Legal Issues:

MBWA Legal Update


Advertising Challenge:

Missouri Broadcasters Association, et al. v. Lacy, et al. - The Missouri Broadcasters Association appealed a district court denial of summary judgment and dismissal of all but one of its claims in its challenge to state alcohol advertising limits.  The United States Court of Appeals for the 8th Circuit rendered its decision on January 19, 2017.

In its Decision, the 8th Circuit reversed the underlying court’s grant of defendants’ motion to dismiss, stating that plaintiffs’ amended complaint plausibly stated a claim upon which relief could be granted.

The Court stated that the two points at issue in the appeal are whether plaintiffs’ amended complaint included sufficient factual matter to state a claim that (1) the challenged Missouri advertising provisions do not directly advance the state’s substantial interests or (2) the provisions are more extensive than necessary.  The Court concluded that the plaintiffs pled more than sufficient facts to state a claim.

First, the amended complaint included sufficient allegations that the provisions did not directly advance the substantial interest of promoting responsible drinking.  According to the Court, the allegations make clear the provisions do little, if anything, to promote the asserted state interest.  The decision points out the inconsistencies in the regulations.  The Court noted plaintiffs’ allegations that the regulations don’t prohibit retailers from offering discounted prices or advertising those discounts in the retail establishment, and 11 CSR 70-2.240(5)(G) exempts manufacturers of liquor other than beer and wine from its ban on advertising rebate coupons.  The Court goes on to state that “if the true aim of the regulations is to promote responsible drinking, the inconsistencies in the prohibitions on advertisements of promotions and sales of alcohol ‘make no rational sense.’”

The Court also concluded that Section 311.070, RSMo, does nothing to further the interests of promoting responsible drinking and maintaining an orderly marketplace.  In fact, it weakens the impact of the statutory scheme in that this section is an exemption to restrictions preventing retailers, wholesalers, and producers from being financially entangled.  And, the amended complaint contains sufficient information to state a claim.

Second, the amended complaint included sufficient information to plead the challenged provisions are more extensive than necessary.  Taking the facts in the light most favorable to plaintiffs, the Court determined that it is clear that there are reasonable alternatives to the restrictions that the state could have enacted that are less intrusive to plaintiffs’ First Amendment rights.

Also, as pled by plaintiffs, Section 311.070, RSMo, could conceivably compel speech and association in violation of the First Amendment.  The Court analyzed, “[t]he statute is conditional in that it only impacts speech if producers and wholesalers choose to include the name and address of a retailer in an advertisement.”  If this information is included, though, the producer or wholesaler is compelled to associate with multiple retailers and to include multiple retailers’ information on the advertisement.   

As such, the plaintiffs pled sufficient facts to survive a motion to dismiss, and the Court reversed the dismissal of the amended complaint.

Out-of-State Retailer Direct Ship Lawsuit:

Sarasota Wine Market v. Nixon - United States District Court for the Eastern District of Missouri


Plaintiffs:  Sarasota Wine Market, LLC d/b/a Magnum Wine and Tastings (a Florida retail wine store), Heath Cordes (owner of Sarasota Wine Market), and Michael Schlueter (a Missouri resident wine consumer)


Defendants:  Jay Nixon (Governor of Missouri), Chris Koster (Missouri Attorney General), and Lafayette Lacy (Supervisor of the Missouri Division of Alcohol and Tobacco Control)


Summary:  On September 23, 2016, Plaintiffs filed their Complaint bringing a civil rights action under 42 U.S.C. § 1983 challenging the constitutionality of §§ 311.462 and 311.060, RSMo.  Plaintiffs assert that these statutes allow Missouri wine retailers to sell, ship, and deliver wine directly to consumers within the state of Missouri, while prohibiting out-of-state retailers from doing so unless they are located in one of the few states which afford Missouri retailers a reciprocal shipping privilege.


Plaintiffs’ Complaint sets forth two counts.  In Count I, Plaintiffs allege a Commerce Clause violation asserting discrimination against out-of-state wine retailers with respect to sale to consumers.  Plaintiffs allege that the Missouri statutory scheme treats differently, and discriminates against, out-of-state wine retailers and provides economic advantages and protection to wine retailers in Missouri.  Plaintiffs seek a judgment declaring §§ 311.462 and 311.060, RSMo, unconstitutional to the extent they prohibit out-of-state wine retailers from selling, shipping, and delivering wine directly to Missouri consumers as a violation of the Commerce Clause.


In Count II, Plaintiffs allege a Privileges and Immunities Clause violation asserting that an out-of-state wine merchant is denied the same privileges as Missouri citizens with respect to sale to consumers.  Plaintiffs allege that Missouri’s ban on wine sales and deliveries by out-of-state merchants denies Mr. Cordes the privilege to engage in his occupation upon the same terms as Missouri citizens.  Plaintiffs seek a judgment declaring §§ 311.462 and 311.060, RSMo, unconstitutional to the extent they prohibit out-of-state wine merchants from obtaining licenses and engaging in their occupations in Missouri as a violation of the Privileges and Immunities Clause.


Plaintiffs also request an injunction prohibiting Defendants from enforcing the statutes and requiring them to allow out-of-state wine retailers to sell, ship, and deliver wine directly to consumers in Missouri.


Status: Defendants filed Motion To Dismiss in January and Plaintiffs filed Memo in Opposition to Motion to Dismiss in February. Awaiting the Court’s decision on the Motion to Dismiss.


The regulatory focus on alcoholic beverage industry corruption has its genesis in the pre-Prohibition American saloon. In the early part of the last century, brewers and distillers used many questionable sales techniques, such as excessive credit, free goods, secretly paying employees, consignment sales and other inducements to persuade saloon owners to carry their beer and spirits over competing brands. Preventing the reemergence of those widely used and abusive business practices has been a core concern of alcohol regulators since the early 1930s when Prohibition was repealed. These are the "tied house" laws, and they exist today, in one form or another, both federally and in every state (and with exceptions that vary from state to state).

The perceived harm comes from increased consumer consumption of the specific alcohol brands to intemperate levels. This theory of intemperate consumption underlies almost all of the tied house laws as they were enacted in the original Federal Alcohol Administration Act.

There are currently significant disciplinary cases in process in California and Massachusetts that are worthy of attention.

California: In early January 2017, the California Department of Alcohol Beverage Control (ABC) filed 34 accusations (agency indictments seeking license suspension or revocation) for providing things of value (television sets, coolers and draft systems, reportedly) against Southern California beer distributors and the various on- and off-premises retail accounts that received the items. The ABC Trade Enforcement Unit is currently processing these accusations. Supplier and retail penalties may involve license suspensions or fines of $10,000 (the typical starting offer in compromise for tied house violations for the suppliers) or the value of the items provided. The Lesson: Both suppliers and retailers must be very careful about which items other than alcohol are sold or provided to retail accounts, how they are accepted, how the transaction is recorded in a contract and, whether they are covered by specific exceptions to the general prohibition against "things of value."

Massachusetts: In a case dating back to early 2016, a beer wholesaler, the Craft Brewers Guild of Massachusetts (CBD) was indicted by the Massachusetts Alcoholic Beverage Control Commission (MABCC) in a "pay-to-play" scheme alleging that CBD paid retailers monthly payments in exchange for their beer being on-tap at the retail accounts. Following a threatened 90-day license suspension, the MABCC fined CBD $2.6 million. The cases continue against the retailers who received the payments. The retailers' defense is that this is normal activity and "everyone does it."

These are not isolated examples of enforcement actions around the country. There are matters pending in Illinois involving alleged retailer smuggling of spirits purchased from lower tax jurisdictions such as Indiana and Iowa; TTB action in Ohio against major retailers and wholesalers over category management, leading Ohio to threaten license revocations; and allegations of smuggling spirits from Maryland to New York that are the heart of a lawsuit by Empire Wine Merchants against Charmer in New York.


California Department of Alcoholic Beverage Control Press Release:  California ABC Fines Two Large Beer & Wine Wholesalers and numerous Retailers for Unfair Business Practices Wholesalers facilitated Prohibited Marketing Practice(s)

The Department of Alcoholic Beverage Control has reached a $400,000 settlement with Anheuser-Busch, LLC wholesalers and a $10,000 settlement with Straub Distributing Company LTD for their engagement in unfair marketing practices aimed at retail licensees. Additionally, approximately 34 retail licensees also received disciplinary sanctions levied against their ABC licenses for their related activities. The settlements came after a year-long investigation begun in 2015 by ABC’s Trade Enforcement Unit that found the wholesalers covered the cost of, or partially financed, refrigeration units, television sets and draught systems at retailers in the Southern California area, in violation of the law.

When wholesalers provide prohibited things of value to retailers, it results in unfair marketplace advantages over other wholesalers. Investigators inspected more than 100 retail customers of Anheuser-Busch, LLC’s distributorships in Sylmar, Pomona, Carson (Beach Cities) and Riverside. They also found that Straub Distributing Company LTD, which distributes Anheuser-Busch products in Orange County, engaged in the activity as well. “The investigative efforts of ABC’s Trade Enforcement Unit and the discipline imposed in these cases reflect the Department’s commitment to maintaining a safe and fair marketplace,” said Acting Director Ramona Prieto. “I appreciate the wholesalers renewed commitment to training, education, and restructuring of their business practices as means of ensuring compliance with the law.”

The settlement with Anheuser-Busch, LLC includes one of the largest penalty fines imposed in the history of ABC, but more importantly, it focuses on the training and transparency necessary to promote a safe and fair economic marketplace. As part of the settlement by Anheuser-Busch, LLC, the company must provide training to its current and newly hired employees regarding the administration of a rental or lease program of Anheuser-Busch, LLC refrigeration equipment by a company unit within the confines of law. Additionally, upon request by the Department, Anheuser-Bush, LLC, must provide evidence of the training. In exchange for suspension of $200,000 of the fine, Anheuser-Busch, LLC agreed to extend the conditions of discipline to all Anheuser-Busch, LLC wholesalers in the state. Failure to comply with the terms of the agreement may result in the imposition of the suspended penalty against any Anheuser-Busch, LLC wholesaler licensed by ABC.

ABC’s mission is to provide the highest level of service and public safety through licensing, education, and enforcement.



Massachusetts leads the way for a national crackdown on 'pay-to-play'


Federal regulators have struck a record-high settlement from a Massachusetts beer distributor.

Federal alcohol regulators vowed a national crackdown on "pay-to-play" in the beer industry, taking aim at an illegal practice that came to light last year in Massachusetts when the state caught a distributor paying bars to put its brews on tap.


Such schemes, federal officials said, limit consumers' opportunity to choose from a broader variety of beers by awarding tap handles to the highest bidder.  The practice is also harmful to small craft brewers who rely on taps to gain access to the market but cannot afford to outbid larger companies in order to secure them.


Officials at the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) issued the warning of a crackdown as they announced the settlement of a previously undisclosed six-month investigation of the Massachusetts distributor, Craft Brewers Guild.  The company previously admitted to Massachusetts regulators last year that it paid various Boston bars more than $120,000 to stock its beers and freeze out those offered by competitors, a practice officials ruled was a violation of state regulations.  But federal investigators now say those payments to bars also violated U.S. trade practice laws.


Faced with the possibility of having its federal license suspended or revoked, Craft Brewers Guild voluntarily paid $750,000 to settle the case, the largest sum TTB has ever collected from a single company for trade practice violations. In a brief statement, the parent company of Craft Brewers Guild, the Sheehan Family Cos., confirmed the deal and said it "fully cooperated" with the investigation.


Robert Angelo, director of TTB's Trade Investigations Division, characterized the large settlement as a warning to beer distributors everywhere and vowed to take a "hard stand" against pay-to-play. "This is not something I intend to walk away from. You're going to see further investigations in this area," Angelo said in an interview. "I don't want industry members to consider getting caught the cost of doing business. I want them to realize there are significant consequences if we catch you."


Craft brewers have been saying for years that pay-to-play is rampant, especially in crowded urban markets. Angelo acknowledged those complaints and admitted the government has failed to consistently enforce the federal prohibition against so-called slotting fees in the beer industry, or payments from brewers and wholesalers to retailers. "It's definitely getting a lot more emphasis now,'' he said.


The decision by TTB to crack down on what has long been a tacitly accepted practice will likely reverberate through the beer industry - if TTB can make good on its enforcement threat but that could prove to be difficult, as the small agency has limited resources and the legal standard for bringing a case is high.  And in the Craft Brewers Guild probe, the agency had the luxury of leaning on the earlier Massachusetts Alcoholic Beverages Control Commission investigation into essentially the same set of facts.


The state case similarly resulted in a record settlement, with Craft Brewers paying $2.6 million in February to avoid a months-long suspension of its license. The company is currently contesting that fine in court, arguing that the state regulation banning pay-to-play is legally invalid. Craft Brewers Guild is also defending itself against a lawsuit brought by Shelton Brothers Inc., a Massachusetts importer that believes the distributor's pay-to-play tactics resulted in lower sales of its beers.


Five Boston restaurant groups were also charged by Massachusetts regulators for accepting the payments from Craft Brewers Guild; one escaped punishment, while a decision by state regulators on the remaining four is pending.


Local brewers cheered the news of a federal crackdown, saying they are tired of bar managers telling them no tap handles are available because they've been bought up by distributors.






Retail Digital Network v. Applesmith


In 2011, the Retail Digital Network brought a new challenge to the statute following the U.S. Supreme Court's decision in Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (2011), which held that heightened scrutiny should be applied to the review of regulations prohibiting non-misleading commercial speech regarding lawful products. The district court rejected this challenge, but in January 2016 the Ninth Circuit reversed, holding that the heightened standard did indeed apply and that, on remand, the government would have to show that the statute is a reasonable and proportional "fit" with the interest being advanced. In November, the court granted the government's petition for an en banc rehearing. Retail Digital Network v. Appelsmith, 810 F. 3d 638 (9th Cir. 2016).

A panel of the Ninth Circuit Court of Appeals ruled in Retail Digital Network that as a result of the US Supreme Court's 2011 Sorrell decision, the California law prohibiting manufacturers and wholesalers from giving a retailer something of value in exchange for advertising requires examination under "heightened judicial scrutiny." This case tests the constitutionality of the state's tied-house laws in relation to the First Amendment and commercial speech.



There have been several legal challenges mounted recently against various Texas Alcoholic Beverage Commission (TABC) laws and regulations.

One Share Rule / Prohibition of Spirits Sales in Grocery

Walmart was the first to file suit against the TABC in 2015, claiming it is irrationally banned from selling spirits for being a public company. This year Walmart has been gaining ground in the case, with the denied interventions of the Texas Package Store Association (TPSA) and package store chain Gabriel Holdings. Most recently the TPSA's appeal to intervene was granted and filed a counterclaim in October.

Texas-based food distributor McLane Company, owned by Warren Buffet's Berkshire Hathaway, also filed suit against the agency in May because it was denied an alcohol distribution permit for violating the TABC's One Share Rule. McLane, in conjunction with the Texas Association of Business (TAB), is attempting to eliminate that rule and create a "level playing field" amongst Texas businesses.

Crowler Decision

The Texas Alcohol Beverage Commission removed a crowler machine from Austin’s Cuvée Coffee Bar in September 2015. Crowlers (a combination of “canned growlers” where beer is canned in a machine on-site) are not allowed on premises where beer is not produced and are regulated as canned products versus being considered with growlers, which are allowed on a wide basis in Texas. The Coffee Bar filed suit alleging that the seizure of the equipment was unlawful, since it was not illegal to possess. A state administrative judge ruled two weeks ago that crowlers are not illegal in the state, writing that "there is no material difference between growlers and crowlers." The TABC is reviewing the decision and may appeal the ruling. 

U.S. Supreme Court Will Not Consider Reviving Texas Alcohol Permit Residency Rule

A Texas trade group for alcohol retailers lost its chance to have the U.S. Supreme Court consider reviving a long-dormant state law requiring a retailer to have a year of state residency before receiving an alcohol sales permit, when the court declined to review the case.


Texas Package Stores Association Inc. argued in an August petition for writ of certiorari that a permanent injunction against a Texas residency rule for new businesses seeking alcohol permits should be lifted, because some level of residency or state citizenship purportedly facilitates cooperation with law enforcement and encourages accountability to the community. But the Supreme Court was not swayed and refused to take up the case.


The rule was initially struck down by a Texas court that determined such a durational residency requirement was a protectionist provision and constitutionally invalid.


Although the Fifth Circuit subsequently agreed that the 21st Amendment of the U.S. Constitution does not authorize states to impose durational residency requirements for alcohol permits, it also found that TPSA had standing to pursue litigation aimed at nixing the injunction.


The suit dates back more than 25 years, when two men, Richard Wilson and Steve Cooper, were unable to buy a Texas nightclub because they would have endangered the club's mixed-beverage permit due to the residency requirement in the Texas Alcoholic Beverage Code.  The pair went on to sue the Texas Alcoholic Beverage Commission, and a court eventually permanently enjoined the commission from enforcing the residency provision.


TPSA, which had intervened as a defendant in the original litigation, in 2014 asked the court for relief from the decision. The Texas Alcoholic Beverage Commission did not join in the motion, and neither of the original plaintiffs filed a response. Two out-of-state corporations, Fine Wine & Spirits of North Texas LLC and Southern Wine and Spirits of Texas Inc., intervened as plaintiffs and argued the residency laws are discriminatory and unconstitutional.


As for the Fifth Circuit's subsequent affirmation of the injunction on the residency rule, TPSA told the high court that the finding is out of line with the "weight of circuit authority" on the issue.


In its cert petition, the trade group argued most circuits interpret a 2005 Supreme Court ruling in Granholm v. Heald, a case regarding the legality of direct-to-consumer wine sales by wineries, to establish a bright line that treats alcohol producers differently than alcohol wholesalers and retailers. The appellate panel's ruling "threatens numerous state laws" that the high court had sought to protect in the 2005 decision, TPSA said.


The group also argued that the underlying ruling is at odds with a 2013 decision by the Eighth Circuit in Southern Wine & Spirits of America Inc. v. Missouri Division of Alcohol & Tobacco Control, which allows states to impose a residency or physical presence requirement on wholesalers and retailers so long as they do not discriminate against out-of-state products.


The case is Texas Package Stores Association Inc. v. Fine Wine & Spirits of North Texas LLC et al., case number 16-242, in the Supreme Court of the United States.


The United States Supreme Court denied certiorari on a petition from the Texas Package Stores Association requesting the lifting of a permanent injunction on the Texas residency rule for alcohol permits. The Fifth Circuit previously concluded that this rule was unconstitutional.


State Appeals Texas Brewer Distribution Rights Sales Win


In August, Travis County Judge Karin Crump held a 3-year-old law preventing Texas brewers from selling their territorial distribution rights unconstitutional. There has been a battle in Texas for craft brewers to be able to sell their territorial distribution rights, since a 2013 senate bill banned the practice. The judge handed down the decision rather quickly, suggesting that some of the state's argument -- tying brewers' ability to sell their own distribution rights to societal ills -- were tenuous. On the other hand, distributors say paying a manufacturer for brands is a direct violation of the tied house law. The motion for new trial was denied but the state perfected its appeal to the Third Court of Appeals the day before the deadline. The appellate court will consider whether there was an error in the trial court's decision. The Texas brewers who brought the complaint are asking that decision be affirmed.








Updated April 2017
(MBWA News)

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