Competition in the Beverage Alcohol Industry Continues Under the Microscope – Part 3
By Robert M. Tobiassen
[Note from John Hinman]: We here at Booze Rules prevailed upon our friend and colleague Rob Tobiassen (former Chief Counsel of the TTB, consultant lawyer with Hinman & Carmichael LLP and current President of the National Association of Beverage Importers) to provide a third installment in his series on what the TTB’s response to the Biden Administration Executive Order on Competition in the Alcohol Industry means in the short and long term. The release of the report a few days ago has resulted in a rush by industry trade associations and the press to figure out what it means. He breaks down the report by its effect on each sector of the industry and points us to what he expects the effort to achieve. We are all busy reading the tea leaves in this cup and expect that the focus on anti-competitive behavior, restrictions on market access and encouraging state legislatures to address systemic anti-competitive behavior in their states will result in both increased enforcement and trade association led initiatives to reform the entire alcohol production, distribution, and retail system in the United States. It’s about time. Rob, over to you…
“A rolling stone gathers no moss.”
Proverb
Capitol Hill may be gridlocked in Washington, DC, but the White House is not. Methodically, the Biden-Harris Administration’s roll out of the New American Dream for the economy continues rolling forward. One aspect of that rollout was advanced this week when the United States Treasury Department released its report “Competition in the Markets for Beer, Wine, and Spirits” (Report) as required under Executive Order 14036, Promoting Competition in the American Economy.
This article continues a series on this major initiative of the Biden-Harris Administration that is covered in two previous articles on this blog in July [https://www.beveragelaw.com/booze-rules/competition-in-the-beverage-alcohol-industry-now-under-the-microscope] and August 2021. [https://www.beveragelaw.com/booze-rules/competition-in-the-beverage-alcohol-industry-under-the-microscope-part-2] This article examines the key points of the Report and opines on some next steps. Fundamentally, the pivotal question remains: Is this the New American Dream or is it “a pipedream.” The widespread and diverse opinion in press releases by trade associations, trade and mainline media, and other interest groups clearly show the deep divides within the beverage alcohol industry.
Key Conclusions of the Report
Essentially, the Report focuses on the regulatory activities of the Alcohol and Tobacco Tax and Trade Bureau (TTB), Federal Trade Commission (FTC), and the Department of Justice Antitrust Division (DOJ). Each agency plays a different role but one conclusion of the Report calls for greater cooperation between the four entities. The report early on states: “The markets for beer, wine, and spirits are unusual.” And then elaborates as explained below.
For TTB, the Report concludes that:
The unfair trade practice rules in the Federal Alcohol Administration Act (1935), in conjunction with State laws, are successful in preventing vertical integration.
The unfair trade practice enforcement policies of TTB result in sanctions against smaller players who have no real market impact and larger players are left alone. TTB should use “enforcement discretion” here to “temper” itself.
The current preapproval of labels and processing complexities of basic permits and other licensing procedures hinders new entrants.
The original goals of the FAA Act to prevent criminal bootleggers from entering the legal industry and trade practice enforcement to mitigate over consumption of beverage alcohol, no longer have currency in today’s marketplace. Current topics of public health should be emphasized like mandatory allergen labeling and ingredient labeling.
TTB should “consider” rulemaking to update the unfair trade practice regulations in particular with respect to (1) newer and less well understood exclusionary conduct and (2) on category management parameters. [Some history here. In 1980, the regulations allowed shelving, stocking, and rotating conduct at a retailer of the industry member’s own products. In 1995, the regulation was expanded to allow the giving of “schematics” to retailers. Kendall-Jackson Winery and American Vintners Association, now WineAmerica, objected to this proposal saying industry could manipulate its use. ATF said it would revisit this change if it found abuse. In 2016, TTB issued a major position statement in an Industry Circular addressing allowed shelf plans as simple designs and not complex arrangements between the retailer and the industry member. The practice remains controversial.]
Clearer and more certainty in the regulations are needed for the industry to perform efficiently in the economy. Clearcut rules level the playing field for enforcement actions and, the report suggests, reduces the ability of larger companies to influence the regulators’ decisions.
Re-evaluate regulations that impose disproportionate burdens on small and medium producers.
Compliance work should be investigations and enforcement of the clearer regulations and not pre-emptive efforts in label preapprovals, permits and licensing decisions.
Without elaboration on a solution, the Report observes that the differing excise tax rates between and within the product categories affect competition. It seems this means both the various tax rates and credits require cumbersome calculations and records that harm small and medium size businesses and, further, that the different excise tax rates result in a wide range of different startup costs for new entrants as a distillery, winery, or brewery.
In my view, it would be most productive for TTB to publish an advance notice of proposed rulemaking seeking public comments on these questions and then, based on the comments received, draft a notice of proposed rulemaking for more specific public comment. The preparation of an advanced notice of proposed rulemaking may be quickly drafted. In promulgating the original unfair trade practice regulations in 1980, an advance notice of proposed rulemaking was published in 1977, as the foundation to gather relevant public comments for the drafting of the notice proposed rulemaking in 1979.
For the FTC and DOJ, the report encourages:
Closer cooperation between the two entities and outreach to TTB by the former.
Reassess merger guidelines for industries already highly concentrated.
Engage with States on laws impacting alcohol industry competition.
Review the effects on distribution by the acquisition of craft brewers by large brewers and conduct, as resources allow, a retrospective on pricing and innovation impacts by these acquisitions.
Evaluate the accuracy of claimed “efficiencies” by mergers.
Direct to consumer (DTC) is noted as offering distribution opportunities to small producers but its spreading from wine to beer and spirits may raise concerns on underaged drinking across the board.
The Report states that the beer industry mergers and consolidations are traditionally handled by DOJ Antitrust Division and wine and spirits mergers and consolidations are handled by the FTC. The Report also raises questions about the huge market concentration in the hands of two largest brewing companies.
Consignment Sales Enforcement Under the FAA Act is specifically addressed. The Report includes an extensive description of the legislative history of the FAA Act, a detailed explanation of how ATF and TTB have administered the FAA Act, and an in-depth summary of each unfair trade practice provision on exclusive outlet, tied-house, commercial bribery, and consignment sales. These details are a very “matter of fact” style. Interestingly, however, the Report expounds a view on the consignment sales provision noting that outside of the FAA Act, no other antitrust law or regulation views consignment sales as “inherently anticompetitive conduct.” Further, the Report explains how consignment sales will help small suppliers and suggests that TTB investigations have shown that small suppliers believe these are a useful and valuable approach for entering the marketplace. Readers of this blog may recall my criticism in the past on the TTB trade practice enforcement actions on consignment sales and stipulated suspensions of basic permits held by small wineries. [https://www.beveragelaw.com/booze-rules/2019/3/12/ttb-consignment-sales-investigations-what-is-behind-the-curtain-of-the-ttb-press-releases] Apparently, the Treasury Department shares my observations.
Analysis of Next Steps
The Report is directed to the Chair of the White House Competition Council established under the Executive Order. The Council is led by the Assistant to the President for Economic Policy and Director of the National Economic Council, who shall serve as Chair of the Council. Among its duties, the Council is responsible for implementing the administrative actions identified in this order.
At this point in time, the sequential timing of the next steps is bifurcated and, in some respects, unclear. Both TTB and the White House Competition Council have different next steps.
TTB
First, the Treasury Department may expect some response from the Council about the conclusions of the Report so none of the action items in the Report is being executed immediately. However, the Executive Order does include a second directive on this Report directing TTB to take several specific follow up steps to the Treasury Report. Following the submission of this Report to the Council, the Administrator of TTB was directed in a separate section of the Executive Order to within another 120 days:
To follow up on the foregoing assessment, the Secretary of the Treasury, through the Administrator of the Alcohol and Tobacco Tax and Trade Bureau, shall, not later than 240 days after the date of this order, consider:
(i) initiating a rulemaking to update the Alcohol and Tobacco Tax and Trade Bureau’s trade practice regulations;
(ii) rescinding or revising any regulations of the beer, wine, and spirits industries that may unnecessarily inhibit competition; and
(iii) reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries. (Emphasis added)
The discretionary scope of “consider” is wide. And the Report addresses specific concerns, like public health policy supporting allergen and ingredient labeling. I will follow closely what are the next steps we see from TTB both through its press releases and revisions to the Unified Agenda of Rulemakings that is released in the Spring and Fall.
White House Competition Council and the Office of Management and Budget
The White House Competition Council is the central recipient and clearinghouse of the reports on all of the 72 action items in the Executive Order. One of the Council’s duties is: “develop procedures and best practices for agency cooperation and coordination on matters of overlapping jurisdiction” and this follows from the Executive Order’s stress on a whole of government approach to competition policy. The Office of Management and Budget (OMB) in the Executive Office of the President (EOP) is the regulatory policy czar. No regulation may be proposed or adopted by an Executive Branch Department without OMB approval and OMB conducts the inter-agency clearance of proposed and final regulations. OMB reviews the regulatory plans of each component of the Executive Branch. The White House Competition Council’s interface with OMB will ensure that recommendations from the Report on the FTC and DOJ will be implemented even though the Treasury Department has no supervisory control over those two entities.
The Future
The unfolding of these events clearly shows that the White House is very serious about this initiative on competition and redefining the American Dream. Real movement forward will ultimately include Congress in some respects of the new programs and activities of the Executive Branch Departments pursued under the Executive Order. The process is long and the rolling stone has a long way to roll.
In my personal view, the totality of this initiative is telling the public, that is, the voters, about the value and benefits of the New American Dream and seeking those voters support in the congressional elections in November 2022 to build a big base in both Houses of Congress to support this plan.
One final observation. I have read many of the press releases and quotations from trade associations, industry members, and others that appeared since the Report was released. Overall, I see the Report as presenting valid concerns that are well known publicly or in the shadows and, furthermore, is balanced with both pro and con explanations. The Report is the first step in a dialogue. The divisiveness of the press releases and quotations worry me and reflect much of the polarization of Washington, DC today. Heels were dug in on positions some "hate" and cherry picking was done with favorable text in the Report. Overlooked here is the fact that the Report itself made no firm conclusions; rather, it put the concerns on the table for all to see and hopefully will start a long needed dialogue on the important public policies governing beverage alcohol in the United States. Debate failed to happen prior to Prohibition. We are standing at a pivotal point where constructive, thoughtful, and empathetic discussions are vital. As President Lincoln said, "The better angels of our nature" must prevail.
Whether it is a new dream, a pipedream, or a nightmare remains to be seen.
The views expressed in this article are solely those of the writer and do not reflect the views of the National Association of Beverage Importers (NABI) or any of its Members.
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.