A call for analyzing the 3-tiered system? NJ Court says alcohol regulations need to be revisited in light of changing conditions

Added on by Ashley Brandt.

There’s an quote from Justice Holmes’ The Path of the Law that goes “[i]t is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.”

We often deal with a version of such a contemptible state of affairs every time someone argues or asserts “tied houses” or the “lawlessness of prohibition and pre-prohibition times” as a justification for the three-tiered-system.  These are vestiges of the past that can be remedied with simple prohibitive laws against such behavior and don’t require entire state-sanctioned distribution schemes for a remedy.

Recently, a superior court in New Jersey upheld an administrative decision from the New Jersey Division of Alcoholic Beverage Control that removed a grandfather exclusion that allowed some select employees of distributors to “service” the accounts of retailers that the employees were related to, thereby receiving kickbacks in the form of sales incentive commissions from their employer for sales the employer-distributor made to that retailer.

The practice had been prohibited by a 1999 regulation and amendment to New Jersey’s Administrative Code stating that no solicitor (distributor’s salesperson) could solicit or order from a retail establishment in which an immediate family member of the solicitor a direct or indirect financial interest.  The reason for the change was a particular situation amongst distributors that had arisen and looked like a scheme that violated the competitive intent of New Jersey’s liquor laws.

In brief, the Court described the scheme as:

[W]holesalers were illegally rebating or "kicking back" a percentage of solicitors' commissions to retailers who regularly purchased from them. This practice was most prevalent with high volume retailers and the result was that the retailers' incomes were subsidized by these illegal rebates or "kickbacks." Complaints by industry members further evidenced a trend whereby some of the large-volume retailers would request that a wholesaler hire the retailer's relative as the solicitor to that retailer's accounts [thereby creating the possibility that the relative-solicitor's commissions were indirectly subsidizing the retailer].

Because the latter practice gave retailers and distributors an advantage where they employed or had a family relationship between employees, the practice was prohibited, but a number of people were grandfathered in if they were already solicitors as of 1999.  The thought behind the grandfather exception was that over time, those people would retire and the practices that the prohibition sought to end would gradually phase out.  That didn’t happen.  A subsequent investigation of the industry in 2007 uncovered new and continued abuses: 

"This investigation established that certain solicitors, who were permitted to service retail accounts held by a member of the solicitor's immediate family pursuant to the grandfather clause … performed no services for their relative's retail accounts but were paid commissions for sales made to those accounts… [m]any large-volume retailers do not even need or want a solicitor assigned to their accounts because they have sophisticated ordering systems in place. Paying commissions to a solicitor when no services are rendered is a violation of the law making … the commissions paid … no more than rebates or "kickbacks" to the large volume retailers.

“This activity created a competitive advantage for the wholesalers employing those relatives because it ensured the retailers would purchase from them. The retailers whose relatives were employed as solicitors also gained a competitive advantage because the commissions could subsidize their household incomes and allow them to lower their prices. As a result, other wholesalers and retailers sought out ways to compete with these subsidies. In sum, the Division's recent investigation demonstrated that further restrictions are necessary to continue to prevent illegal rebates, maintain trade stability and foster a competitive three-tier system of distribution in the liquor industry.”

So the code was amended and the grandfather clause removed, unsurprisingly, the retailers benefitting from the scheme sued claiming they had been wronged and appealed when the administrative hearing didn’t go their way.  In upholding the regulation and the decision in the administrative hearing, the Court sided with the Justice Holmes approach stating:

“New Jersey's liquor control laws and regulations must be administered in the light of changing conditions. Prior measures of enforcement may have failed their mark. Recurrent instances of particular violations must be dealt with accordingly.”

The case strengthens the argument that a vigilant regulatory system can uncover and prohibit the practices that people claim the three-tiered system was meant to forestall.  It’s further proof that some day, we may need to have an honest conversation about the basis for the system and the portions of the system that work and the ones that don’t.

Court holds interstate carrier is not responsible for 3rd party’s shipping fraud - reaffirming importance of instructions on your bill of lading like “protect wine from freezing”

Added on by Ashley Brandt.

The Carmack Amendment (49 U.S.C. § 14706) governing interstate shipping and the Federal Bill of Lading Act (49 U.S.C. § 80101) are two federal statutes that have a great impact on the interstate shipment of wine, beer, and spirits.  Cases clarifying the language and interpretation of the statutes or giving guidance for proper procedures or statements for terms on bills of lading are of particular interest to breweries, wineries, and distilleries using interstate carriers to ship product to distributors or retailers out of state.  Many of the decisions that help the food and drinks business have evolved over time through trial and error and come about when some new circumstance arises that a no one anticipated.

For example, back in 1974 a Federal Court in Ohio, in Pilgrim Distribution Co. v. Terminal Transportation Co., ruled a carrier was not liable for freezing damage to a shipment of 400 cases of wine because the shipper (a wine wholesaler) didn’t tell the carrier that there were any special handling requirements (e.g. “Protect wines  from freezing”).

Recently, a Court found that in complying with a bill of lading’s terms for contacting the recipient by phone at the time of delivery, a carrier could avoid a claim brought by a shipper who had been defrauded by the purchaser if the carrier substantially complied with the terms of the bill of lading.  It makes getting those terms in the bills of lading extra-important.

In Lewis Brass and Copper Company v. ABF Freight System, Inc., a metals company brought a claim against a carrier after it found out it was defrauded in a scheme by a purchaser where materials were delivered before it learned that the payments hadn’t cleared.  The bill of lading had instructions for the carrier to “Call before delivery Scott”.  Scott was the first name given for one of the purchaser’s representatives.

The carrier delivered to the fake company, but not the destination listed in the bill of lading – the carrier had a conversation with “Scott” prior to delivery and was instructed by “Scott” (whom the carrier believe to be a representative of the purchaser) to a different location.  Shortly after delivery, the shipper learned that payments were halted because the credit cards used for payment were reported stolen.  The shipper sued the carrier claiming that if the carrier had called Scott, not simply answered Scott’s phone call and delivered to the actual destination in the bill of lading, not to the new address, the scheme would have been thwarted.  The Court found the conversation was material, not who called whom. 

Under the Carmack Amendment’s laws governing interstate shipping, an “act of the shipper himself” is a defense to the generally strict-liability imposed against carriers for damage or loss to shipped goods.  When the shipper fails to properly inform the carrier about qualities or concerns that end up resulting in damage, the carrier may avoid liability – like shipping wine to a cold climate and not telling the carrier to protect the wine from freezing.

In Lewis, the Court found that the carrier shouldn’t be liable for the third-party fraud – that the shipper was in the best position to ferret out the fraud:

“Told in the most obvious way, this is no t a story of negligence on either [Shipper’s] or [Carrier’s] part; rather, it is the story of [Shipper’s] victimization by unknown fraudsters.  Nonetheless, in the context of this bilateral suit, one of the parties now before has to bear the risk of the fraudulent orders.  That party is the [Shipper].”

For those using third-party carriers for interstate shipments, familiarity with bills of lading and tailoring proper instructions to each particular circumstance can go a long way towards avoiding liability, especially now that complex shipping fraud is increasing and it appears courts are willing to find that shippers like breweries, wineries and distilleries are in the best position to protect against it.

DuClaw(s) out at Left Hand Brewery in craft beer trademark dispute over Sawtooth and Black Jack beer names

Added on by Ashley Brandt.

Left Hand Brewing may have just made the list of the U.S. top 50 craft brewers but DuClaw Brewing Company isn’t writing to congratulate them.  In this lawsuit filed last Monday, DuClaw, which makes a Belgian white it calls Sawtooth and stout called Black Jack Stout wants a Maryland Federal Court to keep Left Hand from making two beers with similar names (or at least from calling them by similar names) Black Jack Porter and Sawtooth Ale.

DuClaw Sawtooth Label

The lawsuit alleges that DuClaw first used the Black Jack and Sawtooth marks in November of 1998 and obtained registration on May 21, 2002.  The U.S. Patent and Trademark Office website shows DuClaw’s Black Jack Stout here and Sawtooth here

Left Hand Brewing Sawtooth Label

The lawsuit claims that Left Hand has expanded into the state of Maryland with its Sawtooth and Black Jack brands and lacks common law rights to the trademarks in Maryland given DuClaw’s use of the marks in Maryland and its registration.  A search for Left Hand’s marks doesn’t show any registration for Black Jack or Sawtooth, so common law rights that exist based on a use prior to the November 1998 or May 2002 dates might give Left Hand a defense – which is why DuClaw is saying what it’s saying about common law rights in Maryland.  Also, the lawsuit says that DuClaw reached out to Left Hand with a cease and desist back in 2010, but that the parties were unable to resolve their dispute.

We’ll continue to follow the matter as it evolves because this case has the potential to create some case law that could serve as guidance for brewers to make some well informed business decisions and potentially avoid or successfully prosecute claims in the ever increasing number of cease and desist cases the craft beer boom is producing.

Don’t get fined for being good - what you need to know about advertising your donations or partnerships with charities.

Added on by Ashley Brandt.

Before wineries, craft breweries or distillers partner with a local or national charity to do some good, make sure you check your state’s co-venturer statutes and get properly registered if you have any intention of telling people about your beneficence.  More that 40 states have commercial co-venturer statutes on the books that regulate the manner and method of advertising your partnership with a charity, not-for-profit, 501(c)(3), etc.  The basic point of every law is to force one of the parties to register with the state, keep records, and ensure that the parties have an explicit written agreement detailing how and when payments transfer funds from you to the charity.

The key points to each state’s requirements are tricky, but some important pitfalls to watch out for:

  • Some states require the commercial co-venturer and charitable organization to have a written contract with mandated terms and many states require that parties file the contract with the appropriate state agency.
  • Most state laws explicitly require written advertisement disclosures including information on the per-unit donation amount of any goods sold, or require a statement of the gross proceeds or other remuneration that the charity is going to get.
  • Many states have reporting mandates that call for annual filings with detailed information on the monies raised, disbursed and what the commercial half of the venture kept.
  • There are states that require the parties to post a bond guaranteeing performance and deliver of the monies that get raised.

Following these laws in important, and getting it right on mediums like twitter and facebook is incredibly nuanced.  A Yoplait promotion in 1999 brought investigation from the Georgia Attorney General’s office when after advertising that Yoplait would donate 50cents for every lid it received in the mail, it forgot to disclose that the promotion was limited to $100,000.  When Yoplait received over 9.4 million lids, Yoplait’s owner, General Mills, forked over an extra $63,000 to the Breast Cancer Research Foundation to avoid legal action.

So what are some helpful tips for making sure that you’re doing good the state-sanctioned way:

  • Have a written agreement that complies with the laws of each state where you’re running the promotion/charitable effort.
  • Check the state statute to see fi you need to get a bond, whether you can state the donation amounts in terms of per-unit donations, whether you need to disclose a maximum donation amount, and if its too onerous, check to see if a less onerous alternative might be had by just making a flat donation.
  • Make sure you have all the required disclosures for commercial co-venturer information.
  • Don’t equivocate in the advertising, make sure nothing is misleading or confusing about the terms of the donation.
  • Have accounting and inventory tracking systems that can accurately keep records about the relevant sales and maintain a proper accounting.

What should wineries, craft brewers, and distillers know about advertising and labeling involving athletes and sports?

Added on by Ashley Brandt.

Between the TTB, the FDA and local and state regulation, there are an incredible amount of rules and regulations regarding advertising and label content that wineries, craft brewers and distillers need to be familiar with.

Sports and beer.jpg

The recent 7th Circuit decision in Jordan v. Jewel Osco allowing Michael Jordan’s lawsuit against a grocery chains that used his image without his permission has sparked some renewed interest the rules regarding the use of athletes, athletic activities and events in advertising alcoholic beverages like wine, craft beer and spirits.

We’ll address the 7th Circuit decision in an entry in a few days, but the TTB’s position on the use of athletes, athletic activities and events in advertising or labeling wine, beer and liquor merits a quick overview.

You might not remember it, but for a time, the ATF/TTB completely banned the depiction of individual athletes of public prominence (locally or nationally) on liquor bottles or the labels on such bottles finding that they were misleading, in that they conveyed the erroneous impression that the consumption of the alcohol contained therein was conducive to the development of athletic prowess or success in a particular athletic endeavor.

In 1995, the ATF/TTB revised this view and came up with a less rigid standard that function more as an “I’ll know it when I see it” test.  The 1995 ruling has a preamble laying out the continuing position of the agency on its role in regulating the behavior of brewers, vintners and distillers in their advertising practices:

ATF is neither a health nor a social service agency. To prohibit a label or advertisement based solely upon social responsibility or the possible impact on youth, without the "false and misleading impression" relationship, is beyond the scope of ATF's statutory authority. Therefore, for ATF to take action against a label or advertisement which is "socially irresponsible," it must be shown that the label or advertisement in question is false, deceptive, misleading, or conveys an erroneous impression.

After discussing the goals of not encouraging underage youth to drink or drink and drive, the ruling issued the following guidance with two caveats – the first was that the TTB reviews everything on a case by case basis, and the second is that disclaimers shouldn’t be used to try and comply with the ruling – with those caveats in mind, the following guidance is as good as you’ll ever get for safe harbor guidance from the agency:

Accordingly, ATF offers the following examples of labels or advertisements which it considers to be unacceptable pursuant to sections 27 CFR 205(e) and (f) and implementing regulations:

(1) any label or advertisement which states that consumption of the alcoholic beverage will enhance athletic prowess, performance at athletic activities or events, health or conditioning;

(2) any label or advertisement which depicts any individual (famous athlete or otherwise) consuming or about to consume an alcoholic beverage prior to or during an athletic activity or event;

(3) any label or advertisement depicting consumption of an alcoholic beverage while the party consuming the beverage is seated in, about to enter, operating, or about to operate automobiles or other machinery.

Conversely, labels or advertisements which ATF generally finds acceptable pursuant to sections 205(e) and (f) and implementing regulations, so long as they do not contravene the above-mentioned principles and examples, include the following:

(1) depictions of or references to athletes, including famous athletes, whether in motion or not and whether in uniform or not;

(2) depictions of or references to motor vehicles or other machinery or equipment, whether in motion or not, whether occupied by a driver or not;

(3) team logos;

(4) schedules of athletic events; or

(5) depictions of, references to or commemorations of specific events (e.g., an automobile race), specific cars or other equipment, such as hockey sticks, footballs, golf clubs, and the like, on alcoholic beverage labels or advertisements.

So the tip here is to use good judgment and specifically avoid the big 3 listed above.  Which, given the recent Jordan decision and already existing laws on using someone else’s image for a commercial purpose, shouldn’t be that hard.