TTB Trade Practice Violations Investigations: They are coming hard so you need to be prepared

TTB Investigation background

The TTB’s (Federal Tax and Trade Bureau) investigations into trade practice violations became a major news story when it was announced that it entered into joint investigations with the Florida and Illinois liquor enforcement agencies. The importance of these issues became very newsworthy when Warsteiner entered into a $900,000 Offer-in-Compromise (OIC) over numerous violations of trade practices.

Warsteiner was accused of several trade practice violations that lead to it engaging in “pay to play” activities. Their practices allegedly resulted in a tied-house, commercial bribery, and exclusive outlet violations.

In a seminar in Chicago, Bob Angelo, the Director of the Trade Investigations Division, announced that the $900,000 fine does not represent a ceiling and fines could go much higher. He indicated that the maximum amount for an OIC is $500 and an OIC is written for each specific violation. So if violations number several thousands, the number could become stratospheric amounts.

In other words folks, Mr. Angelo’s group means business, and with a $5 million appropriation for FY 2017 and 2018, they have great resources to utilize.

So what are the elements of the trade practice violations in “pay to play” schemes and where are the areas that the industry member can challenge the TTB’s allegations?

 

Analysis of the TTB Prohibitions

In the sections below, I will cover the technicality of the laws and trade practice violations. However, before I begin I want to explain some nuances of the TTB prohibitions that are not entirely clear.

Essentially, under the TTB trade practices it is illegal to induce a retailer and in some instances a wholesaler from excluding the product of other competitors. Further, it is illegal to enter into special deals with retailers or sometimes wholesalers that allows them favorable terms such as being able to return unused product or not pay for product that goes unused.

There are four specific TTB prohibitions: tied-house; exclusive outlet; commercial bribery; and consignment sales.

Sometimes what constitutes a violation is not entirely clear and further the TTB must prove that the inducement lead to exclusion of other brands.

So let’s take the tied-house prohibitions pertaining to services, it is illegal to offer a service that creates a tied-house.  So what constitutes the border of permissible v. impermissible? It would seem installing a tap system could constitute stepping over the border while providing services like basic maintenance would not. But the federal government allows schematics for shelf space which is more than a basic service.

So again we are stuck with a fuzzy border of what is permissible v. impermissible.

In the land of TTB confusion, do we take the view that absolutely no services are permissible whatsoever unless specifically enumerated by the TTB?

Again there is no clear and simple test for services. So how do we determine whether the service is prohibited by the trade policies?

Here is the simple fact, if the TTB can’t prove exclusion the service performed should not be a violation. Hence, unless the TTB can prove exclusion, there seems to be no border for what’s impermissible.

The second issue relates to commercial bribery. It seems pretty straightforward, the industry member provides a payment or compensation to a wholesaler or retailer or its employees or representatives and we establish a violation. But how far does commercial bribery go? If the industry member utilizes a retailer’s establishments for major outings and establishes a great relationship with the retailer, and in turn the retailer predominately carries the industry members product, is this commercial bribery?

Or suppose the sales person brings his/her buddies in every weekend and runs up a big tab, is this commercial bribery?

One could assume that if any of these two situations occured couple with a predominance of the industry member’s product in the retail establishment that commercial bribery occured.

But I think this needs to be looked at one step further. Does the industry member condition their spend or corporate outings on a predominance of product? If yes, then there is a tied-house violation, if no, I don’t see where there is a violation. So sometimes these cases are not so black and white.

 

Trade Practice Violations for Pay to Play

 

  1. Tied house

A tied-house violation occurs when an industry member unlawfully induces a retailer to purchase alcohol beverages from the industry member to the exclusion of alcoholic beverages offered for sale by other persons.

Unlawfully inducing a retailer can take several forms. Activities that are considered unlawful inducement include: acquiring an interest in the retailer’s license or business; giving, renting, lending, or selling to a retailer equipment, fixtures, signs, supplies, or services and giving or lending them money; extending credit beyond 30 days; requiring them to take and dispose of a certain quantity of alcohol; providing free labor; and paying for live entertainment at the venue.

A TTB violation will occur if: (1) there is an inducement; (2) there is an exclusion of other products; (3) a violation occurs in interstate commerce; and (4) similar state law (malt beverages only). The TTB must establish all elements for a violation. However, even if your violation does not establish all elements because the transactions did not occur in interstate commerce, the other present elements would probably suffice for a state specific violation.

 

  1. Exclusive Outlet

An exclusive outlet violation occurs when an industry member directly or indirectly requires a retailer by agreement or otherwise to purchase alcohol from that industry member to the exclusion of alcohol sold by others in interstate commerce.

Usually the means for achieving this violation are by contract/agreement that are written or sometimes unwritten. Typically it’s an agreement to buy a certain amount of product for a certain or sometimes indefinite time period. The agreement/contract may indicate that the retailer purchase exclusively from a specific industry member which in turn leads to the exclusion of other industry members.

Any agreement to purchase alcohol should be limited to a single sales transaction.

What results from these agreements/contracts often times is that the Industry Member sells to the retailer on very favorable terms with the agreement to exclude the product of others.

A TTB violation will occur if all the following elements are established: Requirement by agreement or otherwise that retailer must purchase from the industry member; the event must occur in interstate commerce; there must be exclusion of the other industry member’s product; and similar state law (for malt beverages only).

 

  1. Commercial Bribery

Commercial bribery occurs when an industry member provides an unlawful inducement, via bribery or offering or giving any bonus, premium, or compensation to any trade buyer (wholesaler/retailer) to purchase alcohol from the industry member at the exclusion of others.

Commercial bribery can occur in various ways. The industry member offers a gift or bonus to a trade buyer’s employees to promote sales or a sales contest which results in directly or indirectly inducing the trade buyer to purchase more product. Or the distributor/wholesaler acts as a conduit to provide things “of value” to indirectly induce the retailer to purchase more product.

As always all the elements must be established for commercial bribery: 1. inducement to the employee or representative; 2. occurs in interstate commerce; 3. there is an exclusion; and 4. there is a similar state law (for malt beverages only).

 

  1. Consignment Sales

A consignment sale is when the trade buyer is offered to buy/purchase on consignment, or under a conditional sale, or with the privilege of return, or any basis other than a bona fide sale.

An example of a consignment sale is an industry member sells a retailer 300 cases with the understanding that if the product doesn’t sell, that it may be returned.

Another example of an illegal sale under this section is when an importer sells to a wholesaler and the wholesaler is not required to pay for alcohol until sold to the retailer.

To establish a consignment sales violation the TTB must prove: 1. a consignment sale was offered, sold, or there was a contract for to purchase pursuant to a consignment sale; 2. it occured in interstate commerce; 3. similar state law (malt beverages only). There is no exclusion requirement for a consigned sale, it is deemed illegal even if offered to everyone.

 

 Conclusion

The TTB gained some great publicity and some impressive victories. However, this does not mean that having great resources means that they are infallible. There are inconsistencies in their principles and may be situations will arise where they are incorrectly expanding the law. Remember it is on the TTB to prove exclusion, and sometimes a retailer’s choice or other factors may lead to the predominance of one product over another.

In concluding, the TTB’s investigation is very aggressive and thorough, however, an industry member should not just lay down and assume they proved their case by bringing charges. Marshall all your facts, analyze your situation, and determine if the TTB can prove every element.

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