The tied house and commercial bribery provisions are those most frequently cited by regulators reviewing an advertisement or marketing campaign.

It shall be unlawful for any person engaged in business as a distiller, brewer, rectifier, blender, or other producer, or as an importer or wholesaler, of distilled spirits, wine, or malt beverages, or as a bottler, or warehouseman and bottler, of distilled spirits, directly or indirectly or through an affiliate…

(b) “Tied house”

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: (1) By acquiring or holding (after the expiration of any existing license) any interest in any license with respect to the premises of the retailer; or (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; or (4) by paying or crediting the retailer for any advertising, display, or distribution service; or (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; or

(c) Commercial bribery

To induce through any of the following means, any trade buyer 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 products to such trade buyer in interstate or foreign commerce: (1) By commercial bribery; or (2) by offering or giving any bonus, premium, or compensation to any officer, or employee, or representative of the trade buyer; …

TTB, with the cooperation in some states of state alcohol agencies, is conducting a widespread investigation of supplier and retailer activities involving one or more of the following activities: “pay to play” tied house violations, exclusive outlet, commercial bribery consignment sales, slotting fees, illegal sponsorship arrangements, and improper use of third parties, to name a few. TTB is conducting widespread industry interviews and is serving both formal and informal document requests directed at identifying these activities. TTB may prosecute a violation of the Act if the agency can prove an illegal inducement or requirement which resulted in exclusion; put another way, in order to meet its burden of proof, TTB needs to show that the inducement or requirement of the retailer resulted in the retailer purchasing the offending supplier’s products to the exclusion of other brands.

This article is part of our Conference Materials Library and has a PowerPoint counterpart that can be accessed in the Resource Libary.

HospitalityLawyer.com® provides numerous resources to all sponsors and attendees of The Hospitality Law Conference: Series 2.0 (Houston and Washington D.C.). If you have attended one of our conferences in the last 12 months you can access our Travel Risk Library, Conference Materials Library, ADA Risk Library, Electronic Journal, Rooms Chronicle and more, by creating an account. Our libraries are filled with white papers and presentations by industry leaders, hotel and restaurant experts, and hotel and restaurant lawyers. Click here to create an account or, if you already have an account, click here to login.

After the Prohibition was repealed by the 21st Amendment, a complex web of alcohol beverage laws created a “three-tier system” in which independence must exist between alcohol beverage manufacturers, distributors, and retailers. The ways in which these three tiers can interact is strictly controlled by federal and state laws. Armed with an increased budget due to a 2017 congressional appropriation, the U.S. Alcohol and Tobacco Tax and Trade Bureau (the “TTB”) intensified its trade practice enforcement efforts, resulting in several permit suspensions and high fines for industry members (the latest was $1.5 million). This [article] provides some practical advice on how to limit trade-practice enforcement exposure for hospitality clients.

What is a “Tied-House,” and Why is it So “Evil”?

A “tied-house” refers to an impermissible tie between an alcohol beverage retailer, wholesaler, and supplier. The “evils” associated with these ties refer to the post-prohibition fears that cozy relationships between these tiers, or “houses” could lead to less consumer product choice, or to the type of “evils” that existed during and pre-prohibition, like consumer overconsumption, predatory marketing practices by alcohol manufacturers, or dominance by a single producer in the marketplace. The essence of federal and state tied-house laws is that a supplier or distributor cannot exert undue influence over a retailer, and generally cannot pay or credit the retailer for any advertising, display, sponsorship, or distribution service. Similarly, suppliers and distributors are generally prohibited from owning retailers (thus becoming tied-houses). There are general exceptions to these laws that allow a supplier or distributor to market their products to retailers, but those exceptions are extremely limited. For example, in most states a supplier can do a consumer wine tasting at a bar, restaurant, or supermarket, and provide free samples to consumers to encourage a consumer to buy its product. Suppliers and wholesalers can also provide things of nominal value to a retailer, like branded napkins, banners, keychains, etc.

Are things so “Evil” right now?

In order to drive sales and increase profitability, industry members are constantly trying to strike the delicate balance between respecting tied-house laws and making the margins work. At the state level, we have seen heightened action by local agencies to enforce tied-house laws, including a 2017 Pennsylvania Liquor Control Board action that resulted in fines of $9 million paid by two large distributors, a Maine distillery, and an importer, after these industry members purportedly took Liquor Control Board members on lavish vacations, dinners, etc., in exchange for favorable treatment of their products. More notably, the TTB has been visibly present in various markets across the country since 2017, conducting comprehensive investigations at retail accounts in Florida, Illinois, California, and other states.

Best Practices

Retailers can steer clear of trouble in a number of ways:

1. Know the Law on Tied-House Exceptions. This gets tricky, because each state has a separate list of what a retailer can lawfully accept from a supplier or distributor. The details matter. For example, some state laws do not allow an alcohol beverage manufacturer or distributor to do “bar spends” at licensed retail accounts, or only allow them in limited circumstances. In New York, a manufacturer can spend no more than $700 in a retail account to buy rounds of drinks for consumers. In other states, bar spends have no monetary limits, and some states outright prohibit them.
2. Document, Document, Document. When a regulator questions a retail account about having received certain “things of value” from a supplier or distributor, having proper documentation is imperative. As an example, retailers should keep track of every time a supplier or distributor conducts an on-site sampling event or promotion, including time the time of arrival/departure, the types of drinks that were sampled, the total amount spent on the drinks, tip left, etc. Always include a copy of the itemized receipt in your records. Regulators will be looking to the retailer to justify the financial support or item received.
3. Quid Pro NO! Retailers cannot accept even allowable items from an upper-tier industry member, like branded napkins or bar mats, when the gift is conditioned on bar or menu placement, shelf space, etc. This is called a “slotting fee,” and is a classic example of a tied house violation.
4. Management Companies & Event Venues: Even if they don’t hold the retail liquor license themselves, hotel management companies cannot violate beverage law without subjecting themselves to great risk. The TTB is increasingly scrutinizing payments by alcohol brands to unlicensed third parties, where the benefits are clearly passed through to the retail licensee. Not only could these types of violations result in steep fines, but criminal action is also possible, including conspiracy and money laundering charges. At venues like concert or sports arenas, sponsorship agreements with alcohol beverage brands’ need to be carefully scrutinized. The TTB’s current position is that the sponsorship should be for legitimate brand advertising only, but cannot be tied to the food and beverage concessionaire’s activities at the venue. Branded bar areas or lounges are often viewed unfavorably by regulators.

This article is part of our Conference Materials Library and has a PowerPoint counterpart that can be accessed in the Resource Libary.

HospitalityLawyer.com® provides numerous resources to all sponsors and attendees of The Hospitality Law Conference: Series 2.0 (Houston and Washington D.C.). If you have attended one of our conferences in the last 12 months you can access our Travel Risk Library, Conference Materials Library, ADA Risk Library, Electronic Journal, Rooms Chronicle and more, by creating an account. Our libraries are filled with white papers and presentations by industry leaders, hotel and restaurant experts, and hotel and restaurant lawyers. Click here to create an account or, if you already have an account, click here to login.

EXAMPLE #1: EMPLOYEE HANDBOOKS. Though payroll companies and the Internet have made it easy to create an employee handbook, all restaurants and bars would benefit from crafting an employee handbook specific to their needs. Working with a professional who knows your company ensures a familiarity with the employee handbook that becomes invaluable when, inevitably, matters involving discipline, investigations, employee benefits, drug testing, alcohol policy, and termination arise.

EXAMPLE #2: TIP CREDIT NOTIFICATION FORMS. While the restaurant knows it is taking a tip credit in calculating a tipped employee’s wages, and the tipped employee (almost 100% of the time) knows the restaurant is taking a tip credit in calculating his or her wages, that is not enough for the U.S. Department of Labor (“DOL”). The regulations require that an employer specifically tell each employee about the rules regarding the tip credit – and any tip pool – in detail. While the regulations allow notification to be made orally, there is no way to prove oral communication in court. Because DOL enforcement guidelines state that the generic FLSA poster does not meet this obligation, employers should have a written tip credit and tip pooling notification policy before hiring their first tipped employee. Liability for this failure can be astronomical – up to $5.12 per hour for each hour worked by a tipped employee during the previous two years. Multiplied by two!

EXAMPLE #3: RESPONSIBLE ALCOHOL SERVICE POLICIES. Most retailers are well-aware of the fact that they should only hire employees who have received certification from state alcoholic beverage commission-approved courses (or require their employees to obtain certification promptly after hire). However, in Texas, retailers can only invoke the Safe Harbor (preventing the TABC from suspending or revoking their license) in the event of a server’s TABC violation if the retailer has written policies regarding “responsible alcohol service and consumption, and ensures that each employee has read and understands these policies.” Thus, failing to include a straightforward Responsible Alcohol Service Policy for new hires to review and sign could result in significant liability down the road.

EXAMPLE #4: WAGE DEDUCTION AUTHORIZATION FORMS. The FLSA does not permit any employer to deduct an employee’s wages below the minimum wage. Many states, Texas included, only allow wage deductions (for reasons other than taxes and court-ordered garnishments) if an employee has authorized the deduction in writing. Thus, even in Texas an employer cannot legally deduct an employee’s pay for stealing company funds absent a written authorization. This makes a Wage Deduction Authorization another very simple, but very important, document to include with new hire paperwork. Notably, because an employer cannot deduct any wages below the minimum wage, that necessarily means an employer cannot make any deductions for employees that are paid $7.25 per hour or less (such as servers and bartenders). This includes branded/non-generic uniforms, cash register shortages, breakage, walkouts, etc.

EXAMPLE #5: DOCUMENT TRANSLATION. Finally, it is important to mention that even the best employee documents do nothing for an employer if the documents are not translated into a language the employee can read. If an employee cannot read the employer’s documents, the employer is treated as having no employment-related documents at all, and it cannot take advantage of numerous defenses afforded to it in all manner of employment-related disputes.

Suppliers and retailers of alcoholic beverages advertise their respective products and offerings in a wide variety of digital outlets. Questions arise as to how the complex legal landscape of alcohol regulation applies in these digital spaces. Advertising media include social network services (e.g., Facebook), video sharing sites (e.g., YouTube), blogs, and smartphone applications. In addition to these types of media which engage consumers directly on their televisions and personal devices, other types of media target consumers in retail places. These media include digital screens which are physically present in store, as well as seemingly invisible technology which targets the consumer in store on his or her smartphone.

The Law Plays Catch-Up

Tied house laws, which address the financial relationships between supplier and retailer licensees, were enacted well before any digital media was invented. As a result, the alcohol laws have been playing catch up with this technology. Nevertheless, it is clear that social media qualifies as advertising for the purpose of alcohol beverage laws, and more and more jurisdictions are creating specific legislation to clarify this point. For example, Georgia, Kentucky, and Louisiana all now include social media in state definitions of advertising. On the federal level, the U.S. Tax and Trade Bureau (“TTB”) has confirmed that mandatory statements required in supplier product advertising are required in all forms of social media as well.

Paying for Technology: Compliance with State and Federal Tied House Rules

Technology can be expensive, and as a result retailers frequently wish to enlist supplier support to defray the cost of advertising both in and out of their premises. Generally, it is important to remember that the same rules which govern traditional advertising also govern these new technologies. Therefore, the same questions which come up in traditional advertising also apply here. For example, does the advertising involve the supplier paying for or buying advertising for the retailer in a manner that results in prohibited “cooperative advertising”? Does the technology involve the supplier providing or otherwise paying for a piece of equipment which is not covered by any applicable tied house exception?

The recent case of Retail Digital Network, LLC v. Prieto, 861 F.3d 839 (9th Cir. 2017), involved the issue of an impermissible payment for advertising. The plaintiff in the case installs liquid crystal displays for advertisements in retail outlets. Advertisers pay plaintiff for the opportunity to feature their brand advertising in the retail location. Plaintiff in turn then pays the retailer a percentage of the advertising fees generated by the display. Suppliers of alcohol beverages refused to do business with the plaintiff out of concern that California’s alcohol beverage laws prohibited them from paying to place advertising on a retail premises. The plaintiff sued the California Department of Alcoholic Beverage Control to enjoin enforcement of this particular part of the state tied house law. In short, the plaintiff argued that the suppliers’ proposed advertisements were protected commercial speech, and that the state interests and concerns inherent in the Twenty-first Amendment were outweighed by First Amendment interests. An en banc panel of the Ninth Circuit held that the California advertising prohibition directly and materially advanced the state’s interest in maintaining the three tier system, and therefore was sufficient to overcome First Amendment scrutiny.

Because digital advertising has become so popular, a cottage industry has developed for screens, closed loop televisions, and other devices that sit in retail places to stream digital content. Retailers frequently ask whether these items can be paid for or loaned by suppliers. This is a state specific issue, and the answer to the question will vary from one jurisdiction to another. One way to analyze the issue is to determine whether the item really a digital sign (likely covered under a tied house exception) or an illegal thing of value (a gift not covered by a tied house exception). The Texas Alcoholic Beverage Commission (“TABC”) has published two Marketing Practices Bulletins on this subject which provide helpful guidance. The TABC articulated questions to be used to determine the true nature of the item. They include:

• Is the primary purpose of the item to advertise a product?
• Is it a permanent fixture?
• Is it a thing of value?
• How long will the item stay in the retail premises?

Questions Raised by SmartPhone Applications

The uptick in digital advertising has also increased the number of smartphone applications directed at the marketing and sale of alcoholic beverages. Many retailers now have their own smartphone applications, and many interface with applications operated by non-licensees which drive traffic to the retail establishment.

Many of the best practices associated with applications which advertise alcohol are the same as the best practices for websites featuring alcohol products. These include, but are not limited to, age-gating and promoting responsible consumption. In addition, however, smartphone applications also raise several other legal issues in the alcohol space, depending on the functionality of the application. Consider the following issue-spotter questions:

• Does the app, if operated by an unlicensed third party, improperly use or avail itself of the retailer’s license to sell alcoholic beverages?
• Does the app facilitate an improper flow of funds between a supplier and a retailer?
• Does the app offer promotions which could result in violations of state happy hour or drink pricing rules?
• Does the app result in tied house exclusion by directing consumers away from one retailer and toward another?

Summary

Digital communications promoting alcohol present compliance challenges in terms of their jurisdictional reach, and to whom they may be directed. It is best for industry members to consult state law to determine which laws and regulations governing traditional advertising may also apply in the context of digital advertising. Furthermore, many states have developed enforcement policies and other opinion statements on social media and related issues; therefore, consulting state agency resources is recommended.

This article is part of a series, identifying an area of risk and providing steps on how to minimize the threats these risks pose.

Alcohol and Recreational Marijuana

The only way to remove potential liquor liability from your event is to not serve alcohol to begin with. But let’s be honest. Most of the time, this isn’t an option. So how do you reduce the chance of risk related to alcohol? Here are some steps to follow for alcohol related risk management:

1. Protect yourself in the contract: During the very initial stages of planning your event you can limit your vulnerability to risk by including certain clauses in the contract with your hotel, event facility or anywhere else alcohol will be served. The most important clause to include is an indemnification clause. This clause should be included in all contracts, regardless of whether there will be alcohol served. You can also add that servers should be trained in safe alcohol service, the hotel will adhere to all federal and state laws regarding the sale of alcohol and bartenders/servers are not to serve attendees who appear to be intoxicated.
2. Have proper insurance: Before purchasing a liquor-liability insurance policy, review your company’s general liability policy. If the policy does not cover events where alcohol is served, look into a liquor-liability policy. This won’t completely eliminate your liability, but it will cover some situations. Lastly, confirm your venue/vendors are properly insured and licensed.
3. Develop policies and guidelines: Be proactive about expectations on alcohol consumption at events. Let attendees know ahead of time to have fun at the event, but also to drink and behave responsibly. If someone does get out of control, have guidelines already in place on how to handle intoxicated guests. You can set these guidelines not only for your on-site team, but also with the servers/bartenders. If possible, give a third-party (like your catering manager) authority over the event. If someone has obviously had too much to drink, you can notify this designated individual to handle the situation, always with tact. This can relieve you from resistance from the attendee as well as potentially awkward or embarrassing scenarios if a VIP or client is involved.
4. Provide a safe environment: The best way to discourage overindulgence and protect yourself from risk is to create an atmosphere that promotes responsibility and safety. Never offer alcohol during activities involving snow, water or transportation (think jet skiing). For other events, prevent your guests from becoming intoxicated by setting it up in way that does not promote overconsumption.

A few tips are:

• Offer drink tickets instead of an open bar.
• Offer non-alcoholic beverages. Variety and creativity will be more attractive than basic sodas.
• Always serve food when alcohol is served. Eating slows down the absorption of alcohol. Limit salty foods; they make people thirstier.
• Close your bar before the end of the event. This will give attendees the chance to sober up.
• Station the bar in a location that isn’t constantly in guests’ paths.
• Ensure bartenders are using jiggers to consistently measure their pours.
• Keep drinks at the bar. If you have servers circulating with drinks or refilling glasses, many people will accept even if they weren’t planning on having more.
• Even with all these measures in place, there is still the chance someone over indulges. Make sure you have transportation available for those unfit to get themselves home or back to their hotel room. This could be a bus, or be as simple as having taxis available or walking them up to their room.

The above steps should give you a good defense against liquor liability. But there is another culprit for liability cropping up across the nation, recreational marijuana. Although it is only legal in eight U.S. states so far (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Washington and Washington, D.C.), it is important to consider the implications this substance has to your meetings.

The best defense is to develop a policy regarding pot use at your events. If your company’s overall policy doesn’t touch on this subject, be sure to have something in place. A strong policy will not only protect you during events held in states where it has been legalized, but also in states where it is still illegal. Sooner or later, you will meet in a state where weed has become decriminalized, and chances are, you will have at least one participant who might give it a try. Just like with any type of risk management, think of all possible outcomes and have a plan in place for how you will react.

Sources:
MeetingsNet: Seven Tips to Limit Liquor Liability
Strategic Meetings Management Consulting: Alcohol Risk Management
MeetingsNet: Stirring the Pot: What Planners Need to Know About Marijuana Liability
MeetingsNet: 5 Weird Ways Legal Marijuana Could Affect Your Events
Business Insider: Here’s where you can legally smoke weed now