Minimum Resale Price Policies - How to Control Price-Cutters

Over the course of the last two decades our firm has fielded many complaints from our supplier clients about retailers who sell their alcoholic beverage products below cost, a tactic that harms the supplier’s brands, discourages other retailers who are unable to match those prices from buying the products and devastates the supplier’s market pricing strategies.  Adding insult to injury, these below-cost price advertisements are often mere tactics intended to lure consumers to the store, where they are guided to other brands in lieu of the (now “sold out”) brand they saw in the advertisement.  These “bait and switch” tactics are especially pernicious when they show up in on-line price search engines. Until recently, suppliers assumed their hands were tied – retailers set their own prices, and suppliers are not allowed to dictate what those may be. Right?

Yes and no. While minimum resale price requirements are a tricky business and the law is still evolving in this area, it is possible to establish and maintain a minimum resale price policy that will stand up to legal challenges under federal and most state laws.

In 2007, the U.S. Supreme Court held in Leegin Creative Leather Products Inc. v. PSKS Inc. that an agreement between a supplier and reseller to set a minimum price threshold for a product may be legal so long as it does not unreasonably injure competition and in fact may actually encourage competition, depending on the circumstances. (The latter was certainly true for our supplier clients who had retail accounts unable to compete with the cost-cutting retailer.)

Unfortunately, the Leegin decision does not preempt state antitrust law, and states are free to decide whether to continue making such agreements illegal.

Suppliers can avoid this result, however, by establishing a minimum resale price policy that unilaterally announces a minimum resale price for the supplier’s products. Under the “Colgate policy” (named for the famous case that set the precedent), a doctrine established by the Supreme Court almost a century ago, it is perfectly legal for a manufacturer to announce its resale prices in advance and refuse to deal with those who do not wish to adhere to such prices. The most important aspect of this Colgate policy is the absence of an agreement, express or implied, between supplier and reseller. The policy must be one-sided and non-negotiable, and it cannot be adjusted to fit the circumstances of a particular reseller. The policy must have at least one business rationale behind it, and the supplier should provide its policy to all retailers prior to its implementation. In the short term this requires effort on the part of the supplier but in the long term this benefits the brand because it returns control of the brand in the marketplace to the supplier, where it belongs.

For more background and details on legal minimum price policies, as well as a sample resale price policy that prohibits below-retailer-cost pricing, read our recent article on this subject in Practical Winery & Vineyard.

AB 2130 – Gloves Off?

In January, AB 1252 went into effect in California, requiring food employees in contact with “ready-to-eat” food to wear gloves. From the outset, this seemingly minor change to California food safety law generated ripple effects felt throughout the state beverage industry, as the law requires bartenders and tasting room employees to wear gloves when handling edible garnishes or cheese plates. Citing inefficiency, waste and a tenuous relationship to public health, the industry went on the offensive to get the word out about the unintended consequence of the new law. The backlash to AB 1252 was not limited to the restaurant and bar industries. As reported by NPR, local health departments had a difficult time interpreting and implementing the legislation. AB 1252 provided an exemption to the glove requirement for establishments that satisfied certain health department standards. But local health bureaucracies struggled to define the criteria for the exemption process.

Now, emergency legislation known as AB 2130 has been introduced in the California legislature to effectively repeal the onerous requirement of the glove law. The new legislation would permit food employees to handle “ready-to-eat” foods with their bare hands as long as they minimize contact with the food, use an approved food preparation area and make sure their hands are cleaned in accordance with California code.

Bartenders and tasting room employees aren’t out of the woods just yet. The grace period for violations of AB 1252 ends on June 30, and offending establishments may be penalized thereafter. Unless AB 2130 goes into effect by that date, the gloves may very well have to come back on for the state beverage industry.

“Gluten-Free” Labels for Wine, Beer and Distilled Spirits. We’re Still Waiting.

On February 11, 2014, TTB released a Revised Interim Policy on Gluten Content Statements in the Labeling and Advertising of Wine, Distilled Spirits, and Malt Beverages (the 2014 Interim Policy). The 2014 Policy updates the 2012 Interim Policy in the wake of FDA’s final rule on the use of the term "gluten-free" for products under their labeling jurisdiction. (Note: FDA has labeling jurisdiction over certain alcoholic beverages, including certain beers that are not sake, certain malt beverages and wine with less than 7% ABV.) TTB issued the 2014 Policy in order to parallel FDA’s requirements and reduce confusion for consumers. Ultimately, as it pertains to beverages, nothing much has changed, and confusion remains. For FDA and TTB, items can still be labeled “gluten-free” if they do not contain an ingredient that is a gluten-containing grain or inherently does not contain gluten (i.e. wine and vodka distilled from ingredients that do not contain gluten). TTB requires anyone making such claims in an advertisement or on a label to be responsible for verifying that the producer has taken proper measures to avoid cross-contamination, and they should be prepared to substantiate such claims.

Things get trickier when trying to use a “gluten-free” label with a food or beverage that was made with a gluten-containing ingredient and processed to remove the gluten. According to FDA, such items may be entitled to a “gluten-free” designation if the gluten-containing ingredient itself, and not the finished product, was treated to remove gluten such that 20 parts per million or less of gluten remains. However, “gluten-free” is not appropriate where the finished product has been processed. TTB does not anticipate this distinction to matter for malt beverages or distilled spirits made with gluten-containing grains, as the finished product is treated to remove the gluten. Problematically, FDA admits that there is still no scientifically valid way to determine the gluten content in fermented and hydrolyzed foods (including beer), and they are going to issue a proposed rule to address the “gluten-free” labeling of beers subject to its labeling requirements given this quandary. In the interim, FDA will exercise enforcement discretion with respect to FDA-regulated beer.

Celia Saison - created for the brewer's wife with celiac disease.

Therefore, beverage manufacturers seeking to alert consumers to the fact that their finished product has been processed to remove gluten may not use a “gluten-free” designation. However, TTB will approve statements about gluten they conclude are not misleading, which will be evaluated on a case by case basis and may require a disclaimer. This language can be wordy, making label compliance burdensome for producers. As with the 2012 Interim Policy, labels can contain “[processed or treated or crafted] to remove gluten” if they have certain qualifying statements and are not likely to mislead consumers. On the other hand, TTB will consider statements such as “contains x ppm gluten” to be misleading given the lack of scientific validity. Despite this fact, they will still require label applications to include a detailed description of the method used to remove gluten and the submission of results of a gluten assay for the finished product only to confirm there was some change in the gluten level. As with the 2012 Policy, anything that characterizes the relationship of the product to a health condition (such as celiac) is prohibited unless in compliance with TTB regulations.

When FDA issues further guidance or a final rule with respect to gluten-free statements on foods that contain fermented ingredients, TTB will evaluate again whether its own policy should be revised.

AB 1252: Sanitation Overkill?

New legislation effective January 1 in California banning food employees from touching “ready-to-eat” food with their bare hands is causing an uproar in the bartender community. Ready-to-eat food must now be handled with “suitable utensils,” effectively requiring bartenders to wear gloves when making drinks that contain something edible, including cocktail basics such as lime and mint. As of January 28, over 9,000 people have signed the petition on change.org to exempt bartenders from this requirement. However, limiting the exemption to bartenders does not go far enough. Wine and beer tasting room employees will also be required to wear gloves if they serve food in addition to drinks at the tasting room, which is common practice at many locations. While larger brewpubs and wineries often have commercial kitchens with staff that prepare food for guests, many smaller operations do not. For example, under this law leanly staffed establishments may now have to require their tasting room employees to don gloves between pours in order to prepare a cheese and cracker plate ordered to accompany a tasting unless there is a dedicated employee for food service that is properly outfitted. This requirement is not only esthetically irksome, but wasteful and unwieldy.

It is not a foregone conclusion that bartenders and tasting room employees will be wearing gloves in the immediate future. As reported by NPR, California Assemblyman Richard Pan stated that "the purpose of the law was not to force everyone to wear gloves, as much as to ensure that we have cleanliness and food safety in restaurants." Indeed, the requirement can be avoided by applying for prior approval from the appropriate regulatory authority (usually local health agencies), and maintaining documentation regarding food safety procedures, health policies and special training for food employees. However, applying for this exemption is no small burden for bars and tasting rooms - and local health agencies will no doubt be inundated with exemption requests.

While we have been informed that no penalties will be issued for six months while proprietors adjust to the new requirements, it will be interesting to see how health department and other regulators enforce the new requirements in establishments that are not primarily in the business of serving food. Right now the ABC does have the authority to enforce (and does enforce) the health laws in establishments that serve alcoholic beverages. Check back for updates in the near future.

Growlers: Not Just for Beer Anymore

In the past few years, wine packaging and dispensing in the U.S. has taken on new forms, going beyond the now-ubiquitous screw caps on bottles.  These include the various permutations of wine “in a box,” Tetra Paks, and single servings of sparkling and still wine in cans.  On-premise retailers are also increasingly offering wines on tap by the glass or carafe, which retain their freshness better than wines from open bottles. These new technologies offer a range of benefits, from environmental (reduction in the use of glass and the supplier’s carbon footprint) to economic (cheaper packaging and lighter, more efficient freight loads), to widening wine’s appeal to new consumers—particularly the younger set, who are more likely to welcome innovation and are less bound to tradition.

Enter the concept of growlers for wine.  A “growler” is a container that most commonly is filled with beer from a tap at a brewery or on-premises beer seller for the consumer to take home, drink, and then refill and use again. Originally a growler might have been a simple metal pail, but today’s growlers are likely to be glass or ceramic jugs.  Since they are reusable, they are better for the environment, fitting right in with the modern day “reduce, reuse, recycle” ethos.

Starting before Prohibition, when wineries sold most of their wines in bulk rather than bottles, wineries in California and elsewhere have been allowed to fill reusable containers for customers at the winery.  This has also been a longstanding practice in Europe (in France, where it is referred to as wine “en vrac,” it’s not uncommon to see a winery employee filling up a customer’s 1.5 liter plastic Evian bottle with wine from a hose).

Filling 'er up with Côtes de Provence AOC Rosé - Photo courtesy of Gastrocycling.com.

But while many states also allow retailers to sell beer by the growler, very few states allow retailers to sell wine by the growler.  Oregon is one of the first.

Oregon passed House Bill 2443 in April 2013, which, for the first time in that state, permitted wine and cider to be sold in growlers (or, as worded in the bill, “securely covered containers provided by the purchaser”).  The new law also expands the privilege to off-premise licensees, so now restaurants, wine shops, and grocery stores can join breweries and wineries in offering growlers of wine and cider (as well as beer) to their customers.

The law restricts the size of growlers to a maximum of 2 gallons each, and any employee who dispenses alcoholic beverages into a growler must hold a valid service permit issued by the Oregon Liquor Control Commission.

Some winery associations in Washington hope to have a similar law soon in their state, which currently only allows wineries to sell growlers of wine at the winery location itself, and not at additional tasting room locations.  They would also like to see wine growlers become legal for Washington retailers to sell.

Could California be next?