ALCOHOL LAW ADVISOR
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry

Don’t Assume Nonalcoholic Beverage Ingredients Are OK for Alcoholic Beverages

by and | Feb 5, 2024 | , ,

As we enter 2024, more and more brands are joining the nonalcoholic beverage space. An increasing variety of nonalcoholic, single-serve, ready-to-drink beverages are marketing the innovative use of indigenous botanicals, herbs or novelty ingredients found in other foods. This innovation has led to product development teams exploring the use of those ingredients for their alcoholic beverage products, but in many instances those ingredients have not been used in or approved for alcoholic beverages in the United States by the Alcohol and Tobacco Tax and Trade Bureau (TTB), leading to challenges with obtaining formula approvals.

BACKGROUND

As a reminder, the TTB requires that all ingredients added to an alcoholic product be determined generally recognized as safe (GRAS) for use in alcohol. If the TTB finds that a product’s ingredient is not GRAS, it can cause significant delays for your product’s market launch. Currently, the TTB’s GRAS determination relies directly on the advice and approval of the ingredient’s use in alcoholic beverages by the US Food and Drug Administration (FDA).

In line with the historic Memorandum of Understanding (MOA) between the two agencies, the FDA (not the TTB) is responsible for determining which ingredients are prohibited from use in food and/or beverage products under the US Federal Food, Drug, and Cosmetic Act. These include food additives, such as substances added intentionally to food, and color additives. The TTB is authorized by law to utilize the services of a government department or agency to carry out its powers and duties under the Federal Alcohol Administration Act. Pursuant to its MOA with the FDA, the TTB regularly consults with the FDA regarding the approval of ingredients in alcoholic beverages and the requirements of label disclosure for certain substances. The TTB’s Beverage Alcohol Laboratory also analyzes alcoholic beverage products for limited and prohibited compounds and enforces these restrictions for alcoholic beverages as per FDA guidance.

OUR GUIDANCE

In light of these challenges, we recommend that before submitting your formula, double-check to make sure all the ingredients and substances added are GRAS and allowable for use in alcoholic beverages specifically. This will help streamline the approval process and avoid potential delays. Below are some tips you should consider:

  • Check with the ingredient supplier or manufacturer for the regulatory status of the ingredient and ask for a Technical Data Sheet or Product Specification Sheet that likely contains the relevant information.
  • Refer to the TTB’s Limited Ingredients page, which contains both the “Flavoring Substances and Adjuvants Subject to Limitation or Restriction” and “Flavoring Substances and Adjuvants that are Used Only in Certain Situations.” These list many ingredients that may be used in alcoholic beverages only. It is not an exhaustive list of all substances that have limitations in foods or beverages but useful in determining whether a limit is exceeded in an alcoholic beverage product.
  • Search your ingredient on the FDA’s The Substances Added to Food inventory (formerly called Everything Added to Foods in the United States) to determine [...]

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Tips for Alcohol Suppliers Utilizing Social Media

by and | Jan 22, 2024 |

In light of the Federal Trade Commission’s (FTC) 2023 revisions to its Endorsement Guides, it is essential to ensure that your business is compliant. While the alcohol industry is known for product innovation, the industry is also embracing innovation on the marketing and advertising front, most notably with the use of social media. Given the FTC’s recent announcements and enforcement actions, any business marketing their products via social media, influencers or endorsements, including alcohol advertisers, should be aware of basic requirements. Below are recommendations based on that guidance to help ensure your company keeps its social media activity compliant.

  • Third-Party Media Content: Endorsement Requirements
    • The endorser is subject to the same rules and obligations as the industry member. In other words, the alcohol rules that apply to suppliers advertising alcohol also apply to the endorser.
    • Endorsements cannot convey expressed or implied claims that would be deceptive if the advertiser made them directly.
      • For example, a post can be false or misleading if an influencer presents health claims associated with consuming the product.
    • All claims made through endorsements (express or implicit) must have adequate substantiation.
    • Endorsements must reflect the honest opinions, findings, beliefs or experience of the endorser.
    • If the ad represents that the endorser consumed the product, they must have been a genuine user.
    • The endorser’s audience should be at least 73.8% 21 years of age or older.
  • Third-Party Media Content: Disclosure Requirements
    • Material connections must be adequately disclosed on all social media endorsements.
      • Material connections include any financial, employment, personal or family relationship with a brand (e.g., receiving free product, free admission to an event, swag or anything of value).
      • Note posts from employees and the requirements that may be triggered in the event they post about your product.
    • Adequate disclosure includes the following:
      • It requires the connection to be clear and conspicuous (i.e., it “can’t be missed”).
      • It can be satisfied with “#ad” or other hashtags that sufficiently convey the material connection (such as #advertisement, #sponsored, #paid ad, #promotion).
      • You must display it before “clicking more” on the post, which is typically within the first two or three lines. However, a best practice is to place the disclosure at the beginning of the post.
      • It requires the disclosure to be “standing alone” in the endorsement (i.e., not buried within the post and not buried in a string of hashtags).
  • Tips When Drafting Endorser/Influencer Agreements
    • Incorporate appropriate provisions in agreements with influencers and celebrities.
        • Include a description of the content the influencer will be creating, including timing, mentions and aesthetics. Ensure you understand not just what the endorser or influencer plans to say but also what they plan to do (actions).
        • Include the type, form and frequency of the posting [...]

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Contracts Corner: Sponsorship Agreements

by | Jan 10, 2024 |

Sponsorships continue to be one of the alcohol beverage industry’s primary methods of promoting brands to drinkers. In professional sports alone, alcohol beverage brands contributed $480 million in sponsorship revenue across the four major professional sports leagues during the 2022–2023 season, according to a SponsorUnited study. As suppliers look to better target audiences via sponsorships, it’s important for industry members looking to enter into a sponsorship relationship, as well as those hoping to engage an alcohol beverage brand as a sponsor, to understand how the regulation of the alcohol industry impacts these relationships and the contracts that solidify them.

The Federal Alcohol Administration (FAA) Act prohibits an industry member (a supplier or wholesaler of alcohol beverages) from inducing a retailer to purchase a particular product to the exclusion of competitive products. See 27 U.S.C. § 205. An “inducement” may include a partial ownership stake in a retailer, money, free goods or other “things of value” provided to a retailer. The “exclusion” element requires the Alcohol and Tobacco Tax and Trade Bureau to show a potential real-world impact (i.e., the inducement results in a retailer purchasing less of a competing product than it otherwise would have, and the inducement places or threatens to place a retailer’s independence at risk) before a violation is found.

Sponsorships in other industries often involve a commitment that the brand paying sponsorship dollars will be the exclusive offering of a team, venue or event, or at a minimum, require that a particular brand be offered or available to consumers as part of the sponsor benefits. In the alcohol space, an industry member paying a retailer in exchange for the retailer’s commitment to serve the supplier’s brand(s) of alcohol beverages, often called “pouring rights,” typically satisfies both elements necessary to find a violation of the FAA Act: that the sponsorship fee is a thing of value, and it leads to the exclusion of competitive products.

Sponsor benefits should not include a commitment that a retailer purchase or not purchase a particular brand or brands of alcoholic beverages. Because of restrictions on the flow of money from suppliers to retailers, most sponsorship agreements involving an alcohol brand are between an industry member and a third-party unlicensed entity, not the entity holding the license to sell or serve alcohol at an event or within a venue. However, conduct that is prohibited for an industry member to engage in directly is also prohibited if undertaken indirectly using a third party as a pass-through entity. Accordingly, the entity selling sponsorship rights should represent and warrant the following:

  • It does not hold a license to sell alcohol at retail.
  • The funds paid under the terms of the agreement will not be passed on to a retailer.
  • Nothing contained in the agreement is intended to require or prohibit any retailer or concessionaire from purchasing or not purchasing a particular brand or brands of alcoholic beverages.

As we support clients in negotiating sponsorship agreements and understanding the scope of sponsor [...]

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The Tax Implications of Purchasing Craft Producers in the First Half of 2024

by | Dec 19, 2023 | ,

We have republished this August 2023 blog post ahead of the start of 2024.

If a large beverage company is considering purchasing or selling a craft beverage producer, it’s essential to understand how the craft producer may lose its earlier eligibility for reduced tax rates under the Craft Beverage Modernization Act (CBMA) in the first half of a calendar year once it becomes a member of the purchaser’s larger controlled group.

The CBMA provides for certain reduced tax rates on the initial quantities of production and/or removal of beer, wine and spirits. More specifically, it permits a reduced rate of $16 per barrel of beer on the first six million barrels brewed and removed by a domestic brewer, a reduced rate of $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits removed from bond and different, but reduced, tax credits on domestically produced wine credits.

However, to protect against larger manufacturers unjustly benefiting from these reduced tax rates through ownership in different corporate entities, the CBMA made permanent certain controlled group rules. These rules apply the availability of the reduced rates across the overall quantity limitations associated with the greater corporate structure of controlled groups of distilled spirits plants, wine premises and breweries.

The industry has understood the application of these rules for several years. Yet, pursuant to 26 US Code § 1563, it is the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) position that if a company (whether that be a corporation or an LLC) is a member of a controlled group of companies for more than six months (one-half) of any calendar year, that such member is then a component member of the controlled group for the entirety of the calendar year.

So, if a large beverage company purchases a smaller producer in the first two quarters of the year, the reduced tax rates the smaller producer took in the first six months prior to the acquisition may be forfeited based on the larger company’s rates of removal.

Consider this example:

  • Company A is a craft distiller. From January 1 to May 1 of any calendar year, it was eligible for and paid the reduced tax rate of $2.70 on its spirit removals under the CBMA.
  • Company B is a larger distiller. It exhausted its eligibility for the reduced rates within the first two weeks of the same calendar year.
  • If Company B were to purchase Company A on May 1, the two companies would be treated as members of the same controlled group from May 1 to the end of the year. Company A’s eligibility for the reduced rates it lawfully took for the first four months of the year would be forfeited and subjected to either the $13.34 or $13.50 per proof gallon rates for which the combined controlled group would have been eligible depending on the controlled group’s removals.
  • In other words, following a TTB audit, Company A would have underpaid its tax liability to TTB prior to its [...]

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Total Wine Tests the Boundaries of FTC CIDs

by , and | Dec 7, 2023 |

Total Wine & More (Total Wine) and the Federal Trade Commission (FTC) are currently clashing in federal court over a civil investigative demand (CID) that the FTC issued to Total Wine, a third party in the FTC’s investigation of Southern Glazer’s Wine & Spirits, LLC (Southern Glazer).

Total Wine has fervently resisted producing certain corporate documents and data in response to the FTC’s subpoena. It is rare that companies challenge the FTC’s authority to compel production and take such a strong stance against complying with agency CIDs for information. This dispute could have wide-ranging implications for third-party CID compliance, regardless of the industry. For companies operating in the alcohol industry and following the FTC’s investigation into Southern Glazer, the court’s decision could have a serious impact on the investigation as it will impact the breadth of documents and data to which the FTC will have access to for its case.

Under Section 20 of the FTC Act, 15 U.S.C. § 57b-1, the FTC is empowered to issue CIDs, a type of administrative subpoena, to require any person—including third parties—to produce documents or other information, file written reports or answers and give oral testimony relating to any FTC enforcement investigation. When third-party companies are issued CIDs, they usually negotiate the scope and comply, albeit reluctantly, with the requests, as refusing to comply typically is not advised. As part of the FTC’s investigation into Southern Glazer’s business practices and, specifically, whether the company has engaged in discriminatory practices in its sales to retailers in violation of the Robinson-Patman Act or engaged in other unfair competition practices in violation of Section 5 of the FTC Act, the agency issued a number of CIDs to third parties, as is customary. However, in a rare turn of events, a third party, Total Wine, and the FTC have ended up in a court battle over the subpoena.

After making limited productions, Total Wine filed an administrative petition with the FTC to limit the CID’s scope. This action is rarely taken by third parties, who often focus on negotiating the scope of the requests and limiting the burden of compliance to the extent possible, as opposed to challenging the CID itself. The FTC outright denied Total Wine’s petition, and in October, after four months of Total Wine’s resistance to comply fully, the FTC filed a petition seeking a federal court order to force Total Wine to comply with the CID.

In its petition to the court, the FTC alleged Total Wine “unilaterally narrowed the scope of the CID in a manner inconsistent with the CID’s specifications and refused to search any employee’s custodial files for responsive documents.” Although Total Wine has produced purchase-related transaction data to the FTC, it has persistently refused to produce information relating to email communications, business strategies and competitor assessments, and it has described the scope of the FTC’s demand as “truly alarming.” Despite FTC staff and Total Wine trying to work cooperatively together, the FTC has deemed Total Wine’s CID response severely [...]

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