Don’t look now cannabis businesses, but your neighbors may be raising a racket. A June decision by the 10th Circuit Court of Appeals in Denver may have opened the doors to new legal challenges to marijuana operations: civil suits under the Racketeer Influenced and Corrupt Organizations Act (RICO).

RICO was originally intended to go after the mafia and other organized crime, but its broad language means it can be applied in other settings. RICO allows a private citizen to sue “racketeers” for damage to business or property due to the racketeer’s illegal activities or activities that were conducted under his guidance. Since marijuana remains illegal under federal law, the production or distribution of marijuana is considered racketeering.

Continue Reading RICO Madness: Marijuana Operations Face RICO Challenges in Federal Courts

Connect with more than 100 professionals from around the country at the 22nd Annual Wine, Beer & Spirits Law Conference to be held September 14-15, 2017 in Portland, Oregon.  McDermott Partner Marc Sorini will co-chair the event and will speak on alcohol regulatory and distribution issues in the transactional context.  Other conference topics include TTB updates, trade practice developments, crisis management, trends in retailer liability, private label legal issues, and more.  You can view the conference agenda here.

Register today.

Yesterday, the en banc (full) Ninth Circuit Court of Appeals issued the attached opinion in the case of Retail Digital Network v. Prieto, No. 13-56069.

As you may recall, the Retail Digital Network 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 (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).  Then in January 2016, a panel of the Ninth Circuit reversed, holding that Actmedia is “clearly irreconcilable” with the Supreme Court’s 2011 opinion in Sorrell v. IMS Health Inc.  The panel accordingly would have remanded the case to the District Court for further proceedings under Sorrell’s allegedly more restrictive First Amendment standard.  But the state requested an en banc (full court) rehearing, which the court granted.

Continue Reading En Banc Opinion Could Set Precedent for Tied-House Laws

Most brewers are at least somewhat familiar with federal and state laws regulating the interrelationships between members of the different industry tiers. The most well-known are the “tied house” laws, which prohibit or severely restrict brewers or beer wholesalers from owning retail establishments (and vice versa), and substantially limit the ability of brewers or beer wholesalers to provide money, free goods, or other “things of value” to retailers.

Until recently, the laws prohibiting consignment sales in the alcohol beverage industry received little attention. But in the past 18 months, the settlement of two federal investigations involving the beer industry’s biggest players has focused new attention on the subject. This article will explain consignment sale laws in an effort to prevent brewers from inadvertently violating them.

Read the full article.

Originally published in The New Brewer, May/June 2017.

Late last month, the Texas Supreme Court issued a ruling in Cadena Comercial USA Corp. d/b/a OXXO v. Texas Alcoholic Beverage Commission, finding in favor of the Texas Alcoholic Beverage Commission (TABC) and weighing in for the first time on the application of Texas’ tied house law. In a 6-2 decision, the court upheld the TABC’s denial of a retail permit to a foreign corporation whose parent company also holds a 20 percent ownership interest in a foreign brewer.

Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA) holds both a 20 percent interest in the stock of two Heineken entities, as well as–through intermediate holding companies–100 percent of the ownership of Cadena Comercial USA Corp. (Cadena), a company that operates convenience stores. In 2011, Cadena sought licensing as a beer and wine retailer in Texas.  During the license application process, the TABC discovered FEMSA’s ownership of Cadena and interest in Heineken and rejected Cadena’s permit application on tied house grounds. Texas’ alcohol beverage laws define “tied house” as prohibiting any overlapping cross-tier ownership interest.

Upon the denial of its permit application, Cadena requested and received an administrative hearing before a county judge. At the hearing, the TABC’s director of licensing testified that that the TABC would consider even one overlapping share of stock across tiers to violate Texas’ tied house laws. (This principle is referred to as the “One Share Rule.”) The judge denied Cadena’s retail permit application, finding that because of Cadena’s interests in a brewer/manufacturer, issuance of the permit would violate the tied house laws. On appeal, both the district court and the court of appeals affirmed the denial of the permit.

Continue Reading Texas Supreme Court Weighs In on Tied House

With articles about the “magic” of turning employees into company owners popping up in the New York Times and The Atlantic last fall, Employee Stock Ownership Plans are becoming part of the mainstream vernacular. Referred to by those in the know as “ESOPs” (pronounced “ee-SAHP”), these specialty retirement plans are a popular—and tax effective—way for companies to manage succession planning. When structured properly, and ESOP can provide huge financial benefits to companies and their employees alike. According to the National Center for Employee Ownership, there are almost 7,000 ESOPs currently in place. About 10 million people—more people than currently love in the state of Washington—actively participate in an ESOP today.

There have been several craft brewers who have taken advantage of the ESOP structure in the past year and we expect this trend to pique the interest of craft distilleries. This article explores at a very high level some of the issues involved with starting and maintaining a craft distillery ESOP.

Read the full article.

Originally published in Artisan Spirit, Spring 2017.

The Alcohol and Tobacco Tax and Trade Bureau (TTB) recently notified holders of permits that were originally filed in paper of plans to move all permits to the Permits Online (PONL) system this fall. This could lead to substantial delays due to the volume of permits included.  Industry members who wish to submit requests ahead of that time can send their information (EIN, Permit and Registry Numbers) to Permits.Online@ttb.gov and enter Permits Online Data Load in the subject line of the email. Filing amendments electronically has historically been significantly faster using TTB’s PONL system.

In mid-April, the Federal Trade Commission (FTC) sent out 90 letters to advertisers, celebrity endorsers and influencers who use their fame and the power of digital advertising to help promote products.  The facts in each letter vary, but the FTC’s message was a strong reminder that clear and conspicuous disclosure is required if a “material connection” exists between and endorser and the marketer of a product.

Typically, the marketer is a manufacturer, importer or an advertising agency that establishes a relationship with an endorser.  In 2009, the FTC created endorsement guides to ensure that consumers are on notice that an endorser or influencer is being compensated by a marketer.  In 2015, the FTC published an Enforcement Policy Statement on Deceptively Formatted Advertisements.  Those sources provide straightforward guidance to inform consumers that an endorser is acting on behalf of a marketer and to differentiate advertising from truly independent news or reviews of products.

Throughout history, producers of consumer goods marketed their wares with endorsements from famous people and “satisfied consumers.”  Social media provides an enormous boost to the most ancient form of marketing, “word of mouth.”  An image of your product with a celebrity or the perfect “ordinary consumer” in a creative setting can quickly go viral to millions of consumers or receive hundreds of thousands of likes on Facebook.

All ads should be truthful, targeted appropriately, and compliant with industry codes.  If appropriate, ads should also be clearly identified as paid endorsements or advertising material to reduce the risk of consumer deception.  These principles are especially important in the digital domain where viewers tend to move rapidly from one destination to another.

A successful ad that includes use of celebrities or influencers should meet the FTC’s standards to avoid future enforcement initiatives.  The reputation of the advertiser and endorser as well as the integrity of the brands should not be placed at risk by the failure to include clear and conspicuous notices or disclaimers.  Congress granted the FTC broad jurisdiction to police deceptive ads.  The FTC’s guidance has now been around long enough to be on the checklist of every advertiser—particularly those under pressure to publish the next iconic image on Facebook or Instagram!

On March 30, eight bills were introduced by senior members of Congress from both parties to legalize, regulate and tax marijuana. The bills were referred to at least five House Committees, as they address federal criminal law, taxation, banking, transportation, immigration, veterans’ affairs, access to federal benefits and other issues. The legislative activity follows establishment of the Congressional Cannabis Caucus in February. Leaders of the new caucus represent four of the eight states where voters have approved recreational use of marijuana by adults.

In the initial press conference held by Cannabis Caucus members and in statements explaining the new legislation, House and Senate members made frequent reference to laws regulating alcohol beverages. Bills introduced earlier in the current session of Congress also call for state-by-state regulation using language similar to the Section 2 of the Twenty-first Amendment, which authorized each state to regulate the delivery and use of “intoxicating liquors” within its borders.

The failure of national Prohibition of alcohol beverages is often cited as a rationale to legalize recreational marijuana use. Before proceeding toward wider legalization, policymakers should gain a deeper understanding of the history of Prohibition and the regulatory scheme that emerged after repeal. Government regulation is necessary in a complex and pluralistic society of 320 million, but effective marijuana regulation is a tall order.

Continue Reading Legal, Political and Practical Challenges in Regulating Recreational Marijuana

Arthur DeCelle wrote this bylined article describing how brewers can use product labels, point of sale (POS) advertising, social networks, and other media to tell customers about their environmental responsibility efforts. Such information “must be truthful and substantiated by evidence [and] must not be deceptive to reasonable consumers,” Mr. DeCelle wrote, urging brewers to “carefully consider the language you use and any potential for consumer deception [regarding] false or deceptive environmental claims.”

Read the full article.

Originally published in New Brewer, March/April 2017.