I had the pleasure of being invited to speak on alcohol trade practices by Carrie Bonnington and Marc Sorini at the CLE International Beer Wine & Spirits Conference in Phoenix last week, which had some really great presentations on the industry. I shared the trade practices panel with Alva Mather and for anyone who missed it, here is a quick summary of the latest on trade practices:
1. Offers in Compromise & Ongoing Investigations
TTB enforcement has been active in recent years, although offers in compromise (industry member settlements of violations by paying fines) have slowed down from recent periods, focusing more on tax violations than trade practice violations. In the previous few years, much of the TTB’s trade practice enforcement has focused on sponsorship deals at sports and entertainment venues. According to the TTB’s published offers in compromise, these cases have involved unlawful inducements to purchase industry member products and excluding competitors, by paying sponsorships and providing free goods for placement in venue bars, paying third-party promotion companies who are funneling funds to the retail licensees, and distributors swiping credit cards and issuing billbacks for promotions never activated.
While you should work closely with counsel on your specific sponsorships and we do not provide legal advice here, we suggest reviewing sponsorship agreements closely, making sure the sponsor benefits don’t involve a commitment to purchase products, category exclusivity, sponsor-only promotions and sampling, or payments or free goods to retailers. It’s also important to get documentation and details from distributors in connection with billbacks, so it’s clear that any permissible activations are actually taking place and funds aren’t inadvertently going to retailers.
We’re seeing other active (but so far incomplete) investigations by TTB into tax compliance, on-premises bar programs, third-party promotions companies and distributor marketing support, and importer distributors getting products to market non-compliantly. We’ll stay tuned to see if these investigations make their way to violations.
2. Consignment Sales
Booze Rules has covered the topic of consignment sales before but there was an important update this year from TTB, which released an industry circular on the consignment sale provisions of the FAA Act, letting the industry know how it intends to interpret this unlawful trade practice. This circular came after our firm was involved in the defense of a wine wholesaler caught up in TTB’s enforcement of its consignment sale provisions, which, to our knowledge, had previously only been applied to sales to retailers. TTB clarifies in this circular that it will consider unlawful sales to both retailers and wholesalers to include transactions that don’t require payment until the product is sold, sales with the privilege of return, tie-in sales, or on any basis “other than a bona fide sale.”
While most industry members know consignment sales are unlawful to retailers, TTB articulates in this circular that the same is true for sales from producers and importers to wholesalers and warns that payment terms beyond 30 days “may invite scrutiny from TTB.” We note that this guidance may challenge some of the more innovative online and block chain business models emerging lately involving the use of clearing wholesalers and retailers to feed products through to retail licensed end users, so it’s important to pay close attention to TTB’s guidance when reviewing these platforms.
3. Health Claims
TTB did a great series of newsletters this past year on health claims in alcohol beverage advertising that is worth revisiting and reviewing (Mitigating Health Consequences, Suggesting Health Benefits, Use of the Word “Clean” in Alcohol Beverage Labeling and Advertising, Health Claims – Regulations, and Health Claims – Advertising Compliance).
With more brands seeking to catch the consumer trend for “better for you” products, it’s an important reminder to the alcohol industry that health claim related advertising and marketing is potentially misleading without giving the consumer full information about the health effects of alcohol, meaning some of the desired statements are challenging to make without more disclaimers and, sometimes, will not be permitted at all. We noted that this can get even more confusing with the proliferation of low-alcohol products, including many seltzers and no-alcohol products, which are regulated differently than more traditional beer, wine and spirits.
4. State Guidance
Several of the largest state alcohol markets have come out with some interesting guidance and draft guidance recently, including Texas, with its DRAFT E-Commerce Advertising and Sales Platforms marketing practices advisory (which appears to be stalled for now), and New York, with its Third Party Provider Advisory and recent declaratory ruling on Amazon, a retailer, receiving payment from suppliers to advertise on its platform (permitted if it’s not revenue or profit sharing and Amazon maintains a firewall). This is an important issue with many ramifications for marketing platforms operated by third parties.
We also flagged California’s Marketplace Facilitator Industry Advisory from 2020, which I’ve covered on Booze Rules in my Marketplaces 2.0 series with Jeff Carroll. We are still waiting for other states to release similar guidance, recognizing this is a sleeper issue for an industry now working with many marketplaces subject to these state taxes, presenting tax audit opportunities if the marketplaces and the industry members don’t get the taxes right.
These recent guidance documents from three of the largest states for alcohol sales mean a more complex analysis for e-commerce models will be necessary. Gone is the simplicity of the California third-party provider framework from 2011. These states (and perhaps others) are recognizing a more complex e-commerce eco-system where platforms are receiving money from suppliers and retailers and the payment processing and advertising analysis is more complex.
While we haven’t seen announced enforcement actions yet, California appears to be conducting investigations into payments to third party provider e-commerce platforms for advertising and possibly placement in retailer portals. Texas has also been conducting audits of licensees and asking similar questions and we’ve seen other state tax authorities conducting audits on sales tax payments, so we expect to see more enforcement.
5. Thing of Value
We also briefly flagged the recent case our firm defended out of California involving a display in a grocery store that the ABC charged was an unlawful thing of value. We appealed this case to the California Court of Appeals and won because the court found that the thing of value unlawful display charge was without merit because there was no evidence the display provided any benefit to the store other than as advertising. Look out for an upcoming blog post dedicated to an analysis of this important decision and what it means.
If you have questions about any of these trade practices, it may be time for a compliance check-up! Please contact your counsel for legal advice regarding your specific issues.
This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.