Expect government agencies to take closer looks at mergers and acquisitions, and ramp up enforcement efforts around category management, tying and elusive conduct, McDermott Will & Emery partner Alva Mather said during a webinar last week.
Mather and McDermott staff attorney Christine Dower discussed expected impacts from the White House’s executive order on competition, legal issues pertaining to alcohol delivery, cannabis and class action lawsuits.
What to Expect Following the Treasury Report: M&A, Category Management, Tying
The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) has opened its comment period through March 9, 2023, for its proposed rulemaking in the wake of the Treasury Department’s report on the state of competition in the alcohol industry. The TTB is specifically seeking comments about trade practice regulations pertaining to the “exclusive outlet, tied house, commercial bribery, and consignment sales prohibitions” of the Federal Alcohol Administration (FAA) Act.
The report and government activity since its February 2022 publication “puts [the industry] a bit under a microscope, specifically with regard to where the current market structure sits, how that does or does not foster in their mind an open marketplace in terms of looking at competition,” Mather said.
She expects the TTB to call for deeper examination into mergers and acquisitions, “particularly at the wholesale tier – wine and spirits being kind of the dominant one” as the federal government is interested in “how our market is impacting largely negatively smaller participants across all three categories.”
“The goal is really to make sure that whether it’s consolidation or competition in our industry and others, that that’s not inhibiting the ability for other small participants to get an equal shake,” she added.
The Federal Trade Commission (FTC) has already begun investigating anti-competitive conduct, Mather said, but declined to share specifics.
The practice of category management “has been renewed as area of focus,” as the TTB has expressed concern “that larger players that are in the position to act, for example, as category captains in the alcohol beverage space, are, in the report’s terms, eroding the independence of retailers by being in a position to either control or overly influence their buying decisions,” Mather said. Existing TTB regulations prohibit both suppliers and distributors from offering more than “suggested shelf schematics,” and this privilege could be revoked.
“TTB is now asking the industry whether or not they should remove shelf plans as something which is allowed for industry members, because they have concerns that that exception is now being abused,” Mather said.
The Treasury identified the practice of tying – requiring a distributor or retailer to purchase a supplier’s less desired brands in order to have access to its more desired brands – as a potential area for rulemaking due to “myriad complaints it has received,” Mather noted on a presentation slide.
Other trade practices potentially targeted for rulemaking include clarification of tied house interests, potential inducements to retailers via third-party companies, whether the practice of suppliers or wholesalers providing menus to on-premise retailers is an inducement, and how practices such as branded bars and sponsorships can lead to exclusion.
“What we can expect is that this is going to be a very active time over the next several years stemming from the report and from the [executive] order where a lot of things are going to be back on the table in the TTB trade practice space,” Mather said.
E-Commerce Regulatory Issues
Stay-at-home orders during the pandemic fast-tracked the growth of home delivery of alcohol, and the service – now allowed in 45 states and Washington, D.C. – is expected to grow double-digits year-over-year until 2025, Dower said.
There are three models for delivery of alcohol to consumers via e-commerce:
- Unlicensed e-commerce platforms that connect consumers to retailers, such as Drizly;
- Unlicensed “white-label services” that connect a network of licensed retailers, such as Thirstie;
- And licensed retailers that offer delivery to consumers through online orders, such as Gopuff.
Dower cautioned third-party platforms to be mindful of how they assess fees, because deriving the platform’s income from sale of alcohol (rather than the delivery service) could potentially appear as though the platform has an interest in the licensees’ business.
“An agreement that’s based on a flat fee at fair market value definitely helps reduce the risk of a recognizable interest in the licensee,” she said.
Another complicating factor is the money platforms derive from selling digital advertising to suppliers. New York’s State Liquor Authority recently ruled that ad sales must be assessed at flat rates. In addition, platforms should ensure there are “corporate and financial firewalls” between any advertising income from suppliers and retailers.
“The platform can allow a supplier to advertise, but it has to rigorously assure that the money that it receives for the supplier advertising doesn’t benefit a retailer indirectly or directly,” Dower said.
With the rise of online sales of alcohol, states are scrutinizing how consumers’ ages are verified at the time of delivery. Of the 52 decoy orders placed by the Virginia Alcoholic Beverage Control Authority during a 2021 operation, 32 were delivered to underage drinkers, prompting the state to step up enforcement among unlicensed delivery providers.
“The ABC in Virginia ultimately concluded that delivery providers themselves need to be held responsible for verifying age and when delivering alcohol,” Dower said. “In Virginia, now drivers have to go through a state-approved education program before they’re able to deliver alcohol to consumers.”
Virginia, along with California, Colorado, Connecticut and Utah, recently updated consumer data privacy laws in ways that will also affect online delivery platforms. Recall, Drizy has had numerous data breaches, resulting in the Federal Trade Commission exploring taking action against the company and its CEO for alleged negligent behavior.
“These changes are important for folks in the alcohol beverage space, especially alcohol delivery companies, because the data that’s collected from their platforms is at times its own source of revenue, either current or future,” Dower said. “In addition, how the data is shared, how it’s sold, or how it’s paid for between the tiers has ramifications not only for alcohol beverage laws, but for privacy, consumer protection and antitrust.”
Cannabis Still Not Federally Legal, Though CBD Drinks Are ‘Virtually Everywhere’
Nearly all states have legalized the use of CBD, and the market for cannabis- and CBD-infused beverages is expected to reach $8 billion by 2027. However, CBD, which is infused in drinks that are “available virtually everywhere,” has yet to gain federal legalization, Dower said.
“While it’s true that the cannabis and CBD beverage markets are growing, and investors are seeing green, there are tons of landmines of legal uncertainty and questions for those who are looking to enter the space,” she said.
Because the Food and Drug Administration (FDA) has cleared CBD as an active ingredient in Epidiolex, a drug used to treat seizures, it “doesn’t qualify as a food ingredient or a dietary supplement,” which precludes it from federal approval as an ingredient in beverages, Dower said. However, in order for the FDA to take enforcement action against such beverages, it would need to prove that producers are selling them into interstate commerce, which many are not doing without federal legalization.
“[The FDA is] concentrating its resources on products that are making over-the-line curative health claims,” Dower said, adding a caveat. “It’s not to say that it won’t turn its attention to these products that bear less egregious claims in the future.”
Recreational-use cannabis has been legalized in 18 states (Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Mexico, New Jersey, New York, Oregon, Vermont, Virginia, and Washington), but not all of them include beverages as permitted consumption vehicles.
“The different state approaches to regulating CBD makes it very difficult for companies to have a one-size-fits-all for manufacturing and labeling and marketing,” Dower said. “Ever-changing regulations for these products require that companies have to be very vigilant. You need to understand the state regulations and prohibitions and you need to monitor the legislation for new regulations and state guidance for new or different requirements.”
Lawsuits Target Products Making Health Claims, Question Alcohol Base
The beverage-alcohol industry has not been immune from the “proliferation” of class action lawsuits against food and beverage manufacturers, Mather said. The crux of these lawsuits is that producers have allegedly misled consumers into spending more money via “some type of false or misleading statement, or imagery on the product.”
Mather called out brands that hail from one state but are produced by a contract partner in another (for example, a Hawaii-based brand that uses a mainland co-packer) as being susceptible to lawsuits.
“Litigation is following consumer trends,” she said. “We’re continuing to be in a marketplace where there’s a focus on better-for-you premiumization, looking at products that are natural or have natural ingredients, also the rise of non-alcoholic products. As products become more popular, they become more of a target.”
As lines blur between bev-alc categories, some products have drawn consumer confusion lawsuits, such as Anheuser-Busch InBev’s Bud Light Ritas family of flavored malt beverages (FMBs). Earlier this year, A-B agreed to settle a class action lawsuit alleging that the products misled consumers into believing the margarita-inspired FMBs contained tequila.
Other products that have been targeted include those from which consumers infer health claims, such as Molson Coors’ Vizzy Hard Seltzer, which touts the inclusion of Vitamin C. A plaintiff filed a lawsuit in California alleging that the band gives consumers a false impression that the product is healthier than other alcoholic beverages.
“The plaintiffs were able to survive an initial motion to dismiss,” Mather said. “It’s actually quite challenging, although not impossible, to kick these out at the motion to dismiss level, and so that case is proceeding to trial.”