For reasons I will never quite understand, breweries are often treated differently than wineries in California’s alcohol statutes and regulations (ok, I do understand, it is the powerful wine lobby).  When I tell friends and colleagues that beer law has lots of constitutional nooks and crannies, I often wonder if they believe me.  Here’s some proof.

Today, the California Craft Brewers Association (the “CCBA”) and several independent breweries sued Governor Newsom and California State Public Health (“CDPH”) Officer Sandra Shewry in federal court (Central District of California # 8:20-cv-02372) for violations of the Equal Protection and Due Process Clauses of the United States Constitution for how breweries have been treated during the pandemic and will be treated when things start clearing up.  The Complaint seeks a declaration that the Governor’s executive orders and CDPH Guidance violates both clauses, for an injunction prohibiting California to require breweries to serve sit-down, dine-in meals in order to serve their beer in their tasting rooms (unlike wine), and for attorneys’ fees.  I think the lawsuit has merit.  Of course, the Complaint recognizes the importance of promoting California citizens’ health and safety, but doing so while favoring one class of alcohol manufacturer (wine) over another (beer) is arbitrary.

In response to the COVID-19 pandemic, Governor Newsom issued a series of orders, including a prohibition on beer manufacturers from operating tasting rooms unless they provide meals with any beer served at the tasting room—even if the tasting room never previously sold meals.  Wine tasting rooms, on the other hand, do not have to serve food with wine at their tasting rooms.  Oddly, the Complaint notes that even wineries that share tasting rooms with breweries can sell and serve wine without food, but the beer manufacturer must still serve food.  The Complaint further points out that the state has provided no scientific evidence or explanation for this differing treatment.  The bottom line is that the CCBA and the brewery plaintiffs allege that winery tasting rooms and brewery tasting rooms are similarly situated, if not identically situated, and therefore there is no basis to treat them so differently.  I agree, especially with many breweries facing closure and an inability to move product at all.  This is a discrimination case.

Here is what seems to be the crux of the problem.  On May 12, 2020, the CDPH issued an order stating, “Brewpubs, breweries, bars, pubs, craft distilleries and wineries should remain closed until those establishments are allowed to resume modified or full operation unless they are offering sit-down, dine-in meals.  Alcohol can only be sold in the same transaction as a meal.”  Ok, so far.  Everyone is being treated equally.

Then, on June 28 and July 1, 2020, the CDHP eliminated the need for wine manufacturers to serve meals with their wine. Specifically, the July 1 closure Guidance ordered “all brewpubs, breweries, bars, and pubs in these counties must close, both indoors and outdoors, unless they are offering sit down, din-in meals….”  What happened to wine tasting rooms?  They got a pass.  The CDPH offered no explanation as to why wineries can sell wine only, but breweries must serve sit-down, dine-in meals to sell a pint.  Later, the CDPH attempted to justify the differing treatment in a letter to the CCBA by alleging, essentially, that brewery tasting rooms are in urban areas and wineries are not and that wineries are generally not social hubs for people to meet.  That’s just not true.

Regarding the Equal Protection Clause, the complaint proceeds as follows:  (1) the Fourteenth Amendment forbids any state to “deny to any person within its jurisdiction equal protection of laws”; (2) beer and wine manufacturers are similarly situated; (3) Governor Newsom and the CDPH have treated beer manufacturers differently than wine manufacturers regarding the sit-down meal requirement; (4) there is no rational basis for the differing treatment; and, therefore, (5) the order and guidance are unconstitutional.  In a nice stroke of the pen, the Complaint alleges that “imposing the sit-down, dine-in meal requirement on beer manufacturers does not keep California citizens who seek an alcoholic beverage at home entirely, it just sends them to the winery instead—which is likely to be very nearby (or even next door) to the beer manufacturer they would have visited.”

The Due Process cause of action proceeds similarly and focuses on breweries’ deprivation of conducting their lawful business and the detrimental impact on their liberty and property interests.  Further, the Complaint alleges the CDPH guidance is arbitrary and invites arbitrary enforcement.  Perhaps most importantly, at least for procedural due process, the Complaint focuses on the fact that the CDPH guidance was implemented without a constitutionally-adequate hearing and provides no meaningful procedure to challenge the restrictions.

Why do I think this has merit?  The Complaint alleges the disparate treatment of similarly situated “persons” and provides extensive allegations about the state’s lack of any evidence, scientific or otherwise, that could rationally justify the orders.  And if the state tries to argue that its Twenty-first Amendment powers give it broad power to regulate alcohol as it sees fit, it should read 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 516 (1996) where the Supreme Court recognized that the Twenty-first Amendment “does not license the States to ignore their obligations under other provisions of the Constitution.”  To be more specific, the Court relied on “our specific holdings that the Twenty-first Amendment does not in any way diminish the force of the Supremacy Clause, the Establishment Clause, or the Equal Protection Clause.”  Id. (citations omitted; emphasis added).  Thus, the Twenty-first Amendment will not save unconstitutional infringement on breweries’ rights.

Good luck to the CCBA and the named independent brewers.  We’re rooting for you.  Did I mention that Governor Newsom is a winery owner?

 

 

 

The Alcohol and Tobacco Tax and Trade Bureau (known as the TTB) is the federal agency charged with enforcing the Federal Alcohol Administration Act and enacting regulations governing the alcoholic beverage industry.  This includes everything from the federal tied-house restrictions (27 U.S.C. § 205(b)) to the propriety of the labels you see on your craft beers.  Oh, it also collects the taxes.  The TTB has authority over beer shipped interstate.

Under the federal tied-house law, it is illegal for a brewery to directly or indirectly induce a retailer engaged in the sale of alcoholic beverages to purchase beer from the brewery to the exclusion, in whole or in part, of other breweries.  Stated less technically, a beer manufacturer can’t induce a retailer to favor its beer over others.  See 27 U.S.C. § 205(b).  Inducements include such items as “furnishing, giving, renting, lending, or selling to the retailer any equipment, fixtures, signs, supplies, money, services or other thing of value” and by “extending to the retailer credit for a period in excess of the credit period usual and customary to the industry for the particular class of transactions.”  27 U.S.C. § 205(b)(3); see 27 CFR 6.21(c).  In other words, a manufacturer can’t pay to play.  Commercial bribery is illegal (I see you industry folks smirking).

A common violation that many are not aware of is that the sale of alcohol with the privilege of return is prohibited with some exceptions.  In other words, a brewery (or wholesaler) cannot sell its beer to a retailer and then accept a return if the beer fails to move off the shelves (known charmingly in the industry as a “shelf turd”).

The TTB is attempting to extend a helping hand to retailers (and thus breweries by extension) during the COVID crisis by relaxing some of these restrictions.  Specifically, as mentioned above, extensions of credit to retailers beyond 30 days is considered an inducement.  However, the TTB’s latest industry circular (available here:  https://www.ttb.gov/industry-circulars/ttb-industry-circular-2020-3) states that it will not enforce this restriction for extensions of credit for up to 120 days.  But this does not allow a brewery to extend credit to a retailer until the product is sold—that would still be an inducement.  Returns are now allowable if the beer was purchased for an event that was cancelled due to COIVD-19.

In addition, to help retailers in need, the TTB is allowing manufacturers to purchase prepaid gift cards to consumers as long as they are not “tied to an alcoholic beverage retailer, retailer group, or restaurant.”  It is up to the consumer to determine where to spend the gift card, but the manufacturer can encourage consumers to spend them to support retailers or restaurants of the consumer’s choice.  The gift card has to be a generic one, like a Visa gift card, and cannot be a gift card to a particular retailer.  Further, the TTB has stated that it will not investigate donations to charities that support retailers and their employees.  And of course, manufacturers can provide consumers with hand sanitizer.  These would all be considered inducements pre-COVID.

Sigh.  Thanks for the effort.  While these things might provide some relief to a limited number of retailers, there is so much more the government could be doing to help craft breweries.  How about passing the Craft Beverage Modernization and Tax Reform Act that is about to expire?  See prior post.  How about not shutting down outdoor dining when there is no evidence that it contributes to the spread of COVID-19 (state and local issue, I know)?  The bottom line is that big crises require big ideas.  Extensions of credit and hand sanitzer are but a blip on the screen.  Let’s think bigger, government, unless we don’t want craft breweries and the vibrant culture they bring to communities.  This is not hyperbole.

 

This is important, and time is running out.  Craft breweries are getting crushed during the pandemic.  Many are hanging on by a government PPP string.  The Denver Post recently reported that at least 170 independent craft breweries closed during the first half of 2020.  The number is likely to be much larger at present.  Most of these small businesses are in a bad way.  The government needs to get off its rear to help out.

In 2017, Congress provided a temporary reduction in federal excise taxes on beer through the Tax Cuts and Jobs Act (specifically the Craft Beverage Modernization and Tax Reform Act (S. 362/H.R. 1175)).  What did these reductions mean?  It reduced the federal excise tax for breweries producing fewer than 2 million barrels annually from $7.50 to $3.50 per barrel for the first 60,000 barrels.  By the way, this grouping encompasses the vast majority of 8000+ independent craft breweries in the U.S.  It did some other stuff too, but those benefits were for gargantuan mega breweries and importers so not the focus here.  Especially during COVID and the serious decline in sales for independent breweries, this $4.00 savings per barrel is extremely important.

What’s the problem?  The Act is set to expire on December 31, 2020.  If Congress does not act, independent breweries (more than 2000 have opened since the Act went into effect) will see their taxes essentially double.  Really?  At a time like this?  Frankly, many independent breweries simply can’t take the hit and will have to close up shop.

It doesn’t matter if you don’t like beer.  I bet you like jobs.  According to the Brewers Association, craft beer provided 580,000 jobs in the US in 2019.  While that number has certainly shrunk since the 2019 stats came in.  We should all want to stop the bleeding of breweries and their half-million plus jobs.

And it’s not like it’s controversial.  The Beer Institute provides that the Act had largely bipartisan support in both the Senate and the House.  340 members of the House and nearly three quarters of the Senate to be specific.  We should push Congress to extend the Act to allow breweries to invest in their survival through COVID, to allow brewery employees to remain gainfully employed, and to allow us hangers on to drink their fine products.  If there has to be a fight about it, please, lawmakers, make it after the pandemic.  Now get to work.

Let your representatives know that you care about your local breweries and that you support extending the Craft Beverage Modernization and Tax Reform Act.  They’ll be too busy bickering, I’m sure.  But being heard is a start.

Cheers.  And let me know what you think.

 

“Mo Money Mo Problems:” How the Post-Mortem Right of Publicity Affects Craft Brewers

  1. Introduction

I once went to a taproom with an array of eighty self-serve beer taps. It was initially difficult to pick a beer from the eighty options. But soon, one caught my eye: North Coast Brewing Company’s “Brother Thelonious Belgian Style Abbey Ale.” The beer cleverly invoked the name of legendary jazz pianist Thelonious Monk and prominently featured him on the label with a snifter of ale. Being a fan of Thelonious Monk, picking a beer became an easy choice.

A Nielsen Holdings study affirms my taproom experience, finding sixty-six percent of American craft beer buyers believe a beer’s label—instead of reputation or price—is “extremely” important for grabbing their attention. In a crowded market with limited shelf space, a standout label is a great way to distinguish the beer and promote sales. And what better way is there to bring in customers than putting a famous person on the label? The practice is astonishingly common; for example, a quick web search presents dozens of The Notorious B.I.G. inspired beers (e.g. Notorious H.O.P, Notorious P.O.G., Notorious B.I.G., Hoppy Smalls, Big Poppa).

But a brewer using the name and likeness of a deceased celebrity presents right of publicity issues that outweigh the commercial benefits. The right of publicity is the “right of a person whose identity has commercial value . . . to control the commercial use of that identity.” See Waits v. Frito-Lay, Inc., 498 F.2d 1093, 1098 (9th Cir.1992). Celebrities have a property interest in their identities because their identities are “valuable in the promotion of products” and “unauthorized commercial exploitation” of their identities threatens their rights. White v. Samsung Electronics America, Inc., 971 F.2d 1395, 1398 (9th Cir. 1992). California has a common law version and a statutory version of the doctrine. The common law version does not survive death, but the statutory version applies post-mortem.

It is imperative that craft brewers understand the post-mortem right of publicity and tread lightly with deceased celebrity-based beer brands. When brewers ignore the right of publicity, they expose themselves to legal and financial costs associated with the misappropriation of a celebrity’s name and likeness. For example, North Coast Brewing Company recently had to settle for an undisclosed amount with Thelonious Monk, Jr. because it misappropriated the name and likeness of Thelonious Monk, Sr. on “Brother Thelonious” merchandise. Furthermore, if a brewer manages to defend their brand as a parody, other brewers are free to riff on the brand’s name and label. Guest Lecture with Mike Kanach, Intellectual Property Partner, Gordon, Rees, Scully & Mansukhani (June 27, 2020). As a result, other brewers can capture the initial market advantage of the celebrity-based beer. While there are technically ways to avoid harm when using a celebrity’s name and likeness, the best practice is to not have a dead celebrity-based beer because the financial risks are significant.

The Right of Publicity: California Civil Code § 3334.1 and The First Amendment

California Civil Code § 3334.1 provides that users of a deceased personality’s name or likeness for commercial purposes without prior consent are liable to the holder of the decedent’s right of publicity for damages resulting from that unconsented use. See Cal. Civ. Code § 3334.1. However, there are defenses under the First Amendment to the right of publicity. See Comedy III Productions, Inc. v. Gary Saderup, Inc. 25 Cal. 4th 387, 405–07 (2001).

  1. The Statutory Right of Publicity

California Civil Code § 3334.1 makes users of a “deceased personality[’s]” name or likeness on products, or in advertising or sales, liable for $750 or any damages the use causes—including lost profits—if they use the name or likeness without consent of the decedent’s estate. Cal. Civ. Code § 3334.1(a), (c). The injured party measures lost profits with the gross revenue attributable to the use of the personality. Cal. Civ. Code § 3334.1(a). The statute defines “deceased personality” as a person whose “name, voice, signature, photograph, or likeness has commercial value at the time of his or her death, or because of his or her death.” Cal. Civ. Code § 3334.1(h). The use of the decedent’s name or likeness must be “directly connected” to a commercial purpose. Cal. Civ. Code § 3334.1(k).

When a brewer uses a deceased personality on its beer’s label or brand name without consent from the decedent’s estate, it risks financial and legal costs from the misappropriation of the celebrity’s identity. For example, a brewer uses The Notorious B.I.G.’s name or likeness on it’s beer label or as the beer’s name without asking for permission from The Notorious B.I.G.’s estate which then sues the brewer under § 3334.1. These uses qualify as an unconsented use of Biggie’s personality that is directly connected to a commercial use because the name or likeness is on the product itself and promotes sale of the beer. The brewer would have to halt production and sales of the beer and may have to dump any remaining beer at the end of the lawsuit. Furthermore, a brewer using The Notorious B.I.G. on a beer’s label or brand name would cause his estate damages. The damages include gross revenue attributable to the use of The Notorious B.I.G.’s name or likeness and any noneconomic damages. The prevailing party receives attorney’s fees and costs, so if the brewer loses the case, it must pay these costs in addition to its own attorney’s fees. As a result, it is easy to see how a brewer could financially suffer through its unconsented use of a dead celebrity’s identity because lost profits, noneconomic damages, dumping the beer, attorney’s fees and costs add up to substantial sums of money. Most brewers in this scenario can only survive by settling the case, but even settlements can set brewers back considerably.

The Ninth Circuit has held that § 3334.1 only applies to people domiciled in California at the time of death. See Cairns v. Franklin Mint Co., 292 F.3d 1139, 1147, 1149 (9th Cir. 2002). In Cairns, an American mint produced coins with Princess Diana on them, and the Princess’s estate sued the mint under § 3334.1. Id. at 1144. The Court explained British law on the right of publicity applied instead of § 3334.1 because the right of publicity is a personal property right and California law makes personal property rights dependent on the law of the plaintiff’s domicile unless another law provides otherwise. Id. at 1149. Thus, Princess Diana’s estate could not recover damages because Great Britain—her domicile—did not recognize the post-mortem right. Id. at 1149. However, one court recently reframed the law, suggesting there is a claim under § 3334.1 if the decedent’s domicile at the time of death recognizes the post-mortem right of publicity. See Bravado Int’l Grp. Merchandising Servs. v. Gear Launch, Inc., 2018 WL 6017035, 9 (C.D. Cal. 2018).

Under Cairns, using a dead celebrity’s image is outside the scope of § 3334.1 if the celebrity’s domicile was not California when they died. Cairns, 292 F.3d at 1149. However, a celebrity’s estate may have a claim under the Bravadointerpretation of § 3334.1 if the celebrity’s domicile at the time of death offers a post-mortem right of publicity. See Bravado Int’l Grp. Merchandising Servs., 2018 WL 6017035 at 9. Continuing our Notorious B.I.G. example, New York law on the right of publicity would govern under Cairns, while § 3334.1 may apply under the more recent Bravado holding. Given the Bravado holding, a shift in the law is possible, so brewers must be careful when using a dead celebrity’s identity without consent even if they died domiciled outside of California. Otherwise, brewers expose themselves to liability and might divest themselves of their profits.

  1. The First Amendment Defense

Brewers may avoid financial ruin under a First Amendment defense after using a dead celebrity’s personality for a beer brand or label without consent. Because the statute does not exempt beer brands or labels, celebrity-based beers may only receive protection as a parody. To qualify as a parody, the beer brand or label must contain “significant transformative elements” beyond celebrity likeness or its “value . . . [must] not derive primarily from the celebrity’s fame.” See Comedy III Productions, Inc., 25 Cal. 4th at 407 (2001).

“Transformative elements” hinge on whether the work “adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” Comedy III Productions, Inc., 25 Cal. 4th at 404. In Comedy III, an artist sketched The Three Stooges and sold merchandise bearing their image, causing the owner of their rights of publicity to sue for misappropriation of their identities. Id. at 407. The Court held that the work was not transformative because it literally resembled the Stooges rather than transforming their images into something more than celebrity likeness. Id. at 409. The Court explained that the focus is on whether the defendant transforms the celebrity’s likeness such that it becomes the defendant’s own creative expression. Id. at 406. Thus, the artist could not claim his work was transformative because he simply “[created] a conventional portrait of a celebrity so as to commercially exploit” the celebrity’s fame. Id. at 408. Conversely, in ETW Corp. v. Jireh Publishing, Inc., the Sixth Circuit held that a painting commemorating Tiger Woods’s victory at the Augusta Masters Tournament was transformative because the work did not simply depict Woods but combined other images “to describe, in artistic form, a historic event in sports history and convey a message about the significance of Woods’s achievement.” See ETW Corp. v. Jireh Publishing, Inc., 332 F.3d 915, 938 (6th Cir. 2003).

However, a court is unlikely to consider most celebrity-based beer brands and labels to be transformative because their names and artwork are not clearly making a commentary or critique. For example, one Biggie-inspired beer—simply called “Notorious B.I.G.”—provides no commentary and instead copies the rapper’s name. Another example is a beer called “Label Us Notorious”—a lyric from The Notorious B.I.G.—featuring a silhouette image of The Notorious B.I.G. behind a microphone. It is unclear if this beer qualifies as a parody because its artwork does not “transform” Biggie’s image beyond his likeness. Rather, it appears the brewery is simply pulling from the original source to benefit off of the celebrity’s likeness. Furthermore, the commentary provided is not readily apparent other than the brewer touting its notoriety. As a result, the beer brand likely commercially exploits The Notorious B.I.G.’s identity. However, if a brewer made a brand or label that is a distinct expression depicting more than The Notorious B.I.G.’s likeness and conveying a significant message, the brewer may prevail. In short, if a brewer is going to parody a celebrity without permission, they not only should expect a lawsuit, but also, they should be good at parodying in a transformative manner.

If a brewer successfully defends their beer as a parody, the brewer will avoid financial loss associated with the lawsuit because the losing party must cover the brewer’s costs. However, the brewer risks other losses because it is unclear if the brewer has intellectual property protections in the brand and label since the beer brand is a riff on existing intellectual property. (Guest Lecture with Mike Kanach.) In theory, a brewer should receive protection since it made a sufficiently expressive and new mark, but protections remain uncertain which allows others to copy the parody. (Guest Lecture with Mike Kanach.)

III. How Craft Brewers Can Avoid Issues with the Right of Publicity

Craft brewers can avoid liability from the right of publicity if they sufficiently parody the celebrity. However, parody does not avoid the issue but invites it. Instead of leaning on parody, brewers often blatantly appropriate the name and likeness of celebrities in “one-off runs” and sell small batches of beer from their taprooms over a short period of time. Typically, the beer is gone and the sale is over before the brewer receives a cease and desist letter. Serving small amounts of beer exclusively in the taproom allows brewers to market it as a limited-edition offer. Additionally, serving beers from the taproom often involves no artwork invoking the likeness of the celebrity, and if it does it can simply be a parody or rework. Furthermore, the profits generated in these one-offs are miniscule in comparison to continuous sales, which reduces the incentive of filing a lawsuit because the gross revenue does not outweigh the costs of a lawsuit. In that sense, it really is “Mo Money Mo Problems.”

Even so, one-off runs are not advisable because stealing other’s intellectual property is financially and legally risky and ethically questionable. Brewers should not make this behavior a regular practice because continuous appropriation of other’s property makes right of publicity holders and courts less likely to be forgiving in future litigation. Rather, if a brewer seeks to use the name and likeness of a dead celebrity, it would be prudent for the brewer to reach out to the holder of the celebrity’s right of publicity and enter into a licensing agreement to avoid future lawsuits. Still, an agreement does not guarantee zero right of publicity issues; for example, North Coast had an agreement with Thelonious Monk, Jr. before their lawsuit regarding “Brother Thelonious Abbey Ale.” Instead, the best way to avoid issues is to simply not appropriate the name and likeness of a dead celebrity at all. By not using a deceased personality, brewers entirely avoid any potential issues associated with the post-mortem right of publicity.

  1. Conclusion

Right of publicity challenges outweigh the commercial benefits of using a deceased personality in beer brands and labels. If brewers ignore the post-mortem right of publicity, they risk financial harm because the statutory right of publicity prevents future sales and redeems lost profits, noneconomic damages, attorney’s fees, and costs. There are ways to avoid this fallout through parody, but just because a brewer can defend a brand in a lawsuit does not mean it should because parody allows other brewers to riff on the brand, diluting the commercial advantage of the initial parodist. Furthermore, brewers may limit production and sell the celebrity-based beers only in their taproom as a one-off run to disincentivize a lawsuit because a one-off small batch sale limits the profits that the estate could recover. However, this behavior still exposes craft brewers to legal challenges from often well-financed owners of a post-mortem right of publicity. Brewers can avoid issues from the unconsented use of a deceased personality by contacting the holder of the right of publicity and making a written licensing agreement to use the name and likeness of the celebrity on the beer and associated merchandise. But this can sometimes devolve into legal battles that can also harm brewers and divest them of profits. Thus, the best way to avoid issues is by simply not having a dead celebrity-based beer brand at all.

Aloha everyone. As per my custom, below is an unedited  paper written by Tracy Dudick (a rockstar evening student at McGeorge) during my last Craft Beer Law class. This paper examines the sometimes complex relationship between craft beer and legal cannabis.  While there are some similar studies out there, Ms. Dudick provides some great insights and ideas.  See below

Craft Beer and Cannabis Can Coexist

There has been a shift in consumer choice and what is considered culturally acceptable when it comes to legal intoxication. Where nights that used to be filled with a case of domestic beer and joints of a friend’s uncle’s marijuana, now involve a twelve pack of local craft beer and a stop by the neighborhood dispensary. Even more recently with the coronavirus pandemic, the cannabis industry has reached a new level of legitimacy – as cannabis, as a whole, was deemed an “essential” part of life nationwide.

As the cannabis industry continues on the road to legalization, it has been predicted legal marijuana usage could adversely impact the demand for alcohol. However, data suggests legalization in the short term has not affected craft beer sales. In fact, these fears are predominately felt by Big Beer and further pushed through media outlets to create hesitation among the alcohol industry to support marijuana legalization.[1] Despite this rising fear, it seems local craft breweries and some of the world’s largest macro-breweries are leaning into the cannabis industry. At this point, there is no reason to think cannabis and craft beer cannot peacefully coexist, or even support one another.

  1. Craft Beer and Cannabis Can Coexist.

As a preliminary note, marijuana and hops are cousins in the plant world. Cannabis and craft beer are both products of counterculture – where craft brewers have fought for their place in the beer industry, cannabis continues on a slow and uncertain road to legalization. Unlike craft beer, the marijuana industry’s approach to start-up cultivation is considerably more difficult because of higher entrance barriers and stricter regulations.[2] Specifically, the federal government remains marijuana’s most prominent barrier to reaching its full potential. While craft beer is successful at navigating regulatory hurdles, the industry still faces blockades from all levels of government that hinder its true growth.

When the craft brewing industry emerged, the focus departed from America’s typical macro lager and shifted to traditional styles from Europe.[3] This departure led to craft brewers competing to make stronger beers, which subsequently led to greater consumer choice. The craft beer industry’s ability for innovation allows them to offer new products that give consumers choices they previously did not know existed, thus uncovering preferences they did not even know they had. Alike, cannabis innovation can come from anywhere – a grower in their garage or a corporate lab.

According to BDS Analytics, a cannabis market research company, 54% of cannabis users drink beer; however, about half of the cannabis consumers who drank alcohol do not view the two products appropriate for the same occasion.[4] In fact, over a sixth month study, BDS found only 13% of cannabis consumers said they paired marijuana with craft beer. Nevertheless, 68% of cannabis users said their consumption of craft beer stayed the same.[5] Therefore, the evidence suggests the craft beer drinker is not substituting craft beer for a cannabis product – but rather consumes different products at different times.

However, this is not necessarily true in Canada, where marijuana has been fully legal nationwide since October 2018.[6] According to analysts at Wall Street’s Cowen and Co., they believe Canadians are smoking more marijuana than drinking beer because beer sales dropped off by nearly 6.8% in March 2019, which at the time, was the most significant hit in over two years.[7] Moreover, analysts directly connect Canada’s fading interest in beer to the country’s move to legalize marijuana.[8] However, it begs the question if this data considers the considerable change in the beer market in Canada – where mass-marketed, light-bodied lager are on the decline and craft beer is on a rise. Can one really blame it on the weed?

Maybe not. Bob Pease, president and CEO of the Brewers Association, believes the brewing sector is only getting bigger in states that have legalized marijuana – specifically in Colorado, California and Washington. For example, Colorado was one of the first states to legalize marijuana for recreational use and beer sales have not shown any signs of being in jeopardy.[9] In fact, Colorado broke a beer sales state record last year – consuming 1.6 million more gallons of beer than the same month in 2018.[10] A major reason for this boost was lifting the state restrictions – where beer had a 3.2 percent ABV cap on beer sold in retail outlets. Notably, the Colorado cannabis industry recently broke a sales record in March 2019 – further supporting the argument that craft beer and marijuana can live together in harmony.[11]

Furthermore, this arbitrary fear pushed into the media of legal marijuana negatively affecting the beer industry is predominately Big Beer’s fear. In the past decade, Americans have experienced a change in taste regarding food and drink – with farm to fork menus, craft cocktails, and craft beer at the forefront of this change.[12] When Big Beer faced a drastic decrease in the market share, they began to unfairly influence the marketplace by purchasing ownership interest in craft breweries in order to penetrate the market and recover its lost market share.[13] Just like craft beer, Big beer also likely views legalization of marijuana a threat to its market place. Big beer has and continues to lobby against the legalization for fear of a competitive threat.[14] Therefore, it makes sense Big Beer would push against legalization for fear of losing anything more than they already have.

2.  Does Co-Existence Include the Combination?

Now that we have established the growing industries can co-exist in the world of legal intoxication, but can they be combined? In 2017, alcohol infused with hemp or cannabis became a new phenomenon and craft beer circumvented regulatory hurdles and federal prohibition by making a beer that only had cannabinoids and does not contain THC – the psychoactive property of cannabis.[15] But as of 2019, infused beverages only made up a mere 2 to 3 percent of total sales – indicating the possibility that consumers do not want to consume their cannabis the same way they consume beer.

However, the coronavirus pandemic has also impacted consumption behavior recently. As of April 2020, cannabis infused beverage sales have increased by 14%, which is a big jump for the category. The change in consumer sales is seemingly based on the fact the virus attacks the respiratory system, so consumers prefer to eat or drink their cannabis instead of smoking or vaping it.[16] Despite the recent jump in consumption of infused drinks, it is still unclear whether consumers are demanding the infusion of craft beer and cannabis – but that has not stopped Big Beer from investing.

Although most of Big Beer lives in fear of legalization, the large alcohol craft beer acquirers are taking a more progressive approach. Specifically, Big Beer has invested significant money in the cannabis industry, partnering with large legal marijuana producers to invest in cannabis beverage ventures.[17] For example, in 2018, Molson Coors took a controlling stake in a joint venture with a licensed pot producer in Canada. Anheuser-Busch InBev put $50 million toward a similar joint venture with the British Columbia-based Tilray. Lagunitas, now owned by Heineken already sells a hop-flavored, pot-infused sparkling water at marijuana dispensaries, in partnership with Sonoma’s CannaCraft. Constellation Brands, which includes Corona and Modelo, threw down nearly $4 billion — the biggest investment in the history of marijuana — on a 38 percent share in the largest Canadian marijuana producer.[18] For a market player to actively lobby against legalization, these investments beg questions of Big Beer’s intent. Most likely, the reality is Big Beer is trying to break into the market to help increase the slow, steady decline from the past couple decades. However, the logistics of doing this at a commercial level are nearly absurd, as the regulation at state and federal levels are uncertain and unclear. Thus, craft beer should not be concerned with Big Beer’s overwhelming investment. The newly formed relationship between cannabis and Big Beer seems comparable to a business executive marrying a trophy spouse – where appearances seem fun but even if it works, it will most likely be short lived. As legalization continues to change the regulatory environments in states, and eventually the federal government, the production of cannabis-infused beer is on the rise, but it will take time to see if they are here to stay.

Despite the fear peddled by Big Beer, there is no evidence to suggest craft beer and cannabis cannot co-exist in the world of legal intoxication. As consumer palates evolve and counterculture makes its way into culture, we will likely see more of the two industries working in harmony, rather than in competition. Although the change in consumption may demand more batches of cannabis-themed beer, regulatory uncertainty still remains, particularly with the combining THC with alcoholic beverages. As craft brewers and craft growers continue to advance in their innovations, it seems most reasonable for the two industries to support each other as they combat Big Beer and regulatory barriers.

[1] Hayley Peterson, Yep, Marijuana Legalization is Bad News for Beer Sales, SLATE (Dec. 7, 2016),

http://www.slate.com/blogs/business_insider/2016/12/07/beer_sales_take_a_hit_in

_states_where_marijuana_is_legal.html (“The data indicates that many beer drinkers are swapping their six-packs for marijuana instead”, then later citing that mainstream beer sales are down more than craft beer sales. Id.).

[2] Jim Tankersley, How Pot and Hippie Beer Explain the Future of the American Economy, THE WASH. POST (Nov. 7, 2015), https://www.washingtonpost.com/news/wonk/wp/2015/11/07/in-the-land-ofmicrobrews-and-marijuana/?utm_term=.36889bdcc11c

[3] Newman, Tyler, Escape from the Underground: Lessons to the cannabis industry from craft beer, The Growler (Mar. 27, 2018) https://growlermag.com/escape-from-the-underground-lessons-to-the-cannabis-industry-from-craft-beer/

[4] Kendall, Justin, Beer Institute Examines the Marijuana Industry During Annual Meeting (Jun. 13, 2018)   https://www.brewbound.com/news/beer-institute-examines-marijuana-industry-annual-meeting

[5] Id.

[6] Hauser, Lyle, Canada’s legalization of marijuana offers a blueprint for the U.S. (Mar. 22, 2019) https://www.statnews.com/2019/03/22/canada-legalize-marijuana-lessons-united-states/

[7] Adams, Mike, Is Legal Marijuana Hurting Beer Sales Or Helping Them? (May 21, 2019) https://www.forbes.com/sites/mikeadams/2019/05/21/is-legal-marijuana-hurting-beer-sales-or-helping-them/#6358947f47bd

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] 5 N. DAVEY NEAL, CURRENT AND FUTURE ISSUES FACING LOCAL BREWERS AND VINTNERS (2015), 2015 WL 9875437, at *3.

[13] Eileen Faust, Fast Fact About the Merger of Anheuser-Busch InBev and SABMiller, THE MORNING CALL (Oct. 5, 2016) http://www.mcall.com/business/getsmart/mc-fast-facts-about-anheuser-buschinbev-merger-20161005-story.html; For a full list of craft breweries purchased by AB InBev, see The Cut Off – List of Imposter Craft Beer Brands, BREW STUDS, http://wearebrewstuds.com/craft-beer-cut-off/

[14] Scheherazade Daneshkhu and Lindsay Whipp, US Drinks Industry Ponders Effect of Cannabis Legalization, FINANCIAL TIMES (Nov. 25, 2016) note 105 (specifically citing Boston Beer Company, though calling themselves craft beer, as another Big Beer conglomerate).

[15] Press Release, Malkin Law, Cannabis Infused Alcohol (Feb. 14, 2017), http://www.malkinlawfirm.com/cannabis-infused-alcohol/. While hemp-infused beer is technically legal, the regulations by the federal government are abundant: This adds to the already tedious amount of regulations which brewers must face every day).

[16] Salarizadeh, Cynthia, Cannabis Consumer Behavior Alters With Covid-19 Quarantine: Edibles & Drinks Surge (April 3, 2020) https://www.greenmarketreport.com/cannabis-consumer-behavior-alters-with-covid-19-quarantine-edibles-drinks-surge/

[17] Alicia Wallace, Alcohol Goliath Pours $190M into Canadian Cannabis Company, THE CANNABIST (Oct. 30, 2017), http://www.thecannabist.co/2017/10/30/constellation-marijuana-investmentcanopy/91171/.

[18]Lewis, Amanda Chicago, Big Alcohol is pouring billions into the drinkable marijuana market. But is that how anybody wants to get high? (July 30, 2019) https://www.theverge.com/2019/7/30/18639829/weed-beer-drinkable-marijuana-cannabis-drinks-alcohol

 

It’s a really tough time to be an independent craft brewery.  Despite headlines saying that alcohol sales are skyrocketing, and while that is true, small craft breweries have essentially seen two out of three of their main sources of income cut down to nothing.  More specifically, small breweries have almost complete losses in taproom sales and distributed sales.  According to the Brewers Association, brewery on-site sales are down 68% (most are reporting drops in excess of 70%) and on-premise distributed beer (kegs to retailers) are down 91%.  These are bad numbers for the future of independent craft beer.

Recognizing the issue, most state alcoholic beverage control agencies have enacted emergency rules or relaxed enforcement of certain rules to allow small breweries to try to survive until the market returns.  These include relaxations of tied-house rules—rules designed to keep the three tiers of the alcoholic beverage industry (manufacturers, wholesalers, and retailers) separate and free from undue influence among the tiers.  Some of these regulatory relaxations include conduct that was previously outright illegal in some jurisdictions.  They include “to-go” sales from the brewery to the customer (usually curbside or limited contact), delivery of beer, free delivery, longer hours of operations, charitable promotions, production of hand sanitzer, returns of alcoholic beverages, and many more.  Before COVID-19, these activities were prohibited in many jurisdictions.

And while people seem to be drinking more during the great quarantine, those increased numbers aren’t translating to independent craft breweries as much as one might think.  As one of my former clients recently put it, “Any day where we approach breaking even is a good day.”  This is so because, despite government efforts to help, taprooms are closed and restaurants aren’t buying kegs.  This leaves small breweries at the mercy of to-go orders and merchandise sales.  Those numbers simply don’t add up.  I’m afraid we will see a rapid extinction period for many small and independent breweries.

The interesting legal angle, to me at least, is how will the state regulating bodies justify a tightening of the relaxed rules once COVID-19 is contained?  By relaxing regulatory rules during the crisis, the agencies recognized that their normal rules are burdensome on small breweries and that those rules needed to be loosened to help small breweries stay open.  So once COVID-19 clears up, what is the regulatory purpose for tightening the rules back up?  The primary purposes of most states’ alcoholic beverage control rules include temperance and preventing vertical and horizontal integration.  It seems unclear that discontinuing privileges provided during the crisis, like delivery or to-go orders, would further either temperance goals or integration prohibition.

While I expect regulating bodies to in fact tighten their rules when this is over, I expect to see pushback from small breweries at the state and local levels to maintain some of the privileges that the regulating bodies themselves saw fit to relax when breweries really needed them.  I will address these justifications and arguments against them in a law review article over the summer.  Look for it next law review cycle..

Only the strong will survive this.  A new brewery or one that has not found financial stability is in deep trouble of huge losses and most likely closure due to COVID-19.  It’s just a fact.  Despite pleas and community energy from passionate craft-beer folks, the reality is that to-go orders, gift cards, and merch sales alone probably will not be able to keep the lights on for many.  That’s where the government is trying to come in.

Many folks in this industry blast regulators for seemingly arbitrary, arcane, and paternalistic regulations and laws on the books.  Me too—sometimes.  But I am heartened to see the speedy and agile response that many state regulators have taken to at least try to keep breweries and related manufacturers in business.  It has been only five days; yet many states are doing their part.  California, for example, has relaxed several of the less business friendly restrictions in record time—all of which were prohibited six days ago.  To wit (each with exceptions and caveats and only for the time being):

  • Retail-to-Retail Transactions: off-sale retailers can purchase alcoholic beverages from on-sale retailers to avoid spoliation.
  • Extension of credit: manufacturers may extend credit to retailers beyond 30 days.
  • On-sale retailers can sell for off-sale consumption.
  • Bona fide eating places may sell to-go drinks for pickup or delivery (huge btw).
  • Any licensee can sell beverages to people in motor vehicles outside the premises through a pass-out window or slide out tray (think drive thru).
  • Delivery is permitted.

And even some states that are less craft-beer friendly are getting in on the game.  For example, South Carolina has similarly suspended the prohibition on drive-thru or curbside pickup.  Still, for those states that have not gotten their act together, now is the time (looking at you Kentucky et al.).

And another good that is coming out of this thing are those craft distilleries doing their part by suspending distilled liquor production and moving it to hand sanitizer.  Because hand sanitizer is not a distilled beverage, it legally comes outside the purview of state alcoholic beverage regulators.  Check your FDA obligations though.

So thanks to most state governments for trying to help independent beer during this catastrophe.  For those that haven’t yet, come on people.  After all, most states have at least implicitly recognized that independent beer is “essential” by leaving them open during this pandemic.  At least, I’d argue that in court if I had to.

As always, check your state’s alcoholic beverage control agency’s website for updates and can and can’t dos.  Enjoy a local beer—nobody is driving anywhere.  Support local now more than ever.

Coronavirus (COVID-19) Updates

This could be really bad for independent craft beer.  Most states have tied-house laws that prevent manufacturers from giving retailers a “thing of value.”  Among the many prohibitions this encompasses, manufacturers are (were?) universally prohibited from paying a retailer for advertising space.  Several exceptions exist, but the general purpose is to prevent a retailer from becoming beholden to a manufacturer and thus on the hook to push that manufacturer’s beer over another’s.  One of the obvious legal issues this raises is the First Amendment.

In 2017, the Ninth Circuit confronted this very prohibition in the context of a First Amendment challenge.  See Retail Digital Network LLC v. Prieto, 861 F.3d 839 (9th Cir. 2017).  Because this speech is commercial in nature (not core speech like political opinions) statutes restricting this kind of speech traditionally receive an intermediate level of scrutiny called the Central Hudson test.  This test is more lenient than strict scrutiny but something more than rational basis.  If you want to know more about these, email me.  Suffice it to say that statutes and regulations restricting commercial speech face a pretty tough test for a court to hold them constitutional. Under this intermediate Central Hudson test, the Ninth Circuit found that California’s prohibition of a manufacturer paying a retailer for advertising survived Central Hudson because it materially advances the states interest in maintaining a three-tier market system, and there was sufficient fit between that interest in the legislative scheme to prohibit market domination by large manufacturers.  See Retail Digital Network, 861 F.3d at 851-52.  Accordingly, for now, independent craft brewers in the Ninth Circuit can rest easy knowing that manufacturers cannot pay for advertising.

The Eight Circuit just threw a giant wrench in the issue.  In Missouri Broadcasters Ass’n v. Schmitt (dated January 8, 2020), the Eighth Circuit resolved the same challenge to a similar prohibition against paying for advertising in Missouri.  Unlike the Ninth Circuit, the Eighth Circuit held that “Missouri fails to show how the Statute, as applied, alleviates to a significant degree the harm of undue influence.”  The Eighth Circuit also pointed to the many exceptions to tied-house laws and stated that “[a] statutory framework with such advertising exceptions and inconsistencies renders the Statute as applied ineffective in preventing undue influence ‘in a direct and material way,’” in contrast to the Ninth Circuit.  If you are an independent craft brewery in the Eighth Circuit, prepare for an increased squeeze on shelf space and tap handles.

This creates a circuit split.  Big beer would like nothing more.

Why is the bad for independent craft beer you ask?  For two main reason.  First, the only manufacturers who can afford to play the pay for advertising game are the biggest ones.  If paying for advertising space became legal, the independent craft breweries you love would be at a severe disadvantage because they simply cannot afford to play that game.  And retailers everywhere would love increased revenues.  Secondly, and more importantly in my opinion, is that if large manufacturers were allowed to pay for advertising, who is going to police those deals?  More specifically, who is going to decide the reasonable value of an advertisement?  The point is, if large manufacturer A paid a retailer $20,000 per year for advertising, it completely blurs the lines between advertising payments and pay to play.  Frankly, this opens the door for those with deep pockets to legally engage in simple, plain pay-to-play conduct.  It would seriously squeeze your local independent.  We cannot afford to erode tied-house in this manner.  The results will be disastrous.

Cheers (I guess).  And let me know what you think.

*Nod to Ashley W. Brandt for breaking this case.

When Tom McCormick, Executive Director of the California Craft Brewers Association, comes to speak to my Craft Beer Law class here at McGeorge, one thing he always tells my students is that there is a shortage of attorneys conversant with craft beer law and the industry in California.  Well, three craft beer law attorneys just teamed up to form a powerhouse craft beer law legal team.  And I suspect it will have a positive impact on breweries’ legal needs.

According to a press release yesterday, Noble & Page LLP (San Luis Obispo) and Candace Moon of The Craft Beer Attorney, APC (San Diego) have formed an Of Counsel relationship.  This association speaks directly to me because Lucas Noble and Maddie Page are relative newcomers to the craft beer law scene, and I have watched them grow and learn (Lucas, dare I say mentored?) in this amazing industry and practice area.  Candace Moon, on the other hand, is the juggernaut of California craft beer law and is essentially the first attorney to have specialized in this area.  All three are friends of mine.  So it is amazing to see them come together to provide excellent legal services to California’s more than 1000 craft breweries.

In essence, this new association of attorneys forms the largest one-stop shop for any brewery’s legal needs, including ABC and TTB licensing, general counsel services, trademark and copyright, employment, and several more areas.  Lucas and Maddie bring youthful exuberance and energy to the table, while Candace brings more than a decade of expertise and strategy.  While there are several other craft beer attorneys out there in the state (all very capable in my experience, nod to Eugene Pak and Mike Kanach among others), these three teaming up represents a sort of consolidation like we see in the craft brewery segment.  By teaming up, these three attorneys will represent a large number of breweries in the state and are positioned to further increase their client base.

Cheers to Lucas, Maddie, and Candace.  When you need to hire associates (and that day is coming), you know where to look—McGeorge and its craft beer law program.

 

For those of you who read this blog, you might be wondering where the heck I have been? Am I alive? My friends, don’t try to write a book. I say that in jest, of course, but I have been working on the world’s first craft beer law textbook (under contract with Carolina Academic Press) over the summer and over these first few fall months. It is all consuming of my writing time (well, that and two law review articles). Suffice it to say that I have missed my blogging enterprise. But I should be done with the book soon.

A few updates on my scholarly stuff. First, I just finished my third California Craft Beer Law class at McGeorge. This one went really well and had a gifted group of students. Guest speakers included Ting Su (Eagle Rock Brewing), Mike Kanach (Intellectual Property Partner at Gordon Rees and craft beer attorney), Tom McCormick (Executive Director of the California Craft Brewers Association), and Sacramento’s very own Ken Anthony (Founder and Owner of Device Brewing Co.). Second, I have a law review article coming out with the Gonzaga Law Review on unfair competition and remedies stemming from Big Beer’s and Big Distribution’s market conduct in the near future. Third, I and my Research Assistant (Tom Gerhart) have been hard at work on another law review article concerning predatory pricing and anti-competition in the beer market. Updates on that to come. Lastly, for any law profs reading this, McGeorge has asked me to put on a substantive craft beer law presentation at AALS in January 2020 in Washington DC. Check it out to learn about craft beer law and what McGeorge is doing in that sphere (yes, there will be a beer tasting component hosted by yours truly).

And now some substance from our friends at the California Craft Brewers Association. Good news. The CCBA’s sponsored bill, AB 746, authored by Asm. Jim Wood, passed both houses and was signed into law by the Governor last week. This bill amends California’s Health and Safety Code to exempt brewers from the CA Department of Health’s permit requirements. This helps in two ways. First, every brewery in California will save about $1100 annually in permitting fees and expenses. Second, this bill essentially consolidates public health and safety requirements with local regulations that breweries already must comply with. The result is less logistical hoop jumping and less paperwork. Nice win CCBA.

There is A LOT happening in the craft beer legal world these days. Stay tuned in the coming weeks for a post on the new mandatory sexual harassment training requirements for breweries, diversity and inclusion taking hold, and some insights on brewery on brewery conflicts that seem to arise from the increasingly competitive marketplace.

As usual, Cheers! And let me know what you think.