Legal

How to Avoid Pay-to-Play Violations

The TTB has increased its enforcement budget—here’s what you need to know to stay in the clear

Illustration by Jeff Quinn.

“If you swipe your credit card for $2,000, I’ll put you on our menu right now,” said the bar manager at a high-volume bar and restaurant. Sitting at the bar, listening to sales pitches from suppliers and wholesalers, you occasionally overhear proposals like this one. In this case, if the supplier had exchanged money for that menu placement, the transaction would have been illegal. This practice is called pay to play. Although it may be permissible in some industries to pay a store to place your product at eye level, the same is not true for us in the beverage alcohol industry. Lately, the Alcohol and Tobacco Tax and Trade Bureau (TTB), which is responsible for the administration and enforcement of federal beverage alcohol regulations, has been reinvigorated with fresh enforcement funds.  

The federal government has allocated $5 million for TTB trade practice enforcement funds in 2018, available during the agency’s fiscal year, which ends September 30. “Prior to receiving this funding, TTB averaged two trade practice investigations per year based on its limited enforcement resources and the resource-intensive nature of these investigations,” noted TTB’s fiscal 2017 report. Thanks to the new infusion, TTB said it will “substantially increase” the number of trade practice investigations. So far, it has kept that promise.

As of late 2017, the TTB reported 11 active trade practice investigations, two of which were joint crackdowns with state regulators in Miami and Chicago, targeting alleged pay-to-play activities. The investigations are probably not yet complete, as settlements and violations have yet to be announced. In March 2018 the TTB commenced a joint operation with agents from the California Department of Alcoholic Beverage Control, investigating alleged prohibited consignment sale arrangements in Napa and Sonoma Counties.

Possibly setting the tone for the $5 million trade enforcement budget was the 2016 Massachusetts Craft Beer Guild settlement with the TTB for $750,000. The settlement resulted from alleged violations that Craft Beer Guild paid “slotting fees” to retailers in exchange for favorable product placement and shelf space. So what exactly is a “slotting fee”?

Learn Which Practices Are Prohibited

The terms pay to play and slotting fees refer to schemes whereby a supplier, importer, manufacturer, or wholesaler (for simplicity, the “brand”) gives a retailer something in exchange for favorable product placement or shelf space at the retailer’s store, bar, restaurant, or other licensed venue. One of the more common violations is the tied house. Sparing you the history lesson (for that, check out Last Call), this refers to the pre-Prohibition arrangement in which a retailer would be tied to one house or producer. Federal and state tied-house laws were created to keep the upper tiers—for our purposes, the brand—separate from the retailer tier.  

It is unlawful to attempt to induce a retailer directly or indirectly—for example, through an affiliate or agency—to purchase any products from the brand to the exclusion in whole or in part of other brands’ products. (So no, just having your agency do it does not make it legal.) The conduct must be “made in the course of interstate or foreign commerce,” but this is generally an easily provable element for TTB, since most products are sold across state lines. There is a small wrinkle for beer in that the state must also impose similar requirements, though most do.

Prohibited brand conduct includes acquiring or holding any interest in any on-premise or off-premise retailer; acquiring any interest in real or personal property owned, occupied, or used by a retailer; paying or crediting a retailer for advertising or display services; guaranteeing a loan or repayment of a retailer’s financial obligations; extending credit to a retailer beyond reasonable limits; requiring a retailer to buy or sell a certain amount of products; or furnishing, giving, renting, lending, or selling to a retailer any equipment, fixtures, signs, supplies, money, services, or other “thing of value.” This, naturally, is the most common, as all brands want to give retailers signs and other point-of-sale materials.

As noted, a tied-house violation occurs if a brand induces a retailer to buy from the brand at the exclusion of other brands in interstate or foreign commerce. Exclusion occurs when the practice “puts the retailer’s independence at risk” by means of a tie or link between the brand and the retailer and results in the retailer purchasing less than it would have of a competitor’s product. There is a test to determine whether exclusion exists. The TTB looks at the practice and asks the following questions: Did the practice restrict the free choice of the retailer to decide which products to purchase or the quantity to purchase? Did it obligate the retailer to participate in a brand promotion to buy the product? Did it require an obligation to purchase or promote the brand or require a commitment not to terminate the relationship with the brand with respect to purchasing products? Did it allow the brand to be involved in the day-to-day operations of the retailer? Or did it result in discrimination among retailers—meaning that the brand did not offer the same thing to all retailers in the local market on the same terms without business justification for the difference in the treatment?

There are some exceptions, however. These permit a brand to offer point-of-sale advertising material; consumer and retailer advertising specials; product displays; combination packages; consumer tastings and samplings; coupons and sweepstakes or contests; educational seminars; and stocking, rotation, and pricing of the brand’s own products. Brands that operate legally will work within these exceptions.

Meanwhile, a “tie in” sale occurs when a brand requires a retailer to buy a product that it didn’t want in order to buy a product that it did. For instance, it would not be permissible for a brand to force a retailer to buy a certain amount of regular vodka in order to be allowed to purchase the special holiday version. Similarly, it would be impermissible to require a retailer to purchase 10 cases of Winery X’s Merlot in order to purchase Winery X’s award-winning Pinot Noir. ”Commercial bribery” refers to the practice whereby a brand induces a wholesaler or retailer to purchase its productsby offering or giving any bonus, premium, or compensation to any officer, or employee, or representative.” For instance, it would not be permissible for a brand to offer a promotional sales contest in which retailer employees would get a cash prize from the brand for selling that brand.

In addition to tied-house violations, unfair trade practices also include exclusive outlets and consignment sales. An “exclusive outlet” occurs when a brand requires a retailer to purchase its products to the exclusion, in whole or in part, of other brands by means of a contract or agreement, written or unwritten. In short, it’s prohibited to require a retailer to purchase distilled spirits, wine, or malt beverages from the brand in more than just a single sales transaction. A “consignment sale” refers to a sale, offer for sale, or contract to sell with the privilege of return. For example, a brand testing the popularity of a new product cannot sell it to the retailer under the condition that if it doesn’t sell, the retailer can return the product.

Avoid “This” for “That” Situations

Remember, state law will play a major role in your day-to-day activities. The above discussion refers solely to federal law, so be sure to check each state’s rules to confirm permissibility. Still, there are some things you can do to ensure compliance both in the states and federally. Although giving permissible point-of-sale items is a great way to market a brand, it should not be conditioned on receipt of display space of shelf position. For instance, don’t provide signs or a new retailer specialty only if the retailer agrees to preferential display or menu placement.

Here’s another common example: Say a brand is entering into an otherwise permissible sponsorship agreement for signage at an event or arena. Think twice before including a purchase requirement and placement requirement. The brand is not bargaining to be the only tequila sold and the only tequila on the menu. Rather, the brand is bargaining for advertising space based on the marketing value it will receive from the ads and other branding.

By avoiding situations where you give something, a thing of value or service, in order to get preferential display or shelf or menu placement, you will hopefully avoid tied-house violations. A good rule of thumb is to consider whether the brand is giving “this” for “that.” If the answer is yes, think twice.

Given the TTB’s enforcement budget, the best way to avoid pay-to-play violations is to be sure you are acting compliantly. Many industry professionals seek to play in the “gray area,” which suggests some risk. About risk, a wise attorney used to say, if you’re driving in a 25 mph zone, you need to know if you’re going 30 mph or 60 mph. Of course, it’s never recommended to violate the rules, and strict compliance should be of paramount importance to brands. To that end, the TTB is hosting trade practice seminars in many cities; check out the schedule and RSVP here.

Ryan Malkin is an attorney who focuses on alcohol and cannabis law. He is counsel to Hoban Law Group, the nation’s premier cannabis law firm, and the principal attorney at Malkin Law, which focuses on alcohol beverage law. Nothing in this article is intended to be and should be not be construed as specific legal advice.

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