Federal TTB funding feeds crackdown on alcohol pay-to-play schemes.
By Marbet Lewis
The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) has two main jobs: collect taxes and enforce regulations on some highly regulated industries. Under the umbrella term of “beverage alcohol,” the TTB regulates production and distribution of beer, distilled spirits, wine, sake and some kombucha products. The TTB is also charged with regulating marketing and promotional practices in the alcohol beverage industry.
After receiving $5 million in special funding from Congress for 2017-18, the TTB emphasized its stance on trade practice violations and publicly voiced its commitment to investigate pay-to-play schemes. The ongoing investigation effort has been labeled as one of the largest enforcement operations initiated by TTB in cooperation with various state agencies.
Pay-to-play schemes generally involve some form of payment or gift by an alcohol beverage supplier to an on- or off-premise retailer in exchange for preferential tap or shelf space or exclusivity. Trade-practice or “tied-house laws” exist on the federal level and can vary from state to state, but commonly prohibit practices such as exclusive outlet arrangements, commercial bribery and consignment sales that can tie a retailer to a specific supplier through purchasing incentives or even indebtedness.
Generally, it is unlawful for an alcohol beverage manufacturer or distributor to give anything of value to any alcohol beverage retailer (e.g. bar, hotel or restaurant) unless such gift is expressly permitted by federal or state law. Additionally, retailers cannot purchase any products from a supplier to the exclusion, in whole or in part, of other suppliers’ products based on any prohibited arrangement or agreement.
The validity of these restrictive laws has frequently been challenged as being violative of First Amendment rights and impermissibly restricting retailer and supplier advertising. Such challenges have generally failed and recent activity throughout the country indicates that the TTB is taking an aggressive approach in enforcing compliance. Last year, the TTB announced that it was conducting a joint operation with the Florida Division of Alcoholic Beverages and Tobacco (DABT).
Aside from its public partnership with the DABT, the TTB also announced its partnership with the Illinois Liquor Control Commission. These joint federal-state efforts come less than a year after the TTB reached a $750,000 settlement with a Massachusetts distributor that had spent approximately $120,000 in payments to Boston retailers in exchange for favorable product placement and shelf space.
What does this all mean for industry members? Alcohol industry members need to be weary of engaging in common pay-to-play business trade practices that would be acceptable for many other industries or products. What is acceptable when purchasing and displaying non-alcohol beverage products may not be acceptable when stocking a bar or planning next month’s drink specials.
To avoid administrative penalties that can often include large fines, suspensions or even license revocation, retailers and suppliers need to be educated on both federal and state restrictions and exemptions that impact how they buy, display and promote their alcohol products. While we wait for TTB and its partner state agencies to conclude their investigation and issue industry guidance, there a few key areas that require special attention and awareness.
Agreements that result in an exclusive purchase and sales relationship between a supplier or distributor and a retailer are generally not allowed. Current laws favor retailer independence and a more level playing field. Any arrangement, whether written or verbal (or even an unspoken understanding), that limits a retailer’s ability to purchase varying and competing products is likely illegal.
This activity involves a supplier or distributor negotiating preferential tap, display or shelf space in exchange for unlawful gifts, equipment or even charge backs. Slotting fee violations are usually the easiest to spot as there is a visual component but also the most commonly misunderstood trade practice. Overall, this is an area that industry members should approach with caution and concern for prohibited exchange.
Bribery can come in many forms and usually involves sales inducements such as prizes and gifts. The general rule here is that you can incentivize your own staff, but no one else should. Compliance training and internal policies can help on-site staff identify any illegal inducements and possibly mitigate penalties where non-compliant staff engage in or accept unlawful inducements.
The debate over tied-house laws and pay-to-play schemes is sure to continue. At this point in time though, TTB and many state agencies are committed to enforcing current laws and prosecuting violations. Compliance efforts should include internal audits such as reviewing current purchasing and sales practices and developing internal policies as well as training and educating sales, marketing and on-site staff on prohibited practices. As the debate continues, education and compliance are the best shields against liability.
Marbet Lewis is a founding partner of the law firm LewisFox based in Coral Gables, Fla. Lewis started working with the alcohol industry prior to graduating law school in 2004. She works with all there tiers of the alcohol industry including manufacturers, importers and retailers on various licensing and permitting projects, license transactions, mergers and acquisitions and assists with development of marketing, social media and regulatory compliance programs that promote long term business objectives.