United States: Winds Of Change Blowing For Craft Brewers

For those who follow developments in the law and craft brewing with equal passion, every year has its share of substantial issues. This year has been no exception, with a pending Supreme Court case; a substantial upswing in federal trade practice enforcement activity; a massive rewrite of U.S. Tax and Trade Bureau (TTB) labeling and advertising regulations; and prospects for extending the biggest cuts in the excise tax on beer since the repeal of Prohibition.

1. SUPREME COURT UPDATE

As The New Brewer readers know (see the article in this space in the March/April 2019 issue), last fall the U.S. Supreme Court decided to hear a case that could substantially impact the way alcohol beverages are distributed in the U.S. Tennessee Wine & Spirits Retailers Association v. Blair involves the legality of Tennessee's "durational residency" requirements for off-premise retail licensees. Under current law, an applicant for such a license must have been a resident of Tennessee for at least two years, and certain renewal requests must show residency for at least 10 years. Every shareholder of a corporate licensee must meet those requirements. Challenged by an arm of retail giant Total Wine & More along with another retailer, a district court in Tennessee, and then the U.S. Court of Appeals for the Sixth Circuit, both held the residency requirements unconstitutional under the "Dormant" Commerce Clause. The Tennessee Wine & Spirits Retailers Association ("Association") appealed to the Supreme Court, supported by dozens of states

The case raises the question of whether the non-discrimination principles applied to winery direct-shipping laws in the 2005 Granholm v. Heald decision also apply to state laws regulating wholesalers and/or retailers. Since the March/ April article was written, the Supreme Court held oral argument on the case, with tantalizing hints of which way the Court may be leaning.

Attorneys representing the Association and the states (the Illinois attorney general) pressed hard for their "big win"—that state laws regulating wholesalers and retailers are immune from any Commerce Clause scrutiny. Should this position prevail, even an obviously protectionist or irrational law will face no federal court scrutiny under the Commerce Clause. The Justices' questions suggested strong skepticism of the proposition that state laws regulating wholesalers and retailers are immune from Commerce Clause scrutiny. Multiple Justices were critical of the notion that the 21st Amendment shielded protectionist laws from scrutiny. Perhaps most directly, Obama-appointed Justice Sonia Sotomayor, in a discussion with the Association's counsel, seemed to reject the idea that Granholm limited its non-discrimination principle to producers and products. Following oral argument, supporters of the Association and the states could not feel good about the chances of the Court embracing their argument for virtually unfettered states' rights to regulate alcohol beverages.

Predicting Supreme Court decisions is always a risky endeavor. Nevertheless, based on the oral argument, it seems likely that the Court will reject the notion that state laws regulating wholesalers and retailers are completely immune from Dormant Commerce Clause scrutiny. But the Court also seems likely to craft a test for lower courts to evaluate whether state alcohol laws are discriminatory in future cases. That leaves for another day the issues beyond residency that go to the heart of current state regulations of alcohol distribution: those related to direct-to-consumer shipping, physical presence requirements, and the three-tier system.

A final decision from the Supreme Court is expected by the end of June.

2. FEDERAL TRADE PRACTICE ENFORCEMENT UPSWING

The TTB has substantially ramped up enforcement of its trade practice (exclusive outlet, tied house, commercial bribery, and consignment sale) regulations. The provision of additional funding from Congress and a more focused TTB suggest that brewers now face a substantially altered federal enforcement environment. In addition, the TTB continues to announce cases under its excise tax and related authority over producer operations, with a steady stream of "offers-in-compromise" (OIC), usually settlements that include a description of alleged violations and a monetary payment to the government.

While craft brewers may hope that their companies are small enough to fly under the radar, even a casual review of the OICs announced in the past year demonstrate that no industry member is immune to TTB attention. Small wineries, beer wholesalers, small distilleries, and a small beer importer have all entered into OICs in the past year. On the trade practice front, these settlement payments have included:

  • $900,000 in April 2018 paid by small beer importer Warsteiner Importers.
  • $325,000 in November 2018 by Illinois beer wholesaler Elgin Beverage.
  • $1.5 million in December 2018 by Florida beer wholesaler Eagle Brands.

In addition, an investigation of small California winery and wine importer sales to a single New York wholesaler resulted in no fewer than 11 wineries and importers agreeing to a one-day suspension of their TTB basic permits (the federal "license" held by wineries, distillers, and wholesalers). While this may not seem significant, under federal law the TTB can only permanently revoke a permit after it has first been suspended. In essence, these companies now have one strike against them in a twostrike system. All actions stemmed from alleged violations of the TTB's consignment sale regulations, with the TTB alleging that by shipping to their wholesaler without an expectation of payment until the wholesaler sold the wine, the wineries and importers engaged in prohibited consignment sales. According to public statements by the attorneys representing the wholesaler in question, the companies agreed to suspensions of their permits because they are small "mom-and-pop" operations without the means to stand up to the TTB.

These developments require a renewed focus on compliance and a greater understanding of a brewer's obligations and rights. Under the new normal, even infractions considered minor by the TTB's regulatory personnel (e.g., failure to update information on a permit or brewer's notice) can be leveraged in settlement discussions. Similarly, the industry norm of relying on oral assurances from "friendly" regulators— federal and state—may provide little legal protection in an enforcement action.

The TTB will likely continue its renewed focus on enforcement unless restrained by some outside force. Not only has the agency received additional funds for enforcement, the Trump administration has proposed giving the TTB independent criminal enforcement authority and additional duties that are currently the responsibility of the Bureau of Alcohol, Tobacco, Firearms and Explosives. Thus, brewers face a greater likelihood of criminal prosecution for trade practice and other Federal Alcohol Administration (FAA) Act regulations. Brewers do not need a "basic permit," only a brewer's notice, and are therefore less exposed to the TTB's enforcement threat of permit suspension.

Craft brewers should be vigilant about compliance with TTB regulations. Extra attention is required if a brewery owner also holds winery or distillery permits to engage in other manufacturing activities; wholesaler permits to distribute beer or other alcohol beverages; or importer permits to engage in importation activities.

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Winds Of Change Blowing For Craft Brewers

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