Inside Beverage Law: The Corruption Chronicles, Part 2 (Guest Column)

The regulatory perception that the alcohol beverage industry is, at its heart, corrupt, comes from the pre-Prohibition American saloon. In the early part of the last century, brewers and distillers used many questionable sales techniques, such as excessive credit, free goods, secretly paying retail employees, consignment sales, and other inducements to persuade saloon owners to carry their products over competing brands. Preventing the reemergence of these abusive business practices has been a core concern of alcohol regulators since Prohibition was repealed. These “tied house” laws still exist today, in one form or another, both federally and in every state (and with many exceptions that vary from state to state).

The perceived harm comes from encouraging intemperate consumption of specific alcohol brands tied to retail accounts by bribes, anticompetitive behavior, and overly aggressive marketing practices. Intemperate consumption concerns underlie almost all of the tied house laws as they were enacted in the original Federal Alcohol Administration Act. This column is dedicated to reviewing current issues and cases that illustrate these concerns, and to providing a useful guide to avoiding the regulatory liability that could (and has) cost industry members their licenses and permits, as well as resulted in severe fines and suspensions.

California: As expected, the ABC has now officially brought the hammer down on Anheuser-Busch ($400,000 fine, $200,000 suspended for one year on the condition of training), its California distributor ($10,000 fine) and at least 34 retailers (license suspensions) for giving or partially financing refrigeration units, television sets, and draught systems. This penalty is one of the highest the ABC has ever levied against a major producer.

The Lesson: What the ABC has done to Anheuser-Busch can be done to any industry member, including wineries and distilleries. In the wine industry, keg wines are becoming very popular and retailers may ask for assistance paying for the delivery systems. Do not pay for these systems unless you’ve checked with your compliance counsel and the assistance is structured so that it’s within permissible limits (which usually means that the retailers pay provable fair market value).

Category Management: On March 3, 2017, the TTB issued its annual report and officially warned the industry that it’s monitoring category management practices. The agency came to the decision after a nationwide investigation found that “a number of the top alcohol beverage producers” were providing shelf space management services to the top 50 chain-retail establishments worth “millions of dollars per year.” Many in the industry speculate the TTB is looking for the best test case it can find.

From the report: “Services being provided far exceed those contemplated under the shelf plans and schematics exception in the TTB regulations and often include the producers being directly involved in the day-to-day operations of these retailers, including the selection and placement of products in the commodity category.”

The Lesson: It’s not just the top 50 national retail accounts that are the issue here, it’s every retailer (large and small) and every practice that involves doing a retailer’s job for them, from stocking shelves to sweeping floors. If a retailer asks you to perform a service, check with counsel first to make sure the service is permissible and within the legal exceptions to the tied house laws.

Actually, that’s sound advice for any questionable event or action: Seek trusted legal counsel and err on the side of caution.

 

John Hinman is senior partner at Hinman & Carmichael LLP, a San Francisco-based law firm focusing on alcohol and cannabis regulation throughout the United States. He’s been practicing in the industry for more than 40 years, and the lawyers and paralegals at Hinman & Carmichael LLP lead the nation in alcoholic beverage licensing, promotion, distribution and regulatory defense. More information can be found at www.beveragelaw.com. © Hinman & Carmichael LLP

 

This column and the views expressed are intended for informational use only and are not to be construed as legal advice. If you need legal advice, please consult with your legal counsel.