The Origins and Evolution of Exclusion

The FAA Act, Exclusion and
Assessing Retailer Independence
John Hinman, Hinman & Carmichael LLP
Robert Tobiassen, Independent Consultant (Former TTB Chief
Matthew Weston-Dawkes, Senior Associate General Counsel, E & J
Gallo Winery
Assessing Liability: Per Se or Subject to
the Exclusion and Inducement Standard
of 27 USC 205
Commercial Bribery
Tied House
Exclusive Outlet
Consignment Sales
NABCA - 3/13/2013
The Exclusion Standards – 27 CFR 6.151
§ 6.151 Exclusion, in general (a) Exclusion, in
whole or in part occurs:
(1) When a practice by an industry member, whether
direct, indirect, or through an affiliate, places (or has
the potential to place) retailer independence at risk by
means of a tie or link between the industry member
and retailer or by any other means of industry
member control over the retailer; and
(2) Such practice results in the retailer purchasing less
than it would have of a competitor's product.
NABCA - 3/13/2013
Examples of Retailer Independence at
Risk – 27 CFR 6.152
(a) The act by an industry member of resetting stock on a
retailer's premises (other than stock offered for sale by the
industry member).
(b) The act by an industry member of purchasing or
renting display, shelf, storage or warehouse space ( i.e.
slotting allowance).
(c) Ownership by an industry member of less than a 100
percent interest in a retailer, where such ownership is used
to influence the purchases of the retailer.
(d) The act by an industry member of requiring a retailer
to purchase one alcoholic beverage product in order to be
allowed to purchase another alcoholic beverage product at
the same time.
NABCA - 3/13/2013
Retailer Independence has been
compromised when: [27 CFR 6.153]
The practice restricts or hampers the free economic choice of a retailer to
decide which products to purchase or the quantity in which to purchase
them for sale to consumers;
The industry member obligates the retailer to participate in the
promotion to obtain the industry member's product;
The retailer has a continuing obligation to purchase or otherwise
promote the industry member's product;
The retailer has a commitment not to terminate its relationship with the
industry member with respect to purchase of the industry member's
The practice involves the industry member in the day-to-day operations
of the retailer. For example, the industry member controls the retailer's
decisions on which brand of products to purchase, the pricing of
products, or the manner in which the products will be displayed on the
retailer's premises; OR
The practice is discriminatory in that it is not offered to all retailers in the
local market on the same terms without business reasons present to
justify the difference in treatment.
NABCA - 3/13/2013
What do Retailers Want From Suppliers?
Principal Areas of Retailer Concern:
• Supplier Responsibility for Product Quality
• Supplier Responsibility for Accurate Data about
Product, from Pricing to Production to Deals
• Supplier Responsibility to Promote Products
• Supplier Responsibility to Manage Inventory
NABCA - 3/13/2013
Origins and Evolution of Exclusion
Statutory Element of Exclusion for:
• Exclusive Outlet
• Tied-house
• Commercial Bribery
Traditional View: Quantity of sales to and
purchases by retailer (or trade buyer, as
appropriate) are measured
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Origins and Evolution of Exclusion
Current View (Post-Fedway Decision):
Qualitative Element (“retailer independence is
potentially threatened”)
Quantitative Element (Traditional view)
Stein Distributing Co. Decision (9th Cir. 1985).
NABCA - 3/13/2013
Origins and Evolution of Exclusion
Regulatory Framework Implementation of Current
• Red Light
• Green Light
• Yellow Light
Key Point: Know your potential violation(s) in
order to determine how to evaluate exclusion and
determine the applicable regulations.
NABCA - 3/13/2013
Corporate Counsel Guidance Before
Fedway -- 1
• Treat the “inducements” identified in 27 CFR
Parts 6, 8, and 10 as per se violations
▫ BATF enforcement active and confident
▫ BATF approach to “exclusion” made it nearly a
• Note benefits of this approach:
▫ BATF enforcement could be cited where state
enforcement weak
▫ BATF rules could be cited as national standards
 Urge states to adopt similar rules
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Corporate Counsel Guidance Before
Fedway -- 2
• Impact of 7th Circuit decision in Foremost
 Foremost Sales Promotions, Inc. v. Director, Bureau of Alcohol,
Tobacco and Firearms 860 F.2d 229 (7th Cir. 1988)
▫ BATF accepted it only in 7th Circuit per Industry Circular 89-4
▫ BATF seen as unlikely to bring trade practice cases in Illinois,
Indiana, and Wisconsin
• Industry counsel view:
▫ Trade practice guidance based on state law rules in Illinois,
Indiana, and Wisconsin
▫ Continue to treat BATF trade practice rules as per se outside
those states
▫ Conflict over exclusion definition would be decided in another
court decision
NABCA - 3/13/2013
Corporate Counsel Guidance After
• BATF trade practice enforcement at a standstill
pending rulemaking
• Scope of BATF enforcement in future unclear:
▫ How would exclusion be defined?
 Market power requirement?
▫ What practices would still be per se violations?
 Status of slotting allowances
• Effect on state rules and enforcement unclear
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Corporate Counsel Guidance After
BATF Final Rule -- 1
• Final rule maintained relevance of Trade
Practice Rules
▫ Market power requirement rejected
▫ Slotting allowances and other specified practices
“nearly” per se
• But questions remained
▫ Would the rules stand up if challenged in court?
▫ How would BATF apply the “Yellow Light”
• Needed trade practice enforcement and cases to
clarify application of the rules
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Guidance After BATF Final Rule -- 2
• NO guidance from BATF trade practice
enforcement for several years
• Post 9/11 reorganization of federal alcohol
regulation agencies set back enforcement
• In the absence of BATF/TTB enforcement,
primary focus of trade practice guidance was
state law
▫ State enforcement often perceived as weak given
budget problems
▫ Lack of consistency in state laws creates obstacles
for national programs
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Current Corporate Counsel Guidance
• TTB Trade Investigations Division is now active
• However, so far, TTB has only pursued enforcement
against perceived “red light” practices
▫ Industry Circular 2012-01 describes the violations in
the “Harrah’s” case as a form of slotting allowance
• Still unclear what TTB would do in a “yellow light”
case in applying the criteria for determining retailer
▫ Effect of certification of retailer independence?
• In most “yellow light” cases, guidance still focuses
on state enforcement until TTB makes a case
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Exclusion Hypothetical #1
ABC Wholesaler enters into a 9-month advertising
contract with Speedy Racetrack, a retailer. Under
the terms of the contract, Speedy Racetrack will
receive $50,000 and agrees to purchase ABC
Wholesaler’s XYZ malt beverages throughout the
9-month contract period. ABC Wholesaler will be
able to put up signage throughout the racetrack
advertising its XYZ malt beverage products.
Assume similar state law is present.
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Hypothetical #1 (Continued)
Is this an exclusive outlet arrangement?
27 CFR 8.22 prohibits: “Any contract or
agreement, written or unwritten, which has the
effect of requiring the retailer to purchase distilled
spirits wine or malt beverages from the industry
member beyond a single sales transaction.”
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Hypothetical #1 (Continued)
Does the practice place retailer independence at
Not a “red light” practice (27 CFR 8.52):
• No direct or indirect threat of physical or
economic harm by ABC —§ 8.52(a)
• No requirement to purchase or express
restriction on purchasing from another industry
member —§ 8.52(b)
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Hypothetical #1 (Continued)
This contract is a “yellow light” practice:
• Speedy Racetrack has a continuing obligation to
purchase or otherwise promote ABC Wholesaler’s
product —27 CFR 8.54(c)
• Speedy Racetrack has a commitment not to terminate its
relationship with ABC with respect to purchase of ABC
Wholesaler’s products —27 CFR 8.54(d)
• This practice may also hamper the free economic choice
of Speedy Racetrack to decide which products to
purchase —27 CFR 8.54(a)
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Hypothetical #2
ABC Wholesaler contacted several key retailers in the
market area to motivate them to buy certain dual
products (identical products sold by two wholesalers
in the same market area). ABC Wholesaler advised the
retailers that ABC would be implementing a new
service policy for the next 6 months. ABC would
provide free labor to stock and reset the stock of the
retailers’ entire liquor department for the 6-month
period. Several retailers took advantage of ABC
Wholesaler’s service policy.
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Hypothetical #2 (Continued)
Is this a “tied house” arrangement?
• Yes. Free labor to reset the stock of the liquor
department would be a thing of value under 27 CFR 6.41
Does it put retailer independence at risk?
• Yes. This arrangement is a “red light” practice
• “The act by an industry member of resetting stock on a
retailer’s premises (other than stock offered for sale by
the industry member)” is considered to be a practice that
puts retailer independence at risk (27 CFR 6.152(a))
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Exclusion Hypothetical #3 – Final Exam
A national retailer announces that it will mandate that all of its stores allot specified shelf
and display space to designated “core” brands during the next year. Suppliers and
wholesalers are asked to “bid” for these placements by advising the retailer how the brands
it selects would be supported by pricing and other promotional support. The retailer’s
stores would be free to carry other brands and the amount of shelf and display space for
those other brands would be at the discretion of the individual store managers.
Some suppliers/wholesalers promise a $ amount of unspecified support. Some of
these pay the $ directly to the retailer.
Some suppliers/wholesalers promise a $ amount of items allowed by 27 CFR Part 6,
Subpart D (“green light” items). Some of these provide the items directly to the
Some of A and B request and get a letter from the retailer certifying that it will
maintain control over the core brand decisions and might not mandate the brands for
the entire year. The retailer states that this is its policy for all supplier and wholesaler
D. Some of A and B provide funds to a 3d party promotional company. That company
provides some Subpart D items to the retailer but also provides funds for things of
value that are identified as a “means to induce” under the TTB regulations.
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• Questions and examples from the audience
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