1. Introduction

In the twenty-first century, there is an app for everything. Looking to buy more alcohol but do not feel safe driving to your local liquor store to replenish your alcohol supply? No need to worry because there is an app that will deliver alcohol straight to your doorstep. In 2012, three Boston College graduates created the first alcohol delivery app known as “Drizly.” Luke O’Neil, Thursty: A new app called Drizly delivers booze right to your doorstep, Metro.us (May 22, 2013). After completing the initial testing of the app in Massachusetts, the three co-founders expanded its reach to New York, Los Angeles and Chicago. Tom Huddleston, Jr., Ordering on-demand booze is about to get easier, Fortune (May 18, 2015). Today, Drizly is operating in the major cities of thirty states and even Alberta, Canada. Drizly.com (2021). However, Drizly is not alone in the delivery app market with competitors like Swill, Minibar, and Saucey offering similar services. But with Uber’s recent acquisition of Drizly for $1.1 billion, this app seems to be the top market participant. Tom Wark, Why Uber Will Not Be Challenging How Alcohol is Sold and Distributed, Fermentation Wine Blog (Feb. 15, 2021).

So, how does Drizly actually work? After a user downloads the app onto their smartphone device and makes an account, the user is able to search for their desired alcoholic beverage and place an order with one of Drizly’s retail partners. O’Neil, (2013). The retail partner then processes, fulfills, and delivers the order to the consumer within thirty to sixty minutes from the time the consumer finalized their order. Id. From this basic explanation, a few initial concerns are obvious. First, how do alcohol delivery apps fit within the three-tier system and other relevant alcohol regulations? Second, if the app does not fit within the three-tier system, how are Drizly and its competitors cheating the system? The answer to these questions is that they do not fit within the current framework and have carefully crafted their business model to avoid regulation. To be properly regulated, alcohol delivery apps require their own separate fourth tier.

  1. The Laws That Exist Today

There are four areas of the law that are implicated by alcohol delivery apps: the three-tier system, distribution, licensing, and legal drinking age. However, it is important to first understand who has the power to regulate this area and how they do so. The Twenty-First Amendment of the United States Constitution not only repealed the Eighteenth Amendment’s Prohibition, but it also confers onto the states the authority to regulate the transportation and importation of alcoholic beverages. U.S. Const. amend. XXI.  In California, the State’s Constitution vests the Department of Alcohol Beverage Control (“ABC”) with the exclusive power to regulate the manufacture, sale, purchase, possession and transportation of alcohol. CA Const. Art. 20 § 22. The ABC’s regulations can be found in the California Business and Professions Code, Division Nine, commonly known as the “Alcohol Beverage Control Act” (the “Act”) and is a set of permissive statutes. Cal. Bus. & Prof. Code §§ 23000-25762. The Act will be the main reference for the laws at issue here.

First, the three-tier system is the area most implicated by alcohol delivery apps. Since the end of Prohibition most states use this regulatory scheme to separate and regulate the different actors in alcohol: manufacturers (tier one), wholesalers (tier two) and retailers (tier three). Gregory E. Durkin, What Does Granholm v. Heald Mean for the Future of the Twenty-First Amendment, the Three-Tier System, and Efficient Alcohol Distribution?, 63 Wash. & Lee L. Rev. 1095, 1097 (2006). The three-tier system generally prohibits any one tier from intermingling with another. Id. This basically means manufacturers cannot directly sell to consumers, instead they must sell their products to licensed wholesalers who then sell the products to licensed retailers. Id. Further, each tier has their own separate set of regulations that permit and prohibit specific conduct.

Second, alcohol distribution is heavily regulated. This area of law can be complicated to understand since some of the more complex regulations are found here such as strict distribution agreement requirements and franchise laws. Further, while all fifty states regulate the sell and distribution of alcohol, they all have different methods in doing so. Regardless of the different state approaches, the three-tier system and tied-house laws generally require distributors to act as the middle-man between producers and retailers. The role of distributors is to sell the manufacturers’ products to retailers, requiring distributors to have sales representatives who visit bars and take orders for multiple different brands (manufacturers) they represent. John Szymankiewicz, Beer Law (2017). The brands they represent make up a wholesaler’s portfolio and it is the wholesaler’s responsibility to sell the brands’ products by investing time and money into each individually. Id. Further, every brand in the portfolio must have entered into a distribution agreement with the wholesaler. Distribution agreements, also called franchise agreements, have multiple mandatory provisions which includes defining an exclusive sales territory and tough termination protections that overwhelmingly favor distributors over brewers. Cal. Bus. & Prof. Code §§ 25000.5, 25000.7.

While most states have a mandatory second tier, there are limited exceptions for self-distribution in some states, including California. Like the rest of the Act, self-distribution is heavily regulated. As such, the costs of self-distribution and other factors lead most manufacturers to use a wholesaler. Szymankiewicz, (2017). Nonetheless, there may be some hope for the self-distribution realm. There is current proposed legislation in California that would expand a beer manufacturer’s distribution rights by allowing them to obtain a beer direct shipper permit and ship directly to California consumers. Beer manufacturers: direct shipper permits, Senate Bill No. 517, 2021 Cal. Leg. 2021-2022 Sess.

Third, all players in the alcohol business must obtain a license to participate. Cal. Bus. & Prof. Code § 23300. The relevant code section provides that “No person shall exercise the privilege or perform any act which a licensee may exercise or perform under the authority of a license unless the person is authorized to do so by a license issued pursuant to this division.” Id. Therefore, any person or entity without a license is prohibited in engaging in any conduct that falls within the ABC’s scope and can face criminal charges for engaging in such conduct. Id. at §23301. Further, an authorized licensee is only permitted to exercise the rights and privileges specified for the license they hold. Id. at §23355.

Finally, all licensees that have the authority to sell alcohol are prohibited from selling to individuals under the legal drinking age of twenty-one. Cal. Bus. & Prof. Code § 25658. A violation of this law can result in criminal charges and fines up to $1,000. Id. Further, the licensee does not need to have actual knowledge that the individual is not twenty-one to be held liable. Id.

  • How Alcohol Delivery Apps Are Cheating The System

With a basic understanding of the different laws being implicated by alcohol delivery apps, how are alcohol delivery apps cheating the system? The credit is due to their carefully crafted business model. Drizly’s website boasts that their “model is built to be compliant with the regulatory bodies in every state we operate in.” Drizly.com (2021). The most important part of their business model is the partnership relationship between Drizly and local retailers. Drizly’s robust network includes over 4,000 retail partners from coast-to-coast. Id. Furthermore, in 2018 Drizly entered into a partnership with none other than Anheuser-Busch. Drizly Partners with Anheuser-Busch to Stock Office Fridges, Brewbound (July 11, 2018). However, this partnership agreement is different than its regular retailer partnerships as Drizly’s sole job is to stock Anheuser-Busch offices with cold beer. Id. In a regular partnership, Drizly does not actually bring in any profits from the transaction between consumers and retailers. Ni Xu, Drizly: the disruptor of the 3-tier system?, Digital Initiative (Dec. 9, 2015). Instead, Drizly brings in money by charging a monthly license fee to its local retailers. Id. Furthermore, the person who delivers the alcohol to the consumer is not employed by Drizly, but rather the retail partner. Id. Basically, Drizly is simply an interface that retailers use to bring their shelves to the internet which allows consumers to purchase alcohol from wherever they desire.

In light of the three-tier system, where do alcohol delivery apps fit? By not engaging in the actual sale or distribution of alcohol, Drizly and its competitors are able to completely escape regulation. Drizly’s own website states “Drizly was uniquely designed to operate within the three-tier system.” Drizly.com (2021). But is this statement true? The app does not seem to operate within the system, but rather it operates around the system. By strategically not taking any money from the transaction, a delivery app cannot be seen as neither a retailer nor distributor. Instead, they become yet another middle-man, but this time it is between retailers and consumers. While it is natural to see Drizly as a distributor, they stretch the laws even further by avoiding distribution agreements. Again, Drizly’s own website says “we do not guarantee exclusivity to any one store in a given area,” which means they do not enter into distribution agreements with its retail partners. Id. Further, Drizly leaves it up to its retail partners to determine its delivery zone, hours, fees, minimum purchase amounts and more. Id. Drizly’s business model shows that they have carefully reviewed the different states’ alcohol regulations and found a way to operate around the three-tier system and distribution regulations.

Drizly again escapes regulation by not needing a license to operate. In California, the laws require anyone wanting to operate under the Act to obtain a license. Cal. Bus. & Prof. Code § 23300. The Act defines a wholesaler as “any person other than a manufacturer, winegrower or rectifier who is engaged in business as a jobber or wholesale merchant, dealing in alcoholic beverages…” Id. at § 23021. Further, it gives a weak definition of retailers by considering a retailer to be “any on- or off-sale licensee.” Id. at § 23023. With these working definitions, delivery apps do not seem to fall into either tier, even if the wholesaler definition is analyzed broadly. A delivery app certainly is not a manufacturer, winegrower or rectifier (“a person who colors, flavors or otherwise processes distilled spirits”). Id. at § 23016. But can they be considered jobbers or wholesaler merchants? These terms both define the same concept of distributors: people who buy products in bulk from manufacturers and then resell to retailers. Bob Adams, Wholesalers, Jobbers, Distributors & Importers, BusinessTown (2021). Since the apps do not purchase from alcohol or resell to retailers, they are not wholesalers. Further, delivery apps are not on- or off-sale licensees as they are not the actual business consumers are buying from. Therefore, since delivery apps do not fit within either definition and do not sell or deliver the alcohol, they are not required to obtain a license under the current laws.

Lastly, Drizly uses an identification catalog system called Mident to ensure the person receiving the alcohol is of legal drinking age. Dennis Keohane, How Amazon is getting beat by an upstart alcohol delivery app in its own backyard, Pando (Apr. 8, 2015). Drizly provides its retail partners with a Mident identification scanner which allows the delivery driver to scan the consumer’s ID and confirm the consumer’s age. Id. Thus, without a valid ID proving the consumer is of legal drinking age, they will not be given the alcohol. Furthermore, since Drizly is not involved with the alcohol purchase and the person delivering the alcohol is employed by the retailer, it is the retailer’s responsibility to ensure the person accepting the delivery is twenty-one or older. As such, the final concern is avoided, allowing Drizly and other delivery apps to completely evade state alcohol regulations as they currently exist.

  1. How Alcohol Delivery Apps Affect Craft Breweries

It is still not clear whether alcohol deliveries apps like Drizly have a negative or positive effect on craft breweries. With Drizly being the largest e-commerce alcohol platform in North America and its new owner being Uber, it seems Drizly will likely have a negative effect on small breweries. O’Neil, (2013). While Drizly does not directly determine what products are on a retailer’s shelves, wholesalers will be more likely to sell a certain brand to Drizly’s retail partners because of the positive profits. Further, Drizly tracks consumer drinking habits and regularly publishes reports on the data. Uber Acquires Beer Delivery App Drizly in $1.1 Billion Deal, Hop Culture (Feb. 2, 2021). Therefore, if big beer is selling better through Drizly than craft beer, wholesalers will sell more big beer products to maximize the profits for all three tiers. Also, Drizly and most other alcohol delivery apps currently only operate within major cities. This means that if a craft brewery’s distribution agreement does not reach a major city, they will be excluded from Drizly’s robust market. In order to combat this issue, larger wholesalers will need to start representing more small producers, but this solution is not likely.

  1. The Proposed Solution

The manufacture, sale, purchase, possession and transportation of alcohol is one of the most heavily regulated areas. While the three-tier system is not perfect, it does work in a way to protect craft breweries from being overran by big beer. If lawmakers continue to ignore this sleeping giant, it may eventually become so big that post hoc regulation will be difficult to achieve. Therefore, state legislatures need to act quickly to amend their current three-tier system to find a home for Drizly and its competitors, and that home is a new fourth tier. To actually promote temperance and keep alcohol out of the hands of minors, alcohol delivery apps need to be regulated through the ABC. As of now, a user can order as much alcohol as they like and have it delivered on-demand to their doorstep. As long as the recipient has a valid ID they are able to collect the alcohol order, but it is likely easy to use a fake ID or another person’s ID who is over twenty-one. Lastly, while it is positive that the consumer is not driving under the influence to get more alcohol, should we really promote an app that capitalizes off drunk consumers?

State lawmakers need to add alcohol delivery apps to their regulatory scheme because as of now, this money making machine has evaded regulation. Drizly and its competitors are utilizing a loophole in the ABC by not gaining any profits from the direct sale itself and not employing the delivery drivers. Currently, there are no laws that control alcohol delivery apps from profiting off alcohol and it is clear they do not fit in the normal regulation scheme. Therefore, legislators need to act now to create a fourth tier for Drizly and its competitors to be actually regulated under the Act.

Direct-to-consumer (DTC) shipping for craft breweries has rightly become a hot issue and is gaining momentum. With the COVID-19 pandemic wiping out two of craft beer’s main sources of income, taproom sales and keg beer sales for restaurants and bars, the only main income stream that breweries had during the pandemic was DTC sales. They simply weren’t enough for many breweries.

The laws surrounding DTC are a mess and differ from state to state.  Some states allow out-of-state alcohol manufacturers to ship to customers within the state, some prohibit it entirely, and some allow in-state breweries to ship within the state but not out-of-state breweries. This raises an interesting and tumultuous relationship between the dormant commerce clause’s anti-discrimination principle and the Twenty-First Amendment’s relegation of alcohol control to the states. It’s complicated and the subject matter of my summer law review article that I am working on now.

An interesting wrinkle in this arena is that due to the wine lobby’s national strength, wineries have enjoyed more permissive DTC laws across the country—think wine clubs. Everyone wants Napa wine, right? So someone in Michigan could order a fine Napa vintage from California directly from the winery, but that same person couldn’t order a Pliny the Elder or an El Segundo Brewing Company Mayberry IPA from the same state. It makes no sense and likely raises equal protection issues as well.

California, to its credit, is trying to rectify this problem through legislation instead of courts. Current California law, like many other states, allows a winegrower who holds a direct shipper permit to ship directly to a California consumer. Notably, California allows in-state breweries to ship to in-state consumers. A new bill, SB 517 (2021) seeks to allow “a person licensed in this state or any other state as a beer manufacturer who obtains a beer direct shipper permit to sell and ship beer directly to a resident of California….” If SB 517 passes, craft beer fans will be able to point and click and have that Heady Topper or latest Tree House Brewing Company IPA delivered directly to their doors.

This bill is smart. With mounting pressure and legal challenges to DTC restrictions across the country, SB 517 seeks to head off the litigation morass. In my opinion, the days of DTC prohibitions are coming to a close primarily due to the economic protectionism that such prohibitions encourage—namely, favoring in-state breweries over out-of-state breweries. The Supreme Court has yet to weigh in and recently denied certiorari in a case that would have addressed this issue for reasons not relevant here. And while several web-based ordering platforms exist out there, they operate in a regulatory gray area that could pose a risk to breweries.

DTC is overall a good and healthy thing for independent beer. It’s not without its headaches, like permitting and making sure taxes are properly paid. But as we saw with the pandemic, independent beer needs new markets. And while relying on the local community will and should continue to be the main source of income for most independent breweries, the opportunity to reach new consumers over the internet can only be helpful.

Here’s to ordering those hard-to-find unicorns and having them show up at your front door. Let’s hope SB 517 passes. Don’t be surprised if Big Beer is in the background opposing it.

Here’s a link to the bill:  https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB517

 

In craft beer law, one of the most aggravating and seemingly unstoppable issues we see is Big Manufacturers’ constant efforts to undermine, diminish, and erode tied-house laws through the legislative process. Here we go again.

California Assembly Bill AB-1070 (Irwin), introduced on February 18, 2021, is shining example of the shenanigans that deep pockets empower Big Manufacturers to engage in.  The Bill provides as follows [with my bracketed insertions]: “This bill would authorize specified licensees [manufacturers], without direct or indirect charge, to give up to 12 retail advertising umbrellas to an on-sale retail licensee [bars and restaurants], per licensed location [all locations the bar or restaurant has], each calendar year for use at the location [a new set of umbrellas every year!].  This bill would prohibit the retail advertising umbrellas from exceeding the value of $250 per unit [LOL] and would prescribe other requirements in this regard.”

Ask yourself who would want this. Do you think your local craft brewery could afford to give even one $250 umbrella to each of the retail locations that serve its beer? When you multiply $250 by 12, you get $3000. Really? A free $3000 worth of fancy umbrellas? This would be yet another major exception to the tied-house laws.

The primary purpose of tied-house laws is to prevent Big Manufacturers from having undue influence over retailers. See Cal. Bus. & Prof. Code § 25500 et seq. The primary restriction to achieve this goal is to prohibit manufacturers from giving “anything of value” to retailers so that retailers will not be subject to pressure to favor certain brands over others. In addition, California’s alcoholic beverage control scheme, like most states’ schemes, seeks to promote temperance in the consumption of alcoholic beverages.  See id. at § 23000.

AB-1070 (Irwin) patently flies in the face of the legislative purposes behind tied-house laws and California’s alcoholic beverage control scheme. Does allowing manufacturers who can afford to give $3000 x [add up as many on-premise locations as you wish] further the goals of reducing undue pressure on retailers or promote temperance? Nope. Not at all.

Instead, this reflects a larger plan that Big Manufacturers have effectively employed over time to snuff out the pesky little guy. The more exceptions to the tied-house restrictions that Big Manufacturers can pass, the less veracity the whole system has—exactly what Big Manufacturers want. If there are no restrictions on Big Manufacturers giving away free stuff (even money in some cases), the pressure on retailers to push their products, and only their products, will be insurmountable. A small mom-and-pop, or even a large chain restaurant, would be hard pressed to deny such enticing freebies—especially when the Big Manufacturer can quickly supply its own shiny and new crafty beers from the formerly independent brewery down the street that it just bought (with no reference to ownership, of course).

Two cycles ago, it was free glassware; now it is free branded umbrellas. Anyone seeing a pattern? Educate your legislators. This is ridiculous.

While the First-Amendment gets a lot of the constitutional attention in craft beer law in terms of advertising restrictions, another constitutional issue has been stealing some of that focus recently.  More specifically, the Dormant Commerce Clause has been the subject of several high-profile litigation matters across the country. To be transparent, the Dormant Commerce Clause is the subject of a new law review article that I am working on for the summer, but I digress.

So what is the Dormant Commerce Clause? In fact, it is no clause at all. Rather, the Dormant Commerce Clause has been inferred by the Supreme Court as a restriction on states’ ability to favor in-state commerce over out-of-state competitors. The Commerce Clause grants Congress the power to regulate interstate commerce; but the Dormant Commerce Clause acts conversely and prohibits states from favoring their own at the expense of out-of-state actors through either prohibitions or unduly burdening interstate commerce. Boiled down and simplified, any state law that affects interstate commerce must not (1) discriminate against out-of-state competition or favor in-state actors, and (2) must not “unduly burden” interstate commerce. There are a few notable exceptions for important local interests like health and safety.

How does the Dormant Commerce Clause impact craft beer? Most, if not all, states prohibit beer manufacturers from shipping beer out of state and prohibit importing alcoholic beverages without going through a licensed wholesaler/importer. This obviously impacts interstate commerce by favoring in-state manufacturers over out-of-state manufacturers. As one example, California Business & Professions Code section 23661 prohibits direct shipments of alcoholic beverages from manufacturers outside of California into California without much procedural morass and licensing.  See also Bus. & Prof. Code § 23661.3 (allowing direct shipments of wine only if the manufacturer complies with wine shipment permitting requirements). But California breweries cannot directly ship beer to consumers outside of California, and breweries outside of California cannot directly ship their beer to California consumers.  Does that seem fair? Does it seem like favoring one group over another?  It should.

Several lawsuits have popped up recently concerning the direct shipping conundrum, and each of them have raised the Dormant Commerce Clause to argue that such laws disfavor out-of-state manufacturers or that they unduly burden interstate commerce. The United States Supreme Court recently denied certiorari in Lebamoff Enterprises, Inc. v. Whitmer which argued the Dormant Commerce Clause prohibited Michigan’s restrictive import/export laws that allows in-state retailers to sell wine online but prohibits out-of-state retailers from doing so.  See Mich. Comp. L. § 436.1203(3)(15); see also Lebamoff Enterp., Inc. v. Whitmer, — U.S. –, 2021 WL 78088 (denying certiorari).  In addition, the Ninth Circuit just this week upheld California’s Section 23661 that requires retailers to source their alcohol from in-state wholesalers by affirming a District Court’s dismissal of the Dormant Commerce Clause challenge.  See Orion Imports LLC v. Appelsmith, 2021 WL 733286.

There is at least a circuit split regarding whether the Dormant Commerce Clause prohibits such regulations, and the Supreme Court has written in the past that such conduct at least arguably violates the Dormant Commerce Clause.  See Granholm v. Heald, 544 U.S. 460, 487 (2005).  It is important to note that the precedents all concern wine. Why is it that wineries can ship between states (at least sometimes) but breweries cannot? Stay tuned for a forthcoming law review article this summer that explores this topic in-depth and argues that such laws do in fact violate the Dormant Commerce Clause.

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..