The FAA Act, Exclusion and Assessing Retailer Independence. John Hinman , Hinman & Carmichael LLP Robert Tobiassen , Independent Consultant (Former TTB Chief Counsel) Matthew Weston- Dawkes , Senior Associate General Counsel, E & J Gallo Winery. Commercial Bribery Tied House
The FAA Act, Exclusion and Assessing Retailer Independence
John Hinman, Hinman & Carmichael LLP
Robert Tobiassen, Independent Consultant (Former TTB Chief Counsel)
Matthew Weston-Dawkes, Senior Associate General Counsel, E & J Gallo Winery
§ 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.
(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.
The practice restricts or hampers the free economic choice of a retailer to decide which products to purchase or the quantity in which to purchase them for sale to consumers;
The industry member obligates the retailer to participate in the promotion to obtain the industry member's product;
The retailer has a continuing obligation to purchase or otherwise promote the industry member's product;
The retailer has a commitment not to terminate its relationship with the industry member with respect to purchase of the industry member's products;
The practice involves the industry member in the day-to-day operations of the retailer. For example, the industry member controls the retailer's decisions on which brand of products to purchase, the pricing of products, or the manner in which the products will be displayed on the retailer's premises; OR
The practice is discriminatory in that it is not offered to all retailers in the local market on the same terms without business reasons present to justify the difference in treatment.
Principal Areas of Retailer Concern:
Supplier Responsibility for Product Quality
Supplier Responsibility for Accurate Data about Product, from Pricing to Production to Deals
Supplier Responsibility to Promote Products
Supplier Responsibility to Manage Inventory Availability.
Statutory Element of Exclusion for:
Traditional View: Quantity of sales to and purchases by retailer (or trade buyer, as appropriate) are measured
Current View (Post-Fedway Decision):
Qualitative Element (“retailer independence is potentially threatened”)
Quantitative Element (Traditional view)
Stein Distributing Co. Decision (9th Cir. 1985).
Regulatory Framework Implementation of Current View:
Key Point: Know your potential violation(s) in order to determine how to evaluate exclusion and determine the applicable regulations.
ABC Wholesaler enters into a 9-month advertising contract with Speedy Racetrack, a retailer. Under the terms of the contract, Speedy Racetrack will receive $50,000 and agrees to purchase ABC Wholesaler’s XYZ malt beverages throughout the 9-month contract period. ABC Wholesaler will be able to put up signage throughout the racetrack advertising its XYZ malt beverage products. Assume similar state law is present.
Is this an exclusive outlet arrangement?
27 CFR 8.22 prohibits: “Any contract or agreement, written or unwritten, which has the effect of requiring the retailer to purchase distilled spirits wine or malt beverages from the industry member beyond a single sales transaction.”
Does the practice place retailer independence at risk?
Not a “red light” practice (27 CFR 8.52):
• No direct or indirect threat of physical or economic harm by ABC —§ 8.52(a)
• No requirement to purchase or express restriction on purchasing from another industry member —§ 8.52(b)
This contract is a “yellow light” practice:
Speedy Racetrack has a continuing obligation to purchase or otherwise promote ABC Wholesaler’s product —27 CFR 8.54(c)
Speedy Racetrack has a commitment not to terminate its relationship with ABC with respect to purchase of ABC Wholesaler’s products —27 CFR 8.54(d)
This practice may also hamper the free economic choice of Speedy Racetrack to decide which products to purchase —27 CFR 8.54(a)
ABC Wholesaler contacted several key retailers in the market area to motivate them to buy certain dual products (identical products sold by two wholesalers in the same market area). ABC Wholesaler advised the retailers that ABC would be implementing a new service policy for the next 6 months. ABC would provide free labor to stock and reset the stock of the retailers’ entire liquor department for the 6-month period. Several retailers took advantage of ABC Wholesaler’s service policy.
Is this a “tied house” arrangement?
Yes. Free labor to reset the stock of the liquor department would be a thing of value under 27 CFR 6.41
Does it put retailer independence at risk?
Yes. This arrangement is a “red light” practice
“The act by an industry member of resetting stock on a retailer’s premises (other than stock offered for sale by the industry member)” is considered to be a practice that puts retailer independence at risk (27 CFR 6.152(a))
A national retailer announces that it will mandate that all of its stores allot specified shelf and display space to designated “core” brands during the next year. Suppliers and wholesalers are asked to “bid” for these placements by advising the retailer how the brands it selects would be supported by pricing and other promotional support. The retailer’s stores would be free to carry other brands and the amount of shelf and display space for those other brands would be at the discretion of the individual store managers.
Some suppliers/wholesalers promise a $ amount of unspecified support. Some of these pay the $ directly to the retailer.
Some suppliers/wholesalers promise a $ amount of items allowed by 27 CFR Part 6, Subpart D (“green light” items). Some of these provide the items directly to the retailer.
Some of A and B request and get a letter from the retailer certifying that it will maintain control over the core brand decisions and might not mandate the brands for the entire year. The retailer states that this is its policy for all supplier and wholesaler brands.
Some of A and B provide funds to a 3d party promotional company. That company provides some Subpart D items to the retailer but also provides funds for things of value that are identified as a “means to induce” under the TTB regulations.
Questions and examples from the audience