Tied House laws - husband has DSP, wife has ownership in wholesaler

[Jaguiler]

Hi everyone,

Here is hypothetical situation - what if a husband owns a portion of a distillery (DSP) - and the wife owns a portion of the a wholesaler - the wholesaler (wife) only sells the husbands DSP's product and maybe a few other local craft beers/spirits.  

Does this bring tied house laws in to effect ?  Neither person has a share in their spouses business, but they live under the same roof and are married.

Thanks! 

[Patio29Dadio]

I think you will need to rely on an attorney to answer that.  But I believe the answer is no.  I think the tied house rules flow to a spouse... but not other relatives.   I know of situations where distillers in states without self-distribution options had a relative become a distributor to help them move products... but they have to be separate entities without any cross ownership.

 

[Jaguiler]

OK great - the only issue is husband and wife - no cross ownership or investment from one to the other.  This is only a problem if tied house rules flow to the spouse.  I assume the state can answer that flow between spouses.

Thanks!

[dhdunbar]

Husband and wife are of no consequence under federal law.  They may be under state law.  Texas law is draconian. 

Re: Federal law - The federal tied house regulation prohibits holding an interest in a retail license, not a wholesale license.  And it does not prohibit 100% ownership of a retailer, since the a violation only results if the ownership induces the retailer to buy products to the exclusion of products offered for sale by others in interstate commerce.  The legal theory is one cannot induce oneself, so 100% ownership is not prohibited.  

People mistakenly think that the federal law protects the three tier system.  It does not.  Consider all of the wholesale operations that are owned by ABInBbev, for example, which for a time, at least also held an interest in retail outlets at places like Sea-World, in which it held an interest.  I do not know how that stands now.  

[dhdunbar]

Re federal law: 

I should have cited chapter and verse on this because I insist that no one rely on information for which authority is not cited.  I get lazy sometimes.  Since the issue of trade practices is one of common interest to many, I'll address it in a bit more detail.  

§6.21   Application.

Except as provided in subpart D, it is unlawful for any industry member to induce, directly or indirectly, any retailer to purchase any products from the industry member to the exclusion, in whole or in part, of such products sold or offered for sale by other persons in interstate or foreign commerce by any of the following means:

(a) By acquiring or holding (after the expiration of any license held at the time the FAA Act was enacted) any interest in any license with respect to the premises of the retailer;

The regulation goes on to elaborate on the prohibition.

6.25   General.

The act by an industry member of acquiring or holding any interest in any license (State, county or municipal) with respect to the premises of a retailer constitutes a means to induce within the meaning of the Act.

[T.D. ATF-364, 60 FR 20421, Apr. 26, 1995] - Tip - this citation tells you where to look for the authority for the regulation.  In this case it is a treasury decision issued in 1995, which you can find by searching the internet if you are so inclined.  Such citations appear at the bottom of most sections of the regulation.  It is where you can go to dig deeper into the issue.

 

§6.26   Indirect interest.

Industry member interest in retail licenses includes any interest acquired by corporate officials, partners, employees or other representatives of the industry member. Any interest in a retail license acquired by a separate corporation in which the industry member or its officials, hold ownership or are otherwise affiliated, is an interest in a retail license.

6.27   Proprietary interest.

(a) Complete ownership. Outright ownership of a retail business by an industry member is not an interest which may result in a violation of section 105(b)(1) of the Act.

(b) Partial ownership. Less than complete ownership of a retail business by an industry member constitutes an interest in a retail license within the meaning of the Act.

Although less than complete ownership of a retail business by an industry member constitutes an interest in a retail license within the meaning of the Act, it is merely a proscribed inducement.  Remember, the "if" provisions of  §6.21.  A violation only occurs if the jurisdictional elements, exclusion and interstate commerce are also present as a result of the proscribed inducement. 

Interstate commerce is usually easily proven.  But exclusion is a thorny issue.  It makes for court cases. 

§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.

So, not only must the proscribed practice  threaten independence, it must also result in the retailer  the retailer purchasing less than it would have of a competitor's product. 

Section 6.151 goes on:

(b) Section 6.152 lists practices that create a tie or link that places retailer independence at risk. Section 6.153 lists the criteria used for determining whether other practices can put retailer independence at risk.

6.152   Practices which put retailer independence at risk.

The practices specified in this section put retailer independence at risk. The practices specified here are examples and do not constitute a complete list of those practices that put retailer independence at risk.

(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.

Because of the substantial  the burden of showing that someone purchased less of a competitor's product than it would have absent the proscribed inducement, the federal government generally  devotes its limited resources for trade practice enforcement to only the most egregious cases.  That is why, if you look at the offers in compromise and other administrative actions that TTB has taken, for violations of the trade practice provisions, you will see that they are large beyond the ability of any small industry member to pay.

Of all of the acts listed that are deemed to put retailer independence at risk, the one of most danger to small producers is the paying of a slotting fee (§6.152(b), probably indirectly, through payments made to a wholesaler, in support of the wholesalers's efforts, through payments the wholesaler makes to the retailer, to get products onto the shelves of the retailer.  Because slotting fees are common in many industries, they are ingrained in the retail business model.  They just happen to be prohibited in the case of alcoholic beverages.  And if a large industry member is making them and you are contributing to them, you could get caught up in them.  But the chances of that  ......

As you can probably deduce from the above, answers about the likelihood of a practice resulting in a violation of federal trade practice provisions are very (a word I try not to use "very" often) case specific.  In the case of inducement, which can only take place in the head of the person making a purchasing decision, it is impossible to for a governmental agency to predict, in advance, if the proscribed payment or service will have the desired effect.  But I suspect that you would not make it if you did not have reason to believe it would get you what you are seeking from it.  The burden is then on the government to prove you were right.  The risk of their doing so is yours.  Being small reduces that risk, but not to zero.

[Jaguiler]

Thanks Dave,

My question was specifically for my state - which says that a manufacturer cannot be a distributor or related to one.  How come the Federal laws only deal with "retailer" and not manufacturer to wholesaler relationships ?

[dhdunbar]

Questions of why have no answer.  But you ask how?  The law dates to 1935.  It replaced some  codes - voluntary codes of fair competition - that had been established under the National Recovery Act, which had been deemed unconstitutional.   The voluntary codes of fair competition were instituted at the end of prohibition.  The FAA Act as proposed was largely modeled on those codes.

Two sections of the FAA do apply to producer-distributor relationships.  They are the consignment sales and commercial bribery provisions. Exclusive outlet and tied house provisions do not.

The tied house provisions, as first introduced, addressed ties between industry members (wholesalers and producers) and retailers.  The stated purpose was to prevent "those evils" that had led to prohibition.  Industry favored them because regulation tends to legitimize activities  about which the public otherwise might have some doubt.   

The Senate's finance committee report stated as follows:

 

The House bill (sec. 5) prohibited two classes of trade prac- 
tices. The first class of these prohibited practices were those 
which tended to produce monopolistic control' of retail outlets, 
such as arrangements for exclusive outlets, creation of tied 
houses, commercial bribery, and sales on consignment or with 
the privilege of return. The reports of the National Commis- 
sion on Law Observance and Enforcement (Wickersham Com- 
mission) and of other agencies that conducted surveys of liquor 
enforcement problems, all indicated that control by producers 
and wholesalers of retail outlets through the various devices 
such as those prohibited by the bill has been productive not only 
of monopoly but also of serious social and political evils which 
were in large measure responsible for bringing on prohibition. 
The bill seeks to prevent the recurrence of these evils in the 
fields that cannot be reached by the States, provided the evils 
occur in interstate commerce or reach such an extent in the par- 
ticular case that they constitute a substantial restraint on inter- 
state commerce or deterrent to the free flow of interstate com- 
merce in distilled spirits and wines (S. Rept. No. 1215, Federal 
Alcohol Control Act, pp. 6 and 7). 

So that is the how of it.  See what you get when you ask a wonky question of a wonk :-)!  You can find this in the Legislative History of the Federal Alcohol Administration Act., which is available, online, on TTB's website.  https://archive.org/stream/legislativehisto00unit/legislativehisto00unit_djvu.txt