The FAA Act, Exclusion and Assessing Retailer Independence

John Hinman, Hinman & Carmichael LLP

Robert Tobiassen, Independent Consultant (Former TTB Chief Counsel)

Matthew Weston-Dawkes, Senior Associate General Counsel, E & J Gallo Winery

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Assessing Liability: Per Se or Subject to the Exclusion and Inducement Standard of 27 USC 205

•Commercial Bribery•Tied House•Exclusive Outlet•Consignment Sales

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The Exclusion Standards – 27 CFR 6.151§ 6.151 Exclusion, in general (a) Exclusion, in whole or in part occurs:

(1) When a practice by an industry member, whether direct, indirect, or through an affiliate, places (or has the potential to place) retailer independence at risk by means of a tie or link between the industry member and retailer or by any other means of industry member control over the retailer; and

(2) Such practice results in the retailer purchasing less than it would have of a competitor's product.

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Examples of Retailer Independence at Risk – 27 CFR 6.152

(a) The act by an industry member of resetting stock on a retailer's premises (other than stock offered for sale by the industry member).(b) The act by an industry member of purchasing or renting display, shelf, storage or warehouse space ( i.e. slotting allowance).(c) Ownership by an industry member of less than a 100 percent interest in a retailer, where such ownership is used to influence the purchases of the retailer.(d) The act by an industry member of requiring a retailer to purchase one alcoholic beverage product in order to be allowed to purchase another alcoholic beverage product at the same time.

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Retailer Independence has been compromised when: [27 CFR 6.153]a) The practice restricts or hampers the free economic choice of a retailer

to decide which products to purchase or the quantity in which to purchase them for sale to consumers;

b) The industry member obligates the retailer to participate in the promotion to obtain the industry member's product;

c) The retailer has a continuing obligation to purchase or otherwise promote the industry member's product;

d) The retailer has a commitment not to terminate its relationship with the industry member with respect to purchase of the industry member's products;

e) The practice involves the industry member in the day-to-day operations of the retailer. For example, the industry member controls the retailer's decisions on which brand of products to purchase, the pricing of products, or the manner in which the products will be displayed on the retailer's premises; OR

f) The practice is discriminatory in that it is not offered to all retailers in the local market on the same terms without business reasons present to justify the difference in treatment.NABCA - 3/13/2013

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What do Retailers Want From Suppliers?

Principal Areas of Retailer Concern:

•Supplier Responsibility for Product Quality

•Supplier Responsibility for Accurate Data about Product, from Pricing to Production to Deals

•Supplier Responsibility to Promote Products

•Supplier Responsibility to Manage Inventory Availability.

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Origins and Evolution of ExclusionStatutory Element of Exclusion for:•Exclusive Outlet•Tied-house•Commercial Bribery

Traditional View: Quantity of sales to and purchases by retailer (or trade buyer, as appropriate) are measured

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Origins and Evolution of ExclusionCurrent View (Post-Fedway Decision):

Qualitative Element (“retailer independence is potentially threatened”)And Quantitative Element (Traditional view)

Stein Distributing Co. Decision (9th Cir. 1985).

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Origins and Evolution of ExclusionRegulatory Framework Implementation of Current View:•Red Light•Green Light•Yellow LightKey Point: Know your potential violation(s) in order to determine how to evaluate exclusion and determine the applicable regulations.

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Corporate Counsel Guidance Before Fedway -- 1•Treat the “inducements” identified in 27

CFR Parts 6, 8, and 10 as per se violations▫BATF enforcement active and confident▫BATF approach to “exclusion” made it

nearly a formality•Note benefits of this approach:

▫BATF enforcement could be cited where state enforcement weak

▫BATF rules could be cited as national standards Urge states to adopt similar rules

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Corporate Counsel Guidance Before Fedway -- 2• Impact of 7th Circuit decision in Foremost

Foremost Sales Promotions, Inc. v. Director, Bureau of Alcohol, Tobacco and Firearms 860 F.2d 229 (7th Cir. 1988)

▫ BATF accepted it only in 7th Circuit per Industry Circular 89-4

▫ BATF seen as unlikely to bring trade practice cases in Illinois, Indiana, and Wisconsin

• Industry counsel view:▫ Trade practice guidance based on state law rules in

Illinois, Indiana, and Wisconsin▫ Continue to treat BATF trade practice rules as per se

outside those states▫ Conflict over exclusion definition would be decided in

another court decisionNABCA - 3/13/2013

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Corporate Counsel Guidance After Fedway

•BATF trade practice enforcement at a standstill pending rulemaking

•Scope of BATF enforcement in future unclear:▫How would exclusion be defined?

Market power requirement?▫What practices would still be per se

violations? Status of slotting allowances

•Effect on state rules and enforcement unclear

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Corporate Counsel Guidance After BATF Final Rule -- 1•Final rule maintained relevance of Trade

Practice Rules▫Market power requirement rejected▫Slotting allowances and other specified

practices “nearly” per se•But questions remained

▫Would the rules stand up if challenged in court?

▫How would BATF apply the “Yellow Light” criteria?

•Needed trade practice enforcement and cases to clarify application of the rules

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Guidance After BATF Final Rule -- 2

•NO guidance from BATF trade practice enforcement for several years

•Post 9/11 reorganization of federal alcohol regulation agencies set back enforcement

•In the absence of BATF/TTB enforcement, primary focus of trade practice guidance was state law▫State enforcement often perceived as weak

given budget problems▫Lack of consistency in state laws creates

obstacles for national programsNABCA - 3/13/2013

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Current Corporate Counsel Guidance

• TTB Trade Investigations Division is now active• However, so far, TTB has only pursued

enforcement against perceived “red light” practices▫ Industry Circular 2012-01 describes the violations in

the “Harrah’s” case as a form of slotting allowance• Still unclear what TTB would do in a “yellow light”

case in applying the criteria for determining retailer independence▫Effect of certification of retailer independence?

• In most “yellow light” cases, guidance still focuses on state enforcement until TTB makes a case

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Exclusion Hypothetical #1ABC Wholesaler enters into a 9-month advertising contract with Speedy Racetrack, a retailer. Under the terms of the contract, Speedy Racetrack will receive $50,000 and agrees to purchase ABC Wholesaler’s XYZ malt beverages throughout the 9-month contract period. ABC Wholesaler will be able to put up signage throughout the racetrack advertising its XYZ malt beverage products. Assume similar state law is present.

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Hypothetical #1 (Continued)Is this an exclusive outlet arrangement?

27 CFR 8.22 prohibits: “Any contract or agreement, written or unwritten, which has the effect of requiring the retailer to purchase distilled spirits wine or malt beverages from the industry member beyond a single sales transaction.”

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Hypothetical #1 (Continued)

Does the practice place retailer independence at risk?

Not a “red light” practice (27 CFR 8.52):

• No direct or indirect threat of physical or economic harm by ABC —§ 8.52(a)• No requirement to purchase or express restriction on purchasing from another industry member —§ 8.52(b)

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Hypothetical #1 (Continued)This contract is a “yellow light” practice:

• Speedy Racetrack has a continuing obligation to purchase or otherwise promote ABC Wholesaler’s product —27 CFR 8.54(c)

• Speedy Racetrack has a commitment not to terminate its relationship with ABC with respect to purchase of ABC Wholesaler’s products —27 CFR 8.54(d)

• This practice may also hamper the free economic choice of Speedy Racetrack to decide which products to purchase —27 CFR 8.54(a)

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Hypothetical #2

ABC Wholesaler contacted several key retailers in the market area to motivate them to buy certain dual products (identical products sold by two wholesalers in the same market area). ABC Wholesaler advised the retailers that ABC would be implementing a new service policy for the next 6 months. ABC would provide free labor to stock and reset the stock of the retailers’ entire liquor department for the 6-month period. Several retailers took advantage of ABC Wholesaler’s service policy.

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Hypothetical #2 (Continued)Is this a “tied house” arrangement?

• Yes. Free labor to reset the stock of the liquor department would be a thing of value under 27 CFR 6.41

Does it put retailer independence at risk?

• Yes. This arrangement is a “red light” practice• “The act by an industry member of resetting stock on a

retailer’s premises (other than stock offered for sale by the industry member)” is considered to be a practice that puts retailer independence at risk (27 CFR 6.152(a))

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Exclusion Hypothetical #3 – Final Exam

A national retailer announces that it will mandate that all of its stores allot specified shelf and display space to designated “core” brands during the next year. Suppliers and wholesalers are asked to “bid” for these placements by advising the retailer how the brands it selects would be supported by pricing and other promotional support. The retailer’s stores would be free to carry other brands and the amount of shelf and display space for those other brands would be at the discretion of the individual store managers.A. Some suppliers/wholesalers promise a $ amount of unspecified support.

Some of these pay the $ directly to the retailer.B. Some suppliers/wholesalers promise a $ amount of items allowed by 27

CFR Part 6, Subpart D (“green light” items). Some of these provide the items directly to the retailer.

C. Some of A and B request and get a letter from the retailer certifying that it will maintain control over the core brand decisions and might not mandate the brands for the entire year. The retailer states that this is its policy for all supplier and wholesaler brands.

D. Some of A and B provide funds to a 3d party promotional company. That company provides some Subpart D items to the retailer but also provides funds for things of value that are identified as a “means to induce” under the TTB regulations.NABCA - 3/13/2013

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Conclusion

•Questions and examples from the audience

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