Hi again. Please excuse my absence—it’s been a bit busy on the teaching side.

When things “go legal,” it is difficult to discuss a concept without a precise definition (see “causation,” “reckless,” “negligence,” etc.).  The term “craft beer” is no exception.  When I say craft beer, I might mean something totally different than when you say it—it’s a personal experiential thing.  The problem is that the term, as currently defined, is quite squishy and can mean several different things to different people.  I might think (and would argue) that the term only applies to “independent” breweries.  But another might argue that it does not matter who manufactured the beer; it only matters what is in the glass.

I see both sides, but with big beer purchasing more and more “crafty” breweries and (mis)branding itself as just part of the gang, we should create an easy to use, descriptive way to quickly and clearly communicate who made what is in the glass.

The Existing Definition

The Brewers Association (“BA”) is pretty much the national authority on craft beer policy, advocacy, and education. (See www.brewersassociation.com.)  The BA put forth a fairly comprehensive definition of what it means to be a craft brewer and, almost defining by association, what craft beer means.

According to the BA, a craft brewer is as follows (and I quote):

  1. Small. Annual production of 6 million barrels of beer or less (approximately 3 percent of U.S. annual sales). Beer production is attributed to the rules of alternating proprietorships.
  2. Independent. Less than 25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by a beverage alcohol industry member that is not a craft brewer.
  3. Traditional. A brewer that has a majority of its total beverage alcohol volume in beers whose flavor derives from traditional or innovative brewing ingredients and their fermentation. Flavored malt beverages (FMBs) are not considered beers.

(https://www.brewersassociation.org/statistics/craft-brewer-defined/)

Ok. I’m down with that.  Mostly.  As an attorney, I can see a few ways around this definition that a crafty macro brewer could employ to sneak into the club (more on that later).  It wouldn’t be so hard to maintain a 24% ownership or distance oneself through entity creation, etc.

By way of history, the BA changed or modified the meaning of the term “small” from 2 million barrels annually to 6 million in 2014 (makes room for Boston Beer Co., Sierra Nevada, et seq.)  (See https://www.brewbound.com/news/brewers-association-revises-craft-brewer-definition.)  Also, the BA added “or innovative” to number three above and excluded FMBs.  There are some sound reasons for these changes.  (Id.)  But they show that the meaning has evolved as the industry has evolved.

Problems With This Definition

I really don’t quarrel substantively with the BA’s definition. I recognize it needs to be broad to encompass the many categories of widely recognized craft breweries.  That said, I believe it should be narrowed or further categorized.

My issue is with the broad universe that the definition encompasses. The BA data from 2016 shows that there were 5,301 craft breweries in the US that year.  Within that 5,301, there are several types of breweries that bear little resemblance to each other.  And the increasingly sophisticated consumer wants to know and cares what type of brewery made it.  It’s part of the experience. (See lawsuits against various manufacturers for misrepresenting their “craftness.”) It is not unlike the French wine standards known as “appellation d’origine controlee” or “AOC.”  Those laws, and others like them, exist because consumers care about origination and have expectations about products crafted in certain regions and under certain methodologies.

So here are the areas that could use some clarification for consumer use and education in my view.

1.  Small. 6 million barrels of beer is an astronomical amount of beer. To put this into perspective, the largest craft breweries (Yuengling, Boston Beer,Co., and Sierra Nevada) are brewing in the multiple millions of barrels of beer per year (the BA does not release specific numbers, and while I have them, I won’t state them here).  Juxtapose that number with just under 5,000 barrels brewed by one of the largest independent production craft breweries in Los Angeles County (who will remain nameless) in 2016.  You can see how huge the “small” category is—it should be further segmented.

To be fair, the BA classifies a “microbrewery” as a brewery that produces less than 15,000 barrels per year and defines a “regional brewery” as one that produces between 15,000 and 6 million barrels per year. Again, that is a huge variation that can easily be addressed.  And isn’t the term “microbrewery” just so 90s (there are reasons the term has been somewhat abandoned in common parlance)?

2.  Independent. This is the biggest to me. I once heard Mike Rowe say that “production is the enemy of authenticity” or something like that.  I couldn’t agree more.  Mass production devalues a product based on scarcity principles alone, let alone the artisanal nature of craft beer.  But I digress.  Why allow up to a full quarter of a “craft brewery” to be owned by, say, one of the mass producers?  The problem is authenticity.  An attorney cannot “authentically” represent a client while taking up to a quarter of the fee from the adversary (I recognize assumptions and illegalities in here, folks).  Would it be fair to advertise a famous artist’s work as original or authentic when another painter painted a quarter of it?  You get the point.

My view is that independent should mean just that. And only those who are truly independent, meaning 0% owned by non-craft brewers, should be able to lay claim to the title.

3.  Traditional. First, this part of the definition also includes “innovative,” which is really an antonym to traditional. So the definition kind of folds in on itself.  Second, it’s not clear that this really matters anymore.  You can find independent craft breweries making everything from traditional pilsners, to chili beers, to donut chocolate whatevers.  The range is a varied as the styles of beers out there.  To put it bluntly, I’d drop this part of the definition.

Why Bother?

Market confusion. That’s why.  Check out the following “crafty” breweries and who they are owned by (there are more):

10 Barrel Brewing:  Anheuser-Busch InBev

Ballast Point Brewing:  Constellation Brands

Blue Moon Brewing:  MillerCoors

Blue Point Brewing:  Anheuser-Busch InBev

Breckenridge Brewery:  Anheuser-Busch InBev

Devils Backbone Brewing:  Anheuser-Busch InBev

Dundee Brewing:  North American Breweries

Elysian Brwing:  Anheuser-Busch InBev

Founders Brewing:  30 percent owned by Mahou-San Miguel

Golden Road Beer Co.:  Anheuser-Busch InBev

Goose Island Beer Co.:  Anheuser-Busch InBev

Hop Valley Brewing:  MillerCoors

Kona Brewing:  32 percent owned by Anheuser-Busch InBev

Lagunitas Brewing:  50 percent owned by Heineken International

Leinenkugel’s Brewery:  MillerCoors

Mendocino Brewing Co.:  United Breweries Group

Portland Brewing Co.:  North American Breweries

Pyramid Breweries:  North American Breweries

Revolver Brewing:  MillerCoors

Saint Archer Brewing:  MillerCoors

Widmer Brewing:  32 percent owned by Anheuser-Busch InBev

I like to refer to these breweries as “crafty.” Crafty in the sense that the beer can be quite similar to independent breweries in taste, look, and feel.  But also crafty in the sense that they are trying to pull something over on the public.  I’m truly not trying to say that the actual beer is any worse than independent beer generally (there are plenty of lousy independent beers) and will confess to the occasional Bourbon County Stout.  But why are these crafty breweries trying to pass themselves off as something?  The answer, for the naysayers, is because it matters.  If it didn’t matter, you just wouldn’t see the effort from the big players.

So now that you know some basics, you can see how difficult it can be to know precisely what you are drinking. Why not make it easier?

A Modest Scheme

I asked some friends to participate with me in a terminology scheme to quickly and easily identify what is in the glass or what is being recommended. It worked and has now become second nature in our discussions. I’m not married to these terms; I’m sure there are better ones to use, but here goes:

Size: We’ve been delineating size with stars. I’m not particularly excited about this signifier because it seems to go to merits.  But for these purposes, it does not.

One star:          5,000 barrels or less

Two stars:        5,000 to 15,000 barrels or less

Three stars:      15,000 to 50,000 barrels or less

Four stars:       50,000 to 200,000 barrels or less

Five stars:        200,000 barrels or more

You’ll note that the tightest striations come in the smaller breweries. That is simply because there are more breweries in those categories.  And when you start getting into the hundreds of thousands of barrels and up, the differences become less noticeable (more on this in a later post).

Independent: We’ve been using the term “indy” for independent and “crafty” for a non-craft brewer owned brewery—no matter the percentage of ownership (for the reasons described above).  Again, I’m not married to these terms either.  They are just easy.

So it looks and sounds like this:

  1. A new, independent brewery producing 1,500 barrels would be labeled a “one-star indy.”
  2. A big-beer owned brewery producing 10,000 barrels would be labeled a “two-star crafty.”
  3. An independent brewery producing 40,000 barrels would be labeled a “three-star indy.”

You can see how this goes. Now, I recognize that this requires some research and thought to actually properly categorize a brewery under this scheme.  That’s not really the point.  Close enough can work too.  A typical conversation might be along these lines:

Friend: “You should try XYZ Brewing’s new citra IPA.”

Me: “What kind of brewery is it?”

Friend: “It’s probably a two-star indy.”

Me: “By all means then, let’s get one.”

And vice versa.

Give It a Try

The whole point is to try to understand and know who made the beer you are drinking. It adds to the fun and the experience.  The term craft brewery in Spanish is “cerveceria artesanal.”  I like it.  Shouldn’t we know if we are actually drinking something produced by an artisan?

Let me know what you think. Cheers.

 

 

Maybe it’s too late. Every day when I go through my craft beer news cycle (thanks @BrewersAssoc, @CraftBrewingBiz, et al.), I seem to be reading more and more about independent brewery-on-brewery lawsuits. Every time, I mouth a silent “Nooooooo!” Why? Two primary reasons.

Because that’s not the industry most of us know or want to be. When I started in this industry in 2012 or so, craft brewers were universally the nicest, most helpful, and collaborative group I had ever worked with or represented. Period. It was very common for a neighboring brewery to lend a hand if another needed to borrow some hops, yeast, or even labor on occasion. They would hang out together, strategize, share secrets, and collaborate in a way that seemed foreign but uniquely charming. Basically, everyone was just naturally a good citizen of this community and got along swimmingly. And while I think that is still primarily the case, there is no doubt that the easygoing and collaborative nature of this industry is beginning to fade to varying degrees in different locales. I hope I’m not talking about the good ol’ days.

Keep in mind that the beer-drinking public not only wants the freshest, best tasting product available, they also want the experience. Patrons love and identify with the beer, the brewers, and the staff at the local brewery. They are truly folk heroes to some. You know what they hate? Corporate stuff like litigation. For example, ask a brewery that has been involved in litigation about the response on social media from the public. Ask Lagunitas, Port Brewing, and any others who have been involved in a brewery-on-brewery lawsuit. The outcry from the public has universally been one of passionate rejection. It’s bad for business. Patrons want to come to the brewery or buy the beer because it is part of a positive experience and a happy community. Isn’t that what draws us to this incredible industry? While there does come a time when there is no other choice but to fight, the brewers I know are reasonable, awesome people who genuinely care about their patrons. They can and should find a way through a dispute with one of their brothers or sisters in the industry without filing a lawsuit. If not, it will become just like any other industry. Nobody involved wants that.

Because litigation is almost always a lose-lose. Do you know what percentage of civil lawsuits settle before trial? I don’t have the exact number either, but it’s somewhere around 95%. That means both sides have to hire lawyers, both sides file papers with the court, both sides have to participate in the discovery process, then both sides negotiate a resolution. A case can go on for years without getting to trial (last I heard, it was around four years for a California civil lawsuit to get to trial). So what happens during this time? Well, you pay lawyers lots of money to do lawyer stuff. Your secrets and business practices get exposed through depositions and the discovery process. You anger and isolate your patrons. You lose precious business time participating in and worrying about the lawsuit (way more time than you think). I could go on with other negatives, but this should be enough. In short, you have to pay a ton of money and your time and mental energy gets completely sucked. All of this to arrive at a conclusion that more times than not could have been reached in the first two weeks if both sides acted reasonably. Generally speaking, litigation is the worst investment of money and time I can imagine for a small business. And while I recognize that there is simply no choice on rare occasions, litigation should always be the last resort.

So why is this happening? A few thoughts on this. First, the market is maturing and filling up (I’m not saying saturated yet). This obviously makes for less room in labeling, naming, etc. And this is where a lot of the litigation is popping up—trademarks. Trademarks are important and should be enforced where necessary. Name confusion is a definitely a risk to be concerned about. But these things can often times be resolved through a simple phone call or calls without the need for fighting. Second, we are seeing far more high-dollar, investor-backed breweries opening up. These differ from the breweries opening ten years ago in that those new and sophisticated investors want their ROI. That is the primary concern. But that mindset breeds unnecessary confrontation due to pressure. The craft breweries representing the first generation of the current boom (meaning circa mid 2000s to 2015 or so) seemed more concerned with great product and experimentation rather than paying dividends. Thirdly (nod to one of my students), you can’t make crappy, uninspired beer anymore and get away with it. There is enough competition to require top product all of the time. This puts pressure on sales, even for those not pressured by investors. It used to be that a brewery could make sub-par beer and still sell out every batch with no problem. Those days are gone, but the rent still has to be paid. These things seem to me to be the primary drivers of the fights occurring in court. It doesn’t have to be that way. It shouldn’t.

Keep in mind, I’m not talking about CBA/Kona Brewing Company being sued for making only a small percentage of its beer in Kona or MillerCoors being sued for pushing Blue Moon as “craft” beer. I’m talking about the smaller, independent breweries who actually make craft beer with passion and artistry. Independent breweries need to stick together. Work out your issues outside of court and outside of public scrutiny. Your patron community expects and demands it.

Let me know what you think. Cheers.

(oh yeah, this isn’t legal advice)

If you want to bring Congress together, it seems the only thing that is capable of doing so is craft beer (and other craft beverages). I’m talking FEDERAL bipartisanship, folks.

Early this year, Senators Roy Blunt (R-MO) and Ron Wyden (D-OR), and Representatives Erik Paulsen (R-MN) and Ron Kind (D-WI) reintroduced the Craft Beverage Modernization and Tax Reform Act of 2017 in both houses for the 115th Congress. There are twelve initial sponsors in the Senate and thirteen in the House.  Maybe this bill can help quell some of the rancor over more pressing issues.  You know, beer summits over a northeast IPA.

The Act is a good one for craft breweries, especially regarding taxes. Among other provisions, the Act would reduce the federal excise tax from $7.00 per barrel to $3.50 per barrel for the first 60,000 barrels (a huge number compared to most craft breweries) for domestic brewers who produce less than two million barrels annually.  It also reduces the federal excise taxes for larger breweries and leaves it the same for the largest.  The end result is that most craft breweries will see a significant simplification and decrease when it comes to the excise tax per barrel.  In short, the Act would establish fair and equitable excise tax reform to conform the tax structure to the modern market.

But that is not all. The Act also appears to ease labeling approvals—a process that can be quite a hassle and that implicates its own regulatory quagmires.  Further, it repeals provisions regarding inventory restrictions and eases bonding requirements when moving alcohol from place to place.  The end result, ideally, is to add further fuel to the engine to keep the RPMs up.  Hopeful byproducts include further job creation, further revenue growth, and, of course, more great beer.

While I am truly hopeful that the Act can help further these goals, I am more interested in the implications the Act raises. What does it say about craft beer that Congress has seen fit to get involved?  Why would Congress want to reform the tax code in an area that some believe is still a niche?  There is no denying that the craft-beer industry has captured the imagination of the drinking public, but it has also caught the attention of legislators on the federal level.  The naysayers cannot make the “flash-in-the-pan” argument any longer with a straight face.  Craft beer is no niche.  And on some level, it is nice to see Congress’ bipartisan support of something, anything—even if the subject matter doesn’t involve healthcare or national security.  Perhaps this is a small first step in building a bridge between the aisles:  a bridge that rests on a foundation of tiny carbon dioxide bubbles.

Hat tip to the Brewers Association—keep up the good work.

Let me know what you think. Cheers.

Check out the House version here:

https://www.congress.gov/bill/115th-congress/house-bill/747/text

It’s kind of funny. I get a lot of questions from friends and colleagues about why I study craft beer laws and regulations.  People seem to think that it is inconsequential or pedestrian in some sense.  Maybe they are right in light of the social and political mess playing out before us.  But I don’t think so.

It’s Big.  Really Big.

According to the California Craft Brewers Association (great people BTW), there were over 750 craft breweries operating across California as of November 2016. This translates into $7.288 billion to the state’s economy, up from $6.5 billion in 2014.  In addition, over 51,000 Californians owe their livelihoods to the craft-beer industry in some manner. http://www.californiacraftbeer.com/ca-craft-beer/craft-beer-statistics/.  Nationwide, according to the Brewers Association, craft beer had $55.7 billion in sales for 2014 and provided more than 424,000 jobs. See https://www.brewersassociation.org/statistics/economic-impact-data/. The numbers will increase when the latest figures come out.  This ain’t chump change.

Big business with big regulation = fertile legal ground across an array of legal doctrines. So while I love craft beer, it is really the confluence of legal doctrines surrounding this product that is enticing as an area of study.

It’s Rooted In The Constitution(s).

In what seems like a prior life, I used to teach English at a university. I was a huge John Steinbeck fan and taught his books whenever possible.  Faculty teaching more traditional literary authors (read high-brow) might have scoffed and waived Steinbeck off as a mere author of children’s books.  Similarly, the same could be said for studying craft beer laws and regulations in the legal academy.  I suppose I could be labeled a simpleton.

But here’s the rub. Alcohol has not one, but two, of its very own amendments to the United States Constitution:  the eighteenth and the twenty-first.  Arguably, no other subject matter can make such a claim.  California (and several other states) also devotes a rather long and detailed section of its Constitution to alcohol and its treatment in the state in Article Twenty, Section Twenty-Two.  Those of you who went to law school know that many people consider constitutional law, in all of its iterations, the crown jewel of legal scholarship.  Of course, constitutional law is extremely important to our everyday lives and our freedoms as Americans.  To use a syllogism then:

  1. Constitutional law is an important area of study;
  2. Alcohol (thus craft beer) finds its regulatory genesis in constitutional law; therefore,
  3. Alcohol (thus craft beer) is an important area of study.

Ok fine, maybe the syllogism breaks down under serious scrutiny. But you get the point.

It’s A Diverse Topic.

Representing craft breweries and related parties requires significant nimbleness and breadth of knowledge (or willingness to learn multiple areas). To me, the most interesting topics are the three-tier system and its relevance today, as well as the interplay between the First Amendment and commercial speech regulations.  But in everyday practice, a lawyer needs to be comfortable in the following areas to be an effective craft beer lawyer (in no particular order):

  • Property law (leases, land use, zoning, and environmental concerns)
  • Business formation (LLCs, corporations, sole proprietorships)
  • Contract law (ingredient purchases, sales, distributorship agreements)
  • Intellectual property (trademarks, copyright, cease and desist stuff)
  • ABC regulatory practice (too many daily pitfalls to list)
  • TTB practice (same)
  • Advertising (First Amendment issues, particularly social media)
  • Employment law (for obvious reasons)

So yeah, one has to be kind of a jack of all trades. Anyone who practices in this area will tell you that it takes a while to learn, but once you do, the reward is an interesting and wide-ranging practice area with awesome clients.

It’s Fun.

I can’t think of a better group of people to work with and interact with than those in the craft beer community. There is the occasional ego to deal with, but on the whole, craft brewers and their employees are fun loving, interesting people.  When I started, many were unaware of the intricate web of laws that impact a craft brewery’s existence on a daily basis.  Now, I am seeing a more sophisticated market player, well aware of the complexities and backed by investor money.  In its current version (see the eighties and nineties), the industry is still a toddler.  But it is growing up fast and will reach young adulthood in the next five to ten years.  Guess who will need solid legal counsel.

Oh, and there might be some free beer to try on occasion.

If I sound defensive, I’m not. Craft beer is just such an interesting area to study and to watch.  More and more, things are reverting to a pub society—where people meet at the local brewery to talk news, business, life, and anything else you can imagine.  I’ll be there too—probably writing an article over a Mayberry IPA (find some).

Let me know what you think. Cheers.

So it’s no secret that I am a supporter of tied-house laws and the three-tier system. They serve the following important policy objectives: preventing vertical and horizontal integration in the alcohol market, prohibiting unfair competition tactics (pay-to-play, kickbacks, etc.), and, to some degree, promoting responsible drinking. Given that these laws have been around awhile, many legislatures have created exceptions to the three-tier system for any number of reasons. California has dozens. That’s not great for longevity.

It would take this whole blog post to even bullet point all of the exceptions to California’s tied-house laws. Perhaps the most striking exception is that a beer (or wine) manufacturer can self-distribute its own product. See Cal. Bus. & Prof. Code § 23357. Thus, California has done away with the second tier of the system to some extent. That is very helpful to new breweries hoping to get their products out and into the market because they do not have to engage a distributor prior to any marketplace reputation. So while I like the exception (because it is helpful to craft brewers), its very existence makes me a little nervous.

There are many exceptions; their existences make me nervous too. For example, a manufacturer can set up window displays and stack its own beer at a retailer’s premises. Id. at § 25503.1(a)(1). A beer manufacturer can serve and discuss its beer at a retailer’s premise if it is for a “course of instruction,” as vague as that is. Id. at § 25503.55(a). And a beer manufacturer can sell its product at a farmers market (provided it obtains a permit). Id. at § 23399.45. Without a doubt, these exceptions are helpful to craft breweries. But their helpfulness might be overshadowed by the long-term risk that they, and the many others like them, pose.

Why do they make me nervous? As I’ve said before, there is a concerted effort out there to get rid of or to minimize tied-house laws. That would benefit big beer manufacturers to the detriment of craft breweries (I recognize some people don’t agree—we can argue about that later). So, as an attorney, if I were hired to defend the three-tier system in a lawsuit, I would be a little hesitant to argue the importance of upholding that system when there are so many exceptions. A multitude of exceptions tends to lessen the government’s ability to argue that the law must be upheld because the interests it serves are so important. If those interests are so important and fundamental, why so many exceptions? It also gives opponents a modicum of ammo to argue that the three-tier system disfavors big beer or, as applied, constitutes naked protectionism. I don’t think that these are winning arguments. But I also thought I could slip out the final tile when I last played Jenga.

Let me know what you think. Cheers.

 

Excuse all the hyphens. Friends and colleagues have been asking me what tied-house laws are and what is this three-tier system, exactly. So let’s step back and explore these terms.

What is a “tied house”?   In simple terms, a tied-house is any retail outlet that is beholden to a particular alcohol manufacturer for any reason. The concept can be illustrated by traditional pubs or saloons prior to Prohibition. Large alcohol manufacturers would provide such retailers with low-interest loans, free draft systems, and even direct payments in exchange for favorable or monopolistic treatment from that retailer. In some cases, a manufacturer might own every retail outlet in town, which outlets would then sell only that manufacturer’s product. So the result of tied houses is a decrease in competition and consumer choice, while providing retailers with every incentive to oversell alcoholic beverages (particularly those made by the retailer’s benefactor). After Congress repealed Prohibition in 1933 through the Twenty-First Amendment, every state in the union enacted some version of laws designed to prohibit and minimize tied-houses.

What is the “three-tier system”? In its purest form, the three-tier system is a market regulation concept whereby each “tier” of alcohol manufacture, wholesale (distribution), and retail must remain completely separate from the others. That is, a manufacturer cannot have an ownership or business interest in a distributor or a retailer and all the vice versas you can imagine. As the California Supreme Court put it, “[m]anufacturing interests were to be separated from wholesale interests, wholesale interests were to be segregated from retail interests. In short, business endeavors engaged in the production, handling, and final sale of alcoholic beverages were to be kept distinct and apart.” California Beer Wholesalers Assn., Inc. v. Alcoholic Beverage Control App. Bd., 5 Cal. 3d 402, 407 (1971). Most states have some version of these regulations to keep each tier independent of the others, mainly for the purpose of prohibiting tied houses and the anti-competitive results and temperance issues they raise. There are many variations on this theme among the states, since the Twenty-First Amendment gave the states the power to create their own regulatory schemes.

So what are “tied-house laws”? These laws and regulations are those enacted by the state legislatures or promulgated by the state agencies for the purpose of creating and enforcing that state’s version of the three-tier system. Again, the purpose was to prohibit (or at least minimize) large manufacturers from unduly influencing wholesalers and retailers. This isn’t a theoretical problem. “In the era when most tied-house statutes were enacted, state legislatures confronted an inability on the part of small retailers to cope with pressures exerted by larger manufacturing or wholesale interests.” California Beer Wholesalers, 5 Cal. 3d at 407-08. There are myriad different tied-house laws that states have enacted and modified over the years—each jurisdiction is different to some degree. California’s, originally enacted in 1935, can be found in the California Business and Professions Code section 25000 et seq. And California has a ton (more on these in later posts). As a specific example, California Business and Professions Code section 25503 provides that it is illegal for a manufacturer to give “anything of value” to a retailer (or wholesaler), to give rebates or kickbacks to retailers, to pay a retailer for advertising in the retail outlet, and to give a retailer any free goods (with some exceptions). So California’s idea was to try to keep separation between the tiers by essentially prohibiting bribes for favorable treatment. There are many more restrictions and exceptions contained in California’s statutes and regulations. As the Supreme Court noted, these regulations were designed to prevent dominance in the market by large-scale players and to maintain independence between the tiers. California Beer Wholesalers, 5 Cal. 3d at 408.

Why do we care? Without these laws, the market would turn into a free-for-all for those with the deepest pockets. Of course international monoliths would take every advantage to squeeze out pesky independent brewers who keep taking market share—dare I say even pay bribes to retailers? And as I have pointed out before, many state three-tier systems and accompanying tied-house regulations are under attack through sophisticated lobbying efforts, legal challenges (see prior blog posts), and even through circumventing the laws in questionable/illegal ways. Are there problems with the three-tier system? You bet. Do the benefits outweigh the problems? That depends on if you favor consumer choice, an even playing field, and good old independently brewed beer in all its glorious iterations.

Let me know what you think. Cheers.

In my last entry, I explored how the Ninth Circuit’s potential application of “heightened” commercial speech protections under Sorrell’s First Amendment analysis could spell trouble for the craft brewing industry in California.  Well, the Eighth Circuit recently continued the trouble, but it did so without applying any stricter scrutiny than that applied under the traditional Central Hudson test* (requiring a four-prong “intermediate scrutiny” analysis for commercial speech regulations).  Independent breweries: the three-tier system is in serious jeopardy.

In Missouri Broadcasters Assoc. v. Lacy, — F.3d — (8th Cir. 2017) (available at 2017 WL 218024), an association of broadcasters, a winery, and an alcohol licensee brought suit against the Missouri state supervisor of liquor control under the First Amendment and challenged three Missouri tied-house regulations that are fairly similar those in California (and most other states).  Specifically, the Missouri regs (1) prohibit alcohol retailers from advertising discounted prices outside the retail premises; (2) prohibit retailers from advertising prices below the retailer’s actual cost; and (3) require manufacturers, in all advertisements, to exclude the retail price, list multiple retail businesses not related to each other, and make the listing “inconspicuous.”  The stated purpose of these regs appears to be the state’s interest in promoting responsible alcoholic consumption.  For unstated reasons, the district court granted the government’s motion to dismiss.

The Eighth Circuit reversed. Instead of applying a “heightened” scrutiny analysis under Sorrell, as contemplated by the Ninth Circuit in Retail Digital Network, the Court reversed under the plain old Central Hudson intermediate scrutiny analysis—the one that courts have applied to many tied-house laws in the past that survived that level of scrutiny. See, e.g., Actmedia, Inc. v. Stroh, 830 F.3d 957 (9th Cir. 1986).  This is yet another example of the growing trend that federal courts are following to provide greater protections for commercial speech in the alcohol industry.  And a key part of the three-tier system in almost all jurisdictions has been leveling the advertising playing field—both for anti-competitive reasons and to promote some level of responsible drinking.

The Eighth Circuit looked askance at the Missouri regs for several key reasons. First, it held that “the common sense link between advertising promotions and increasing demand for alcohol does not demonstrate the challenged restrictions directly advance the interest in responsible drinking.”  The notion seems to be that for a regulation to survive even Central Hudson (as it is currently being applied), the states would have to show a more substantial nexus to the asserted interest than has been accepted in the past.  Second, the court suggested that there are likely alternatives to these regulations that directly advance the state’s goals in a less obtrusive manner (i.e., higher taxes on alcoholic beverages and educational campaigns).  Third, the court seemed to accept that the third regulation compelled speech by requiring advertisements to list multiple retailers (California requires this too).  So the case is now back in the district court’s hands.

Why do we care? The craft brewing industry is witnessing a multi-front, organized campaign to attack and dismantle the three-tier system.  Those who have lost market share to independent craft breweries** would like nothing more than the unfettered use of their deep pockets to influence the market to their advantage—whether through advertising or even direct pay-to-play conduct.  Of course, both are restricted or prohibited under the three-tier system to minimize vertical and horizontal integration and to promote responsible drinking.  The benefits to independent craft beer under the three-tier system are obvious.  But they are in jeopardy.  If you couple the mounting attacks on tied-house regulations with the growing trend in the federal courts (harder looks at commercial speech regulations), craft brewers are akin to my twelve-year-old son facing an Aroldis Chapman fastball.

I will note that the Eighth Circuit rejected the idea that Sorrell requires a departure from Central Hudson.  “Though Sorrell does describe the required scrutiny as ‘heightened,’ the Supreme Court still went on to apply the four-prong standard of Central Hudson.” Missouri Broadcasters, — F.3d – at n.5.  This potentially creates a circuit split between the Ninth and the Eighth Circuits, depending on how the Ninth Circuit resolves Retail Digital Network.  Perhaps craft beer will find itself before the Supreme Court in some capacity.

* The traditional Central Hudson test courts examine four questions:  “(1) whether the speech concerns lawful activity and is not misleading; (2) whether the asserted governmental interest justifying the regulation is substantial; (3) whether the regulation directly advances the governmental interest asserted; and (4) whether the regulation is not more extensive than is necessary to serve that interest.”  Central Hudson Gas Elec. Corp. v. Pub. Servs. Comm’n of New York, 447 U.S. 557, 566 (1980).  I say “traditional” because I am anxiously waiting to see if the Ninth Circuit modifies the analysis in Retail Digital Network.

** I use the term “independent” craft breweries due to big beer’s expansion into, and purchase of, what most would consider “craft” breweries. For reference, see Blair A. Robertson’s article at the Sac Bee:  http://www.sacbee.com/food-drink/beer/article118258943.html.

Let me know what you think.  Cheers.

 

So here’s the thing: there is an extremely important case in front of the Ninth Circuit right now that could have a dramatic impact on the craft beer industry. For reasons I won’t get into here, the Ninth Circuit as a whole (not the typical three-judge panel) heard oral arguments on January 19, 2017 regarding Retail Digital Network v. Appelsmith, 810 F.3d 638 (9th Cir. 2016). If the case goes the way the federal trend suggests, craft brewers could very likely find themselves being squeezed out of retail outlets—both bars and stores.

Why so important? It appears likely that the Ninth Circuit will strike down one of California’s tied-house restrictions (more on these in a future blog) that has been in effect since 1935. To summarize, California Business and Professions Code section 25503(h) makes it illegal for alcohol manufacturers to pay a retailer for advertising space on the retail premises. They can still advertise where they wish, but they cannot pay the retailer for that advertising. As Judge Callahan from the Ninth Circuit put it, “[t]hus, for example, a liquor store owner in California can hang a Captain Morgan Rum sign in his store’s window, but the Captain can’t pay him, directly or through an agent, for doing so.” Id. at 641-42.

Why is this law now potentially unconstitutional? Since the early 2000s, federal courts have been giving commercial speech more protection under the Fourth Amendment. The traditional test, known as the Central Hudson test, is what we call “intermediate scrutiny.” That means that while a demanding standard, it is not the highest standard courts can apply. In fact, the very statute at issue in Retail Digital Network (Section 25503(h)) was challenged and upheld in 1986 by the Ninth Circuit under this intermediate scrutiny standard. See Actmedia, Inc. v. Stroh, 830 F.2d 957 (9th Cir. 1986). But in 2011, the Supreme Court jumped on a commercial speech case and suggested, but did not apply, what the court deemed “heightened scrutiny.” See Sorrell v. IMS Health, Inc., 564 U.S. 552 (2011). The Court failed to even hint at what this heightened scrutiny would look like, and the opinion is entirely unclear as to whether the Court was simply considering Central Hudson as already a heightened analysis.

The three-judge panel of Retail Digital Network took Sorrell to heart. That panel, while not overturning Section 25503(h), sent it back to the district court to apply this amorphous heightened scrutiny to the statute (and strongly hinted that it wouldn’t survive). That is when the Ninth Circuit as whole (known as “en banc”) stepped in to review the case and hear oral arguments on January 19, 2017. So we don’t know if the Ninth Circuit is going to follow the trend and apply some form of heightened scrutiny. If it applies the traditional Central Hudson test, then Section 25503(h) will likely stand. If it applies heightened scrutiny, Section 25503(h) will likely be deemed unconstitutional.

Why do craft brewers care? If infinitely deep pockets (such as those pockets belonging to big beer) are allowed to purchase point-of-sale advertising, independent craft breweries are obviously at a significant disadvantage. One of the two main reasons Section 25503(h) was passed in 1935 was to prevent vertical and horizontal integration in the alcohol market (the other reason was to promote temperance), as well as to prohibit large manufacturers from currying favor with retailers by paying them to the exclusion of other manufacturers. Also, who is to tell whether a payment for “advertising” was really for that purpose, and not a payment just to get the retailer to push that manufacturer’s product (which is illegal)? You can see the logic. This would essentially amount to legal pay-to-play. Those of us in the industry know that pay-to-play exists at the margins (at least), but to legalize it would cut to the core of the three-tier system.

Think of the last time you were in a grocery store. The beer aisle consists largely of two big beer brands in various shapes and sizes—six pack cans, six pack bottles, six pack tin bottles, twelve pack cans, twelve pack bottles, twelve pack tin bottles, and on and on (not to mention gimmick spouts, wide mouths, etc.). Do consumers really care that much about packaging? Nope. It is shelf space. And that is everything. Allowing big beer manufacturers to purchase advertising space (and all the goodies that come along with a beholden retailer) will only further squeeze independent craft breweries from the shelves. What mom and pop store doesn’t want an influx of cash—even if there are strings attached?

Let me know what you think.  Cheers.