Have you seen this yet?

Ignore the interesting syllabic presentation. It’s not quite news anymore in the craft beer world that the Brewers Association recently created this seal so that members can use it on their marketing and products.  So what does this seal mean?  Why is it significant?

According to the BA, the “independent craft brewer seal is a handy tool for enthusiasts to easily differentiate beer from craft brewers and beer produced by other, non-craft companies.” While BA membership is not required, “[q]ualified craft brewers who want to promote their beer in conjunction with the seal may deploy the seal on packaging, marketing collateral, websites, tap handles, menus and other materials only if solely in connection with their [licensee’s] products.”  In other words, independent brewers are free to use this seal to identify their beer as long as it qualifies as craft under the BA’s definition(s), and they agree to a simple licensing agreement. See https://www.brewersassociation.org/brewers-association/craft-brewer-definition/.

Awesome idea. Drinkers should have an easy way to identify where the beer they are drinking comes from.  But there are a couple of interesting issues the seal raises.  For example, who is independent enough?  With investor group ownership on the rise, with mergers and outright purchases, it’s a difficult question to answer.  Since the BA owns the mark and the BA has its definition of what it means to be a craft brewer, it can simply point to that definition and say yay or nay.  But the theoretical answer to that question is elusive, and everyone in the industry seems to be grappling with it.

From a legal perspective, the seal strategy is an interesting one. The BA is technically a not-for-profit trade association and essentially an advocacy group whose mission it is to “promote and protect American craft brewers, their beers and the community of brewing enthusiasts.”  Of course, the BA is generally recognized as THE association in the craft beer world (though some have argued that it is getting unwieldy and perhaps overstepping on some issues like label content).  And as someone who studies, teaches, writes about, and supports independent craft beer, I am very glad and excited that the BA does what it does.

But what will the BA do when a crafty brewery tries to use the symbol? Most of us know that IP owners have to enforce their rights or risk waiving them.  Most often, this comes in the form of a cease and desist letter.  Unfortunately, c/d letters have become quite common in the industry (my loyalty to a major US sports organization has been tested due to ham-handed c/d letters to clients).  Should a c/d letter not work, the next step is litigation.  And we know how expensive and time consuming that is—even if the litigation is border line frivolous or the positions are indefensible.  So the interesting question is how far the BA will take it once the symbol gets on the wrong bottles or packaging.  I’m assuming that it would go all the way, even through an expensive and distracting lawsuit.  I’m also assuming that the BA considered this very question before it put the seal out there.  But what if twelve crafty breweries started using the symbol at the same time?  Six?  Could the BA handle several of these lawsuits at the same time?  I wouldn’t put such tactics beyond the realm of possibility.

I suppose I am saying that the seal puts the BA in a potentially untenable position of having to defend its IP in several fora against several defendants. In the end though, the risk seems worth it, and I applaud the BA for sticking its neck out so that consumers will know what their beer is.  Besides, c/d letters and responses can be quite entertaining to write.

Let me know what you think. Cheers.

 

 

The list of Big Beer owned crafty breweries keeps getting larger (many known as ABI’s “High End”). That is, until ABI recently announced that it is out of its craft brewery acquisition phase.  The focus now, according to ABI, will be on an organic growth.  Check out Good Beer Hunting’s article on this topic here:

http://goodbeerhunting.com/sightlines/2017/9/7/anheuser-busch-inbev-the-high-end-layoffs

Perhaps what is most striking in this age of consolidation is the stark contrast between the way independent craft breweries and ABI’s “High End” crafty breweries actually conduct their business. When Big Beer buys a craft brewery, the common refrain from the acquirer and the acquired is that nothing will change, we are still the same people, we just have more of a marketing budget now, etc.  Trust us, we are still craft beer.

Not really.  We got a small glimpse behind the veil last week.  ABI laid off 360 people from its High End group.  Of course, we will hear that it is simply eliminating redundancy, adapting to market changes, or whatever.  Maybe that is true.  But the layoffs are significant and unsurprising to independent craft beer insiders.  It shows that these crafty breweries try to smell like independent craft and try to look like independent craft, but they simply aren’t.

As one laid off High End employee put it:

“It’s just crazy that they created all of that structure just to destroy it in two and a half years. They just let go of 50+ Cicerones at once.

Their PR guy is already trying to spin the ‘360 people is a small part of the 2,000+ employees in the High End’ angle, but the truth is that the brewery personnel has never been considered a part of the High End by those actually on the AB side. They weren’t even included in national calls for reps or district managers. They just cut the well-educated and experienced sales force that was in place to insert new, and cheaper, blood.”

See the GBH website posted above.

In my experience, this behavior is antithetical to what is most important to independent craft beer, namely community, good people, creativity, and just plain old doing the right thing. And it goes to show that the acquired, at least the employees of the acquired, were never really part of the High End, never really had a say, and never really mattered.  This, despite all the nothing has changed rhetoric.

Last week at the CCBA’s California Craft Beer Summit, I saw many old brewery friends and made many new ones (awesome event BTW). I saw people lending each other hops, sharing brewing ideas, discussing collaborations, and generally being good citizens.  Aren’t they supposed to be tight-lipped competitors?  Without equivocation, these folks care about their employees and want what is best for both the business and their staffs.  I even know one owner who paid for one of his brewers to go to a prestigious brewing program knowing full well the guy is too talented to stay around long.  To many, me included, this ethos is what makes independent craft beer such an amazing and inspiring industry.

While I am sure there were good bottom-line reasons for ABI to do what it did, there’s simply a lot more to independent craft than eliminating corporate redundancy, providing career transition opportunities, and workforce reduction strategies. It goes to the heart of the industry–the people.  The beer speaks for itself.

Let me know what you think. Cheers.

So the Ninth Circuit got this one right. Basically, big beer still won’t be able to pay retailers for advertising under California law.  That, my fellow craft beer lovers, is a big deal.

If you’ve followed my prior blog posts, you’d know that I have been following the Retail Digital Network (“RDN”) case very closely.  It has major ramifications for craft beer, but as I’ve been saying all along, it also has major ramifications for the First Amendment and commercial speech regulations.

A little case history. RDN operated digital advertising displays in alcohol retail stores.  Those screens would then run a loop of advertisements for various companies that would show in the stores.  RDN entered into an agreement with two alcohol manufacturers to run advertisements in those stores for a fee.   However, those two manufacturers quickly killed those deals because California tied-house restrictions prevent alcohol manufacturers and wholesalers from giving anything “of value” to retailers for advertising their alcohol products. See Cal. Bus. & Prof. Code § 25503(f)-(h) (the “Code”).   Several other alcohol manufacturers declined such agreements on the same basis.  RDN sued the ABC, arguing that the Code impermissibly restricted commercial speech and was thus unconstitutional.

The District Court granted summary judgment in favor of the ABC because the Ninth Circuit had already considered this precise issue in Actmedia v. Stroh, 830 F.2d 957 (9th Cir. 1986) and found in favor of the ABC.  That decision found that the Code restrictions survived traditional commercial speech scrutiny under the Central Hudson test.  It basically held that California’s interests in prohibiting vertical and horizontal integration and temperance were sufficient to justify the restriction that prevented point-of-sale advertising restrictions for alcohol manufacturers and wholesalers.

On appeal, a three-judge panel of the Ninth Circuit reversed. It held that an intervening Supreme Court case, Sorrell v. IMS Health Inc., 564 U.S. 552 (2011) modified Central Hudson’s intermediate scrutiny test and required an undefined “heightened” scrutiny.  The opinion did not explicitly state what this new test would look like or what exactly would be modified from the original Central Hudson test.  It also heavily hinted that the challenged Business and Professions Code sections would not survive this heightened level of scrutiny.

But alas, before the District Court could decide the matter, the Ninth Circuit took it en banc. See Retail Digital Network, LLC v. Prieto , 861 F.3d 839 (9th Cir. 2017).The Court first recognized that the Code was adopted to “prevent the resurgence of tied-houses following the repeal of the Eighteenth Amendment” and that the legislature was specifically concerned that “advertising payments could be used to conceal illegal payoffs to alcoholic beverage retailers.” Id.  Is that ok?  Is that sufficient grounds to restrict commercial speech?  The Ninth Circuit thinks so, even under the plain old Central Hudson test that has been in use for years.

The crux of the argument RDN made is that for “content- or speaker-based regulations of commercial speech, Sorrell [supra.] requires courts to apply a greater level of scrutiny than Central Hudson previously required.” Id.  The Ninth Circuit didn’t buy it:  “RDN reads Sorrell too expansively.  Contrary to RDN’s argument, Sorrell did not mark a fundamental departure from Central Hudson’s four-factor test, and Central Hudson continues to apply.” Id.  The Court thus upheld the Code because it “directly and materially advances the State’s interest in maintaining a triple-tiered market system, and because there is a sufficient fit between that interest and the legislative scheme. Actmedia thus forecloses RDN’s First Amendment challenge to Section 25503(f)-(h).” Id.  Actmedia for the win.  “Old” law can still be good law.

So for craft beer fans, the bottom line is that in California, big beer simply can’t pay a retailer for advertising on site. Why is this a big deal?  Studies show that point-of-sale (“POS” in this case) advertising has dramatic impacts on purchasers.  Also, we know that big beer is not loathe to bend or break the rules to achieve galactic domination.  It would be quite easy for a payment to go from manufacturer to retailer for “advertising” that has no basis in reality or relationship to the advertising purchased.  Of course, who would police such transactions is another matter altogether.

For legal fans, there are lots of intricacies in the opinion that are very interesting, including disapproval of temperance as a justification for the Code’s restrictions and a potential avenue of attack for future challenges. Did I mention the circuit split?  If these interest you, be on the lookout for my forthcoming law review article on this subject.  I’ll let you know when it gets published.

* I hope you’ll excuse my brief summer hiatus. My daughter plays travel softball.  Some of you will understand that.  The en banc opinion came out during that hiatus.

What’s Big Beer up to? If you pay attention to beer headlines or the blogosphere, you have no doubt noticed folks shining light on Big Beer’s antics.  In my mind, Big Beer’s conduct can be classified into two camps:  Vader (akin to vertical integration) and the Borg (akin to horizontal integration with some psychology mixed in).  It’s kind of funny because Big Beer does things that suggest it wants to exterminate craft beer like pesky Jedi rebels.  At the same time, however, Big Beer is trying to convince whoever will listen that it’s just part of the Rebel Alliance and should be treated as part of it.  Don’t fall for either.

First, what are vertical and horizontal integration? Both are significant in anti-trust law.  Briefly, vertical integration is a process by which a single company seeks to control both the production and distribution of a product to increase market power.  For my purposes, it is akin to Vader’s (actually the Emperor’s) attempt to “crush the rebellion” so that only the Big Beer Empire will remain.  Horizontal integration, just as briefly, is essentially consolidation of multiple companies at the same level of production through various M&A tactics (like mergers, takeovers, buyouts, etc.).  This conduct smacks of a robotic Jean-Luc Picard’s famous “resistance is futile” takeover of the good guys.  Both are dangerous to consumer choice, healthy markets, and continued growth to independent brewers.

Vader: Seek and Destroy

On the vertical integration side, Big Beer continues its quest for galactic domination wherever it can—both legal avenues and possible illegal avenues.

Aside from the obvious fact that Big Beer controls or owns an exceedingly large percentage of distributors, one of the most common ways that Big Beer is seeking to tighten its grip is through state legislatures and legal challenges. An interesting assortment of pro Big Beer measures have passed recently that give, or continue to give, Big Beer advantages over its peace-loving enemies.

For example, North Carolina (home to roughly 150 craft breweries and a thriving craft-beer scene) just experienced a potentially significant setback for its craft breweries. North Carolina only allows craft breweries to self-distribute their beer until they reach an annual production of 25,000 barrels of beer (makes no sense to me, seriously).  At that point, the brewery has to turn over distribution a distributor.  For obvious reasons, there can be significant advantages for independent breweries to self-distribute (i.e., controlling where the product is placed and retaining a higher profit margin).  Then, the House introduced House Bill 500.  Its original language included a provision to allow craft breweries to self-distribute up to 200,000 barrels.  But alas, in late April, the House passed a watered down version of House Bill 500 that stripped the 200,000 number and left it at 25,000.  Guess who contributed a bunch of money to the cause?  Yep.  Vader’s henchmen.*  That is just one example on the legislative side.  There are several more.

Another avenue that Vader continues to march down is the old pay-to-play, we didn’t know it was illegal, bit. Just two days ago, the Boston Globe reported on Big Beer’s anticompetitive behavior in that market: “[T]he brewing giant [guess which] gave illegal incentives worth nearly $1 million to hundreds of Boston-area bars and package stores to push sales of Budweiser and its other drinks while stifling those of other brewers.”**  Of course, obligations attach to free gifts (which, by the way, is a reason that I advocate for some of the less ridiculous tied-house laws out there).  Big Beer’s response?  “We believe that we lawfully provided branded-point-of-sale items to retailers.”  It’s everywhere folks.  Don’t be fooled.

Speaking of anti-competitive behavior, I love this one. Just yesterday, news broke that AB-InBev cornered the entire South African hops market in an effort to prevent American craft brewers from getting their rebellious hands on some much desired hop varietals. ***  Instead, the empire will keep those hops for its own defectors known as AB-InBev’s “High End” division.  It’s like Vader controlling all the light saber crystals in the galaxy.  The good guys simply won’t have the materials to make what they need.  It’s plain that cutting off the supply of new and exciting hops is wrong, but what is stopping Big Beer from expanding this plan?  Independent brewers are simply beside themselves—and more than just a little worried.

And then there is the old “get the lawyers involved” plan. As I’ve posted in prior blogs, the Eight Circuit, in Missouri Broadcasters v. Lacy, and the Ninth Circuit, in Retail Digital Network v. Appelsmith, either have adopted or appear to adopt a heightened scrutiny standard for commercial regulations in the alcohol industry.  At least in California, it looks like manufacturers will soon be able to pay retailers for advertisements at the point of sale.  If you said that sounds like legal pay-to-play, you’re right.  Who is going to control or monitor those “advertising” contracts between Big Beer and retailers?  Who is going to confirm that Big Beer is truly only paying for advertising?  Never mind the First Amendment problem that raises, but a retailer will be free to accept whatever amount Big Beer is willing to pay for “advertising,” of course with the commensurate obligations to exclude the rebels wherever possible.  And guess who supported/funded the litigation?

I’ve said in the past that I am generally a fan of tied-house laws. This is why.  Are there stupid, antiquated laws on the books?  Absolutely.  But there are many, including the law challenged in Retail Digital Network (Cal. Bus. & Prof. Code § 25503(h)), that are helpful to prevent Vader from using his force choke on the industry.  Without them, independent breweries will find themselves at the mercy of the merciless.

The Borg: Resistance is [Not] Futile

In an odd, Jekyll and Hyde turn, Big Beer is trying like mad to have the consuming public believe that it is part of the rebel alliance.

This is where the horizontal side of things comes into play. I recently read Tom Acitelli’s The Audacity of Hops (awesome book—read it), and it contains a very interesting quote from Bill Coors (yes, that Coors):  “When an industry starts to consolidate, you either get consolidated or you consolidate.”  Yep.  That’s happening too.

Many of you know about the proposed merger of AB-InBev and SAB Miller (if you don’t, Google it). The numbers in terms of dollars and worldwide production are insane.  But it’s happening on the independent level with increased frequency.  That is, Big Beer continues to buy up independent breweries at an alarming rate.  While I have listed many Big Beer-owned “crafty” breweries in prior posts, last week kind of broke my heart.  Wicked Weed, a successful North Carolina independent brewery, became part of the Borg collective.  Apparently, it just couldn’t resist any longer.  But independent beer fans and independent breweries reacted in an overwhelmingly negative manner.  The reaction was so strong that Wicked Weed cancelled a large, charitable event called the “July Funkatorium” that was an annual favorite of southern independent beer fans.  And while this is quite a show of consumer power, the Borg will continue moving through the galaxy assimilating as many indies as possible, hoping you won’t notice or won’t care.

The Borg has its own blogs now too. But you wouldn’t know it.  Check out Oct.co [not a typo], “a classier beer magazine” and a partnership between AB-InBev and Conde’ Nast (and possibly other companies).  It is sleek.  It is cool, and it has a Borg feel and angle to it.  (I don’t blame the writers—they gotta make a living too and some of the articles are quite good).  And then there is the debacle between Beachwood Brewing (good people BTW) and the AB-InBev owned TheBeerNecessities.com a few weeks ago.  Basically, Beachwood agreed to do an interview with a freelance writer to help out another small business.  Of course, the article was then published on the Borg-owned website.  Sneaky, sneaky.  Beachwood was having none of it. You can read Beachwood’s statement here: http://thefullpint.com/beer-news/beachwood-brewing-issues-statement-abi-owned-thebeernecessities-com/.  See?  Big Beer is just like those independents, blogs and all.

If this conduct rubs you the wrong way, it should. Resistance is not futile.  It matters who makes your beer.

Let me know what you think. Cheers.

* https://www.craftbrewingbusiness.com/business-marketing/wholesalers-paid-1-5-million-contributions-north-carolina-government-2013-16-castration-house-bill-500/.

** https://www.bostonglobe.com/business /2017/05/09/budweiser-owner-accused-stifling-competition-with-giveaways-hundreds-bars-and-stores massachusetts/ZK4GlD6BTUTSkpQwMuP4uN/story.html.

*** https://www.pastemagazine.com/articles/2017/05/ab-inbev-just-commandeered-the-entire-south-africa.html

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

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

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

The Existing Definition

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

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

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

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

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

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

Problems With This Definition

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

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

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

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

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

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

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

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

Why Bother?

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

10 Barrel Brewing:  Anheuser-Busch InBev

Ballast Point Brewing:  Constellation Brands

Blue Moon Brewing:  MillerCoors

Blue Point Brewing:  Anheuser-Busch InBev

Breckenridge Brewery:  Anheuser-Busch InBev

Devils Backbone Brewing:  Anheuser-Busch InBev

Dundee Brewing:  North American Breweries

Elysian Brwing:  Anheuser-Busch InBev

Founders Brewing:  30 percent owned by Mahou-San Miguel

Golden Road Beer Co.:  Anheuser-Busch InBev

Goose Island Beer Co.:  Anheuser-Busch InBev

Hop Valley Brewing:  MillerCoors

Kona Brewing:  32 percent owned by Anheuser-Busch InBev

Lagunitas Brewing:  50 percent owned by Heineken International

Leinenkugel’s Brewery:  MillerCoors

Mendocino Brewing Co.:  United Breweries Group

Portland Brewing Co.:  North American Breweries

Pyramid Breweries:  North American Breweries

Revolver Brewing:  MillerCoors

Saint Archer Brewing:  MillerCoors

Widmer Brewing:  32 percent owned by Anheuser-Busch InBev

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

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

A Modest Scheme

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

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

One star:          5,000 barrels or less

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

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

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

Five stars:        200,000 barrels or more

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

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

So it looks and sounds like this:

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

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

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

Me: “What kind of brewery is it?”

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

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

And vice versa.

Give It a Try

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

Let me know what you think. Cheers.

 

 

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

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

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

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

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

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

Let me know what you think. Cheers.

(oh yeah, this isn’t legal advice)

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

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

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

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

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

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

Let me know what you think. Cheers.

Check out the House version here:

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

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

It’s Big.  Really Big.

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

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

It’s Rooted In The Constitution(s).

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

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

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

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

It’s A Diverse Topic.

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

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

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

It’s Fun.

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

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

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

Let me know what you think. Cheers.

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

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

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

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

Let me know what you think. Cheers.

 

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

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

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

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

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

Let me know what you think. Cheers.