On November 9, 2022, the U.S. Alcohol and Tobacco Tax and Trade Bureau (“TTB” or “Agency”) announced that the Agency is considering updating the alcohol trade practice regulations for the first time in 20 years. The current trade practice regulations, codified at 27 C.F.R. parts 6 (tied house), 8 (exclusive outlets), 10 (commerical bribery) and 11 (consignment sales), prohibit certain practices that threaten the independence of retailers and/or give the industry members an unfair advantage over their competitors.
Some alcohol industry members may question why TTB is considering updates now. As many may recall, the Department of the Treasury issued in February 2022 the report “Competition in the Markets for Beer, Wine, and Spirits.” This report highlighted a number of changes to the alcohol beverage industry and the burden of the current regulatory scheme on small businesses that indicates a need to update the trade practice regulations. Since the report’s publication, TTB has heard strong interest from the public, and alcohol beverage industry members on providing much needed updates to the trade practice regulations to reflect the massively evolved alcohol beverage market and retail environment.
To help gather additional input from the public, TTB has opened a docket to allow interested stakeholders a way to provide input on improvements to the current trade practice regulations. Specifically, TTB requests information on any concerns or issues with the trade practice regulations as well as information on the following topics:
- Updating the trade practice regulations generally
- How might TTB update the trade practice regulations to clarify and/or modernize the categories of conduct that may result in exclusion or threaten retailer independence?
- How might TTB update the trade practice regulations to clarify and/or modernize any exceptions to those categories?
- Is there exclusionary conduct the current trade practice regulations overlook?
- Trade practice regulations and competition
- How might TTB update the trade practice regulations to authorize more practices that would not result in exclusion or threaten retailer independence, including any limits on those practices?
- How might TTB update the trade practice regulations to focus more on practices that have greater effect on the market?
- Digital marketplace
- How might TTB update the trade practice regulations to take into account current marketplace realities, especially in light of the rise of digital marketing strategies (e.g., digital coupons, instant rebate coupons, and virtual retail shelf space in digital retail storefronts where products may be purchased online)?
- Category management – The Treasury Report both raised concerns about the threat that category management activities pose to retailer independence. One specific concern is that industry members, acting as category managers or captains for retailers, are either making the buying decisions for retailers or strongly influencing the retailers’ buying decisions in a way that threatens retailer independence.
- How might TTB update the trade practice regulations to more thoroughly define and address category management activities to ensure that those activities do not lead to exclusion?
- Shelf plans
- Should TTB remove the exception which allows industry members to provide retailers with shelf plans and shelf schematics? See 27 C.F.R. § 6.99(b).
- Is providing shelf plans and shelf schematics a practice that places or has the potential to place retailer independence at risk?
- What additional services, whether furnished in conjunction with providing shelf plans or schematics or otherwise, place or have the potential to place a retailer’s independence at risk?
- Slotting allowances (slotting fee) arrangements – The TTB regulations provide that paying or crediting a retailer for any advertising, display, or distribution service is an inducement. The industry members have identified slotting fees as a major issue in the marketplace. TTB regulations do not expressly define slotting fees.
- TTB invites comments on whether TTB should update the trade practice regulations to include a definition of slotting fees, and, specifically, the extent to which such a definition should account for display space in the retail premises (e.g., shelves, designated high-visibility areas behind the bar, tap lines, well/rail placement, prominent placement on menus, or in featured drinks) as well as virtual display space (e.g., digital retail storefront, associated digital ad campaigns where products may be purchased online).
- TTB also seeks comments on whether the slotting fee definition should include free or subsidized equipment that is, by agreement or design, only able to display or dispense the furnishing industry member’s products.
- Interest in a retail license or property
- TTB seeks comments on whether TTB should amend the tied house regulations to address crowdfunding and/or minority interest in a retail license/property as being an interest that would not result in an inducement.
- TTB also invites comments on whether TTB should define a level of ownership interest that would not result in exclusion and, if so, what that interest should be.
- Third party companies – Although TTB’s tied house regulations apply to inducements furnished directly, indirectly, or through an affiliate, there may be some confusion pertaining to inducements made through third party companies.
- How might TTB amend the regulations to better address such inducements?
- How might TTB amend the regulations to address third party delivery/fulfillment services?
- Consumer specialty items and point of sale advertising materials – Within certain limitations, TTB’s tied house regulations allow industry members to provide retailers certain consumer specialty items and point of sale advertising. See 27 C.F.R. § 6.84. Some of these items, especially ‘‘alcoholic beverage lists or menus,’’ have been used to provide hidden inducements to retailers.
- How might TTB update the list of specialty items and point of sale advertising materials allowed under the regulations to discourage their use for illicit purposes?
- Should TTB update the regulations to place monetary caps on these items?
- Tied House payment terms – The tied house regulations currently allow for a 30-day extension of credit for retailers that would not result in an inducement. See 27 C.F.R. § 6.65.
- Should TTB consider allowing for longer payment terms for retailers? If so, what should those payment terms be?
- Consignment sales payment terms safe harbor – TTB recently issued TTB Industry Circular 2022–1, ‘‘Payment Terms Under Consignment Sales Provisions,’’ announcing a safe-harbor for 30-day payment terms, which the Circular deemed unlikely to result in a consignment sale arrangement.
- TTB seeks comments on whether it should amend the regulations to add specific safe harbor payment terms and, if so, what any such terms should be.
- Definition of trade buyer – The FAA Act defines a ‘‘trade buyer’’ as ‘‘any person who is a wholesaler or retailer.’’ Similarly, TTB’s commercial bribery and consignment sales regulations define a ‘‘trade buyer’’ as ‘‘any person who is a wholesaler or retailer of distilled spirits, wine or malt beverages.’’ See 27 C.F.R. § 10.11 and 11.11. There has been some confusion about how such definitions apply to importers that wholesale (purchase for resale at wholesale) the products they import but are not required to obtain a separate wholesale basic permit pursuant to 27 U.S.C. 203(a)(2).
- TTB seeks comments on whether it should amend the regulations to clarify that trade buyers include persons engaged in wholesaling or retailing alcohol beverage products, regardless of permit status.
- Private label arrangements – A number of industry members have expressed concerns about private label arrangements and how many of those arrangements may run afoul of the TTB trade practice regulations. Private label arrangements may involve an industry member contracting with a retailer to produce products on the retailer’s behalf creating the potential for an exclusive outlet or tied house violations.
- TTB seeks comments on how its tied house and/or exclusive outlet regulations might address private label arrangements.
- Brand sharing with retail establishments – Some industry members have directly or indirectly entered into arrangements whereby retailers are permitted or required to use an industry member’s brand name as part of the name of the retail establishment.
- TTB seeks comments on whether it should amend the regulations to specifically address brand sharing arrangements.
- Sponsorships – A number of industry members have identified exclusionary concerns with sponsorships at ballparks, concert venues, and other events.
- How might TTB amend the regulations to clarify when this conduct may be exclusionary?
- Activities which result in exclusion or place retailer independence at risk – Under the tied house, exclusive outlet, and commercial bribery regulations (27 C.F.R. parts 6, 8, and 10, respectively), an inducement or requirement to purchase an industry member’s products violates the FAA Act if such activity resulted in exclusion. See 27 C.F.R. §§ 6.21, 8.21, and 10.21. Exclusion occurs when (1) a practice of the industry member, whether directly or indirectly, places (or has the potential to place) retailer (or trade buyer with respect to commercial bribery) independence at risk by means of a tie or link between the parties or any other means of industry member control over the retailer or trade buyer; and (2) such practice results in the retailer or trade buyer purchasing less than it would have of a competitor’s product. See 27 C.F.R. §§ 6.151, 8.51, and 10.51. The tied house and commercial bribery regulations specify certain practices deemed to place a retailer’s or trade buyer’s independence at risk. See 27 C.F.R. § 6.152 and 10.52. The exclusive outlet regulations specify certain practices that result in exclusion and other practices that do not result in exclusion. See 27 C.F.R. § 8.52 and 8.53.
- TTB invites comments as to how it might update the regulations with respect to which practices place or have the potential to place retailer independence at risk, as well as which activities would result in exclusion under these parts.
- TTB also invites comments on whether it should clarify or alter the definition of exclusion in terms of ‘‘purchasing less’’ of a competitor’s product, as provided in the regulations. See e.g., 27 C.F.R. § 6.151(a)(2); 8.51(a)(2); 10.51(a)(2). For example, new retail establishments may have never purchased from competing industry members that did not induce or require such purchases. Should the regulations explicitly address that situation, and, if so, how?
- Should TTB modify the regulations to establish and clarify levels of proof that would be deemed sufficient or insufficient to demonstrate exclusion?
- Criteria for determining a risk to retailer independence – The tied house, exclusive outlet, and commercial bribery regulations provide specific criteria that indicate that a particular practice, other than those specifically listed in §§ 6.152, 8.52, 8.53, and 10.52, places retailer or trade buyer independence at risk. See 27 C.F.R. §§ 6.153, 8.54 and 10.54.
- TTB invites comments on how TTB might amend the regulations to provide additional clarity as to when a wholesaler or retailer’s independence is at risk.
- Third party contracts – The exclusive outlet regulations provide that contracts between an industry member and retailer, which require the retailer to purchase products from that industry member and expressly restrict purchase of such products from another industry member, are practices that result in exclusion. See 27 C.F.R. § 8.52.
- How might TTB clarify that such contracts between an industry member and a third party, where the third party controls the retailer, would also result in exclusion?
- Sales competitions – A number of industry members have expressed concern that large industry members are engaging in commercial bribery activities by offering incentives, including, but not limited to, cash, airline tickets to tropical getaways, tickets to sporting events, flat screen televisions, and vacations for trade buyer sales representatives to push sales of the industry member’s products. Current regulations provide that such inducements threaten trade buyer independence if provided to sales representatives in secret.
- TTB seeks comment on whether any such inducements threaten trade buyer independence regardless of whether they are provided in secret.
This solicitation provides a unique opportunity for the alcohol beverage industry to influence the future of inter-tier relations before TTB has proposed changes to the regulations. To that end, TTB is accepting written comments from interested stakeholders through March 9, 2023. Comments can be submitted to the agency on www.regulations.gov under Docket Number TTB–2022–0011.
Interested in knowing more or commenting?
Our alcohol beverage team assists all tiers of the alcohol beverage industry navigate state and federal trade practice regulations. Additionally, the team has worked with associations and companies to develop comments and advocacy strategies before TTB to ensure any final regulation is not unduly burdensome and allows for innovation in the alcohol beverage industry. Contact Emily Lyons, John Godar or your Husch Blackwell attorney to learn more.