Legal Aspects Of Brewing, Selling And Drinking

Legal Aspects of Brewing, Selling and Drinking Beer
Jeffrey M Glazer, AttorneyGlazer Legal Servicesjmg@glazerlegal.com608-277-1778

Overview
The Three-Tier System
Exceptions: Brewpubs and Direct-Ship
Breweries
Brewing Licenses
Business Considerations
Labeling Law (Federal and State)
Taxes (Federal and State)

Supremacy Clause
Article IV, Paragraph 2 of the US Constitution:
“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the contrary notwithstanding.”
1982 Supreme Court decision: “A state statute is void to the extent that it actually conflicts with a valid federal statute.“
Preemption: the displacement of a lower jurisdiction's laws when they conflict with those of a higher jurisdiction.

What Does The Three-Tier System Look like?
Ten specific acts that are common around the country (from Costco):
Uniform Pricing Rule
WI: Must offer same terms to all (125.33(6))
Price Posting (not in WI)
30-Day Price Hold (not in WI)
Minimum Mark-Up (10%) (not in WI)
Quantity Discount Ban
WI: permitted but must offer same terms to all (125.33(6))
Cash Payment
WI: may extend commercial credit (125.33(4))
Delivered Price Requirement (not in WI)
Central Warehousing Ban
WI: May not deliver to retailer unless first at distributor (125.34(2)); retailer cannot hold distributor’s license
Ban On Sale To Other Retailers
WI: retailers can only sell to non-license holders (i.e., customers)(125.02(19) and 125.34(5))
Exclusive Sales and Distribution
WI: may not sell a brand exclusively to one retailer unless brand is produced by a brewer producing less than 300K bbl (125.33(8)); distribution rights must also be exclusive (125.34(3)(a)(2)

Costco v Hoen: Ninth Circuit Court of Appeals – 2008
Costco argues that state three-tier system is preempted by Federal anti-trust laws
Anti-trust only applies to practices “which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”
Lots of confusing talk about “hybrid” v “unilateral” restraints – the reason this is a big deal is because “unilateral” restraints are, per se, not pre-empted;
Unilateral: uniform pricing, minimum mark-up, central warehousing, retailer-to-retailer, volume discount, delivered pricing, and no credit sales
Anti-competitive: Price posting, 30-day hold because no state review as to reasonableness of prices

Exceptions – Brewpubs
SB 224/WI Stat. 125.295 – Brewpub Permit
Eligible: 1) brewpub group does not exceed 10K bbls, 2) entire manufacturing process occurs on-premises, 3) operate a restaurant on-premises, 4) hold “Class B” license for restaurant and offers for sale beer manufactured by a brewer other than applicant/brewpub group, 5) holds sales/use tax certificate
Allows: 1) up to 10K bbls, 2) bottling, 3) growlers, 4) possession/storage, 5) transportation between brewpubs or “Class B” premises of the brewpub group, 6) sale to wholesalers, 7) sale directly to retailers of up to 1K bbls, 8) retail sale at brewpub, 9) sale at state fair or county fairgrounds
Prohibits: 1) may not possess a “Class A” license, “Class B” beer license except for the restaurant, wholesaler’s license, brewer’s permit, “Class B” or “Class C” liquor licenses, warehouse permit; 2) no more than 6 brewpub permits

Exceptions – Direct-Ship
Granholm v Heald: US Supreme Court - 2005
Michigan and New York laws allowing in-state wineries to direct-ship to customers but not out-of-state wineries is unconstitutional
violates the commerce clause prohibiting discrimination against interstate commerce
Exception to three-tier system in that it allows direct sale of beer, wine and spirits to consumers directly from the Brewery or Winery (Producer)
WI: No for beer, but in-state or out-of-state wineries can direct-ship with permit

Breweries
So, you want to start your own brewery?
Paperwork, paperwork, and more paperwork
Power of attorney, personnel questionnaire, environment information, supplemental information on water quality considerations, pay.gov user agreement, signing authority for corporate and llc officials, brewer’s notice, brewer’s bond, brewer’s collateral bond
Oh yeah. More paperwork.
Quarterly federal excise tax forms, Application for Federal EIN, stock and share distribution reports, source of funds & property lease information
State Paperwork
Brewer’s Permit/Brewpub Permit, Class A/Class B/Class C licenses, State Excise tax forms, wholesaler’s permits, Sales/Use Tax, State EIN
Local paperwork
Class A/Class B/Class C licenses (if regulated by municipality), building permits and special use exceptions

Breweries
Not to mention the fact that breweries are expensive
Starting Your Own Business 101
Business Plan
Where/From whom are you going to get your money?
LLC v Corporation

Breweries
Brewery v. Contract v. Alternating Proprietorship
Question: Do you care if you actually own your equipment?
If “No” then contract/alternating proprietorship might be for you
Contract: host owns equipment and all in-process liquid/beer, host fills out all paperwork and pays all taxes, host, in theory, performs all tasks according to direction (but necessarily in practice), sells beer to tenant at dock in bottles/finished form (kegs, whatever)
Alternating Proprietorship: host owns equipment but tenant owns all liquid and is responsible for all paperwork and taxes and transportation

Breweries - Labeling
Certification/Exemption of Label/Bottle Approval (COLA) – Federal
“Front” label: Brand name, class, name and address (unless on back label), net contents, alcohol content of non-hop-extract added flavors (alcopops)
“Back” label: importer (if applicable), bottler (if applicable), alcohol content (only if req’d by state law), sulfite/yellow #5/aspartame declaration
An interesting problem: “No product other than a malt beverage fermented at comparatively high temperature, possessing the characteristics generally attributed to “ale,” “porter,” or “stout” and produced without the use of coloring or flavoring materials (other than those recognized in standard brewing practices) shall bear any of these class designations.” Except some states, like Texas, require “ale” to appear on the label if the product is over X% regardless of the temperature of fermentation.

Things that can not be on your label
False statements
Protected geographic indications
Statements that disparage competitors
Anything “obscene or indecent”
Misleading statements regarding tests, standards, or analyses
Names of public prominence unless that person/entity has, in fact, endorsed the product
Suggestion that the product is or contains distilled spirits
Simulation of any government stamp
The word “bonded”
Flags/seals/coats of arms
Health-related statements
The words “strong” or “full-strength”
Numerals that might indicate alcohol content

Organic: must conform to the USDA National Organic Program rules
Barley must be organic
In October 2007 USDA ruled that hops must also be organic
However, later that year, after extensive lobbying by Anheuser Busch, hops were added to the exemption list.
Lakefront Brewmaster Russ Klisch: “Adding hops to the National List (Section 205.606) would irreparably damage the reputation and credibility and integrity of the organic brewing industry’
The USDA did not listen to Mr. Klisch and hops are still on the exemption list

Breweries - Taxes
Federal Excise Tax: $18/bbl
If smaller than 2M bbl, $7/bbl on first 60K bbl, $18/bbl on all others
State Excise Tax: $2/bbl
If smaller than 300K bbl, $1/bbl on first 50K bbl, $2/bbl on all others

Breweries - Taxes
2009 AB 287: raises tax from $2/bbl to $10/bbl
Does not eliminate 50% credit
$2/bbl of the tax will be used to provide grants to local law enforcement "to reduce crimes related to alcohol", $4/bbl will be used for "community aids", another $2/bbl will be used for grants to substance abuse.
Interesting question: If the 50% credit still applies does the state still allocate 2/4/2? The bill, as written, seems to say so.

Drinking Beer
ALRC Proposal a city-wide ban on the sale of less than a six pack of beer or malt liquor (except imports or microbrews), fortified wine and less than a pint of liquor.
“Import and Microbrew” – less than 150K bbls
Question: is “Guinness” an “import” if it’s produced under license here in the states?
Currently this ban is in effect on State Street
Purpose: reduce alcohol-related crime
Alcohol-related Crime: anything against the law or even just socially unacceptable - which would include societal ills from theft, muggings, panhandling and fights to vagrancy and loitering.
Problem: The alcohol-related crime moved to other areas where these could be purchased.
Solution: Ban sale of 40s everywhere in the city
Don’t seem to understand the market that they are regulating

THANK YOU – QUESTIONS?

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Legal Aspects Of Brewing, Selling And Drinking

by Jeffrey Glazer on Jan 14, 2010

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