During my craft beer law class this summer at McGeorge, many students were surprised to hear about the many ways that Big Beer seeks to restore lost market share. One way in particular that seemed to rankle their eager minds is how Big Beer quietly impacts the supply chain that independent craft brewers (and home brewers) rely on. There are several ways that Big Beer uses the market to continue to dominate production. But there are two examples that people rarely talk about and seem not to know about.

The first example stems AB InBev’s purchase and ownership of Northern Brewer.* Northern Brewer is generally regarded as the largest supplier of homebrew materials for both home brewers and nano breweries alike. As many of you know, home brewers and nano breweries tend to be an independent lot. They typically make beer for the passion of it. But what many don’t realize, and what the public at large doesn’t realize, is that when home brewers or nano-breweries purchase their supplies from Northern Brewer, the profit from that goes to Big Beer. You see, in 2016 AB InBev’s venture capital business (ZX Ventures) purchased Northern Brewer. What this means is that even though a nano brewer might be truly independent as defined by the BA and even use the BA’s independent logo on its packaging, AB InBev still has its fingers in the mash. The same goes for home brewers. Is it illegal? Nope. But it’s just one more tactic that smells like integration and monopolization. One of my brewer friends was quick to tell me last week that “AB will own everything in ten years.” Maybe so.

The other example that seemed to resonate with the students is AB InBev’s purchase of nearly the entire 2017 South African hop harvest.** South African hops contain some of the most desired, newer aroma varietals on the market, including African Queen, Southern Star, and Southern Aroma. Many craft breweries either used these hops or would love to get their hands on them. But AB InBev beat them to the punch. Instead, it just bought all of the South African hops that were to be allocated for North American craft brewers for use in AB InBev’s “High End” beers. Is it illegal? Nope. But you can see the uphill battle that independent breweries face when dealing with such market power.

Ok, so I realize that Big Beer has a business to run and that its pockets are far deeper than any independent brewery can fathom. But there is such a thing as being a fair market citizen. And while Big Beer does step up and do the right thing (like emergency water for Puerto Rico) on occasion, those in the industry view those kind of seemingly altruistic acts with suspicion—especially in light of the type of conduct described above. For good reason.

Let me know what you think. Cheers.

 

*http://www.startribune.com/roseville-based-beermaking-supplier-northern-brewer-bought-by-world-s-largest-beer-company/397142501/

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

As a bit of a jaded reward for writing a great paper in my Craft Beer Law class, the following is a very interesting paper written by a rock-star McGeorge student, Megan McCauley.  Megan has been a standout student in two of my classes–especially Craft Beer Law.  What I find most interesting about her piece is the idea of creating a dispute resolution mechanism for Brewers Association members to lessen the potential for brewer-on-brewer litigation.  It’s a good read, and it provides a glimpse of what we are doing here at McGeorge in Craft Beer Law.  Cheers!

What’s in a Name? Mitigating the Tension Between Independent Craft Breweries and Trademark Law

Introduction

In the past decade, small and independent craft breweries have taken America by storm. During the industry’s infancy, the number of craft breweries rose from eight in 1980 to 537 in 1994.[1] Today, there are over 6,000 craft breweries in the United States.[2] Largely driven by consumer demand and expedited by self-distribution laws that allow small craft breweries to sell directly to consumers in taprooms, the craft beer boom has created a market that injects billions of dollars into our economy.[3] In 2016 alone, craft breweries contributed $68 million to the national economy.[4]

With more and more breweries entering the marketplace, brewers are struggling to come up with unique and innovative beer and brand names. “Virtually every large city, notable landscape, creature and weather pattern of North America … has been snapped up and trademarked as the name of either a brewery or a beer.”[5] As the market becomes increasingly saturated, the likelihood of conflict between breweries also increases as market players seek to protect and maintain their brands. In recent years, this conflict has primarily come to fruition in the courtroom. This trend is troubling because the adversarial nature of litigation is the antithesis of the craft beer industry’s collaborative and collegial identity. Therefore, to help harmonize the industry and avoid courtroom battles between craft brewers, industry members should pursue alternative tactics of protecting their trademark rights, such as mediation or trademark consent agreements, in lieu of litigation. This paper explores the tension between trademark law and the craft beer industry and proposes two mechanisms that may help minimize the need for litigation in this context.

Protecting Trademark Rights and Respecting the Culture of Craft Beer

For most craft breweries, survival depends on being able to protect their brands and trademarks.[6] In the past, “craft brewers have … solve[d] trademark disputes amicably, rather than through litigation.”[7] However, in light of the industry’s recent growth, many craft brewers have opted for more “adversarial approaches to trademark disputes, including expensive trademark litigation, harming competitors’ reputation on social media, or trademark bullying.”[8]

Trademark litigation is particularly detrimental in the craft beer industry because protracted courtroom battles contradict the collegial nature of the industry. A hallmark of the craft brewing movement is the focus on developing a local fan base, rather than mass distribution or production.[9] While this is often due to tight budgets and limited resources, it is also a product of the “home-grown” mentality that stems from the industry’s humble roots. After all, most craft breweries were born out of home brew kits in basements and garages.[10] Based on this grassroots approach, craft brewers’ unique “culture of collaboration and the cultivation of local community support … have combined to create a close-knit industry with a strong sense of camaraderie.”[11] For many craft brewers, it is critical for customers and industry members to perceive them as “laid back, easygoing, and focused mainly on brewing great beer.”[12]

Based on those concerns, if a craft brewery chooses to pursue litigation to protect its trademark rights, it may experience a reputational hit during the ensuing court battle.[13] For example, many craft beer enthusiasts and consumers have begun “using online petitions to pressure the plaintiffs into resolving their disputes out of court.”[14] They complain that resorting to litigation, as opposed to resolving disputes amicably, contradicts the community spirit that serves as the foundation for the entire industry.[15] This backlash has inspired some breweries to reconsider litigation, while others have remained steadfast in their decision.

Since a craft brewery’s success is often directly correlated to its ability to build and maintain a “grassroots fan base and support in the local community,” this friction between trademark enforcement and the craft beer industry’s culture poses serious challenges to small and large craft breweries across the country.[16]

The Lanham Act, Likelihood of Confusion, and Trademark Coexistence Agreements

If a craft brewery uses its trademark in interstate commerce, federal trademark registration is available to protect their ability to enforce their intellectual property rights in that mark. Pursuant to § 2(d) of the Lanham Act, an application for trademark registration may be refused if the mark “so resembles a mark registered in the Patent and Trademark Office … as to be likely, when used on or in connection with the goods of the applicant, to cause confusion.”[17] A significant share of trademark litigation deals with this section.

One creative way that craft brewers have avoided the negative impact and costs of trademark litigation is through trademark coexistence agreements, also known as consent agreements. A consent agreement is “an agreement between parties in which one party (e.g., a prior registrant) consents to the registration of a mark by the other party (e.g., an applicant for registration of the same [or similar] mark…).”[18] The goal of these contracts is to permit “potentially confusing trademarks to coexist without [the risk] of trademark infringement suits.”[19] Parties seeking trademark registration often introduce these agreements to overcome refusal of their registration pursuant to § 2(d) of the Lanham Act.[20] Often times, the craft brewing industry’s “sense of camaraderie … translates over to how breweries … approach potential trademark issues with other breweries,” making these agreements particularly attractive to industry members.[21]

While they are not dispositive, consent agreements are usually considered as evidence that confusion is unlikely under § 2(d).[22] The Trademark Manual of Examining Procedure explains the deference that examining attorneys of the Trademark Trial and Appeal Board (“TTAB”) apply to these agreements:

Examining attorneys should give substantial weight to a proper consent agreement. When an applicant and registrant have entered into a credible consent agreement and, on balance, the other factors do not dictate a finding of likelihood of confusion, an examining attorney should not interpose his or her own judgment that confusion is likely.[23]

This deference, however, was brought into question in 2016 with the TTAB’s decision in In re Bay State Brewing Co.[24] In that case, the TTAB refused to register a brewery’s trademark, despite their consent agreement with the owner of a similar mark. One basis for the court’s decision was that “both marks [would] be used in overlapping geographical areas, namely New England and New York.”[25] This suggests that where parties to a consent agreement operate in entirely distinct geographical markets, the TTAB may afford more deference to the agreement. Overall, Bay State Brewing diverges from the highly deferential standard previously employed and complicates a brewery’s ability to use consent agreements to avoid litigation.[26]

Crafting a Solution to Minimize Trademark Litigation

Moving forward, it would greatly benefit the craft brewing industry to avoid litigation whenever possible. Not only would this allow craft brewers to focus on supplying the market with quality craft beer, but it would also preserve both parties’ and the court’s resources. Two courses of action may help reduce litigation, including encouraging craft brewers who choose to use consent agreements to do so with utmost care and detail in light of the heightened scrutiny used by the TTAB, and also by urging the Brewers Association to mandate a non-binding mediation program for all craft brewers participating in the trade association.

          A.      Refining Consent Agreements

If craft brewers are unable to enter into trademark consent agreements, an increase in litigation is almost inevitable.[27] This litigation threatens to undermine the collegial and unique culture of the craft brewing industry. Specifically, the rise in litigation “may hamper the development of many smaller breweries and prevent the craft brewing industry from expanding as it has recently.”[28] In the future, it would be ideal if the TTAB afforded more deference to consent agreements out of respect for the party’s freedom of contract as well as their unique understanding of the industry as it exists on the ground.[29] That said, to a certain extent, Bay State Brewing simply signals that consent agreements will be carefully and meticulously scrutinized.[30] Thus, while these contracts do not guarantee success in refuting trademark registration refusal, they remain useful tools if crafted carefully.

For example, in Bay State Brewing, the TTAB was particularly concerned with the overlap of geographical coverage between the applicant and registrant’s brews. One way to alleviate those concerns is to clearly identify the geographic regions in which each party will operate and ensure there is no overlap. That, however, still does not guarantee that the consent agreement will be given great weight. Alternatively, brewers can pursue concurrent use registration. Concurrent use applications request that a trademark be registered in a specific geographical area of the United States.[31] In their application, the applicant “lists one or more parties who concededly have rights in the mark in other geographical areas of the United States.”[32]

Overall, the takeaway from cases like Bay State Brewing is that when consent agreements deal with virtually identical goods, craft brewers must be prepared for extensive scrutiny by the TTAB.[33] Moving forward, craft brewers who enter into consent agreements must take great care to ensure that their agreements clearly and succinctly show, for example, that the goods travel in distinct trade channels, that the parties mutually agree to limit the scope of their use, and that the parties will take steps to avoid any possibility of confusion in the marketplace. [34]

            B.     Self-Policing Through a Mandatory, Non-Binding Brewers Association Mediation Program

Another approach to minimizing trademark litigation between craft brewers would be to focus on the “possibility of industry self-policing through the implementation of a mandatory non-binding mediation scheme required as a condition of membership in the industry’s trade organization.”[35] Essentially, in order to minimize the inevitable conflicts between craft brewers over concurrent use of a similar trademark, the Brewers Association would implement this mediation process as a component of its dispute resolution procedure and as a condition to membership in the trade association.[36]

Arguably, the Brewers Association has the most accurate and up-to-date information on any developments within the industry. Since it is a trade organization, rather than a legislative body, it can respond quickly and efficiently to changes in the industry on a national scale. This approach is particularly useful when compared with federal legislation because it would not require any changes to the well-established Lanham Act, nor require any legislature to afford special treatment to a specific industry.[37] Furthermore, a state-based legislative approach would likely fail primarily because of the confusion and inevitable discrepancies between different state’s approaches.[38]

The largest benefit of this approach is that it would encourage “brewers to work within the industry to resolve … dispute[s] quietly.”[39] This would increase the chances of settlement, limit the strain on judicial resources, and allow the parties to return as quickly as possible to promoting their breweries and creating great beer. By diverting the resources that are currently being expended on protracted legal battles, this tactic would also encourage even further growth of this already thriving industry.[40]

Conclusion

In recent years, the tension between the “culture and expectations of the craft brewing industry and the requirements for federal trademark registration” has resulted in a significant number of lawsuits between craft breweries across the country.[41] Often times, this friction forces craft brewers to choose between “protecting their valuable trademarks and being subjected to industry ridicule or forgoing trademark protection and allowing their marks to be infringed, diluted, or tarnished.”[42] Therefore, to succeed in the increasingly competitive marketplace while also maintaining the good will of a brand, craft brewers must consider alternatives to litigation in the future.[43] Implementing a mandatory, non-binding mediation procedure as a condition to membership in the Brewers Association as well as encouraging detailed, thoughtful, and carefully crafted consent agreements may help alleviate the tension that extensive trademark litigation places on the craft beer industry.

[1] History of Craft Brewing, Brewers Association (last visited Mar. 9, 2018), https://www.brewersassociation.org/brewers-association/history/history-of-craft-brewing/.

[2] Id.

[3] Derek Thompson, Craft Beer is the Strongest, Happiest Economic Story in America, The Atlantic (Jan. 19, 2018), https://www.theatlantic.com/business/archive/2018/01/craft-beer-industry/550850/; National Beer Sales & Production Data, Brewers Association (last visited Mar. 9, 2018), https://www.brewersassociation.org/statistics/national-beer-sales-production-data/.

[4] C.J. Hughes, How Craft Breweries Are Helping to Revive Local Economies, The New York Times (Feb. 27, 2018), https://www.nytimes.com/2018/02/27/business/craft-breweries-local-economy.html.

[5] Alastair Bland, Craft Brewers are Running Out of Names, and Into Legal Spats, NPR (Jan. 5, 2015), https://www.npr.org/sections/thesalt/2015/01/05/369445171/craft-brewers-are-running-out-of-names-and-into-legal-spats.

[6] Spencer Wiles, The TTAB Should Drink a Beer and Relax: Implications for Trademark Consent Agreements in the Craft Brewing Industry After In re Bay State Brewing Company, Inc., 74 Wash. & Lee L. Rev. Online 103, 105 (2017).

[7] Gabrielle L. Palanca, More Collaboration, Less Litigation: Analyzing Craft Beer Within Intellectual Property’s Negative Space, 88 U Colo. L. Rev. 13, 14 (forthcoming publication), available at http://lawreview.colorado.edu/wp-content/uploads/2017/05/Palanca_Final_Formatted.pdf.

[8] Id.; Rebecca Winder, Trademark Protection in the Craft Brewing Industry: A Beer by Any Other Name May Be an Infringement, 15 Wake Forest J. Bus. & Intell. Prop. L. 147, 149 (2014); see The Brooklyn Brewery Corp. v. Black Ops Brewing, Inc., 156 F.Supp.3d 1173 (E.D. Cal. 2016) (action for enforcement of federal trademark rights, which resulted in enjoining Black Ops Brewing, Inc. from using “Black Ops” or “Black Ops Brewing,” and resulting in a name change for the defendant brewery); see also Complaint at 5, Port Brewing v. Moylan’s Brewing Co., No. 10 CV1826IEG (S.D. Cal. Sept. 2, 2010).

[9] Winder, supra note 8, at 150.

[10] Id. at 152.

[11] Id.

[12] Id. at 155.

[13] Id.

[14] Samantha Drake, Craft Beer’s Recent Spate of Lawsuits Has Beer Drinkers Hopping Mad, Quartz (Jan. 13, 2016), https://qz.com/589208/craft-beers-recent-spate-of-lawsuits-has-beer-drinkers-hopping-mad/.

[15] Id.

[16] Winder, supra note 8, at 150.

[17] Lanham Act, 15 U.S.C.S. § 1052.

[18] Trademark Manual of Examining Procedure § 1207.01(d)(viii) (Oct. 2017) [hereinafter “Trademark Manual”].

[19] Wiles, supra note 6, at 127.

[20] Trademark Manual, supra note 18, § 1207.01(d)(viii).

[21] Wiles, supra note 6, at 135.

[22] Id. at 128–129.

[23] Trademark Manual, supra note 18, § 1207.01(d)(viii); see Erica Fang, Brewing Likelihood of Confusion: A Look at Coexistence Agreements, Bend Law Group (July 17, 2017), http://www.bendlawoffice.com/2017/07/17/brewing-likelihood-of-confusion-a-look-at-coexistence-agreements (explaining that “Courts will consider [consent agreements as] evidence that there is no likelihood of confusion because the parties entering into the agreement are those who would most greatly be affected by potential consumer confusion”).

[24] In re Bay State Brewing Co., 2016 WL 1045677, *4 (T.T.A.B. 2016) (refusing to register Bay State Brewing’s “Time Traveler Blonde” mark after finding likelihood of confusion with another brewery’s prior registration of “Time Traveler” for beer, ale, and lager, notwithstanding a consent agreement between both parties).

[25] Id.

[26] Wiles, supra note 6, at 157.

[27] Id. at 158.

[28] Id.

[29] Id.

[30] Sandra Edelman, Consent Agreements – Not Always a Sure Path to Overcome Likelihood of Confusion Refusals in the USPTO, The TMCA (Nov. 27, 2017), http://thetmca.com/consent-agreements-not-always-a-sure-path-to-overcome-likelihood-of-confusion-refusals-in-the-uspto/.

[31] Trademark Manual, supra note 18, § 1207.04(a).

[32] Id.

[33] See Edelman, supra note 30.

[34] See In re A-Plant 2000, ApS, 2017 ITAB Lexis 306 at 15 (T.T.A.B. 2017) (establishing five factors the TTAB looks to when evaluating consent agreements).

[35] Winder, supra note 8, at 149.

[36] Id. at 163.

[37] Id.

[38] Id.

[39] Id.

[40] Id. at 164.

[41] Id. at 161.

[42] Id.

[43] Id.

This last weekend (2/16-2/18), I had the honor and privilege of teaching the first craft beer law class offered at a U.S. law school (and I believe worldwide). Several of my friends and colleagues are asking me what the heck that looks like.  It must be a joke, right?  Nope.  I’m pretty sure California’s 921 craft breweries would agree with me.

To start, as is often the case with new classes, McGeorge offered this class for one unit over one weekend. Going forward, I am confident that we will offer it as a full semester, two-unit elective class.  So for those who are interested, here is what the class looked like.

Day one: Extensive discussion and analysis of historical bases for regulation, the three-tier system, and tied-house laws.  The students also read all three opinions from the Retail Digital Network case, and we discussed those opinions extensively.  We had a quiz on the first day based on tied house and a mock email from a brewery client asking if it could do this or that under the ABC Act and commensurate regulations.

Day two: Trademarks and distribution.  All.  Day.  Obviously, these two things are very important for any craft brewery.  It was intense and maybe a little long, but definitely worth it.  The students took a quiz analyzing the Stone Brewing complaint (re Keystone’s use of “Stone”) filed in early February.  AJ Tendick from Bike Dog came to class and spoke for about an hour about his experiences with regulations and laws, and we went to the Bike Dog taproom on Broadway in Sacramento where we discussed duplicate licenses for type 23s and may or may not have had a beer or two.

Day 3: Labeling (TTB and ABC), ABC structure and enforcement, and licensing.  Tom McCormick, Director of the California Craft Brewers Association, stopped by and gave a very interesting talk about regulations, politics, and tied house.  He was also very careful to point out the need for lawyers who are knowledgeable and willing to work with independent craft breweries.  We also had a quiz on labeling where we analyzed a label on a can actually in the market to determine TTB and ABC compliance.

We did not get to all the material in Candace Moon’s (the Craft Beer Attorney’s) very helpful book called Brew Law 101. So the students were definitely exposed to some areas of the law that we could not hit in class, including employment, entity formation, etc.

The students will finish the class by writing a research paper on a topic of their choosing that impacts independent craft beer (positively or negatively) based on statutes, regulations, case law, or policy. I left it open on purpose because there are so many interesting topics to discuss.  I can’t wait to read them.

In short, the class was a huge success. The students were awesome—engaged, curious, thoughtful, and passionate.  Thanks to University of the Pacific, McGeorge School of law for supporting me in this endeavor.  I can’t wait to do it again.  We only scratched the surface.

Let me know what you think. Cheers.

So what a brewery says on labels and packaging is important. And consumer protection laws (including false advertising laws) are important. Add these two concepts up, and it appears to be class action heaven.  Brewers can avoid this nasty equation by being as up front as possible on both labels and packaging, especially about where a particular beer comes from.

One Northern District of California lawsuit involves Kona Brewing Company (Broomfiled v. Craft Brew Alliance).  The class action complaint alleges misleading or false labeling and advertising.  The plaintiffs allege that they were duped into purchasing Kona beer at a higher price because of Kona’s advertising schemes that play on Hawaiiana and specifically contain a map of the Big Island with a star that identifies Kona’s headquarters and an invitation to visit the brewery.  This, despite all Kona beer sold in the continental United States was actually brewed in the continental United States (the beer labels themselves state this fact).  Kona filed a motion to dismiss and claimed that the packaging was nothing more than non-actionable puffery.  But in late September, the Northern District denied the motion (granting the motion as to some causes of action) and allowed it to proceed, primarily on the grounds that the reasonable consumer test is best left for a jury to decide and that the map identifying Kona’s location and its invitation to visit the brewery could allow consumers to believe the beer was actually brewed in Hawaii.  So the case will go on, dollar signs in plaintiffs’ counsels’ eyes and all.  The class certification process alone can be horribly expensive for both sides.  Settlement anyone?

Asahi Beer U.S.A. finds itself in a remarkably similar predicament. Facing a class action complaint that alleges violations of California’s CLRA, Unfair Competition, and False Advertising, Asahi moved to dismiss.  The complaint alleged that consumers were deceived into overpaying for Asahi beer because they thought the beer was made in Japan.  It wasn’t.  In fact, it was brewed in Canada.  Interestingly, like Kona, each label copped to the fact that it wasn’t brewed in Japan.  In October, the court denied the motion in its entirety on several grounds.  Perhaps most germane, the court held that whether the packaging containing Japanese characters and the name Asahi (meaning “morning sun” in Japanese) was misleading to a reasonable consumer could not be decided as a matter of law.  Starting to see a pattern?  There are more of these cases lurking out there.

This raises two interesting things in my mind. First, there is a vocal group of craft beer pundits that loudly proclaim nothing matters besides what is in the glass.  I respect the position.  But I don’t believe it to be true.  Conversely, consumers do care about things like who made the beer and where it came from.  And if consumer concerns aren’t enough, than maybe false advertising lawsuits are.  Second, and most interesting to me, I have yet to see a lawsuit or an allegation that a truly independent brewer has misrepresented anything on a label or packaging.  They don’t have to.  So while big producers keep trying hard to assert their localness, the clothes simply don’t fit.  Of course, if where a beer is made and by whom is not important, big producers would not need to resort to potentially misleading advertising to gain an edge.  Brewers just need to be forthright in their marketing and packaging.  Honesty is the best (and most cost-effective) policy.

Let me know what you think. Cheers.

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