Craft Spirits Magazine August 2019

Page 69

legal corner

CRACKING DOWN ACSA’s legal advisor weighs in on the latest from the TTB enforcement front. BY RYAN MALKIN AND ASHLEY HANKE

Increased enforcement activity by the Alcohol and Tobacco Tax and Trade Bureau (TTB) has made headlines since 2017, when it first received an additional $5 million in funding specifically for trade practice enforcement activities. TTB certainly put those funds to use, plus the additional $5 million it received for fiscal year 2018. Since receiving increased funding, not only did TTB conduct trade practice seminars in most major cities, but it substantially increased trade practice enforcement activities by adding staff and investigatory ability. The investigations over the past two years have resulted in, so far, 43 offers in compromise. Industry members nationwide paid record-breaking sums for alleged trade practice violations. Although TTB is receiving a few million less for trade practice enforcement for its next fiscal year, TTB will prioritize the highest-risk cases, expressing concerns over the “high incidence of unlawful activities.” Recent enforcement actions Consignment sale violations ranked high on TTB’s radar over the past year. Between December 2018 and February 2019, four California wine wholesalers and two California wineries each served one-day stipulated permit suspensions for consignment sale violations. An additional California wine wholesaler also under investigation opted to surrender its permit. These stem from a joint operation TTB conducted with the California Department of Alcoholic Beverage Control. Specifically, these industry members allegedly engaged in consignment sales of wine to buyers who were not obligated to pay for the wine until after it had been sold to retailers, giving an unfair advantage over other industry members. Meanwhile, a $350,000 offer in compromise was accepted from a wholesaler in Peoria, Illinois, for an alleged consignment sale and exclusive outlet violation. Here, the wholesaler sold beer to retailers with the right of return and entered into arrangements in a requirement that retailers buy the wholesaler’s products. The trend in outsourcing unlicensed third parties for marketing, promotional and pay-


ment services was also reflected in TTB’s enforcement priorities when the TTB recently accepted two offers in compromise regarding the use of third parties to circumvent tiedhouse laws and indirectly engage in activities that would otherwise be considered a tiedhouse violation.

TTB will prioritize the highest risk cases, expressing concerns over the “high incidence of unlawful activities.” For instance, a $420,000 offer in compromise was accepted from a large beer importer for entering into indirect agreements or “understandings” with retailers through a supposedly independent third party. The importer paid the third party but the money ended up in the pocket of the retailer for advertising, display and distribution services related to the importer’s brands of beer. Specifically, the TTB alleged that the importer made payments, in part, to secure tap handles and that this amounted to a slotting fee. A $2.5 million offer in compromise was also accepted from a major beer importer for allegedly providing money or things of value to retailers for product placement and providing certain retailers with draft systems at no charge while reimbursing other retailers for the cost of purchasing the draft systems through credit card swipes. Other alleged violations included payments to retailers that purported to reflect permissible activities such as consumer sampling, but the payments were actually slotting fees. Additional violations TTB noted in its investigations include: · Entering into sponsorship agreements that are tied into product placement or

exclusivity arrangements. · Using third-party marketing companies to indirectly provide things of value to retailers, including to pay for entertainment. · Providing otherwise permissible promotional items but in exchange for preferential product display/menu space. · Altering invoices to conceal impermissible payments. · Paying retailers for “events” that never took place. · Engaging in consignment sales under the pretense of brokerage agreements. · Making false statements to TTB investigators during interviews, even after being provided the opportunity to amend their statements. · Illegally operating without a valid federal permit due to not timely reporting changes of ownership, management, or control over operations. What should you do if TTB shows up at your distillery? Consider a policy that all requests for information and records from regulators, like TTB, be directed to the company’s CEO or attorney. However, nothing will give you more comfort than knowing that you followed the rules. ■

Malkin Law, P.A. is a law firm serving the alcohol beverage industry. Nothing in this article is intended to be and should not be construed as specific legal advice.

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