By: Robert Tobiassen, Compliance Consultant and Former Chief Counsel (TTB)
Introduction by John Hinman, Senior Partner, Hinman & Carmichael LLP
Rob Tobiassen has prosecuted, and advised on, hundreds of alcoholic beverage industry trade practice cases since 1978 when he first joined the Bureau of Alcohol Tobacco and Firearms. Rob rose through the ranks at the BATF (and then the TTB) to Chief Counsel before retiring in 2012. Rob is now providing his significant expertise to those of us engaged in advising our clients how to comply with the trade practice laws, and defending cases when circumstances dictate. This article is a primer on TTB Trade Practice enforcement principles and policies. Rob and I will be on a panel discussing trade enforcement issues at the upcoming NABCA Legal Symposium in Arlington VA on March 18-20, 2018.
The TTB has Substantially Picked up the Pace of Unfair Trade Practice Enforcement–and Pay to Play is at the top of the Agenda
TTB is making its presence known in the unfair trade practice arena. In July 2017, it announced a joint investigation by TTB and Florida State Authorities in the Miami area and then in September it followed with a joint investigation by TTB and Illinois State Authorities in Chicago, the Quad Cities, and Peoria. Both press releases from TTB emphasize these investigations are focusing on “pay to play” schemes. According to the press releases, "Pay to play," also known as "slotting fees," is an unlawful trade practice that hurts law-abiding industry members and limits consumer choice.[1]
The TTB Now has the Money to Investigate, and has reorganized to use the new budget cost effectively
Congress gave TTB $5 million of specific funding for fiscal years 2017 and 2018 for “the costs of programs to enforce trade practice violations of the Federal Alcohol Administration Act…” This appropriation reflected an effort by many industry groups to ensure that TTB has adequate resources to enforce the unfair trade practice provisions of the Federal Alcohol Administration Act (FAA Act), Title 27, United States Code, Section 205(a) through (d). Trade practice investigations are extremely resource intensive. They are conducted by investigators and auditors who must obtain evidence through extensive field investigations involving interviews and analyses of business records, and significant attorney support from the Office of the Chief Counsel.
To position itself to conduct these investigations, TTB has reorganized the Trade Investigations Division (TID), Office of Field Operations. Since the TTB’s inception in 2003, the Trade Investigations Division has been charged with enforcing the unfair trade practice provisions.[2] TID has six districts around the country.[3] The Market Compliance Office (MCO), Office of Headquarters Operations was moved to TID and monitors trade practice matters. MCO has an Advertising and Trade Practices Program Manager, Lisa Gesser, who is available to answer your trade practices questions at TradePractices@ttb.gov. A new Office of Special Operations was established in TID. It is charged with initiating, conducting, and overseeing trade practice investigations. Staffing of that office includes nine Special Operations Investigators (SOI) and a supervisor. The SOIs are positioned around the country. TID investigators from the field district offices will be assigned to assist in investigations. Under this reorganization both monitoring and enforcement is centralized in one program division.
Looking back at what TTB has done in the past several years in enforcement of unfair trade practices provides a guidepost to the current and future investigations. Essentially, TTB has focused on two areas: the “slotting fee” payments for product placement and consignment sales for malt beverages (beer) in the context of “freshness dating” returns. An examination of the statutory requirements for a trade practice investigation sheds light on why TTB may be focusing on these investigations.
The reason for the appropriation and the reorganization is because the industry asked for the trade practice laws to be enforced. A permissive climate where enforcement is hit or miss encourages corrupt activity, and it is the TTB’s mission to root out corruption wherever it can.
Federal Unfair Trade Practices Under the FAA Act – What are they and how is a case made?
There are four unfair trade practices:
- Exclusive Outlet (Section 205(a))
- Tied-house (Section 205(b)) with seven specific types of means to induce.
- Commercial Bribery (Section 205(c))
- Consignment Sales (Section 205(d))
“Pay to play” schemes can fit under the first three practices. Here is how a violation is proven:
There are three statutory elements for a violation.
- First, there is the substantive conduct by the industry member. For exclusive outlet, this is a requirement of a connection, by agreement or otherwise, with a retailer. For tied-house, this is one of seven enumerated means to induce a retailer. The enumerated means involve: (1) holding an interest in a retailer’s license; (2) holding an interest in a retailer’s personal or real property; (3) furnishing, giving, renting, lending, or selling to a retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value subject to regulatory exceptions; (4) paying or crediting a retailer for any advertising, display, or distribution service; (5) guaranteeing a loan or financial obligation of a retailer;(6) extending credit beyond the proper credit period; or (7) by requiring a retailer to take and dispose of a certain quota of product.
- For commercial bribery, this is a secret payment to an employee of a trade buyer or the offering or giving of any bonus, premium, or compensation to any officer, employee of representative of a trade buyer. A trade buyer is a wholesaler or retailer; the term does not include importers.[4] For consignment sales, this is an offer, sale, or contract for a consignment sale, a conditional sales, a sale with the privilege of return, an other than bona fide sale, or a sale where any part of the sales transaction involves the acquisition by the industry member from the trade buyer of other distilled spirits, wine, or malt beverages subject to exceptions for ordinary and usual commercial reasons arising after the merchandise has been sold. A trade buyer can also violate the consignment sales provisions by offering, purchasing, or contracting to purchase under one of the enumerated conditions.
- The second element is exclusion. There must be a certain impact from the substantive conduct on the retailer or trade buyer. This element is unique to the Federal unfair trade practices under the FAA Act. The substantive conduct must have resulted in the retailer or trade buyer “purchas(ing) any such products from such person [industry member] to the exclusion in whole or in part of distilled spirits, wine, or malt beverages sold by other persons [industry member] in interstate or foreign commerce.” Exclusion is not a statutory requirement for a consignment sales violation. This element is frequently the most challenging for TTB to establish in an alleged violation. State trade practice laws just prohibit or restrict the substantive conduct and have no requirement such as exclusion.
- The third element is an impact on interstate or foreign commerce. The requirement, means to induce, or consignment sales transaction (1) must have been made in interstate or foreign commerce, or (2) if such person [industry member] engages in such practice to such an extend as substantially to restrain or prevent transactions in interstate or foreign commerce, or (3) if the direct effect is to prevent, deter, hinder, or restrict other persons from selling or offering for sale any such products to the retailer or trade buyer in interstate or foreign commerce.[5]
· Finally, in investigations involving malt beverages, there must be similar state law. That is, “the law of such State imposes similar requirement with respect to similar transactions between a retailer or trade buyer in such State and a brewer, importer, or wholesaler of malt beverages in such State, as the case may be.”[6]
Establishing Exclusion
Exclusion is a challenging element to establish. For many years, TTB’s predecessor bureaus viewed it as a purely quantitative factor.
Did the quantity of distilled spirits, wine, or malt beverages purchased from others by the retailer or trade buyer decrease while the charged industry member undertook the substantive conduct?
Several Federal court decisions examined the purpose of the exclusion provision and held it was more than a mere quantity change; there was also a qualitative aspect to exclusion. The courts in Foremost (7th Circuit 1988) and Fedway (DC Circuit 1992) relied on the earlier decision in National Distributing Company (DC Circuit 1980) review of the legislative history of the unfair trade practice provisions and interpreted exclusion to mean that the practice by the industry member places or has the potential to place retailer independence at risk by creating a tie or link between the industry member and the retailer or by other means of industry member control over the retailer. Quantity alone was not enough. The Government lost all three cases. In Fedway, then Circuit Judge Ginsburg "suggested" in a footnote that the agency should utilize the rulemaking process to promulgate regulations on this definitional question.
In the Bureau, we were smart enough not to ignore her footnote.
Establishing Exclusion
Regulations on exclusion were developed in rulemaking in 1994-95 for the unfair trade practices of exclusive outlet, tied-house, and commercial bribery. See, Treasury Decision ATF-364, 60 Federal Register 20402 (April 26, 1995). Using the tied-house regulations as an example, under 27 Code of Federal Regulations (CFR), section 6.151, exclusion, in whole or in part, is a two-part analysis.
The first part is section 6.151(a)(1) which adopts the judicial description of exclusion from Foremost and Fedway and the second part reflects the traditional position that there must be a change in the retailer’s purchasing pattern:
Exclusion, in general.
(a) Exclusion, in whole or in part occurs:
(1) When a practice by an industry member, whether direct, indirect, or through an affiliate, places (or has the potential to place) retailer independence at risk by means of a tie or link between the industry member and retailer or by any other means of industry member control over the retailer; and
(2) Such practice results in the retailer purchasing less than it would have of a competitor's product.
(b) Section 6.152 lists practices that create a tie or link that places retailer independence at risk. Section 6.153 lists the criteria used for determining whether other practices can put retailer independence at risk.
The regulations then identify certain conduct that by operation of law through the regulation meets the first part of the exclusion standard. In the vernacular, these are sometimes called “red lights.”[7]
§6.152 Practices which put retailer independence at risk.
The practices specified in this section put retailer independence at risk. The practices specified here are examples and do not constitute a complete list of those practices that put retailer independence at risk.
* * * * *
(b) The act by an industry member of purchasing or renting display, shelf, storage or warehouse space (i.e. slotting allowance).
A slotting fee which arises in the “Pay to play” schemes is deemed to put the retailer independence at risk. TTB needs to show nothing more to meet this portion of the exclusion standard. This is one reason TTB looks to make the “Pay to pay” cases. TTB still must establish the second portion of the exclusion element relating to the quantity purchased by the retailer.
“Pay to play” and “Slotting Fees” Settlements – a lot of money has come over to the Government in Settlements
In November 2016, TTB accepted a $750,000 offer in compromise from the Craft Beer Guild LLC for allegedly paying “slotting fees” by furnishing things of value to retailers in Massachusetts to obtain favorable product placement and shelf space in violation of the tied-house and exclusive outlet provisions.[8]
In 2011 offers in compromise totaling $1.9 million were paid by six industry members who participated in the 2008-2009 Harrah’s Nationwide Beverage Program. The TTB investigation, which focused on activities in the Las Vegas area, alleged that the industry members furnished nearly $2 million in means to induce through a third party to Harrah’s Entertainment hotel and casino subsidiary corporations to obtain preferential product display and shelf space, that is, “slotting fees.”[9]
The emphasis in the press releases on “Pay to play” schemes in Florida and Illinois and the administrative settlements clarify that “slotting fee” scenarios are a high priority for TTB enforcement.
TTB Ruling 2016-1 on Shelf Management– The next frontier in slotting fee cases
While not an enforcement action, TTB Ruling 2016-1, dated February 11, 2016, “The Shelf Plan and Shelf Schematic Exception to the ‘Tied House’ Prohibition and Activities Outside Such Exception”[10] and the Frequently Asked Questions[11] could result in slotting fee cases.
In 1995, the tied-house regulations were amended to provide “(t)he act by an industry member of providing a recommended shelf plan or shelf schematic for distilled spirits, wine, or malt beverages does not constitute a means to induce within the meaning of section 105(b)(3) of the Act.”[12] TTB summarized the core of the Ruling to mean: “The plain language of the regulation removes only the act of providing a recommended shelf plan or shelf schematic from the prohibited means to induce enumerated in section 105(b)(3) of the FAA Act. Additional service or items of value do not fall within the §6.99(b) exception.” Because the Ruling deals factually with shelf space determinations, maybe these additional services, depending on what is provided to the retailer by the industry member, could be a “slotting fee.”
The allowance of shelf plans or shelf schematics was controversial. Public comments submitted by Kendall-Jackson Winery and Wine America raised concerns about the potential for abuse through biased analyses or industry members providing additional services. The Bureau responded that it would review the situation if abuses arose or a retailer becomes dependent on a single industry member’s purchasing advice. See, Treasury Decision ATF-364, 60 Federal Register 20402, 20418 (April 26, 1995).
While TTB has conducted investigations on shelf schematics it has taken no enforcement actions resulting in offers in compromise or administrative action to suspend or revoke a basic permit as of this date. However, both the issuance of TTB Ruling 2016-1 and the discussion of that Ruling in the TTB Annual Report for Fiscal Year 2016 clarify that shelf plans and shelf schematics will be a priority for TTB, particularly if the additional services provided could be crafted as a “slotting fee” arrangement.[13]
Consignment Sales and Malt Beverages – Selling too much so you can take it back, as Miller Coors and AB have discovered, is a violation for which the supplier may pay dearly
The second area where TTB has recently undertaken trade practice enforcement action involve the intentional overstocking of malt beverages and buy-backs of seasonal malt beverages by an industry member under the ordinary and commercial reasons in the consignment sales provision as interpreted in TTB Ruling 2012-4, which was superseded by TTB Ruling 2017-2, Revised - Freshness Dating and Allowable Returns of Malt Beverage Products under the FAA Act.[14]
The consignment sales provision states it is unlawful for an industry member to sell, offer for sale, or contract to sell to any trade buyer, or for any such trade buyer to purchase, offer to purchase, or contract to purchase any products with the privilege of return, among other types of arrangements. Importantly, the consignment sales provision does not have the element of exclusion. However, returns for ordinary and usual commercial reasons as listed in the regulations are permissible, but not required. The TTB Rulings interpreted the return of defective product authorized under 27 CFR section 11.32, as applying to malt beverages returned under a freshness dating policy established by the brewer provided the policy met criteria in the Ruling. The Ruling contained the caveat that this interpretation does not apply to a situation where the “industry member is encouraging, requiring, or forcing a trade buyer to overstock its products (i.e., purchase more of its products than it may other reasonable expect to sell), or if a trade buyer agrees to purchase more of an industry member’s products then it may otherwise reasonably expect to sell…”
In 2015, TTB accepted an offer in compromise from MillerCoors LLC for $450,000 for alleged intentional overstocking of its products in the manner covered by the caveat in the Ruling.[15] In 2016, TTB accepted an offer in compromise from Anheuser-Busch LLC for $300,000 for alleged violations of the consignment sales provision through the buy-back of seasonal malt beverages through two of its End of Season Buy-back Co-op programs[16]. In both these cases, TTB simply had to establish the substantive conduct of the sale with the privilege of return not allowed under one of the ordinary and usual commercial reasons in the regulations and that the transaction met one of the three interstate commerce clause jurisdictional clauses—in these cases the first clause was met because the electronic communications including email moved in interstate commerce. Because these cases involved malt beverages, TTB also had to meet the similar state law requirement.
The absence of the exclusion element made these cases easier for TTB to establish the alleged violation. It is much closer to the State trade practice laws where the substantive conduct itself results in the violation.
What’s next?
Clearly enforcement of the unfair trade practice provisions is a priority for TTB and it now has the resources to carry out these investigations. Emphasis will likely be on “slotting fee” cases, given the favorable treatment under the exclusion regulations. TTB has stressed “Given the many new, often small, businesses entering the market, TTB’s enforcement of trade practice laws ensures that industry members can compete in a fair and open marketplace.”[17]
The appropriations language is broad and could encompass training seminars for industry members around the country. Education and investigations are all part of enforcement of the FAA Act. TTB previously held TTB Expos and other regional seminars in many areas. To foster voluntary compliance, it would be very useful and appropriate for TTB to do these seminars again. Given the lengthy period that unfair trade practice enforcement was minimal, many in the industry today are not aware of the Federal provisions and it is too easy to fall or stumble into a violation.
What if my company must respond to an investigation?
A future blog article will examine how to respond to a TTB unfair trade practice investigation should you find your company the target of one.
- Should you talk with TTB investigators?
- Can you have Counsel present?
- What is TTB’s records examination authority in unfair trade practice investigations?
- Can TTB serve a judicial or administrative subpoena for records or testimony?
- Can TTB demand reports on your promotional activities?
- When should you consider raising settlement discussions with TTB
- Should you give a document retention notice to your employees?
- With the increase in trade practice investigations should industry members conduct internal reviews of their promotional practices and possible use the Voluntary Disclosure Policy in Industry Circular 2004-5[18] before a TTB investigation uncovers a potential problem? More to come.
Where do the states stand on this?
Every violation of the federal Trade Practice regulations is likely a violation of the regulations of the state in which the violation occurs. Duplicate federal and state prosecutions are common and we will see more of them. So, the message from here is to know the rules, train your managers and marketing personnel, and be careful when executing programs that are close to the line.
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[1] https://www.ttb.gov/news/ttb-florida-authorities-conduct-joint-trade-practice-investigations.shtml and https://www.ttb.gov/press/press-release-fy-17-09-illinois-auth-conduct-joint-tp-invest.shtml
[2] https://www.ttb.gov/offices/tid.shtml
[3] https://www.ttb.gov/pdf/tid_map_addresses.pdf
[4] 27 USC section 211(a)(3).
[5] Congress used this extensive language on interstate and foreign commerce in order to ensure that the FAA Act was constitutional. In May 1935, the United States Supreme Court declared that the industry codes under the National Industrial Recovery Act of 1933 were unconstitutional in A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935) and, thereby, effectively invalidated the alcohol industry Codes of Fair Competition. The FAA Act was enacted in August 1935 to provide for adequate Federal regulation of the alcohol beverage industry. However, in Fedway Associates, Inc. v. United States Treasury Department, BATF, 976 F.2d 1416, 1424 (D.C. Cir. 1992), then Circuit Judge Ruth B. Ginsburg found that the interstate commerce element was relatively easy to establish for alcohol beverages.
[6] 27 USC section 205(f) and 27 CFR sections 6.4(b), 8.4(b), 10.4(b), and 11.4(b).
[7] The “red light” structure for exclusion is different for exclusive outlet under the regulations. Section 8.52, Practices which result in exclusion, provides “The practices specified in this section result in exclusion under section 105(a) of the Act.” That is, the “red light” conduct under this regulation establishes both parts of the exclusion standard.
[8] https://www.ttb.gov/fo/compromise/2016/craft_beer_guild_gedacted.pdf
[9] https://ttb.gov/press/fy11/press-release-fy-11-4-faa-oic.pdf
[10] https://ttb.gov/rulings/2016-1.pdf
[11] https://ttb.gov/faqs/alcohol_faqs.shtml#sch
[12] 27 CFR section 6.99(b).
[13] TTB Annual Report for Fiscal Year 2016, page 18, at https://ttb.gov/foia/pdf/ttbar2016.pdf
[14] https://ttb.gov/rulings/2017-2.shtml
[15] https://www.ttb.gov/fo/compromise/2015/millercoors-oic-redacted.pdf
[16] https://www.ttb.gov/fo/compromise/2016/anheuser-busch-accepted-oic-redacted.pdf
[17] TTB Annual Report for Fiscal Year 2016, page 18, at https://ttb.gov/foia/pdf/ttbar2016.pdf
[18] https://ttb.gov/industry_circulars/archives/2004/04-05.html