4/11/2012. The Best Offense is a Good Defense Protection for Brewers in Distribution Melinda Sellers, Burr & Forman LLP

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1 The Best Offense is a Good Defense Protection for Brewers in Distribution Melinda Sellers, Burr & Forman LLP This seminar will provide a general overview of the Federal Alcohol Administration Act and the regulations related to the Federal Alcohol Administration Act applicable to distribution, labeling and advertising beer. This seminar will provide new brewers and distributors with a working knowledge of the rules of the game and will offer seasoned brewers and distributors a refresher course in how to protect their business from costly mistakes. Anda Lincoln, Funkwerks, Inc. Distribution and Protection for Brewers Federal Alcohol Administration Act Distribution Agreements Self-Distribution Federal Alcohol Administration Act 27 U.S.C a 205 Exclusive Outlet Commercial Bribery Consignment Sales Labeling Advertising State Law Exemption for Beer Exclusive Outlet 27 CFR Does not apply between a producer and a wholesaler ( 8.3) Only applies to the extent the state law has similar requirement ( 8.4(b)) Unlawful to require a retailer to purchase products to the exclusion of products sold by other persons ( 8.21) Contract that requires retailer to purchase beyond a single transaction is prohibited ( 8.22) Third party agreements that result in exclusion are prohibited ( 8.23) Can not require participation in a promotion to obtain a product ( 8.54(b)) 27 CFR Applicability: Does not apply to transactions between wholesaler and brewer ( 6.3) Does not apply to transactions between industry member and retailer wholly owned by industry member ( 6.3) Only applies to the extent state law imposes similar requirements ( 6.4) 1

2 Rule: It is unlawful to induce a retailer to purchase any products to the exclusion of products offered for sale by other persons by any of the following means: 1. Holding any interest in any license with respect to the premises of the retailer 2. Acquiring any interest in the real or personal property of the retailer used in conducting the business 3. Furnishing, giving, renting, lending or selling to any retailer any equipment, fixtures, signs, supplies, money, services [Note: Exemption in 6.81] 4. Paying or crediting the retailer for any advertising display or distribution service 5. Guaranteeing any loans made to the retailer 6. Extending credit ( 6.65) for period beyond customary terms ( 6.65) 7. Requiring retailer to take and dispose of certain quota of products Outright ownership not prohibited ( 6.27) Acquisition of a mortgage constitutes an interest in the retailers property within the meaning of the Act Renting display space within the retail establishment constitutes an interest in the retailer s property Delaying delivery of a product beyond the time that payment is received is furnishing a thing of value Can not require the purchase of one product in order to obtain another product Example: requirement that retailer purchase a certain amount of product in standard packaging to receive it in premium packaging May only purchase seasonal product if regularly carry session product (See also 6.152) So What Can We Do to Sell Our Beer? Provide or sell retailer equipment, inside signs, supplies, or services (subject to record keeping requirement) Give or sell product displays to a retailer; value must not exceed $300 per brand must bear conspicuous and substantial advertising on the product or industry member which is permanent or securely affixed Provide or sell point of sale materials ( 6.84) Provide line cleaning services ( 6.88) So What Can We Do to Sell Our Beer? Provide samples not more than 3 gallons of beer to retailers who have not purchased that brand in the previous 12 months Provide engraved blocks to retailer Offer samples or tours of brewery ( 6.94) Provide coupons Offer contest prizes, premium offers, refunds to consumers but not to employees and representatives of wholesalers or retailers 2

3 So What Can We Do to Sell Our Beer? Stock, rotate and affix prices ( 6.99) Provide shelf plan or schematic ( 6.99) Provide outside signs so long as sign also contains substantial advertising about the product (may not exceed $400) Commercial Bribery 27 CFR Applicability: to transactions between industry members and employees, officer, or representatives of trade buyers 1 ( 10.3) Only applicable to brewers if the state law imposes similar restrictions with respect to similar transactions between a brewer and wholesaler ( 10.3(b)) Rule: Unlawful for industry member to induce a trade buyer to purchaser the industry member s products to the exclusion of products sold or offered for sale by other persons by offering or giving: A bonus, premium, or compensation or other thing of value 1 Wholesaler or retailer Commercial Bribery What is Meant by Bonuses, Premiums, Compensation or Other Things of Value? Need not be given for the purpose of direct inducement Gifts, donations, or payments for advertising in trade buyer employee associations are considered given directly to the employees Gift of free trips is implied will pass through to officers or employees Commercial Bribery Test: Do records reflect the gift as an asset of the company (thus subject to tax consequences) or as a personal asset of an officer or employee or representative? Must be bona fide sale no privilege of return Sales contests are inducements within the meaning of the Act Industry member paying money to trade buyer employee in return for the employee agreeing to order products from the industry member without knowledge or consent of the trade buyer-employer ( 10.52) Consignment Sales 27 CFR Applicability: Transactions between industry members and trade buyers ( 11.3) Only applies to brewers if the State law imposes requirements on similar transactions ( 11.4) Rule: Must be a bona fide sale no privilege of return Consignment Sales Unlawful for an industry member to sell products if any part of the sale involves the acquisition by the industry member for the trade buyer as a condition to present or future sales, to accept other products from the trade buyer ( 11.23) Unlawful to buy or rent the display shelf or warehouse space owned by the retailer ( 11.24) Unlawful to accept returns because product was over stocked ( 11.45) or because seasonal ( 11.46) 3

4 Labeling & Advertising 27 CFR What is required on the label? What is prohibited on the label? Advertising rules Labeling & Advertising 27 CFR What is required to be on the brand label: 1. Brand Name ( 7.23) 2. Class ( 7.24) 3. Name and Address ( New Contents ( 7.27) 5. Alcohol content ( 7.71 Labeling & Advertising Labeling Rules In addition, on the brand label or a separate label: 1. Name and address of importer 2. Name and address of bottler or packer 3. Alcoholic content 4. Statement that the product contains FD&C Yellow No Declaration of sulfites 6. Declaration of aspartame Shall not use ale, porter, or stout unless the beverage is produced at a comparatively high temperature possessing the characteristics generally attributed to these styles ( 7.24(e)) Certain geographical names are prohibited unless produced in the particular region indicated by the name unless contain American. Exceptions IPA and Pilsen, Pilsener, or Pilsner ( 7.24(f)) Labeling Rules Alcoholic content MAY be included: Alcohol Free contains no alcohol ( 7.71(f)) Non-alcoholic - >.5% Alc. by Vol. ( 7.71(e)) Low alcohol/reduced alcohol - >2.5% Alc. by Vol. Use of the term organic must comply with the USDA National Organic Program Rules Labeling Rules Must use contrasting background so that requirements are readily legible In English Firmly affixed No use of stamps, U.S. flags or military insignia No use of words bonded, aged in bond, or other phrases that imply government supervision No use of the words strong, full strength, extra strength, high proof, or similar phrases No health related statements that are untrue 4

5 Advertising TTB may require written report containing information on sponsorships, advertisements, promotions, and other activities for a period not to exceed 3 years. The listing of names and addresses of 2 or more unaffiliated retailers selling products of industry member is permitted Can not contain retail price of product Listing is only reference to the retailer ( 6.98) Advertisements in programs or brochures issued by retailer associations at a convention or trade show may not exceed #300 per year for any retailer association ( 6.100) Outside signs permitted but may not exceed $400 ( 6.102) Advertising Must contain name and address of industry member responsible for its publication Conspicuous statement of the class to which the product belongs (unless advertisement refers only to general line of beers) ( 7.52) Advertising Prohibitions Advertising Prohibitions False or misleading statements Obscene or indecent Any statement or representation of or relating to analyses, standards or tests (irrespective of falsity) that the TTB finds to likely mislead consumer Any statement that the beer is brewed under or in accordance with any municipal, state, or federal law The words bonded or aged in bond Misleading language that the beer contains distilled spirits Subliminal messages are prohibited ( 7.54(b)) May not disparage a competitor s product Comparative advertising is allowed if includes: Scientifically accepted procedures Name and address of the testing administrator Distribution Agreements Know the law of the state Franchise State? Notice procedure becomes extremely important Specify services expected of each party: Line cleaning Promotional events In-person orders Frequency of deliveries Storage & handling requirements Sales and inventory data to be provided Method / frequency Distribution Agreements Consider binding arbitration v. proceeding in court Are there administrative remedies that must be pursued first from a local or State alcohol board or agency? Storage requirements 5

6 Self-Distribution Self-Distribution Local market Know your state s laws many states do not allow self-distribution. Transportation requirements Distance and cost efficiencies Some tips for selling to retailers: Schedule appointments and know the store what what it focuses on Schedule tastings Make timely deliveries Follow-up regularly Definitions Industry Member Any person engaged in business as a distiller, brewer, rectifier, blender or other producer or as an importer or wholesaler of distilled spirits, wine or malt beverage Trade Buyer Any person who is a wholesaler or retailer of distilled spirits, wine, or malt beverages Retailer Any person who is engaged in the sale of distilled spirits, wine, or malt beverages to consumers Advertising: Regulated Words Word or Phrase Ale, Porter, or Stout bonded, aged in bond strong : full strength, extra strength, highest, high proof, pre-war strength Rule Must be brewed at comparatively high temp. possessing characteristic generally attributable to these styles ( 7.24) Not allowed Not allowed likely to be considered statements of alcoholic content ( 7.29(f)) Advertising: Regulated Ads Phrase or Ad Buy Birmngham Beer at the Piggly Wiggly Supermarket and Publix Supermarket for $9.99 / six pack Buy Birmingham Beer at the Piggly Wiggly Supermarket Rule Not allowed to advertise the retail price of product Not allowed to advertise only one retail location 6