Introduction from John Hinman: Rob attended the TTB 2019 Trade Practice Seminar last week in New York City and shared with us his analysis of the TTB enforcement policies – which demonstrate a distressing lack of understanding of industry marketing and sales developments over the last 20 years and may, in his view, exceed TTB Agency authority. TID officials at the conference expressed how amazed they are at the involvement of third-party promotion companies in alleged violations.
Considering that third party promotion companies are ubiquitous throughout the wine, beer and spirits industry; from social media advertising, to product ordering and delivery, to menu printing, to merchandising and on and off premises tasting events to the trade and the public, that TTB is “amazed” is beyond troubling.
Rob’s thesis is this “amazement” should not lead to an over-zealous attempt to use false theories of aiding and abetting (based on the nature of the three-tier system) to create secondary liability and new violations. Industry member education at a sophisticated level must be paramount. Making threats of enforcement action without education (properly grounded in the operating law) is both unfair and legally unsupportable. The FAA Act trade practice provisions are too complex for threat-based enforcement.
Our purpose in this continuing series of articles is to educate our friends and colleagues about the need to carefully review all activities that involve funding promotional programs intended to influence retailer and consumer purchasing activity – which is the purpose of all promotional activity.
We also encourage all industry members to obtain specialized legal advice from the many capable specialized industry lawyers practicing today – it’s worth the expense because once a TTB or ABC action is filed the defense costs (plus the existential threat to the existence of the underlying business from loss of licenses and permits and excessive penalties) rise quickly.
Rob is the former TTB Chief Counsel (2003 to 2012) and handled independent consulting projects prior to joining the National Association of Beverage Importers (NABI) as President last Fall. All the views he expresses below are his alone and are not intended to reflect the views of NABI or any of its Members.
Secondary Liability in Unfair Trade Practice Violations: TTB’s Targeting of Third-Party Promotion Companies.
By Rob Tobiassen
Targeting without Education – Deja Vu All Over Again
Listening to the TTB officials presenting at the kick-off 2019 TTB Trade Practice Seminar last week in New York City was deja vu to the seminars given last year. Then the Trade Investigations Division (TID) Director gave his synopsis of the current trade practice investigation trends…always an interesting topic.
Third party promotion company programs used by retailers (and often funded by suppliers to coordinate lawful promotional programs) is the enforcement target de jour. We were reminded (once again) of the exclusive-outlet and tied-house offers in compromise accepted in 2011 from six suppliers for their promotional activities involving retailer promotional company and Harrah’s casinos in Las Vegas. The widespread use of promotional third-party companies to service retailer accounts amazed the TID official. His zeal was noteworthy.
Such zeal leads to wondering how wide-spread the TTB is throwing the net out in the industry right now.
More concerning was the complete missing of an educational opportunity here for TTB. The tenor of the TID official’s comments were beware, we are there. Why not identify the alleged problems? Why not educate the industry participants taking time away from very busy business lives to learn about compliance?
Yes, you can remind the audience of the 2011 industry circular on industry member participation in retailer promotional entities but at least explain what in the eight years since it was issued is the problem it did not address or that the industry members are forgetting or ignoring here?
Educate, do not simply threaten.
Secondary liability versus “Indirect” Liability – What is Indirect?
The unfair trade practice prohibitions cover activities undertaken directly, indirectly, or through an affiliate with a retailer (in the case of exclusive-outlets and tied-houses).[1] Nowhere does the Federal Alcohol Administration Act (FAA Act) define “indirectly.”[2] Similarly, the FAA Act does not include provisions on conspiracy or aiding and abetting, the usual legal theories for secondary liability in American jurisprudence.
The scope of an industry member acting “indirectly” through a third-party entity is explained in both the exclusive outlet[3] and tied-house[4] regulations.
Essentially, in these situations, something of value (such as money) passes from the industry member to a third-party entity that uses the money for providing a promotional benefit or tangible item of value to the retailer. Importantly, to be charged with an “indirect” violation, something must have passed from the industry member as a concrete benefit to the retailer not permitted by the regulations.
The “means to induce” the retailer must have passed from the industry member to the retailer, directly or indirectly. Knowledge, facilitation, negotiation, etc. are not sufficient to charge an industry member unless the TTB can link that industry member to an actual “requirement, by agreement or otherwise” in the exclusive-outlet context or the actual “means to induce” in the tied-house context.[5]
Aiding and Abetting – Can One Aid and Abet Another’s Violation?
Aiding and abetting (or “secondary”) liability does not require the passage or flow of a concrete benefit to a retailer from the party being charged. It arises where a party assists another person who directly commits the unlawful act - - such as furnishing the “means to induce” in a tied-house arrangement.
Under the three-tier system, you have three parties: suppliers, distributors, and retailers. This multiple party structure raises questions of whether aiding and abetting liability arises where one party allegedly commits an unlawful trade practice violation and the other party is a mere conduit.
For example, if a supplier, directly or indirectly, enters into an unlawful promotional practice benefitting a retailer, then is the distributor liable for aiding and abetting because it delivered alcohol beverage products of that suppler to the retailer because of the promotional arrangement? The distributor benefits from increased sales but has it violated any trade practice regulation?
Even if it knew of the promotional arrangement with the retailer through the third-party promotional entity? I would say no. If the promotional practice were a co-op arrangement where the distributor provided some of the money for the promotional practice, then the distributor would have primary liability and not secondary liability. For example, a promotional program for a retailer may be set up through a third-party promotion company and both the supplier and distributor share the expense of the promotional practice furnished to the retailer.
However, what happens where the supplier funds the entire promotional practice through the third-party company and the distributor’s only involvement is selling and delivering distilled spirits, wine, or beer/malt beverages to the retailer who is the receipt of the promotion practice which TTB alleges violates the trade practice provisions?
Distributor Banks – Do Banks Create Primary Liability? It Depends on How the Bank is Administered and Who Puts the Funds in
TTB has recently claimed in enforcement and settlement actions that the distributor is liable under an aiding and abetting theory for the supplier’s alleged violation where the distributor provided no money or other things of value, directly or indirectly, to fund the alleged unlawful promotional practice put on by the third-party retailer promotional company. There is no linkage by the distributor with the “requirement, by agreement or otherwise” or with the “means to induce.”
This is a dangerous extension of liability theory. The only link here may be indirect knowledge that the supplier is funding the program. Similarly, where a distributor undertakes to market or merchandise in violation of the regulations without the knowledge of the supplier (which ultimately benefits from the transaction) is this a basis for “secondary liability”? How about when the Supplier also co-contributed to the fund used to finance the program?
The TTB Trade Enforcement Seminars raise more questions than answers and, if the Trade Enforcement Investigators cannot answer the questions, how are the industry members expected to do so?
One point however is clear, both Suppliers and Distributors who jointly contribute to promotional banks have an obligation to monitor how that money is being spent, who it is going to benefit, and how.
Simply condemning the programs without providing detailed and comprehensive guidance on how lawful joint promotional programs should be set up and conducted is an abdication of TTB responsibility. If TTB is unable to articulate this clearly, then how can TTB expect the industry member to discern it? How can it be legitimately asserted by TTB that the industry member was “plainly indifferent” to anything?
The US Supreme Court says the Civil Aiding and Abetting Charge Requires a Specific Statute or Regulation Defining the Offense and the Elements Necessary to Prove it – That Does Not Exist in the FAA Act or the Regulations
The TTB’s aiding and abetting position has no legal support in the FAA Act, case law, or past TTB practice; which was demonstrated by the Las Vegas settlements noted earlier.
First, the FAA Act itself includes no provision imposing aiding and abetting liability. The term “indirectly” does not include aiding and abetting conduct as made clear from Supreme Court law discussed below.
Second, Federal case law establishes that aiding and abetting in the civil context only arises where Congress has enacted a specific provision imposing such liability. Unlike Federal criminal law where Congress has enacted a general aiding and abetting statute in the United States Criminal Code,[6] there is no corresponding general aiding and abetting statute in the civil context.
This is the holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A, 511 U.S. 164 (1994). The Securities Act of 1934 imposes private civil liability on those who commit a manipulative or deceptive act in connection with the purchase or sale of securities. The issue before the Supreme Court was whether the private civil liability under section 10(b) extents as well to those persons who do not engage in the manipulative or deceptive practice but who aid and abet the violations. The Supreme Court said “no.”
First, the text of the 1934 securities law does not provide aiding and abetting liability here. Second, the 1934 Act uses the phrase “directly or indirectly” but that phrase does not encompass aiding and abetting. Finally, the majority stated that Congress has not enacted a general aiding and abetting statute “either for suits by the Government (when the Government sues for civil penalties or injunctive relief) or for suits by private parties.”[7] (Emphasis added.) The opinion points out by comparison that Congress has enacted aiding and abetting statute applicable to all Federal criminal offenses.[8]
All three of these rationales apply to whether TTB may rely on an aiding and abetting theory under the FAA Act, enacted one year after the Securities Act of 1934, in trade practice enforcement actions and all lead to the same answer, “no.”
The TTB has Ignored this Law and Needs to be Called Out
This is important because a recent offer in compromise settlement in the Abstract and Statements (the offers in compromise settlement documents that can be found in links from the TTB website) states that the proponent (the wholesaler) aided and abetted the payment (presumably by the supplier) to a third-party promotion company that benefited a retailer.[9]
The Abstract and Statement goes to great length to characterize the situation as one of negotiations and facilitation but the problem remains that under the Supreme Court decision, aiding and abetting is not an applicable theory of liability in a civil action by the Federal Government unless the underlying statute expressly provides for it; the FAA Act does not provide for it. These TTB characterizations are meaningless surplusages. Only if the distributor’s involvement rose to the level of “directly or indirectly” providing the means to induce the retailer would there be a legal ground present to charge the distributor.
Because the characterizations by TTB are legally irrelevant, then the only involvement of the distributor is selling and delivering beer produced by the supplier to the retailer. This conduct cannot rise to the level of an alleged violation by the distributor. This is where the TTB is going off the rails and taking the industry with it.
Education over threats is the solution.
TTB needs to explain its theories of liability and not simply say “It is because I say it is.” It must prove its case because that is how due process works in the United States of America. Brief and oblique references in Abstracts and Statements are NOT educational. More dangerously, however, they pick up a life of their own.
Having cited aiding and abetting once, TTB will now say it has been our successful practice that “aiding and abetting” is a viable theory of secondary liability. Yet, no ALJ or court has so ruled; it only appears as an allegation in some buried away Abstract and Statement. (And then TTB asserts that the industry member was “plainly indifferent” to the trade practice requirements so it committed a willful violation …but that is a story for another day.) This type of bootstrapping affronts due process.
The more meaningful and telling portion of the Abstract and Statement is the closing sentence informing that the proponent also had an alleged unreported change in ownership and control. As explained in my recent blog, a distributor cannot risk TTB telling its supplier that its basic permit may not be valid because this is often the “kiss of death” under a distribution or franchise agreement. This is the moving force behind TTB settlements that tout trade practice violations.
The Aiding and Abetting Theory Contradicts Past TTB Practices.
This approach by TTB contradicts the Las Vegas trade practice investigation of a decade ago that was highlighted by TID officials at the Trade Practice Seminar last week.
In that third-party promotion company arrangement, the suppliers set up a “bank system” with the third-party promotion company that Harrah’s then drew promotional items allowed under the tied-house regulation exceptions. These banks exist throughout the industry today in the menu printing and product display world.
TTB charged the violation as a subterfuge on the alleged basis there was an agreement by the retailer to give preferential display and shelf space to the suppliers’ products. The overall investigation was settled through offers in compromise by six suppliers. No offers in compromise were submitted by any distributors. The offers in compromise submitted by the suppliers did not reference the distributors (as some supplier large dollar offers in compromise have done in the past). After accepting the supplier offers in compromise, then TTB issued guidance on industry member participation in retailer programs[10] and that guidance is silent on any secondary liability by the distributor that simply sells and delivers beer of the supplier participating in the retailer third-party promotion company arrangement. Had TTB concluded that there was liability by the distributors or the suppliers in these offers in compromise it would have (or should have as a matter of good guidance) so stated.
Liability for Multiple Parties Requires Participation by Multiple Parties
In summary, selling and delivering of beer by a distributor to a retailer does not establish a legal foundation for liability under an aiding and abetting theory. A distributor should only be liable where it directly or indirectly supplies the “means to induce” the retailer or the third-party promotional company that passes the value along to the retailer. Alleged knowledge, negotiation, and facilitation by the distributor has no legal significance where the distributor cannot be linked to the actual “means to induce” either directly or indirectly in a tied-house or to the “requirement, by agreement or otherwise” either directly or indirectly in an exclusive outlet. The same principle applies to a supplier where the liability is attributable to the distributor.
The Trade Practice Laws and Anti-Trust Policy – Educate, Don’t Just Roar
The trade practice provisions are complicated provisions of law and are difficult to understand and enforce. Unfortunately, that is the nature of anti-trust type laws (laws that prevent unfair or unlawful commercial behavior) given their public policy goals. But this is not and cannot be an excuse for sloppy enforcement policies based on threats rather than education.
Education is essential here because of this complexity of the trade practice laws. At every TTB Trade Practice Seminar last year and at the one last week in New York City, we keep hearing
“Ladies and Gentleman, let me assure you that you do not want to be the subject of an investigation; they are disruptive to your daily business.”
No kidding. That is why education is so important here. All the threats in the world do not teach the industry how to comply. The simplicity of the TTB Trade Practice Seminars has been highlighted by many. The industry needs a college level course and not one for elementary school. The huge dollar amounts of the offers in compromise and the range of suspensions of the “new normal” sought require nothing less.
Given the emphasis at the TTB Trade Practice Seminar last week on the “amazement” about the extensive presence of third-party promotional companies and TTB’s proposed broad net of capturing distributors in supplier funded arrangements with such promotional companies, TTB must explain in any press release or public guidance document that suggests a liability under and aiding and abetting theory why TTB is not following the Supreme Court precedent. It must consistently explain its case against the industry member. Transparency is a key component to education based on enforcement actions if those actions are going to be cited by TTB as a tool for education.
Again, in America it is the Government’s responsibility to prove you are guilty, it is not your responsibility to prove you are innocent.
[1] Title 27, United States Code (USC), section 205, flush language.
[2] The term “affiliate” is defined in 27 USC section 211(a)(4).
[3] 27 Code of Federal Regulations (CFR), section 8.23.
[4] 27 CFR, section 6.42.
[5] Only in the context of a consignment sale, is the offer alone the operative basis for an alleged violation. 27 USC section 205(d). For exclusive outlet, tied-house, and commercial bribery, there is no “attempt” theory of liability.
[6] 18 USC section 2.
[7] 511 U.S. at 182.
[8] Subsequently in Rolo v. City Investing Company Liquidating Trust, et al, 155 F.3d 644, 656 (3rd Cir. 1998) the Court of Appeals held that the Central Bank decision lead to a holding that there is no aiding and abetting liability under the RICO private right of action provisions for the same reasons.
[9] https://www.ttb.gov/fo/compromise/2018/oic-elgin-beverage-redacted.pdf
[10] https://ttb.gov/industry_circulars/archives/2012/12-01.html