Legal Aspects Of Brewing, Selling And Drinking

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Looks at the legal issues surrounding starting up your own brewery.

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  • Fed v State – The Two-tier system
  • “Unilateral” means only the government can trigger the enforcement of the regulation; “hybrid” means private parties (e.g., distributors) can enforce the regulation. In one case, the state sets the bar, in the other a private party – so, think about a law that says “retailer must charge at least X% over cost” versus a rule that says “the retailer must charge at least whatever percentage his distributor requires” – the former is “unilateral”, the latter is “hybrid”; in other words anti-trust law is concerned about private parties conspiring to suppress competition, NOT the state itself suppressing competition – which it is allowed to do, provided it does not do so in a discriminatory manner (e.g., Granholm); hybrid laws must have some component of meaningful state review for reasonableness and non-collusion
  • “brewpub group” is basically other brewpubs that might be owned by a brewpub – e.g., The Dane buys a restaurant, makes it a brewpub, but it isn’t called, or really even related to The Dane – can share beer, but all brewed counts against limits“entire manufacturing process” – what is the “manufacturing process” – does this include fermentation? Barrel conditioning? Bottling? Aging? Question is somewhat negated by “prohibitions” that prohibit brewpubs from owning any permit that would allow these processes off-siteDoesn’t require that entirety of beer sold on-premises be brewed there – only that the entire process does occur on premises
  • Where/from whom: trade-off – the more money you want and the more liability you are asking someone to undertake (e.g., co-signing or personal guarantees) the more control that person or entity is going to want to have – control will take the form of business decisions in the case of equity investors, or will take form of collateral for lenders/banks
  • Legal Aspects Of Brewing, Selling And Drinking

    1. 1. Legal Aspects of Brewing, Selling and Drinking Beer<br />Jeffrey M Glazer, AttorneyGlazer Legal Servicesjmg@glazerlegal.com608-277-1778<br />
    2. 2. Overview <br />The Three-Tier System<br />Exceptions: Brewpubs and Direct-Ship<br />Breweries<br />Brewing Licenses<br />Business Considerations<br />Labeling Law (Federal and State)<br />Taxes (Federal and State)<br />
    3. 3. Supremacy Clause<br />Article IV, Paragraph 2 of the US Constitution:<br />“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.”<br />1982 Supreme Court decision: “A state statute is void to the extent that it actually conflicts with a valid federal statute.“<br />Preemption: the displacement of a lower jurisdiction&apos;s laws when they conflict with those of a higher jurisdiction.<br />
    4. 4. The Three-Tier System<br />What Does The Three-Tier System Look like?<br />Ten specific acts that are common around the country (from Costco):<br />Uniform Pricing Rule<br />WI: Must offer same terms to all (125.33(6))<br />Price Posting (not in WI)<br />30-Day Price Hold (not in WI)<br />Minimum Mark-Up (10%) (not in WI)<br />Quantity Discount Ban<br />WI: permitted but must offer same terms to all (125.33(6))<br />Cash Payment<br />WI: may extend commercial credit (125.33(4))<br />Delivered Price Requirement (not in WI)<br />Central Warehousing Ban<br />WI: May not deliver to retailer unless first at distributor (125.34(2)); retailer cannot hold distributor’s license<br />Ban On Sale To Other Retailers<br />WI: retailers can only sell to non-license holders (i.e., customers)(125.02(19) and 125.34(5))<br />Exclusive Sales and Distribution<br />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)<br />
    5. 5. The Three-Tier System<br /><ul><li>Costco v Hoen: Ninth Circuit Court of Appeals – 2008
    6. 6. Costco argues that state three-tier system is preempted by Federal anti-trust laws
    7. 7. 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.”
    8. 8. 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;
    9. 9. Unilateral: uniform pricing, minimum mark-up, central warehousing, retailer-to-retailer, volume discount, delivered pricing, and no credit sales
    10. 10. Anti-competitive: Price posting, 30-day hold because no state review as to reasonableness of prices</li></li></ul><li>The Three-Tier System<br />Exceptions – Brewpubs<br /><ul><li>SB 224/WI Stat. 125.295 – Brewpub Permit
    11. 11. 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
    12. 12. 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
    13. 13. 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</li></li></ul><li>The Three-Tier System<br />Exceptions – Direct-Ship<br />Granholm v Heald: US Supreme Court - 2005<br />Michigan and New York laws allowing in-state wineries to direct-ship to customers but not out-of-state wineries is unconstitutional <br />violates the commerce clause prohibiting discrimination against interstate commerce<br />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)<br />WI: No for beer, but in-state or out-of-state wineries can direct-ship with permit<br />
    14. 14. Breweries<br />So, you want to start your own brewery?<br />Paperwork, paperwork, and more paperwork<br />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<br />Oh yeah. More paperwork.<br />Quarterly federal excise tax forms, Application for Federal EIN, stock and share distribution reports, source of funds & property lease information<br />State Paperwork<br />Brewer’s Permit/Brewpub Permit, Class A/Class B/Class C licenses, State Excise tax forms, wholesaler’s permits, Sales/Use Tax, State EIN<br />Local paperwork<br />Class A/Class B/Class C licenses (if regulated by municipality), building permits and special use exceptions<br />
    15. 15. Breweries<br />Not to mention the fact that breweries are expensive<br />Starting Your Own Business 101<br />Business Plan<br />Where/From whom are you going to get your money?<br />LLC v Corporation<br />
    16. 16. Breweries<br />Brewery v. Contract v. Alternating Proprietorship<br />Question: Do you care if you actually own your equipment?<br />If “No” then contract/alternating proprietorship might be for you<br />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)<br />Alternating Proprietorship: host owns equipment but tenant owns all liquid and is responsible for all paperwork and taxes and transportation<br />
    17. 17. Breweries - Labeling<br />Certification/Exemption of Label/Bottle Approval (COLA) – Federal<br />“Front” label: Brand name, class, name and address (unless on back label), net contents, alcohol content of non-hop-extract added flavors (alcopops)<br />“Back” label: importer (if applicable), bottler (if applicable), alcohol content (only if req’d by state law), sulfite/yellow #5/aspartame declaration<br />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.<br />
    18. 18. Breweries - Labeling<br />Things that can not be on your label<br />False statements<br />Protected geographic indications<br />Statements that disparage competitors<br />Anything “obscene or indecent”<br />Misleading statements regarding tests, standards, or analyses<br />Names of public prominence unless that person/entity has, in fact, endorsed the product<br />Suggestion that the product is or contains distilled spirits<br />Simulation of any government stamp<br />The word “bonded”<br />Flags/seals/coats of arms<br />Health-related statements<br />The words “strong” or “full-strength”<br />Numerals that might indicate alcohol content<br />
    19. 19. Breweries - Labeling<br />Organic: must conform to the USDA National Organic Program rules<br />Barley must be organic<br />In October 2007 USDA ruled that hops must also be organic<br />However, later that year, after extensive lobbying by Anheuser Busch, hops were added to the exemption list. <br />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’<br />The USDA did not listen to Mr. Klisch and hops are still on the exemption list<br />
    20. 20. Breweries - Taxes<br />Federal Excise Tax: $18/bbl<br />If smaller than 2M bbl, $7/bbl on first 60K bbl, $18/bbl on all others<br />State Excise Tax: $2/bbl<br />If smaller than 300K bbl, $1/bbl on first 50K bbl, $2/bbl on all others<br />
    21. 21. Breweries - Taxes<br />2009 AB 287: raises tax from $2/bbl to $10/bbl<br />Does not eliminate 50% credit<br />$2/bbl of the tax will be used to provide grants to local law enforcement &quot;to reduce crimes related to alcohol&quot;, $4/bbl will be used for &quot;community aids&quot;, another $2/bbl will be used for grants to substance abuse. <br />Interesting question: If the 50% credit still applies does the state still allocate 2/4/2? The bill, as written, seems to say so.<br />
    22. 22. Drinking Beer<br />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.<br />“Import and Microbrew” – less than 150K bbls<br />Question: is “Guinness” an “import” if it’s produced under license here in the states?<br />Currently this ban is in effect on State Street<br />Purpose: reduce alcohol-related crime<br />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.<br />Problem: The alcohol-related crime moved to other areas where these could be purchased.<br />Solution: Ban sale of 40s everywhere in the city<br />Don’t seem to understand the market that they are regulating<br />
    23. 23. THANK YOU – QUESTIONS?<br />

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