Tied House Enforcement: TTB Cracks Down on “Pay to Play” Schemes
The federal crackdown on “pay to play” arrangements in the alcohol beverage industry continues. In a press release issued on Friday, the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau announced that it was conducting a joint operation with the Illinois Liquor Control Commission to look into alleged “pay-to-play” in Chicago, the Quad Cities, and Peoria. Illinois is no stranger to these types of tied house violations: in 2009, 10 Illinois wine distributors paid over $800,000 as a result of a TTB investigation into payments made by distributors to retailers for shelf space.
There has been a recent uptick in tied-house enforcement actions by TTB. Just a few months ago, the TTB launched a coordinated effort with the Florida Division of Alcoholic Beverages in what it described as “the largest trade practice enforcement operation that TTB has initiated to date.” The Illinois and Federal joint federal-state efforts come less than a year after the TTB reached a $750,000 settlement with a Massachusetts distributor that had spent approximately $120,000 in payments to Boston retailers in exchange for favorable product placement and shelf space.
Under federal tied-house law, it is unlawful for an alcohol beverage supplier to “induce,” directly or indirectly, any alcohol beverage retailer (e.g. bottle store, bar or restaurant) to purchase any products from that supplier to the “exclusion,” in whole or in part, of other suppliers’ products. Inducement under federal law can arise from a supplier furnishing or giving retailers anything of value anything of value, subject to various exceptions. “Pay-to-play” schemes generally involve payments by an alcohol beverage supplier to an on- or off-premise retailer for tap or shelf space.
New Alcohol Beverage Regulations Give Licensees Expanded Rights and Privileges in the New Year
Beginning on January 1, 2016, new provisions of the California ABC Act will go into effect that will, among other things, provide industry members with additional rights and privileges related to marketing, events and promotions, and will also create a new Craft Distiller License. A summary of a few of these important new statutory provisions is included below.
Retailer and Non-Retailer Sponsorships of Non-Profit Events (Section 23355.3):
- This new statutory section was largely drafted in response to accusations filed by the ABC against certain wineries related to their participation in a nonprofit event, the “Save Mart Grape Escape”. As the name suggests, although this was a nonprofit event, Save Mart, a licensed retailer, was also a sponsor of the nonprofit event. The ABC had alleged in its accusations that participating supplier-side licensees that referenced the event by name on their websites or social media feeds were giving a thing of value to Save Mart in violation of California’s tied house rules. Section 23355.3 resolves this issue by providing an exception to the tied house rules that not only allows both retail and nonretail licensees to sponsor non-profit events but allows participating nonretail licensees to reference retail licensees, subject to the restrictions contained in the statute.
- Section 23355.3 permits sponsorships of nonprofit organizations (not other organizations) that are conducting and receiving benefit from the subject event. Note that nonprofits are still required to obtain any required temporary licenses from ABC to conduct their event.
- A nonretail/supplier side licensee may advertise or communicate its sponsorship of or participation in the nonprofit event in social media and elsewhere, which advertising can include identification of both retail and nonretail licensees that are sponsoring or participating in the event and can include posting, re-posting, forwarding or sharing social media and/or other advertisements or communications made by other nonretail or retail licensees (subject to the restrictions below) . For purposes of this provision “social media” is specifically defined as “a service, platform, application, or site where users communicate and share media, such as pictures, videos, music, and blogs, with other users.” Note that Section 23355.3 does not usurp other applicable industry or legal standards that govern when and where the advertisement of alcohol is acceptable and typical precautions to ensure responsible advertising practices should be taken.
- Any advertisement or communication by a nonretail licensee that includes identifying a retail licensee (including reposting, forwarding, sharing social media posts by others) cannot include the retail price of any alcoholic beverage or otherwise promote the retail licensee beyond its sponsorship or participation in the event.
- It should be noted that donations of alcoholic beverages to nonprofits by supplier side licensees are only permitted to the extent they are otherwise allowed under Section 25503.9, which only permits certain supplier side licensees to make certain types of donations to nonprofits. And except as otherwise may be permitted in specific circumstances under the ABC Act, retailers are not permitted to give or sell alcoholic beverages to the nonprofit.
- Nonretail/supplier-side licensees should be careful not to provide other things of value to retail licensees, except as permitted above. Specifically, nonretail licensees should not pay or reimburse any retail licensee, directly or indirectly, for any advertising services (whether by social media or otherwise) or cover any costs of a retail licensee sponsoring or participating in the event.
- Retail licensees are also subject to rules and restriction under the new statute and should not accept any payment or reimbursement, directly or indirectly, for any advertising services offered by a nonretail licensee and should not offer or provide nonretail licensees any advertising, sale, or promotional benefit in connection with the sponsorship or participation.
Sponsorships of Certain Live Entertainment Marketing Companies in Napa (Section 25503.40)
- Section 25503.40 creates a new exception to the tied-house rules that allows certain alcohol beverage licensees to purchase sponsorships and advertising time and space from certain live entertainment marketing companies related to live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events promoted by a live entertainment company in Napa County, such as Bottlerock. The events are to be held at entertainment facilities, parks, fairgrounds, auditoriums, arenas, or other areas or venues that are designed for, or set up to be, and lawfully permitted to be used for live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events. The conditions and restrictions related to such sponsorships are set forth below.
- Only the following types of licensees are permitted to sponsor events under 25503.40: Beer Manufacturer (Type 01 or Type 23), Out-of-State Beer Manufacturer’s Certificate (Type 26), Winegrower (Type 02), Winegrower’s Agent (Type 27) , Distilled Spirits Manufacturer (Type 04 and likely new Type 74 craft distilled spirits manufacturer), Distilled Spirits Manufacturer’s Agent (Type 05), Rectifier (Type 07, 08 or 24) or Importer that does not hold a wholesale or retail license (Type 09 (but only if hold one of the other licenses listed), 10, 11, 12 (but only if hold one of other licenses listed) or 13).
- The above licensees may sponsor events promoted by a live entertainment company and may purchase advertising space and time from or on behalf of a live entertainment marketing company. For purposes of Section 25503.40, a live entertainment marketing company must be a entertainment marketing company that is a) a wholly owned subsidiary of a live entertainment company b) not publicly traded, c) has its principal place of business in the County of Napa, and d) which may own interests, directly or indirectly, in retail licenses or winegrower licenses.
- Sponsorships must be pursuant to a written contract and may only be purchased by permitted licensees in connection with live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events that take place at entertainment facilities, parks, fairgrounds, auditoriums, arenas, or other areas or venues that are designed for, or set up to be, and lawfully permitted to be used for live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events located within the County of Napa. Expected attendance of the event must be at least 5,000 people per day and the live entertainment company promoting the event is required to represent to the retail licensee that will hold the license for the event, such as the concessionaire, that the live entertainment company promoting the event, including the subject event, has not exceeded the permissible limit of three events in the County of Napa for the year in which the event is being held.
- An on-sale licensee (such as a concessionaire) selling alcoholic beverages at the event must serve at least one other brand of beer, distilled spirits, and wine (one per category) distributed by a competing wholesaler in addition to any brand manufactured or distributed by the sponsoring or advertising licensees.
- Participating licensees are not permitted to give, or lend anything of value to an on-sale retail licensee, except as expressly authorized by 25503.40 or any other provision of the ABC Act.
- Note that while Section 25503.40 does not itself provide licensees the right to be present at the events (either pouring their products and/or educating the consumers in their tents), because the premises will be licensed as an on-sale retail premises, Sections 25503.4, 25503.55 and 25503.57 of the ABC Act would allow limited education and tastings by certain wine, beer and spirits licensees at the event, subject to the terms and conditions of those sections and approval by the event organizers.
Listing of Retailers in Supplier Advertising and Marketing (Section 25500.1)
- The recent revisions to Section 25500.1 of the ABC Act have revised the tied-house exception in that section to provide supplier side licensees with new ways to refer to retailers in their advertising and marketing. These changes were driven by new marketing and advertising practices on the internet and social media but apply to all marketing and advertising practices. Previously, listings of retailers were only permitted in response to consumer inquiries and were further limited by statute.
- Supplier-side industry members (such as manufacturers or wholesalers) may list the following information in their advertising or marketing (include social media posts), so long as the remaining requirements listed below are also satisfied: Names, addresses, telephone numbers, email addresses, or Internet Web site addresses, or other electronic media, of two or more unaffiliated on-sale or off-sale retailers selling the beer, wine, or distilled spirits produced, distributed, or imported by the supplier-side industry member. The listing must include information about two or more unaffiliated retailers and must be the only reference to the on-sale or off-sale retailers in the direct communication with the consumer.
- The listing cannot contain the retail price of the product.
- The listing is made, or produced, or paid for, exclusively by supplier-side industry member.
- For more information about the changes to Section 25500.1, refer to our prior blog post on this issue.
New Craft Distiller License & Expanded Tasting Privileges for Distilled Spirits Manufacturers
- Various provisions of the ABC Act have been amended to create the new Type 74 craft distiller license for distillers that manufacture up to 100,000 gallons of distilled spirits per fiscal year (July 1 through June 30). The new legislation has also provided Type 04 distilled spirits manufacturers, and craft distillers, expanded rights and privileges with respect to consumer tastings.
- The new Type 74 craft distiller license may be issued to a person who has facilities and equipment for, and is engaged in, the commercial manufacture of distilled spirits. The fees for the craft distiller shall be the same as those of a Type 04 distilled spirits manufacturer. It should be noted that the craft distiller will be required to report its production to the ABC on an annual basis, and if the production amounts go above the maximum requirements described below such that the craft distiller no longer qualifies to hold a craft distiller’s license, the ABC will automatically renew the license as a Type 04 distilled spirits manufacturer’s license (Type-04).
- The production, sale, distribution and tasting privileges of the new Type 74 Craft Distiller’s license include the right to:
- Manufacture up to 100,000 gallons of distilled spirits per fiscal year (July 1 through June 30) (excluding brandy that the craft distiller manufactures or has manufactured for them). In its advisory, ABC noted that “gallon” is defined in Section 23031 as “that liquid measure containing 231 cubic inches” and that the amount to be reported is the actual liquid volume manufactured not proof gallons. ABC also clarified that measurement of gallons for this purposes is the volume of distilled spirits (excluding waste product) drawn off the still.
- Package, rectify, mix, flavor, color, label, and export only those distilled spirits manufactured by the licensee. This means that the holder of a craft distiller license is not permitted to package, rectify, mix, label, flavor, color or export any spirits manufactured by any other licensees. However, ABC has confirmed that this provision does not prohibit the use of grain neutral spirits manufactured by another distiller in the manufacture of distilled spirits by a craft distiller licensee, since that requires actual re-distillation of grain neutral spirits. ABC has also noted that this prohibition against rectification of other products also means that the holder of a rectifier’s license (Type 07 or Type 24) cannot also hold a craft distiller’s license.
- Only sell distilled spirits that are manufactured and packaged by the craft distiller solely to a wholesaler, manufacturer, winegrowers, manufacturer’s agent, or rectifier that holds a license authorizing the sale of distilled spirits or to persons that take delivery of those distilled spirits within this state for delivery or use without the state.
- Sell up to 2.25 liters (in any combination of prepackaged containers) per day per consumer of distilled spirits manufactured by the craft distiller at its premises to a consumer attending an instructional tasting on the licensed premises pursuant to Section 23363.1.
- Sell all beers, wines, brandies, or distilled spirits to consumers for consumption on the premises in a bona fide eating place as defined in Section 23038, which is located on the licensed premises or on premises owned by the licensee that are contiguous to the licensed premises and which is operated by and for the licensee, provided that any alcoholic beverages not manufactured or produced by the licensee must be purchased from a licensed wholesaler.
- During private events only, sell or serve beer, wines, and distilled spirits, regardless of source, to guests during private events or private functions not open to the general public. All alcoholic beverages sold at the premises that are not manufactured or produced and bottled by or for the licensed craft distiller must be purchased only from a licensed wholesaler. ABC has noted that “private events” and “private functions” do not include events, activities, or functions that are open to the public, whether by purchase of a ticket or otherwise. As an example, the ABC has stated that it would not consider a cocktail-making class that anyone could attend to be a “private event or private function”.
- Craft distillers (unlike type 04 distilled spirits manufacturers) have also been provided with a tied house exception that allows a craft distiller to hold ownership interests in up to two (2) on-sale licenses (such as restaurants, hotels or bars). Other than the products made by or for the craft distiller, all other alcoholic beverages at such on-sale retailers must be purchased from a California wholesaler. Further, the interested craft distiller’s products cannot exceed more than 15% of the total distilled spirits by brand offered for sale by the on-sale licensee. This exception shall continue to apply, even if the distiller no longer qualifies as a craft distiller, so long as the distiller qualified as a craft distiller at the time it first obtained the interest in the on-sale retailers.
- As noted above, the recently enacted legislation amending Section 23363.1 provided both craft distillers and distilled spirits manufacturers expanded privileges with regard to direct to consumer tastings from their licenses premises. Type 04 and Type 74 licensees may now provide one and one-half ounces tastings of distilled spirits per individual per day from their premises with or without charge and can also serve these tastes in the form of a cocktail or mixed drink.
Beer Tastings at Farmers Markets
- Previously, under Section 23399.45, beer manufacturers were permitted to sell limited amounts of bottled beer at certified farmers markets so long as they held a Type 84 certified farmers market beer sales permit. An amendment to Section 23399.45 will now the holder of a type 84 certified farmers’ market beer sales permit to conduct instructional tasting events for consumers at certified farmers markets as well. These privileges are automatically extended to Type 84 permit holders as of January 1, 2016 so no additional permit is required for existing permit holders.
- The holder of a certified farmers market beer sales permit is authorized to conduct an instructional tasting event for consumers at locations specified in Section 23399.45 at a certified farmers market.
- The tasting is limited to 8 ounces per person per day and may be provided as provided as one 8 ounce tasting or various smaller tastings.
- The instructional tasting event area must be separated from the remainder of the market by a wall, rope, cable, cord, chain, fence, or other permanent or temporary barrier.
- Only one Type 84 license holder may conduct an instructional tasting event during the a farmers market.
- The licensee shall not permit any consumer to leave the instructional tasting area with an open container of beer.
Please note that the information provided above is just an overview of the requirements of the new legislation. Careful review of each statute in its entirety should be undertaken before any actions are taken in reliance on these new provisions.
We will be posting details on other new legislation in the coming days and weeks, but for questions on any of the new legislation discussed above and how it may affect your business, please contact Bahaneh Hobel.
Diageo and Major Brands Settle Franchise Law Dispute
This is the way most franchise law litigation ends: not with a bang, but with a whimper. After over a year of legal jostling, Diageo and Major Brands have apparently reached settlement, according to Missouri news outlets.
Suppliers trying to terminate their relationship with a Missouri distributor should closely review a state court opinion issued in the same case in response to Major Brands’ preliminary injunction motion. In that opinion, the court found that Missouri’s franchise law does not necessarily apply to all alcohol beverage distribution agreements. Instead, the court concluded that, “A liquor distributor who seeks to invoke the protections of [Missouri’s Franchise Law] must show (1) an arrangement, (2) in which a person grants to another a license to use a trade name, trademark, service mark, ‘or related characteristic,’ (3) in which there is a community of interest in the marketing of goods, and (4) which involves a relationship of liquor wholesaler and liquor supplier.” See also Missouri Beverage Co. v. Shelton Bros., Inc., 669 F.3d 873 (8th Cir. 2012).
Smaller producers trying to get out of a franchise relationship may be able to argue that no “community of interest” exists, so long as they make up only a small portion of the distributor’s portfolio. Major Brands successfully argued (in the preliminary injunction stage) that because Diageo brands accounted for 23% of Major Brand’s total revenue, a community of interest existed, and Missouri’s franchise law applied. There is, however, no clear minimum threshold that would consider sufficient to prove the existence of a community of interest.
Franchise Law Trial Begins in Missouri
After 18 months of discovery and motion practice, Diageo and Missouri distributor Major Brands will have their day in court to determine if state franchise law prevents Diageo from terminating its Missouri distribution agreement.
In March 2013, Major Brands brought suit in Missouri state court against Diageo and its new Missouri distributor, Glazer’s, claiming that the alcohol beverage producer’s attempt to terminate the distribution agreement violated state’s franchise law. At the time of the attempted termination, according to Major Brands, Diageo products accounted for 23% of the distributor’s gross revenues.
Jury selection began on Monday, September 15. We will continue to provide updates as the case unfolds.
Five Key Points for Alcohol Beverage Distribution Agreements
Recently, Bahaneh Hobel, Senior Alcohol Beverage Attorney from Dickenson, Peatman & Fogarty, provided the Beverage Trade Network with some insights on the “5 Key Points You Must Cover in Your Distribution Agreements.” To review her article and learn more about important issues to consider in drafting distribution agreements. View Article
For more information or assistance on any alcoholic beverage law matters, contact Bahaneh Hobel
Update on The Battle of Missouri and Franchise Distribution Law
In its June 20, 2013 ruling on Major Brands’ request for a preliminary injunction, the Missouri Circuit Court, to the chagrin of the large producers, affirmedMissouri’s franchise law. The Court further held that there was no good cause for Diageo’s termination of its distribution agreement with Major Brands. However, in a partial victory for Diageo, the Court declined to issue a preliminary injunction forcing Diageo to continue working with Major Brands – Major Brands would be entitled to money damages only.
The battle in Missouri is far from over. Bacardi is also seeking to terminate its relationship with Major Brands, and litigation is pending in both Federal and State Courts. And certainly, the lobbying efforts of both distributors and producers will continue in earnest.
For more information or assistance on distribution litigation contact us.
Diageo Americas v. Major Brands: Franchise Law Litigation and Forum Selection
Franchise Laws and Diageo’s Recent Distributor Termination Action in Missouri
We usually see this alleged “breach of franchise agreement” used as the basis for a counter-claim by the purchaser of our client’s wine. Typically, XYZ Winery sells its wine to a retail establishment in a franchise state, which then doesn’t pay for the wine. When our client sues the purchaser in California state court, the purchaser counter sues for breach of the alleged franchise agreement, and will sometimes remove the case to federal court. The purchaser will then use the cost of litigation of its counter-claim to negotiate a discount on the amount owed, or a complete “walk-away” settlement.
In a recent Missouri case, however, Diageo sued its distributor in the state to terminate its distribution agreement. Diageo argues thatMissouri state law should not apply to the two distribution contracts in question. Diageo relies on language in its distribution contract with Major Brands that states that the contract’s terms are to be governed by Connecticut law for certain products, and New York law for certain other products. In the alternative, Diageo argues that it has good cause to terminate the agreement should Missouri law apply, claiming that Major Brands failed to devote sufficient resources to the promotion of Diageo’s products, among other things.
We will be watching this case and will report on its outcome.