Today’s off-premises retail landscape is dominated by large chains that rely on practices generally known as category management to maximize the profitability of their stores. Some of the activities falling under the category management umbrella require close interaction between the retailer and the producers, importers, or distributors supplying them product. As a result of this interaction, the federal Alcohol & Tobacco Tax & Trade Bureau (TTB) last year issued a ruling indicating that industry members’ participation in category management activities could result in a violation of the tied-house provision of the Federal Alcohol Administration (FAA) Act and the TTB’s corresponding tied-house regulations.

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Originally published in The New Brewer, September/October 2017.

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.  Continue Reading Tied House Laws and Category Management: A Continuing Quandary

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:

  1. Assuming a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s product;
  2. Receiving and analyzing confidential and/or proprietary competitor information for a retailer;
  3. Furnishing to a retailer market data from third party vendors;
  4. 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
  5. 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.

The Fall 2014 issue of Artisan Spirit introduced readers to the unusual and rather complicated legal concepts arising from the “tied-house” laws.  It covered the general concepts of:

a) separating the retail tier from the upper tiers of the industry
b) federal and state regulation in this area
c) the federal scheme prohibiting “inducements” leading to “exclusion”
d) cross-tier ownership prohibitions
e) restrictions on upper-tier assistance to retailers

This new article, published in the Spring 2015 issue of Artisan Spirit, takes readers a little deeper into the subject of tied-house laws by pondering the policy behind them and examining some hot topics on what constitutes prohibited “thing of value” assistance to retailers.  But remember that tied-house laws exist on the federal and state level, and that each state has the authority to enact its own particular variations on the tied-house concept.  While a few states simply adopt federal law, most have enacted their own statutes and regulations, leading to substantial variations between the laws of different states.  As a result, no article could possibly capture all the complexities involved, and distillers should seek their own counsel before making a particular investment or running a particular marketing program.