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FinishedRye

Who Can and Can't Own Equity in a Distillery?

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States vary.  Talk to the state directly.  

Federally, there is no prohibition against a distillery holding an interest in a wholesaler.

There are potential problems with  ownership of an interest in both a distillery and a retailer. Federally, "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."  Those mean include "acquiring or holding any interest in any license with respect to the premises of the retailer." 27 CFR 6.21.

Merely doing something that constitutes a means to induce is not, per se, illegal.  For a violation of the tied house law to occur, all three elements enumerated in 6.21 - the common ownership, exclusion, and interest commerce - must be present.  If the government want to prove a violation, it must prove that it is more likely than not that each of those elements is present.  

Put most directly, that can be a pain the butt.  TTB is not likely to expend the time and energy necessary to do that on some small time distillery that has, as a principal, someone who owns a local bar.  

Sections 6.26 and following expand on the subject.  

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 (27 CFR 6. 26).   

However, a distillery may own, with impunity, complete interest in a retailer.  "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." (6.27).  

A potential problem arises only if the the distillery owns less than 100% interest in the the retailer "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." (6.33).

A distillery need not hold the interest directly to create a potential problem.  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. (6.32)

Note that it would appear that the indirect interest provision applies only when a person associated with the distiller "acquires" an interest in the retailer.  This leads to the question, "What about instances in which a person who already holds an interest in a retailer acquires an interest in a distillery?"  I would argue that this is not prohibited, but I am not an attorney and that is no legal advice.  

Next, the mere existence of a means to induce does not create a violation by itself alone.  The means to induce must actually cause exclusion.  

The meaning of the term "exclusion" as it is now used in the regulations was shaped by case law.  Exclusion only occurs when the ownership (1) places the retailers independence at risk and (2) results in the retailer purchased less than it would have of the product of the distillery's competitors.  

The regulations go on to say that a distillers holding less than 100% interest in a retailer places the Independence at risk, but only where the ownership is used [my empahsis] as a means to influence the purchases of the the retailer.  See 27 CFR 6.51 and 6.52.  Note that since the language requires that the distiller "use" the ownership to influence the purchases of the retail, it would seem to follow that a retailer could simply chose, independently, to buy the products of the the distiller, without triggering a violation.  But do not take that to the bank - again, I am not an attorney and that is not legal advice.  I only argue that it appears that TTB does have the burden of proving that the distillery used its direct or indirect ownership to influence the purchasing decisions, else it would seem unlikely that the distillery placed the retailers independence at risk.

In short, as someone who used to construct trade practice cases, and who could spend six months to a year, in same cases, pursuing a single case, I can see all manner of defenses against alleged violations of 6.21 that might result from partial ownership, unless their is some overt threat or use of force, which would more likely result in an exclusive outlet charge.

I am sorry if this is not the clear type of "yes or no" answer you might prefer, but it is the best I can do.

 

 

 

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Really detailed and useful response.

Do you have any cursory thoughts about if a distillery seeks to sell or grant equity to someone who owns a major distributorship?

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In which state?

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