Industry Compliance

The Federal Alcohol Administration Act (FAA Act), the federal law adopted post-Prohibition in conjunction with the 21st Amendment, turns 80 this year. The past 80 years have seen much change within the alcoholic beverage industry, but the basic framework adopted shortly after the repeal of Prohibition remains the same.

That basic framework created three tiers of participants in the alcohol industry: (1) suppliers or manufacturers, which includes brewers, distillers and wineries; (2) wholesalers or distributors; and (3) retailers. Each of the three tiers is subject to a variety of federal, state and local laws that affect business relations and trade practices among alcoholic beverage industry participants.
While the advent of craft breweries, microdistilleries, and direct sales of wine have slightly chipped away at the strict requirements of the three-tier system the basic framework remains. Compliance is essential for any member of the alcoholic beverage industry.

Federal Laws

The FAA Act sought to cure many of the perceived problems with the alcoholic beverage industry that existed prior to Prohibition, and the U.S. government agency tasked with enforcing the FAA Act and regulating the industry – currently the Tax and Trade Bureau (TTB) – promulgated regulations interpreting and supplementing the FAA Act. Of those statutes and regulations, two parts of the unfair trade practice laws are of the most concern to a retailer.
First, federal law prohibits “tied houses” and “exclusive outlets,” which are manufacturers that are affiliated with retailers.
Second, federal law prohibits the “unlawful inducement” of a retailer to purchase a manufacturer’s products. Before Prohibition, many alcoholic beverage manufacturers owned their own taverns that sold their own products, and these taverns naturally sought to sell as much product as possible. Taverns frequently provided salty snacks to encourage consumption and a person employed by the bar to further encourage patrons to purchase additional drinks.
Retailers were given incentives and things of value to sell additional products. Lawmakers, charged under the FAA Act to promote temperance, were concerned with a return to pre-Prohibition excess and thus provided separation between manufacturers and retailers.
The goal was to insulate retailers from undue influence by manufacturers by prohibiting manufacturers from owning an interest in retailers and from giving things of value to retailers. There are, of course, exceptions to the rule.
The TTB regulations and interpretive rulings provide an illustrative lists of “things of value” that do not cause a violation of the FAA Act. Further, the TTB has taken the position that complete ownership of a retailer by a manufacturer does not cause a tied house or exclusive outlet violation. As discussed below, these exceptions and the regulatory authority left up to the states have given rise to a complex system of regulation that differs in every state.

State Laws

The 21st Amendment gave the states the power to regulate the alcohol industry generally as the states saw fit. Therefore, the alcoholic beverage industry is further subject to different laws for each state. State laws generally strengthen the three-tier system created under the FAA Act by imposing additional restrictions on each tier.
The laws also provide a regulatory framework for retailers that is missing from the FAA Act. For example, in some states a manufacturer may not act as a retailer at all and may not sell its products even at its production facility.
Some states allow for limited self-distribution by manufacturers, while other require all alcoholic beverages to be sold through distributors.
States may treat beer differently from wine and liquor, and may treat large manufacturers differently from small manufacturers. Retailers may be limited by a certain number of licenses in some states, while other states may limit the number of outlets any one person or entity may own.
This confusing patchwork of state laws is expressly authorized by the 21st Amendment, which directly grants to states the authority to regulate alcoholic beverages.

Local Laws

Local laws also affect each tier of the alcoholic beverage industry. The most drastic local law is that of outright prohibition – many states have “local option” alcohol laws that give counties or municipalities the right to authorize or prohibit alcoholic beverages. Some states allow local restrictions to be imposed by local authorities even in “wet” counties, such as limiting closing times, sales and consumption locations, or even whether beer can be sold cold.
Municipalities may restrict the location of alcoholic beverage outlets by zoning ordinances and license restrictions that are designed to prevent excess consumption. Although local laws do not normally directly regulate the three-tier system, they do have a significant effect on each tier’s operations. The three-tier system is an integral part of the U.S. system of alcoholic beverage regulation and compliance. No matter which tier a business may fall under, any company desiring to manufacture, distribute, or sell alcoholic beverages must be aware of the myriad of federal, state and local laws affecting the industry.

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