Over the past year, the United States Alcohol and Tobacco Tax and Trade Bureau (TTB) has substantially increased enforcement in the alcohol industry, indicating that increased regulatory scrutiny may be here to stay for alcohol manufacturers, wholesalers and retailers.
The alcoholic beverage industry consists of three "tiers" of participants: manufacturers, (e.g. wine growers, liquor distillers, beer brewers, importers, etc.), wholesalers and retailers (e.g. bars, restaurants and liquor stores). The federal government, as well as every state in the United States, prohibits certain entanglements between the three tiers. Most prominently, manufacturers, wholesalers and retailers cannot be under common ownership, and, with few exceptions, are not permitted to provide anything of value to one another. This means that manufacturers and wholesalers are largely prohibited from providing funding, equipment, services and free advertising to retailers, and retailers are forbidden from providing special treatment (including exclusivity) in exchange.
Enforcement of these so-called "tied-house" laws can often be spotty, especially at the federal level, but that is changing. In 2017, the federal government allocated $5 million to the TTB to increase enforcement within the alcohol industry. Whereas the TTB averaged two alcohol-related enforcement actions per year prior to receiving the funding, the TTB announced six major enforcement actions in 2018 and the beginning part of 2019. Three of those cases resulted in one-day permit suspensions, and the remaining three cases resulted in "offers in compromise" of over $2.7 million.
More specifically, in May 2018, the TTB accepted a $900,000 offer in compromise from Warsteiner Importers Agency Inc. (Warsteiner), which imports beer from Germany's largest privately owned brewery. The TTB alleged that Warsteiner engaged in "pay-to-play" practices, including by paying to have dedicated tap lines installed for retailers and by sponsoring events on retailers' premises in exchange for exclusivity for its products — meaning that the retailers were not permitted to serve competitors' beer at the events. Both of these allegations, if true, constitute clear violations of the tied-house laws by interfering with the retailers' independence. At the time, the $900,000 offer in compromise was the largest in TTB history.
Just months later, the TTB, in a joint operation with the Florida Division of Alcoholic Beverages and Tobacco accepted an even larger $1.5 million offer in compromise from QAC, LLC, a wholesaler in Miami, also for pay-to-play schemes.
Key Takeaways:
- Federal and state tied-house laws can be complicated and difficult to understand, even for seasoned industry participants, and the consequences can be severe when manufacturers and wholesalers get too cozy with retailers.
- Lack of enforcement of the tied-house rules may have made many industry players complacent, but compliance obligations remain critical.
- With over $2.7 million in settlements and several permit suspensions, the TTB has shown what it can do with a modest enforcement budget, and a more aggressive regulatory regime may be here to stay for the alcoholic beverage industry.
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