What's New

California Attorney General Advisory Regarding Distributor Agreements

The California Attorney General has issued an Advisory to California Beer Manufacturers and Importers regarding distributor agreements.  The Advisory concerns complaints received by the AG’s office regarding the actual or threatened exercise of control of beer wholesalers by persons not holding a wholesale license issued by the California Department of Alcoholic Beverage Control.  The purpose of the Advisory is to provide guidance under existing California law as to the types of contractual provisions the AG’s office deems to be unenforceable under California law and the types of conduct the AG’s office considers to be in violation of California law.

After an exhaustive review, the AG’s office maintains it has found serious threats to the ability of the distribution tier of licensees to maintain the independence of their business operations. The AG’s office expressed its concern for the independence of each licensee and the identification and designation on the respective license of all persons with any direct or indirect control, ownership or interest in the license. It further stated that California’s licensing system requires separation between manufacturer, wholesaler and retailer licensees in the production, distribution and sale of alcoholic beverages.

The AG’s office states that the privileges of a distribution license include the authority to make management, personnel, pricing and product decisions and furthermore includes the authority to control the distribution of funds, to profit from the sale of alcoholic beverages and to control the sale or transfer of ownership of the licensed business.  Consequently, if these decisions are made or controlled by non-licensees it would constitute a violation of California law.

Numerous distribution agreements, particularly agreements between beer manufacturers and wholesalers, were reviewed by the AG’s office.  Finding that many of these agreements contain provisions that grant manufacturers unlawful control over wholesalers, the AG’s office elected to provide regulatory guidance identifying the types of contractual provisions that it deems to be unlawful and unenforceable.

These provisions include:

1. Manufacturers having control or approval rights over personnel decisions, including hiring decisions, compensation arrangements, duties and responsibilities, allocations of time communications with retailers and termination decisions;
2. Manufacturers having approval rights over a wholesaler’s business plan;
3. Manufacturers having the right to impose, without mutual agreement of the parties, a material and substantive change to wholesaler standards or a material and substantive amendment to an agreement with the wholesaler.
4. Manufacturers having the right to prohibit a wholesaler from distributing any brand of another manufacturer or otherwise exercising control over a wholesaler’s decisions regarding brands of another manufacturer; and
5. Manufacturers having the right to control or approve a wholesaler’s acquisitions or divestitures of businesses or product lines, or a change in control of a wholesaler or a wholesaler’s business, in either case including a manufacturer’s right of first refusal to purchase or right to appoint a designee purchaser.

Any attempt to enforce these provisions will be considered unlawful by the California Attorney General.  Additionally, it will be considered unlawful for a manufacturer to engage in conduct intended to induce a wholesaler to enter into a contract that is contrary to California law.  The AG’s office threatens that it will take whatever steps are appropriate under California law (and there are many) to hold manufacturers and importers liable for violations of the law.  The AG closes the Advisory by stating that the office has a particular concern that the coercive effect of these distributor agreements, which give manufacturers a high level of control over distributors’ businesses and operations, could ultimately result in a detrimental impact upon competition in the alcoholic beverage industry, particularly as too small and craft breweries.

We anticipate that other state AG’s offices and alcoholic beverage regulatory boards will follow California in scrutinizing distribution agreements and find that these provisions and others violate their respective state laws.

TTB Clarifies Guidance on Bailment Warehouses

TTB has issued a clarification of its guidance on bailment warehouses.  The agency states that it does not consider private bailment warehouse agreements to violate the consignment sales provisions of the FAA Act provided they satisfy the following conditions:

1. The industry member must retain title to the alcoholic beverages in the bailment warehouse until it is transferred to a wholesaler;
2. The alcoholic beverages subject to the bailment agreement must be segregated from the alcoholic beverages owned by the wholesaler;
3. The wholesaler must place an order in writing or by telephone with an authorized representative of the industry member and the order must have been accepted by the industry member.  The industry member does not need to be on the warehouse premises but must be considered to have custody of the product;
4. The alcoholic beverage must be readily accessible to the industry member without consent of the wholesaler;
5. The industry member and the wholesaler must maintain adequate records that show the transfers of the products to and from the bailment warehouse to the wholesaler’s inventory of products; and
6. The transfer from the bailment warehouse to the wholesaler’s inventory of alcoholic beverage products must be a final bona fide sale.

It should be pointed out that states may have their own laws and regulations relating to bailment warehouses.

TTB Clarifies Brewed Products as “Beer” under the IRC and as “Malt Beverages” under the FAA Act

TTB has received many inquiries regarding the labeling standards that apply to beers produced from substitutes for malted barley, such as sorghum, rice or corn as well as questions regarding the appropriate labeling of beers that are made without hops.  TTB looked at the classification of “malt beverages” and “beer” under the FAA Act, the IRC and regulations.  The definition of “beer” under the IRC differs from the definition of a “malt beverage” under the FAA Act.  Under the IRC there is no requirement for beer to be fermented from malted barley; instead, a beer may be brewed from malt or “from any substitute therefore.”  Additionally, the IRC does not require the use of hops in the production of beer.  The definition of “beer” under the IRC provides that the product must contain one half of 1% or more of alcohol by volume whereas there is no minimum alcohol content for a “malt beverage” under the FAA Act.

The end result of this is that a fermented beverage that is brewed from a substitute for malt but without any malted barley may constitute a “beer” under the IRC but does not fall within the definition of a “malt beverage” under the FAA Act.  Additionally, a fermented beverage that is not brewed with hops may fall within the IRC definition of “beer” but falls outside the definition of a “malt beverage” under the FAA Act. Saké and similar products are included within the definition of “beer” under the IRC but are also included within the definition of wine under the FAA Act therefore saké and similar products with an alcohol content of at least 7% alcohol by volume are subject to the labeling and other requirements of the FAA Act.

 Beers that do not conform to the definition of a “malt beverage” under the FAA Act are not subject to the labeling, advertising and other provisions of TTB’s regulations.  Brewers and importers of such products are not required to obtain a certificate of label approval for these beers.

Brewery products that are not malt beverages under the FAA Act but conform to the IRC definition of “beer” are still subject to all of the applicable requirements of the IRC and part 25 of TTB’s regulations.  This includes labeling of bottles, approval of formulas and the government health warning statement requirements.

In situations where a brewery product fails to meet the definition of a “malt beverage” under the FAA Act, the product will be subject to ingredient and other labeling requirements administered by the FDA.

TTB is reconsidering its 1994 guidance that beers fermented from at least 25% malted barley and made with at least71/2 pounds of hops per 100 barrels were “malt beverages” under the FAA Act.  Accordingly, brewers should request clarification from TTB regarding the classification of fermented beverages that contain hops and malted barley but are made from less than 25% malted barley or less than 7 ½ pounds of hops per 100 barrels.

FDA Guidance Regarding Labeling of Beers Subject to FDA Labeling Jurisdiction

FDA has recently issued guidance to industry on how to label beers that are subject to the FDA’s labeling laws and regulations.  The guidance was issued as a result of TTB’s clarification that certain beers do not meet the definition of a “malt beverage” under the FAA Act.

Labels of beers that are subject to FDA’s labeling requirements must bear:

1. On the principal display panel a statement of identity which can be similar to the statement of composition that is required for certain malt beverages under the FAA Act regulations, such as “Beer made from sorghum” or “Sorghum Beer”;
2. An accurate statement of the net quantity of contents in inch/pound units (e.g., 12 fluid ounces).  The statement of the net quantity of contents must appear in the lower 30% of the principal display panel. The type size used for the net quantity of contents statement is dependent on the size of the principal display panel.  FDA recommends that manufacturers declare net quantity of contents in metric units in addition to inch/pound units;
3. The name and place of business of the manufacturer, packer or distributor (e.g., Imported by ABC Brewers, Chicago, IL 52705).
4. In the statement of ingredients the common or usual name of each ingredient if the product is made from two or more ingredients, in descending order of predominance by weight.  This includes the name of any chemical preservative present and a description of the function of the preservative, a declaration of any added coloring and a declaration of added flavor, such as any spices, natural flavors or artificial flavors.
5. Nutrition labeling unless exempt.

All of the FDA mandatory label information must appear either on the principal display panel or the information panel and must appear in one place without other intervening material.  Food allergens must also be declared.

There are no FDA preclearance labeling requirements or certificate of label approvals similar to TTB requirements.  Products that do not meet FDA labeling requirements may be subject to regulatory action such as warning letter or seizure.  FDA intends to exercise enforcement discretion relating to these labels allowing manufacturers until January 1, 2012 to revise the labels on their non-malt beverage beers.

TTB Defers Review of Certain Alcohol Beverage Formulas

TTB has recently stated that it has received many inquiries from the alcohol beverage industry about the addition of vitamins and other nutrients, directly or indirectly through a flavor, to alcoholic beverages.  The issue of whether or not ingredients added to alcohol beverages is generally recognized as safe (GRAS) falls within the jurisdiction of the FDA.  Due to the uncertainty as to how the FDA regulations would apply to such products and the need for TTB to provide clear guidance on this issue to the alcohol beverage industry, TTB has stated it is important to work with the FDA on these issues so that TTB can establish clear and appropriate guidance to alcohol beverage industry members.  As a consequence of this uncertainty, TTB has decided to temporarily suspend consideration of requests for guidance on these issues while the agency works to develop the appropriate guidance.

Texas Alcoholic Beverage Commission issues Marketing Practices Bulletin on Product Displays and Enhancement Items

The Texas Alcoholic Beverage Commission has issued a Marketing Practices Bulletin regarding product displays and enhancement items.  The TABC states that it has received inquiries regarding in-store alcoholic beverage displays provided by manufacturers and wholesalers to retailers. TABC regulations allow members of the wholesale tier and those authorized to sell to retailers with the permission of the retailer to organize and construct displays of alcoholic beverages they sell.  Historically, it has been the policy of the TABC to allow upper-tier members of the industry to provide retailers with “display enhancement/enhancer items”, including televisions, grills, etc. provided these items are used for the sole purpose of product promotion.  Enhancer items may only be provided to the retailer on a temporary basis of not more than 30 days.  The TABC states that it was never its intention to allow upper-tier members to leave display enhancer items on a retail premises or allow the retailer to keep these items.

The Commission emphasizes that it prohibits upper-tier members from furnishing, lending, renting or selling anything of value to a retailer, including items used in the construction of product displays.  Upper-tier members of the industry who provide these items to retailers must ensure that these items are not given or left on the retail premises.  If the TABC finds that display items are left with a retailer in any capacity beyond the temporary 30 day limit, the TABC will pursue appropriate administrative action against each party involved, including the retailer, wholesaler and manufacturer.

This is a clear directive from the TABC on product displays and product display enhancement items.  Many states do not allow this liberal use of display enhancement items.  It is important to know a state’s regulations before building displays and using display enhancement items.

TTB Alcohol Beverage Sampling Programs Target Advertising, Labeling and Contents Compliance

TTB has announced the establishment of two new market-based sampling programs.  Through these initiatives, identified as the Alcohol Beverage Sampling Program and the Alcohol Beverage Advertising Program, TTB will determine the rate of compliance by the alcoholic beverage industry with Federal alcohol beverage laws and regulations regarding advertising, labeling and product content on an annual basis.  TTB conducted pilot programs in 2008 on distilled spirits products and malt beverage products in 2009.  The agency will focus on wine in 2010.  Results of the 2008 pilot program on distilled spirits products are outlined in the Industry Circular 2010-1.

For the 2008 Alcohol Beverage Sampling Program TTB obtained a list from an independent source that identified domestic and imported distilled spirits products currently sold in the United States.  TTB used a stratified random probability sampling process to identify products from the list for market procurement analysis and evaluation.  The agency then applied standard descriptive statistical techniques to produce accurate estimates of compliance across the distilled spirits industry.

TTB reviewed the product labels to determine if all legally required information was stated on the label and matched the approved COLA for the label.  The product was also tested for percent alcohol by volume, fill, solids, total acids, fusel oils, methanol and other ingredients and properties to ensure that what was described on the label was what was actually inside the container

The Alcohol Beverage Advertising Program estimates overall advertising compliance by beverage type and media type using basic statistical analysis of domestic producers’ and importers’ advertising selected through a random stratified sampling procedures.  In 2008, TTB obtained a list of distilled spirits television, radio, print and outdoor ads that recently appeared in the marketplace.  TTB also randomly selected websites for evaluation.  After obtaining the samples from these sources, TTB reviewed all ads to determine their compliance with Federal regulations.

TTB found that 88% of the distilled spirits products’ labels matched approved COLAs and were in compliance with Federal laws and regulations for distilled spirits. TTB found that 62% of tested distilled spirits’ contents matched the labeled description and were in compliance with Federal alcohol beverage laws and regulations for distilled spirits products.  95% of the content violations were the result of the samples being either over-proof or under-proof beyond established tolerance levels.  The rate of marketplace compliance with Federal alcohol beverage laws and regulations for distilled spirits products regarding product content matching the labeled description was 98%.

TTB found the compliance rate for all distilled spirits advertisements with Federal alcohol beverage advertising laws and regulations to be 82%.  The predominant reasons for noncompliance were no alcohol content statement for the advertised beverage and no name or address for the responsible advertiser.  The top reasons for noncompliance of ads by media type were no commodity statement in radio ads, no class or type statement in internet ads, no alcohol content statement in radio and internet ads and no name or address for the responsible advertiser in radio, internet and print ads.

TTB intends to use both Programs to review each alcohol beverage commodity on a three-year cycle for comparison purposes.  When TTB finds violations of Federal alcohol beverage laws and regulations via these programs, the agency will contact the responsible industry member and take appropriate enforcement action.  It is the industry member’s responsibility to comply with all laws and regulations.