Pay to Play. WRITTEN BY MARBET LEWIS
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his past July, the federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) confirmed its participation in a joint operation with the Florida Division of Alcoholic Beverages & Tobacco (“DABT”) targeting South Florida retailers in an effort to investigate alleged “pay to play” schemes. The TTB reported this joint operation as one of the largest trade practice enforcement initiatives launched in recent history. Last year, we saw Boston’s Craft Brewers Guild fined along with several retailers for similar trade practice activities. Pay-to-play or “slotting fee” schemes, while prevalent in many markets, implicate various trade practice and tied-house violations. Allegations of violations usually involve the unlawful payments, often reaching thousands of dollars in monetary payments or gifts of other goods, to retailers for preferential product placement and exclusion of competing brands. These types of investigations often uncover direct payments to retailers and indirect payments utilizing third-party marketing companies to funnel illegal inducements. While these business activities fit within the usual and common course of business negotiations in other markets with non-alcoholic products, within the alcohol industry, the practice is illegal under the Federal Alcohol Administration Act (“FAA Act”) and a majority of state alcohol laws. Industry members may publicly admonish the act and criticize alleged violators, but in practice, these types of private arrangement are widespread and difficult to uncover and prosecute. Moreover, the rigidity in standing trade practice regulations contradicts the modern free flow of commerce making compliance sometimes difficult for large suppliers and start-up craft brands alike. Many trade practice regulations still governing the alcohol industry today have their roots in pre-Prohibition practices that were common during the early 20th century. The alcohol distribution system at the time consisted of only suppliers and retailers. Local producers had ownership ties to many saloons and WWW.ARTISANSPIRITMAG.COM
sold their products on extended credit terms, furnished expensive equipment and supplies, paid rebates for retailer support of brands, and engaged in various other means of cutthroat competition for control of retail outlets. Some of these practices promoted excessive consumption and indebted retailers to such an extent as to strip them of their economic independence. The era of Prohibition, often referred to as the “failed experiment,” didn’t resolve any of the preProhibition problems. Instead, an illegal industry flourished and crime rates skyrocketed. In 1933, the 21st Amendment repealed Prohibition and laid a foundation for the creation of our three-tier system and extensive state regulation. The three tier-system and subsequent trade practice and “tied-house evil” regulations aim to eliminate the direct link between suppliers and retailers that fosters indebtedness and the loss of retailer independence that can stagnate product innovation and overall market growth. Ideally, the three-tier system should: Create a system for reliable tax collection; Support tier independence and market access for smaller businesses; and Allow more state/local control over the places and methods by which alcohol is sold. Unfortunately, trade practice and tied-house regulations are overly complicated, often misunderstood, and consequently (and conveniently) ignored. The whistleblower complaint sparking an investigation doesn’t always come from an innocent party, but rather a competing brand or retailer that just can’t play at the same level. So, ultimately, how will increased enforcement activity impact the prevalent use of pay-to-play schemes? Sporadic enforcement activity from the TTB and state agencies leaves much room for inconsistency in the interpretation of restrictions and permissible exemptions. Often, on-site staff and managerial staff or sales representatives simply aren't familiar enough with the rules to be able to live by them in their daily business activities. When evidence and allegations are peeled away, the most common
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