Tied House Regulations

[crc32]

I am looking at starting a micro distillery. 5 years ago, I started a hotel which has a liquor license. Unfortunately, I'm a guarantor on all the loans for the hotel, and removing me from that is not possible.

Will this be an absolute bar to a DSP license? My state laws (NC) seem to allow for a discretionary exception to be made, but I see no such language in the Federal law. However, the Federal law is written seem only to block activities "to induce ... any retailer ... to purchase any such products from such person to the exclusion in whole or in part of distilled spirits ... offered for sale by other persons ..." (relevant statute quoted below).

Based on that, it seems like I would not be violating this section if I guarantee a loan, but do not induce my hotel to purchase my spirit. Perhaps by prohibiting my hotel from buying my spirit?

Has anyone had any experience with these tied house regulations in this kind of situation? Once I start the distillery, my active involvement with the hotel will be zero.

27 USC Sec 205:

To induce through any of the following means, any retailer, engaged in the sale of distilled spirits, wine, or malt beverages, to purchase any such products from such person to the exclusion in whole or in part of distilled spirits, wine, or malt beverages sold or offered for sale by other persons in interstate or foreign commerce, if such inducement is made in the course of interstate or foreign commerce, or if such person engages in the practice of using such means, or any of them, to such an extent as substantially to restrain or prevent transactions in interstate or foreign commerce in any such products, or if the direct effect of such inducement is to prevent, deter, hinder, or restrict other persons from selling or offering for sale any such products to such retailer in interstate or foreign commerce:
...
(2) by acquiring any interest in real or personal property owned, occupied, or used by the retailer in the conduct of his business; or

(3) by furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value, subject to such exceptions as the Secretary of the Treasury shall by regulation prescribe, having due regard for public health, the quantity and value of articles involved, established trade customs not contrary to the public interest and the purposes of this subsection;

...

(5) by guaranteeing any loan or the repayment of any financial obligation of the retailer; or
(6) 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 ascertained by the Secretary of the Treasury and prescribed by regulations by him; or
(7) by requiring the retailer to take and dispose of a certain quota of any of such products
...

[dhdunbar]

There is nothing in federal law that prohibits a person who holds an interest in a producer or supplier from also owning wholly a retailer. Look at tasting rooms where spirits are sold! The legal theory is that you cannot induce yourself.

Partial ownership of the retailer presents a possible problem. I'd have to know the details of how the businesses are structured before making further comment. But if I were you, for the reasons stated below, I would not be concerned.

First, the language of the law says an industry member cannot acquire an interest in a retailer, either directly or indirectly.

Second, nothing prohibits a retailer from acquiring an interest in a supplier.

Further, your guarantee of the loan preceded the formation of the DSP.

Next, TTB has to prove, as you point out, that your acts as a supplier induced the hotel bar to purchase your products to the exclusion, in whole or in part, of products offered for sale by others in interstate commerce. Read with care, the jurisdictional clause, “or if such person engages in the practice of using such means, or any of them, to such an extent as substantially to restrain or prevent transactions in interstate or foreign commerce in any such products, or if the direct effect of such inducement is to prevent, deter, hinder, or restrict other persons from selling or offering for sale any such products to such retailer in interstate or foreign commerce.”

As someone who pursued such violations in the past, let me tell you that can be a significant hurdle, even when you have big money changing hands. I'll speak personally now, there is no way in which you would ever have induced me to spend the time necessary to prove all of elements need to prove a possible tied-house violation by what is probably, if you will excuse me, a minnow in a world of whales. There are too many other, more important, issues to pursue.

Imagine all of the tied-house violations that exist in say, Las Vegas, and ask, "Why would TTB want to investigate me. "

So, don't worry about prohibiting the hotel bar from serving your products. Act in the best interest of the bar, which probably means the best interest of the hotel as well, and that probably means having a variety of products available for the customers. You will be fine.

Oh, and I'm not an attorney and this is not legal advice and you should not rely on it as your sole source of information and you should consult your attorney before.... That is good advice.

But do watch out for the state laws. Make sure North Carolina is not going to take exception. States have some really restrictive laws - the cousin of your employee is the wife of the bartender, etc.... That is ridiculous, of course, but not as farfetched as some of the state laws take things.

[crc32]

Wow! Thanks for such a detailed response!