You Have Been Warned - Do Your Promotional Business Practices Comply With the Law?
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On November 8, 2018, The Alcohol and Tobacco Tax and Trade Bureau issued Industry Circular 2018-7, Industry Compliance with Trade Practice Laws and Regulations. Beginning in 2017, the TTB “significantly intensified its trade practice education and enforcement program. . . generally aimed at investigating exclusive outlet, tied house, commercial bribery, and consignment sale violations.” According to the TTB:
Since the beginning of these increased enforcement efforts, TTB has found significant violations of Federal trade practice laws and regulations by some members of the alcohol beverage industry. Such industry members use unlawful trade practices to gain an unfair advantage over law-abiding industry members, which ultimately limits consumer choice. These unlawful trade practices are significant and widespread and have contributed to a marketplace wherein compliant industry members and small businesses just entering the marketplace are unfairly challenged to compete with the industry members committing these unlawful activities.
Examples of violations uncovered by the TTB include:
Paying fees or providing “other things of value” to retailers in exchange for display space, shelf space or tap space (‘slotting fees’). In some cases, such payments are hidden in the company’s books as payments for samplings that never took place.
Offering sponsorship agreements that are tied into product placement or exclusivity arrangements.
Using third-party marketing companies to indirectly provide things of value to retailers (despite Industry Circular 2012-1), such as payments for entertainment at the retail venue and marketing support that includes items or services not specifically exempted under 27 CFR part 6, Subpart D.
Providing items and services listed in Subpart D as exceptions to 27 CFR 6.21(c), when they are used to violate other provisions of the tied-house regulations. For example, furnishing promotional items covered under the Subpart D exceptions in exchange for preferential product display space.
Altering invoices in an effort to conceal the nature of inducement payments.
Paying retailers for ‘events’ which never took place.
Engaging in consignment sales under the pretense of brokerage agreements.
Operating illegally without a valid Federal permit due to not timely reporting changes of ownership, management or control over their operations.
This is significant for several reasons. First, it is confirmation that certain industry members are taking intentional action to frustrate fair competition, especially competition from small businesses just entering the marketplace. Second, the collective voice of small businesses is starting to be heard by Federal regulators, and hopefully in turn, State regulators. Third, it serves as confirmation that laws and regulations must be followed.
To the last point, the TTB is essentially putting the entire alcohol beverage industry on notice as it is requesting “each industry member review its promotional business practices to ensure such activities comply with the letter and spirit of the Federal trade practice laws and regulations.” In other words, compliance is mandatory with the actual language (letter) and interpretation of such language (spirit) of laws and regulations.
We constantly advise clients on the actual language of Federal and state laws and regulations, how such language is (and may be) interpreted by regulators and the risks of operating their business inconsistent with both. A solid defense to alleged violations is not based on “the law has never been enforced” and/or “everyone else is doing it.”
Please contact us if you have questions about Industry Circular 2018-7 or need assistance with reviewing your promotional business, advertising, social media and sales force activities.