Irish Liquor Lawyer honored to speak at the home of Rose Bowl
I had the distinct privilege of speaking at this great conference and I am very thankful that Carrie Bonnington, a nationally renowned liquor attorney, selected me for this panel.
Many thanks abound for a wonderful conference
Many thanks to Pam Frantz from NCSLA and Matt Boting and Jacob Appelsmith from California ABC for hosting a great conference. Even though Matt couldn’t roll his R, the conference was first class. We all enjoyed Pasadena, the City of Roses.
Trade Practice Investigations Panel
Trade Practice Updates Investigations, Accusations, Settlements, Litigation, Legislation.
Carrie Bonnington, Partner, Pillsbury Winthrop Shaw Pittman LLP.
Rob Tobiassen, Compliance Consultant and former Chief Counsel, TTB;
Lee Riegler, Supervising Agent in Charge of the Trade Enforcement Unit,California ABC;
Sean O’Leary (Irish Liquor Lawyer), President, O’Leary Law and Policy Group.
This panel discussed several issues including: 1. The focus of the trade practice investigations; 2. How does exclusion factor into trade practice violations; 3. What role does exclusion play at the state level; 4. Will suspensions become par for the course as a result of TTB Investigations; and 5. What are we going to see going forward?
1. The focus of the trade investigations
State and federal laws govern trade practice violations, but the federal and state agencies have different laws, focus, and investigative techniques for reigning in trade practice violations.
Each panelist provided insight on the trade practice investigations for their specific jurisdiction.
Lee provided an overview of the California Trade Enforcement Unit, the unit reviews all non-retail licenses as well as retail applications that show cross ownership issues.
The ABC Trade Enforcement Unit does the majority of trade practice violations with 4 agents, 2 in the north and 2 in the south. The District offices initiate the investigations and look to the trade enforcement team as subject matter experts. Most of the violations are discovered from complaints in the industry. Some in the natural course of business.
Rob is not happy about the trade practice investigations.
He provided some historical background on how we got here today, and talked about the new normal of TTB investigations.
The federal government had an aggressive program for investigating trade practice violations and then lost the Fedway case in 1992 and the aggressiveness dissipated. The TTB came out with regulations in 1995 after Fedway and trade practices took a back seat.
Then years later, the feeling was that trade practice violations were the wild west and industry complained and Congress answered by appropriating $5 million for investigations. TTB based on this, had to reassess its trade practice program, the investigations and settlements began to change.
With $5 million appropriated the bureau has to show results and is looking hard at alleged violations. The performance metric is what did you get for the money spent? The TTB needs to show results in fines and suspensions.
In Rob’s view criminal charges won’t be filed unless industry members lie. But some of the investigative techniques and the TTB’s mindset concerns him.
Bob Angelo, head of the investigative unit, hired agents that were from tobacco smuggling investigations, because they know how to run a criminal investigation and conduct interviews. However, there is a distinct contrast in the two categories, tobacco smugglers are criminals and bad people, the vast majority of the people in the alcohol industry are not smugglers and are generally good people.
There is a difference between a criminal matter and a civil matter and that has been lost in the translation that is creating the new normal. They are using techniques in an investigation that have never been used on the civil side.
The interesting question is if the trade associations will lobby for change and will there be long term repercussions on the consequences of the investigation?
The new normal is that TTB is using investigative techniques that people are not accustomed to and looking at much higher settlements. Progressive discipline that Bob Angelo is employing was industry member specific not industry member wide.
The TTB looks at 4 elements when deciding to settle a case. 1. How willful was the conduct; 2. How cooperative was the industry member; 3. What is the market impact of the investigation; and 4. What is the compliance history of the member.
In Rob’s view, this is supposed to be industry member specific, but the industry as a whole is treated as it has a bad record, even if the majority have a stellar compliance history.
Further, TTB is entering into settlements before they even give you the list of violations.
Rob brought a final but very important point that Bob Angelo’s team reversed their investigation approach. They go to retailers first, whereas in the past they would start with distributors and suppliers initially.
I touched on issues of the Illinois Trade Practice Investigations and how the Bud v. Miller dynamic has shaped the Illinois market. Bud was behind Miller in Chicago, which influenced Bud to start aggressively going after market share and Miller also started becoming aggressive in maintaining and enhancing the market share.
In my view, the preponderance of one brand over another at an establishment raised the attention of state and federal regulators and led them to investigate whether trade practice violations were occurring.
The trade practice investigations also focused on other brands and spirits producers, but I think the Bud. vs. Miller street fight for control in Chicago heavily influenced the Illinois trade practice investigations.
I also indicated that the state relies on complaints. Most of the complaints come from industry members either snitching or asking if its permissible to engage in a practice because someone else is presently doing it.
Disgruntled employees are also a source. Rob indicated that a vast majority of clients are beer distributors, and the investigations are focused on this.
2. How does exclusion factor into Trade Practice Violations?
Exclusion used to be a quantitative issue before Fedway, after Fedway exclusion needs to be more than a quantitative issue, there needs to be a conduct that threatens the independence of the retailer. The purpose of the statute was vertical integration, if the practice leads to the retailer losing that economic choice, then there is vertical integration.
The Federal government issued regulations in 1995 in response to Fedway. The regulations have never been tested, because it made sense for the industry to pay the government less than you would pay your attorney. But with the ante raised in terms of seriousness of punishment, this calculus is changing.
If the hearings go to ALJ, the TTB will need to justify exclusion like they never have been before.
Is TTB meeting the burden, we need to look at it on a case by case basis, but there are problematic issues. The retailer’s independence at risk needs to be proven and the assumption that tap handles change and this means the retailer’s independence is at risk, does not necessarily follow.
Also, and potentially problematic, investigators are provided more leeway in what constitutes a slotting fees. As an example, the sales manager holds 10 events a year at a retail establishment and has a great relationship with the establishment, during this time the tap handles become predominant for this brand.
Is this putting the retailer’s independence at risk because of this changeover? It depends, if the 10 events are conditioned on obtaining a majority of the tap handles, there is a distinct possibility, if not, it makes it very hard to prove.
Exclusion used to be a minor issue, until the Harrah’s decision in 2011, where Harrah’s made industry members pay to be part of a program to get their product slotted. The exclusionary piece was never challenged, could the TTB prove exclusion if it was challenged?
With the new TTB investigations, will we see a challenge to the exclusion rules?
3. How exclusion plays at the state level
Illinois and California do not have exclusion requirements, how does this effect their practices?
It makes California investigations more straight forward. The slotting fee is enough, exclusion may be considered for punishment. Because there are no exclusion requirements in California, we can file against the license where TTB can’t.
Even though there is no exclusion requirement, California judges the severity of the punishment by looking at whether there is a specific intent to keep another industry member out of the market.
In Illinois there is no exclusivity requirement, Illinois seems to look at whether a brand’s tap handles predominant a retail establishment.
4. Will suspensions become par for the course as a result of TTB Investigations?
If TTB is looking at suspending the license, what message is TTB sending. The TTB needs certain metrics for its $5 million appropriation.
The wineries that TTB suspended are very small and are not Gallo or Constellation. The one day suspension is not as severe for the small wineries. But it helps the TTB because it pads their stats, more optics than true enforcement.
However, the one day suspension for beer distributors is severe because a suspension may lead to the termination of the franchise agreement.
I was asked about the suspension of Skokie Valley Beverage out of Illinois and whether we will see many more suspensions.
I indicated that the TTB is coming hard and fast in their investigations and will be looking for everything, but since suspensions for beer distributors temporarily shut off the spigot for beer for a whole geographic area, this seems severe and unlikely.
5. What are we going to see going forward?
The TTB will consistently receive complaints, and we could focus on one main issue and something else will come up. The Trade Enforcement unit will be very busy.
The future of how successful the TTB is on issues like exclusion, depends on whether its worth the opportunity cost for someone to fight them.
Industry members won’t go to the ALJ, they will go to Congress to lobby. The TTB’s slotting fee argument could be weak,
When the industry does not agree with a practice or there is a dispute, we should expect more proposed legislation.
End of Panel
More reviews on the conference to be continued…
Brendan O’Leary, known as Precious Offspring, falls asleep during my presentation, no love for dad’s speaking.