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

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

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

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

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

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

Let me know what you think. Cheers.

Check out the House version here:

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

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

It’s Big.  Really Big.

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

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

It’s Rooted In The Constitution(s).

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

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

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

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

It’s A Diverse Topic.

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

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

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

It’s Fun.

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

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

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

Let me know what you think. Cheers.

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

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

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

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

Let me know what you think. Cheers.

 

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

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

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

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

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

Let me know what you think. Cheers.

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

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

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

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

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

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

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

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

Let me know what you think.  Cheers.

 

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

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

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

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

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

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

Let me know what you think.  Cheers.