'Tied-House Evil' Laws

Orderly Conduct 1

Bringing order to the pre-Prohibition alcohol industry.

By Louis Terminello

“Tied-house evil” is a rather antiquated sounding expression but one which is alive and well in the alcohol beverage industry. This article looks at some of the laws and regulations that have been “on the books” since the legalization of the manufacture, distribution and sale of alcoholic beverages.

The doctrine was designed to prevent tied-house evil. Prior to legalization, alcohol distribution and sale was primarily in the hands of the criminal element. These criminals desired to control all aspects of the industry, and gain favorable treatment for their brands at the retail level. They employed strong arm tactics against retail vendors, forcing the vendors to be exclusive outlets for their products.

What resulted, however, was a landscape of unfair business practices, violence and mayhem. Tied-house laws and the three-tier system were then put in place to expel the criminal element and bring order to an otherwise disorderly business.

Three-Tier System

The three-tier system exists in the laws of nearly every state. The system requires three levels in the industry: manufacturer or supplier (including importers), distributors and retail vendors. In essence, the law states that upper tier industry members shall not be licensed as vendors, and retail vendors, conversely, shall not be licensed as upper tier industry members.

Intriguingly, cross-ownership by a shareholder is prohibited regardless of the amount of control exercised and the fines for violating the three-tier system can be quite severe. For example, not long ago, in the New York market, a large prominent retailer failed to disclose that one of its shareholders was also a shareholder of a large winery in Italy. The New York State Liquor Authority uncovered the cross-ownership and ultimately the retailer was forced to pay a fine of $500,000 and cease operations for one month.

'Tied-House Evil'

This article examines Florida law because the author of this article resides there. Florida statute 561.42 is as well known as the tied-house statute. In a nutshell, the statute states that upper tier industry members shall not have a financial interest, directly or indirectly, in the business of a licensed retailer.

The statute goes further, becoming all-encompassing as it states, “nor shall such manufacturer distributor, importer, primary American source of supply, brand owner or brand registrant or any broker, sales agent or sales person thereof, (a/k/a industry members) assist any vendor by any gifts or loans of money or property of any description or by the giving of any rebates of any kind whatsoever.” Conversely, the statue goes on to prohibit licensed vendors from accepting anything of value from industry members. 

Orderly Conduct 2This statute is carefully crafted to ensure that industry members keep their hands in their own pockets, based on the notion that the tied house laws level the playing field and prevent abuse. Interestingly, a few years ago, the Florida Division of Alcoholic Beverages and Tobacco issued a statement that the same tied-house laws shall apply to third party marketing companies, effectively shutting down this workaround to tied house.

Repercussions for violating Florida Statute 561.42 can be quite serious based on the number of occurrences. Both the industry member and retail vendor suffer consequences. First time violators receive a penalty of $1,000, which goes up exponentially with subsequent offenses. The fourth violation results in the revocation of the violator’s license.

Exceptions and the Slow Erosion of Tied-House

Impressively, over the past decade, creative entrepreneurs discovered holes in the three-tier system and took advantage of them. The most obvious is the rise of microbreweries, distilleries and wineries. Exceptions in the law led to such manufacturers being permitted to operate retail outlets on property contiguous to the manufacturing premises.

In Florida, both microbreweries and wineries may hold manufacturing licenses and retail licenses. In fact, as manufacturers, they are permitted to sell to alcoholic beverage distributors, and from their retail outlet, make face-to-face sales transactions with consumers. While commonly referred to as tap rooms or tastings rooms, these are in fact fully functioning bars that keep some microbreweries and wineries in business.

Florida craft distilleries are not yet permitted to hold retail licenses, but are permitted to sell limited quantities of their products, in sealed containers and for off premise consumption only, from souvenir shops located on their premises. Moreover, the Florida legislature recently passed legislation that allows beer distributors to give retailers glassware free of charge. In the past, glassware was only permitted to be sold at fair market value.

This is one small step in the slow erosion of tied-house. It will be interesting to see how this “evil” and the three-tier system further erode. In a highly competitive business, it seems highly likely that such erosion will only continue.

Louis J. Terminello is a partner, chair of the hospitality, alcohol and leisure industry group and member of the firm management committee at Greenspoon Marder. He concentrates his practice on administrative law and providing legal services to all tiers of the alcohol beverage industry, including retailers, suppliers and wholesalers. Terminello can be reached at louis.terminello@gmlaw.com.

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