening the door to part of California’s tied-house scheme potentially being declared unconstitutional. The case concerns the legality of sections of California’s tied-house laws, California Business and Professions Code Section 25503(f)-(h), which prohibit manufacturers and wholesalers (and their agents) from giving anything of value to retailers in exchange for advertising their products. Retail Digital Network, LLC (RDN), which installs advertising displays in retail stores and contracts with parties to advertise their products on the displays, sought a declaratory judgment that Section 25503(f)-(h) violated the First Amendment after RDN’s attempts to contract with alcohol manufacturers failed due to the manufacturers’ concerns that such advertising would violate these tied-house provisions.

The district court found Section 25503(f)-(h) constitutional under a Ninth Circuit case from 1986, Actmedia, Inc. v. Stroh, in which the court upheld Section 25503(h). The Actmedia court applied the intermediate scrutiny test on commercial speech regulation articulated by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980). The Central Hudson test looks at whether: (1) the speech is not misleading and concerns lawful activity; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is not broader than necessary to serve the governmental interest. RDN argued that subsequent Supreme Court decisions – Rubin v. Coors Brewing Co. (1995), 44 Liquormart, Inc. v. Rhode Island (1996), and Sorrell v. IMS Health, Inc. (2011) – overrule Actmedia.

The Ninth Circuit determined that Actmedia is “clearly irreconcilable” with Sorrell – a difficult standard to meet. (The court did not find Coors or 44 Liquormart to have undermined the reasoning of Actmedia as these cases involved complete bans on certain commercial speech, which Section 25503 is not.) Sorrell required “heightened judicial scrutiny” (rather than the intermediate scrutiny applied by the Actmedia court) of restrictions on non-misleading, content- or speaker-based commercial speech about lawful products.

Such heightened scrutiny may be applied using the Central Hudson test, the Ninth Circuit found, but the court must further focus on the consistency between the government’s asserted interest under the second Central Hudson prong and the legislative purposes that “actually animated” the challenged law. In articulating its decision, the court noted that other federal circuit courts of appeal have agreed that Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech.

The court reversed the lower court’s grant of summary judgment to the California Department of Alcoholic Beverage Control (ABC) and remanded the case to the district court to apply heightened judicial scrutiny to the statute. Specifically, the court advised the lower court to consider whether the ABC has shown a real danger of paid advertising of alcohol beverages leading to [...]

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European Court of Justice Rules that a Scottish Law Establishing Minimum Unit Pricing for Alcoholic Drinks May Violate EU Law

by McDermott Will & Emery | Dec 29, 2015 | Trade Practices

On 23 December 2015, the Court of Justice of the European Union (ECJ) – Europe’s highest court – ruled that a Scottish law establishing minimum unit pricing for alcoholic drinks may violate European Union law.

The case dealt with the The Alcohol (Minimum Pricing) (Scotland) Act 2012 (2012 Act), which imposes minimum unit pricing (MPU) on the retail sale of alcohol beverages in Scotland.

The stated purpose of the 2012 Act is to protect human life and health by increasing the price of low-cost, high-strength alcohol beverages, with a view to decreasing consumption. To achieve this objective, the 2012 Act and a subsequent 2013 order prescribed that the MPU for alcohol beverages would be 0.50 GBP. The minimum sale price for alcohol beverages would then be determined by a formula that included the MPU as well as the strength and volume of the alcohol beverage.

The 2012 Act was challenged in court in Scotland, and its implementation has been delayed pending the outcome of the case. In the course of the proceedings, the Inner House of the Court of Session (the Scottish Court) referred to the ECJ certain questions concerning the interpretation of EU law. In particular, the Scottish Court asked whether the effect of the 2012 Act is to restrict the free movement of goods – a cornerstone of EU law – and if so, whether this can be justified in order to protect human life and health. The Scottish Court also asked whether the 2012 Act can be justified when alternative tax measures are available, which would not impact the free movement of goods to the same extent.

Responding to those questions, the ECJ ruled that:

The 2012 Act is likely to impede access to the UK market for alcoholic products produced in other EU Member States, and thus restrict the free movement of goods. Nevertheless, such a restriction may be permissible as long as it is an appropriate means of protecting human life and health and is proportionate to this objective.

In this respect, the ECJ ruled that a Member State cannot reject alternative measures (g., taxation measures) that may achieve the same objective and “may be less restrictive of trade and competition within the European Union.” The ECJ observed that a tax measure that increases the overall price of alcohol beverages could also protect human life and health, while still allowing suppliers the freedom to establish their prices. This suggests that the 2012 Act may not be seen as proportionate to its objective.

Ultimately, in light of the ECJ’s interpretation, it is for the Scottish Court to determine whether the MPU is justified.

The ECJ’s decision expresses a clear view that the 2012 Act restricts the freedom of goods, and that it may not be justified since other, less restrictive measures – e.g., excise taxes – could achieve the same health of objective, while not impeding trade and competition. This will undoubtedly create hurdles for proponents of the 2012 Act. [...]

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