3 Tier Separation between producers, retailers etc

[Palmetto Coast]

I've heard conflicting takes on the separation of producers, wholesalers and retailers as it relates to ownership in a distillery. Is it Federal or State level (or both)? I'm familiar with the various 3-tier systems in many states and also that many are control states. Can anyone give me a link to the Federal statute that disallows this, please?

We've been approached by someone with limited interest in a liquor retail store, who wanted to invest in our business. I didn't think it was possible, but can't seem to locate the specific laws that would not allow it.

Thanks,

Todd

[Roger]

N/A

[John McKee]

Todd,

The manner in which 3-Tier systems are regulated are controlled at the state level. Contact your state level distillery licensor and they'll have those answers. In some states, its a sharp line, in others its a total % of ownership, etc, etc.

Cheers,

McKee

[Palmetto Coast]

Thanks John. I thought that was the case.

Todd

[dhdunbar]

It is not just a state issue. It is also a federal issue. It's just that in practice, TTB does not have the resources to pursue violations. They are not easy to prove. I know, because I used to try to do that.

States tend to either allow or prohibit ownership "per se," but the federal law is more complicated. The federal law requires that the government prove that you did something that it considers a prohibited inducement, but must also show that because of the prohibited inducement, the retailer purchased your products to the exclusion in whole or in part of similar products offered for sale by others in interstate commerce.

Here are the principal provisions:

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;

( By acquiring any interest in the real or personal property owned, occupied, or used by the retailer in the conduct of his business;

© By furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services or other thing of value, subject to the exceptions contained in subpart D;

(d) By paying or crediting the retailer for any advertising, display, or distribution service;

(e) By guaranteeing any loan or the repayment of any financial obligation of the retailer;

(f) By extending to the retailer credit for a period in excess of the credit period usual and customary to the industry for the particular class of transactions as prescribed in §6.65; or

(g) By requiring the retailer to take and dispose of a certain quota of any such products.

Interest in Retail License

§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.

§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((1) of the Act.

( 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.

Now, as you read that, remember that I said the government must prove other elements in order to establish a violation. It is not illegal, per se, for you to acquire or hold an interest in a retailer. The exclusion and interestate commerce nexus must also be established.

Next, the rules are not only complicated, they are also complex, that is, the way in which TTB will enforce them at some time in the future is always gong to be an unknown. We can see what TTB is doing in regard to trade practice investigations; we cannot predict what they will do in the future by way of enforcing the trade practices legislation.

Given TTB's current staffing, it is unlikely that it would take the time to investigate the activities of any small producer when it has, on its plate, the problem of major retailers, like Kroger, appointing Southern Wine and Spirits as the category captain for its alcoholic beverage sections. What you do or do not do is a pimple on the butt of that elephant.

So the advice to look to the state first is sound, but if you want to know IF federal law applies, whether or not it is enforced, it does.

Now, with everything I've said, any responsible answer to your question requires an understanding of the particulars of the situation. There is no boilerplate solution.

[dhdunbar]

Todd:

I should have read your question more carefully. Yod did not ask if you could acquire an interest in a retailer; you asked if a retailer could acquire an interest in your distillery. It is a quite different question. I don't have time tonight to unravel that issue tonight, but I did not want to leave my answer out their and subject to misunderstanding of the sort my misreading the question could occassion. I'll try to give a better answer in a couple of days.