INSIGHT: Alcohol Regulation—While States Sober Up, Uncle Sam Is Going Back to the Punchbowl

The federal government recently increased enforcement of federal alcohol trade practice laws at a substantial cost to alleged violators.

For example, at the end of 2018, the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) accepted a record-high $1.5 million settlement, called an offer-in-compromise, from QAC LLC (d/b/a Eagle Brands). TTB alleged, among other things, that Eagle Brands paid retailers to carry and promote its products to the exclusion of competing products and hid those payments as banquet events, credit card payments for rebates, or consumer samplings.

A complex web of disparate laws across and within the states has resulted from broad state power to regulate alcohol after the repeal of national Prohibition. Alcohol beverage industry members have recently challenged some state laws as unconstitutional, and the U.S. Supreme Court has agreed that state power to regulate alcohol has its limits.

But that does not mean that industry members can breathe easier. Regardless of what happens on the state level, the federal government retains the power to regulate alcohol in interstate commerce and exercises it to regulate trade practices in the alcohol beverage industry.

The dormant Commerce Clause has increasingly limited otherwise broad state power to regulate alcohol but also vests the federal government with authority to regulate alcohol in interstate commerce, and the TTB increasingly has been exercising this power. Alcohol beverage industry members should remain mindful of their obligations under both state and federal law.

Commerce Clause Limits State Power

The states’ power to regulate alcohol is not limitless. Under the Commerce Clause, Congress has the express power to regulate interstate commerce. The “dormant” Commerce Clause is a corollary legal doctrine that prohibits states from interfering with interstate commerce by enacting laws that discriminate against out-of-state interests.

Two U.S. Supreme Court cases have applied the dormant Commerce Clause to states’ power to regulate alcohol. Granholm v. Heald, 544 U.S. 460 (2005) involved two states’ laws that permitted in-state wineries to ship directly to consumers but prohibited out-of-state wineries from doing the same. The court held that the laws violated the dormant Commerce Clause because they discriminated against out-of-state interests and interfered with interstate commerce. Consequently, if states permit direct shipments from in-state wineries, they must also permit direct shipments from out-of-state wineries.

Tennessee Wine & Spirits Retailers Ass’n v. Thomas, No. 18-96 (2018), which is still pending in the Supreme Court, involves a Tennessee law that essentially limits liquor licenses to residents who have lived in the state for no less than 10 consecutive years. Two retailers who did not meet the 10-year durational requirement challenged the law as unconstitutional under the dormant Commerce Clause.

A federal district court held that Tennessee’s 10-year durational requirement violated the dormant Commerce Clause and the Third Circuit affirmed. The Supreme Court has not yet issued a decision but—as noted in the media—the justices appeared skeptical of the Tennessee law during oral arguments this past January.

Commerce Clause and Federal Power

As the Supreme Court recently has reined in states’ efforts to regulate alcohol, the federal government has intensified its own regulatory and enforcement efforts.

Federal law regulating alcohol has its roots in the Federal Alcohol Administration Act (FAA), passed in 1935. TTB is responsible for administering and enforcing the FAA’s provisions. TTB considers alcohol beverage producers, importers, wholesalers, bottlers, and warehousepersons all to be industry members.

Most industry members know that TTB oversees alcohol beverage labeling, advertising, and permitting as the FAA provides. However, some may not know that the FAA prohibits certain trade practices and TTB enforces those provisions too. In particular, there are four types of unlawful trade practices affecting the industry:

1. Tied-Houses. It is unlawful for an industry member to induce, directly or indirectly, a retailer to purchase the member’s alcohol beverages to the exclusion others.
2. Exclusive Outlets. It is unlawful for an industry member to require, directly or indirectly, a retailer, by agreement or otherwise, to purchase the member’s alcohol beverages to the exclusion of others.
3. Commercial Bribery. It is unlawful an industry member to induce a wholesaler or retailer to purchase the member’s alcohol beverages to the exclusion of others by commercial bribery or offering or giving any bonus, premium or compensation to employees, officers, or representatives of a wholesaler or retailer.
4. Consignment Sales. It is unlawful for an industry member to sell, offer to sell, or contract to sell alcohol beverages to a wholesaler of retailer (or a wholesaler or retailer to offer or contract to purchase) on consignment, under conditional sale, with privilege of return, on any basis other than a bona fide sale, or where any part of the transaction involves the acquisition of other alcohol beverages from the wholesaler or retailer.

There are of course many details and exceptions to these unlawful trade practices. But each may fall within TTB’s jurisdiction if it establishes a nexus with interstate commerce.

Industry Should Beware Federal Power

Starting in 2017, TTB “significantly intensified” its trade practice education and enforcement programs after Congress appropriated $5 million to TTB for those efforts. In 2018, as part of its trade practice education program, TTB hosted a series of trade practice seminars in four major cities.

In 2019, TTB plans to host four additional seminars in New York, San Diego, Seattle, and St. Louis. As part of its enforcement program, TTB also undertook several investigations and enforcement actions in cooperation with state agencies. Many of the enforcement actions were for alleged unlawful trade practices and resulted in new record-high offers-in-compromise with TTB.

In May 2018, TTB announced a record $900,000 offer-in-compromise with a beer importer and then TTB set a new record in December with a $1.5 million offer-in-compromise with a wholesaler.

Accordingly, industry members should remain mindful at all times of their obligations under both state and federal law.

Author Information

Justin McGuirk is a San Francisco-based lawyer in Reed Smith’s Global Commercial Disputes Group whose practice focuses on assisting clients in the alcohol beverage industry.