Alcohol & Beverage

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The Supreme Court recently granted certiorari to review an opinion of the Sixth Circuit on constitutional limits on states’ ability to regulate the distribution of alcohol beverages. Tennessee Wine & Spirits Retailers Ass’n v. Byrd, No. 18-96.

With the advent of the 21st Amendment in 1933, which turned control of alcohol beverage regulation over to the states, temperance groups insisted on a rigid, three-tier system for the distribution of alcohol. Typically, under state laws a manufacturer of alcohol beverages can only sell to a distributor and it may not have any ownership interest in the distributor. The distributor in turn sells to retailers who sell to the general public. Neither the manufacturer nor the distributor may have any ownership interest in the retailer. Consumers can only purchase alcohol beverages from retailers.

The rise of the internet and direct delivery companies such as Amazon has undermined this rigid distribution system. The State of Michigan amended its statute to permit wineries located in Michigan to sell directly to consumers. Out-of-state wineries, however, could only sell to Michigan distributors. In Granholm v. Heald, 544 U.S. 460 (2005), a surprisingly divided Supreme Court held, 5-4, that its anti-discrimination holdings under the Commerce Clause trumped the states’ residual authority under the 21st Amendment. It also held that the direct-sale statute impermissibly discriminated in favor of in-state wineries.

Granholm settled the question of whether states could discriminate against out-of-state manufacturers. It left open the question of whether the Commerce Clause also protected wholesalers and retailers and the lower courts are divided on that point. Granholm clearly held that the three-tier system is not a per se violation of the Commerce Clause. Based on that holding, the Second, Fourth and Eighth Circuits have all held that Granholm does not apply to wholesalers and retailers.  The Fifth and Sixth Circuits have reached the opposite result. Continue Reading Constitutional Requirements For Distribution Of Alcohol

Coffee sellers in the State of California will now be required to provide cancer warnings on their coffee products. On March 28, 2018, a California State Court issued a Statement of Decision in a Proposition 65 (Prop 65) case that found that Starbucks and other retailers failed to prove that a chemical found in coffee poses no significant harm. Council for Education and Research on Toxics v. Starbucks Corporation, No. BC435759 (L.A. Super. Ct. Mar. 28, 2018).

Under California’s Prop 65, cancer warnings are required to appear on a wide range of products. In 2010, a nonprofit sued over 90 coffee sellers alleging that the companies failed to warn consumers regarding the presence of acrylamide in their coffee in violation of Prop 65. Acrylamide is listed as a chemical known to the State of California to cause cancer and reproductive toxicity and, consequently, products containing it are required to carry a warning. The chemical is created in certain plant-based foods during cooking, baking, frying, or roasting at high temperatures. Because acrylamide is also created during the cooking process for other foods, including potato chips, bread, french fries and roasted nuts, many of these products are arguably required to carry cancer warnings in California.

The court in the Starbucks case still has to rule on penalties the coffee sellers could face, but the decision exposes the defendants to significant fines: civil penalties of up to $2,500 per person exposed each day over eight years.

Contact us if you need help determining whether your products – coffee or otherwise – are covered by Prop 65, if you want assistance designing a Prop 65-compliant warning label for your products, or if you need legal counsel to address a Prop 65 60-day notice you’ve received.

On June 13, Husch Blackwell’s Food & Agribusiness industry team presented a seminar in Denver, CO spotlighting industry finance and investment trends and regulatory developments. More than 50 professionals attended the seminar, representing ag processing, food distribution, ag production and industry-focused lenders and investors. The morning started off with Jim Ash, Husch Blackwell’s Food & Agribusiness industry team leader, moderating a panel focused on industry trends. The panelists included –

The panel discussion kicked off by discussing the current consumer trends and whether or not the current trends are considered sustainable. The panel agreed the importance of food safety is top of mind with consumers and food company executives alike. Healthy alternatives, convenience and transparency in labeling were also noted as important to consumers. Consumer demand for new products with unique flavorings is resulting in small, nimble companies being rewarded. An example of this is the growth in the craft beer industry.

The panel turned their attention to consolidation within the industry. The panelists agreed the mega-deals would likely continue over the next 18-24 months, but smaller deals at the other end of the spectrum would also continue, highlighting the importance of companies being nimble and responsive to the market. For smaller companies within the industry, 75% of the deals were for strategic reasons compared to an average across all industries of 50%. Technology advances and the need for innovation were also mentioned as driving consolidation. European companies are looking to North America for investment because of perceived opportunity.

Commodity pricing and the impact on the industry was discussed next. Over the long-term the prices for commodities are expected to rise, however in the short-term there will be continued downward pressure until there is a significant correction, which will likely be driven by a weather event. Pricing is driven by supply and demand and in the short-term there is an excess supply; however, long-term commodity demand will be driven by rising world-wide socio-economic status increasing demand for protein, which is a more inefficiently produced food source. The current excess supply is the result of technology advances resulting in improved yields and the absence of a significant weather event over the past several years. Continue Reading Denver Food & Agribusiness Seminar: Regulatory & Investment Trends

In the last few years, there has been an influx of false advertising and labeling claims targeting food and beverage producers, principally though consumer class actions. The lawsuits seem to be an outgrowth of consumers’ growing interest in foods and beverages that are artisanal and locally grown or made.  The beverage alcohol industry has not been spared from these suits, seemingly bearing a disproportionate load of claims including those alleging false “country of origin”, and those alleging misleading statements pertaining to methods of manufacturing.  Fortunately for the industry, courts have recently shown a willingness to dispose of these cases early in the lawsuit, principally by way of motion to dismiss for failure to state a claim.

Late last year, the Southern District of California dismissed a case brought against the makers of Red Stripe beer for using an allegedly misleading label regarding the beer’s purported country of origin.  The allegations focused on labeling statements such as “The Taste of Jamaica” and further suggestions in advertising that the beer was a “Jamaican Style Lager.”  While long produced in Jamaica, production of Red Stripe beer moved to the United States in 2012.

In its order dismissing the case, the court, using a “rational consumer” test, determined “no reasonable consumer would be misled into thinking that Red Stripe [was actually] made in Jamaica with Jamaican ingredients based on the wording of the packaging and labeling.”  Red Stripe’s labels were compared to that of a “Swiss Army Knife” where “Swiss” modifies “Army” as “Jamaican” modifies “Style” rather than suggesting the true country of origin for the finished product.  The court also noted that even if consumers believe it was once brewed in Jamaica, no legal authority places a duty on its maker and distributors to refute any pre-conceived notions consumers may have as to the product’s country of origin. Red Stripe’s label clearly states, consistent with TTB regulations, that the beer is brewed and bottled in Latrobe, Pennsylvania.

Beverage alcohol products touted as “craft” have also faced a number of suits over the past few years.  Perhaps most notable was the matter involving MillerCoors’ Belgian witbier Blue Moon.  A class action was instituted in California contending that use of the term “Artfully Crafted” was misleading to consumers as it connoted the beer was a craft beer where in reality the product was brewed in MillerCoors’ Golden Colorado mega-brewery.  The complaint also alleged that Blue Moon was sold at a premium price, that MillerCoors directs retailers to place Blue Moon alongside other craft beers, and that it instructed retailers to refer to Blue Moon as a “craft beer.”  The case was dismissed with the court concluding that a premium price does not amount to a representation about the product and MillerCoors was not responsible for any misrepresentations by retailers when it does not have “unbridled control” over them.

The complaint against Blue Moon cited to the definition of a “craft beer” proposed by the Brewers Association guidelines, which provides that entities making “craft beers” produce less than 6 million barrels annually, are less than 25% owned or controlled by a non-craft brewer, and make beer using only “traditional or innovative brewing ingredients.”  The Brewers Association, however, admits that its definition of “craft beer” has no legal force.  The court generally ignored this putative definition in dismissing the class claims.

The phrases “handmade” and “handcrafted” have also been the subject of much class action litigation in the United States.  Several suits have been dismissed against Maker’s Mark, a whiskey-making subsidiary of Beam Suntory.  Using the same “rational consumer” test noted above, the judge in Salters v. Beam Suntory found that “no reasonable person would understand ‘handmade’ in this context to mean literally by hand” and that no national consumer would believe that whiskey was made without substantial equipment.

Similar claims were made in no less than five suits brought against the makers of Tito’s Handmade Vodka.  In general, the various class plaintiffs claimed that “handmade” had to mean “made by hand, not by machine, and typically, therefore of superior quality,” a dictionary-based definition. Tito’s, the lawsuits explained, uses “mechanized and/or automated machinery and processes to manufacture and bottle its vodka, rather than human hands.” Several of these matters were similarly dismissed in the early stages of litigation, again based on findings that reasonable consumers were not being misled by the brand name or by marketing that focused on the brand’s modest beginnings.  One of those cases, however, survived a similar motion to dismiss, with that judge finding reasonable consumers could be misled by the statements.  Shortly before trial in that case, the parties apparently resolved their disputes.

What This Means to You

Beverage alcohol manufacturers should exercise care in selecting brand names, as well as coining label slogans and advertisements for their products.  Ambiguous or potentially misleading terms and claims regarding the product’s place of origin, ingredients used, or methods of manufacture can bring about costly litigation in the form of class action lawsuits.  Even though many courts have ruled early in the litigation against the class plaintiffs, brewers, distillers, winemakers, and other alcohol beverage brand owners should consider the arguments made by the class plaintiffs when selecting brand names and developing advertising and labels.

Last week the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) published Ruling 2016-3, TTB’s most recent effort to reduce regulatory burdens on industry members. Breaking with past regulations, Ruling 2016-3 approves general-use formulas for proprietors of distilled spirits plants producing vodka, whisky, brandy or rum products that incorporate certain specified harmless coloring, flavoring or blending materials. The TTB’s Ruling should help reduce regulatory burdens by streamlining the formula review process and allowing industry members to get their products to market without having to wait for additional formula approvals. A full copy of the TTB’s Ruling 2016-3 can be found here.

Particularly, TTB will now approve general-use formulas for the following spirits produced in accordance with applicable TTB Standards of Identity:

  • Vodka containing no harmless, coloring, flavoring or blending materials other than sugar (no more than 2 grams per liter), citric acid (no more than 1 gram per liter) or both.
  • Rum containing no harmless coloring, flavoring or blending materials other than sugar, brown sugar, molasses or caramel, if the blending materials are no more than 2.5 percent by volume of the finish rum product.

TTB also now approves general-use formulas for certain types of whiskey that contain sugar, caramel, or wine—if the flavoring or blending materials are no more than 2.5 percent by volume of the finished product. However, TTB makes clear that no coloring, flavoring, or blending materials of any kind may be used in the production of spirits that are designated as “bourbon whiskey” or “straight” whisky.

Finally, TTB will approve general-use formulas for certain types of brandy that contain sugar, caramel, fruit juice of the same fruit from which the brandy is distilled, or wine fermented from juice of the same fruit from which the brandy is distilled. As for other spirits, the total quantity of flavoring or blending materials may not exceed 2.5 percent by volume of the finished product.

TTB Ruling 2016-3 is a welcome step toward accomplishing the TTB’s goal of increased regulatory relief for distilled spirit industry members. We will continue to monitor developments in this area and keep you up to date on any future regulatory changes impacting alcohol beverage industry members. For more immediate information on this topic, please feel free to contact Andy Gilfoil.

New regulations from the Food and Drug Administration (FDA) regarding nutritional information labeling are generating concern within the beer industry that the cost of compliance might be damaging and cost prohibitive for the industry.

Effective December 1, 2016, the FDA will require disclosure of nutritional information for regular menu items, including alcohol beverages, appearing on menus for larger restaurant and brew pub chains.

The Affordable Care Act (ACA) amended the Federal Food, Drug, and Cosmetic Act (FDCA) to require disclosure of caloric counts for standard menu items at restaurant and brew pub chains with 20 or more locations nationwide. Craft brewers have expressed concern that the cost of the nutritional testing could make it difficult to compete with larger brewers, particularly with respect to seasonal or smaller batch beers.  Originally set to go in effect in 2015, the FDA extended the time to comply with the regulation from December 1, 2015 to December 1, 2016, in large part to accommodate the concerns of the craft beer industry.  (For more on the extension, see our previous post here.)

The beer industry could elect to fight the FDA’s regulatory power to weigh in on matters traditionally left to the Alcohol and Tobacco Tax and Trade Bureau (TTB). The FDA has authority over labeling of all “food,” which by definition includes certain alcoholic beverages.  Since the end of prohibition, however, the TTB and its predecessor agencies have generally exercised authority to regulate all things alcohol, including product labeling, to the exclusion of the FDA’s jurisdiction.

The two agencies’ regulatory authority over alcohol beverages has been contested often. While the FDA and TTB have fought about their regulatory overlap at times, they have also worked together (for example, on “gluten-free” labeling issues).  Even in the era of cooperation, however, the FDA’s proposed labeling regulations may spark another dispute between the agencies, and provide leverage that the craft beer industry could use to fight the regulation.

The Husch Blackwell Alcohol and Beverage team will continue to monitor these and other regulatory issues and can assist with all compliance-related issues.

Earlier this year, an entity using the moniker “U.S. Right to Know” filed separate petitions with the Federal Trade Commission and the Federal Drug Administration contending that American consumers are being deceived by use of the term “diet” on or in relation to soft drinks that contain “non-nutritional artificial sweeteners” (NNAS) such as  aspartame.  Under The Food, Drug and Cosmetic Act, terms like “diet” may be used in the brand of a soft drinks in certain circumstances.  These petitions, however, cited to research suggesting that “diet” soft drinks and other artificially sweetened products actually contribute to weight gain in consumers.  The petitions asked these federal regulators to address this perceived misleading advertising.

Late last month, the FTC responded, announcing it would not initiate an investigation.  A few days later, the FDA issued a letter advising that it needed more time to address the claims.

Principally at issue in these citizen’s petitions is whether using the term “diet” in the brand names of soda products, like Diet Coke and Diet Pepsi, deceives consumers by suggesting those soft drinks actually promote weight loss.  According to the petitions, reasonable consumers buy diet soft drinks believing that their consumption will result in weight loss. Whether consumer are deceived or mislead by use of a term must necessarily be predicated on what consumers actually understand that term signifies in a particular context.  Here, the consumer group’s petitions were devoid of evidence to support its contentions that consumers actually buy “diet” sodas because they believe their mere consumption will result in actual weight loss.

As the United States Supreme Court found in the matter of POM Wonderful v. The Coca-Cola Company, Inc., statements or terms allowed by FDA regulation for particular products may nonetheless serve as a basis for false advertising if the context of the statement is found to be misleading to consumers.  In that vein, U.S. Right to Know’s petitions focus on a term  — “diet” — specifically allowed by FDA regulations for soft drinks using NNAS.  These petitions, however, seem to be directed to the science of whether NNAS might actually promote weight gain in consumers. The American Beverage Association and other industry groups strongly dispute this assertion and cite to studies showing that drinking diet beverages helps people lose weight.

The true motivation of U.S. Right to Know is, frankly, unknown, although a citizens petition to the FTC can be a precursor to consumer class action lawsuits claiming deceptive trade practices in false or misleading labeling and advertisements. So for now, the jury is out on whether advertising or promoting consumables using the term “diet,” regardless if that usage is compliant with FDA regulations, could nonetheless land you in court.

Following up on our blog post from Friday, June 12, (here) Senator Wyden’s (D) proposed legislation, The Craft Beverage Modernization and Tax Reform Act of 2015, also takes aim at regulations and taxes affecting distilleries, wineries and other alcohol beverage categories.

The proposed Act reduces the excise tax for spirits producers on the first 100,000 gallons produced or imported by 80% from $13.50/proof gallon to $2.70/proof gallon.

Wineries making less than a quarter of a million gallons of wine are eligible for the so-called “wine producer tax credit”. The current tax credit structure is 90 cents/gallon up to 100,000 gallons produced. This legislation expands that credit to $1/gallon on the first 30,000 gallons produced by any domestic winery. To further benefit small wineries, Wyden’s bill allows domestic wineries producing less than 2 million gallons to claim an additional 90 cent credit for the first 100,000 gallons produced.

The Act also calls for the exemption of 90% of alcohol producers from filing bi-weekly bonding requirements and exempts all beverage producers from capitalization rules for “aged” products.

As written, The Tax and Trade Bureau of the U.S. Treasury (TTB) would receive additional funding for regulatory and labeling approval activities. The TTB’s increased funding is also intended to help the relevant tax collecting agencies (IRS, DHS, CBP and the Department of the Treasury) to share more information with each other to investigate tax evaders.

To see a copy of the Craft Beverage Modernization and Tax Reform Act of 2015, please visit Senator Wyden’s congressional website, or click on this link. We will continue to closely monitor this proposed legislation and provide updates of its progress.

Oregon Senator Ron Wyden (D) has introduced a bill that would reform the federal tax on beer – a tax that has not changed since 1991. The current beer tax is $7 per barrel on the first 60,000 barrels for microbrewers (i.e., brewers who brew less than 2 million barrels per year). For microbrewers, after the first 60,000 barrels, the tax increases to $18 per barrel. Currently, all other brewers pay $18 per barrel from the first barrel of beer produced.

Wyden’s bill, introduced today, would reduce the excise tax rate from $18 to $16 per barrel for the first 6 million barrels brewed for every brewer, and reduce the tax rate to $3.50 bbl/year on the first 60,000 barrels for microbrewers (still defined as those producing less than 2 million barrels annually). Wyden’s bill synthesizes elements of two competing bills.

  • The Fair BEER Act, championed by the Beer Institute, a trade organization generally identified with big brewers, would change the excise tax rates on a graduated scale; $0 bbl/year for the first 7,143 barrels produced, $3.50 bbl/year for barrels 7,143-60,000, $16 bbl/year for barrels 60,001-2 million, and $18 bbl/year for each barrel over 2 million brewed.
  • The Small BREW Act, championed by the Brewers Association and craft breweries, would change the excise tax rates to; $3.50 bbl/year for each barrel up to 60,000, $16 bbl/year for barrels 60,001 to 1,940,000, and $18 bbl/year for each barrel over 1,940,000.

All bills would reduce federal excise tax rates for a beer industry that now numbers well over 3,000 breweries in the United States.

The craft beer revolution in Colorado is nothing new. Recently, however, Colorado has seen growth in the production of craft spirits. Wineries and brewpubs have long been permitted to sell food on premises, but manufacturers of distilled spirits were prohibited from doing so.

That has now changed. Colorado Governor John Hickenlooper recently signed into law House Bill 15-1204 authorizing the establishment of “distillery pubs” in the state. The new law was modeled after Colorado’s brewpub license law, and allows microdistilleries to operate restaurants to showcase their craft spirits.

As with brewpubs, there are regulatory hurdles that distillery pubs must clear. First, the distillery pub must obtain licenses from federal, state, and local authorities. Those local requirements mandate the distillery pub demonstrate that it “meets the reasonable requirements and the desires of the adult inhabitants of the neighborhood” where it will operate. Also, for on-premises consumption, like most bars, the business can’t sell alcohol after 2:00 a.m. Liquor can’t be sold in sealed bottles for at-home consumption after midnight.

The new law also limits the amount of craft spirits these new distillery pubs can produce to no more than 45,000 liters (5,000 cases). Also, the law caps the amount of spirits sold at wholesale to licensed retailers to 2,700 liters (300 cases). And, at least 15% of the distillery pub’s gross revenue must come from the sale of food.

The new distillery pub law also replicates the “tied house” prohibitions contained in the brewpub license laws, which generally prohibit vertical integration of the alcohol beverage industry. But, distillery pub owners can own craft brew pubs and vice versa.

The new distillery pub should enable Colorado’s fast-growing craft spirits industry to capitalize on a seemingly ever-growing demand in Colorado from consumers who want to enjoy products produced at local businesses.