Alcohol wholesalers, importers, wineries and distilleries are required by 27 USC 203 of the Federal Alcohol Administration Act to have a federal basic permit to engage in the alcohol business. Breweries were exempted from the requirement to secure a permit when Congress passed the law in 1935. This law is administered by the Alcohol Tax and Trade Bureau (TTB) housed in the Treasury Department. A condition of the federal permit is compliance with the Unfair Competition and Unlawful Practices provisions of 27 USC 205 and their related regulations at 27 CFR 6 through 11. These regulations further detail the specifics of the traditional federal trade practice violations of Exclusive Outlet, Tied House, Commercial Bribery, and Consignment Sales.
Recently the TTB has issued press releases announcing trade practice investigations jointly conducted with local state regulators in Florida, Illinois and now California. Likewise, various states have undertaken increased trade practice enforcement efforts. It is unknown other than from the TTB press releases what areas are the specific focus of the TTB and state investigations although some have suggested that slotting fees and consignment sales are a primary area of concern.
Questions About Commercial Bribery Prohibition
One of the primary areas of federal trade practice violations is the concept of commercial bribery. Commercial bribery relates to illegal incentives and hidden compensation between the tiers. Due to some confusion about the application of this law, NBWA asked the TTB to address various hypothetical sales incentives under the commercial bribery provision such as trip incentives or individual sales personnel incentives. Their answer can be found here and I encourage you to closely read and re-read the TTB response.
The TTB letter notes:
“The Federal Alcohol Administration Act’s Commercial Bribery provisions, 27 U.S.C. 205(c), and the implementing TTB regulations (27 CFR part 10) make it unlawful for any industry member (supplier, wholesaler or importer), directly or indirectly or thorough an affiliate, to induce a trade buyer (wholesaler or retailer) to purchase distilled spirits, wine, or malt beverages from the industry member to the exclusion, in whole or in part, of similar products sold or offered for sale by other persons in interstate or foreign commerce, (1) by commercial bribery; or (2) by offering or giving any bonus, premium, or compensation to any officer, employee, or representative of the trade buyer. The bonus, premium, compensation, or other thing of value need not be offered or given for the purpose of directly inducing a trade buyer to purchase from the seller, but rather is applicable if an industry member induces officers, employees or representatives of the trade buyer to promote sales of the industry member’s products and thereby indirectly induces the trade buyer to purchase from the industry member. (See 27 CFR 10.21)
The commercial bribery law notes that the prohibited transactions relate to the supplier or distributor dealings with retailers as well as suppliers’ interactions with distributors. The TTB letter made it clear it is permissible for suppliers to offer incentives to wholesaler companies. However, the wholesaler company must have control of where the money goes and cannot be “a mere pass through” for the supplier to an individual distributor employee:
The commercial bribery provisions of the FAA Act and TTB regulations do not preclude offering or giving money or other things of value directly to a wholesale entity itself (i.e., the corporation, partnership, or individual who owns the business). However, TTB will consider the wholesaler as acting as a mere conduit between its officers, employees, or representatives and the industry member, if:
- There is an agreement or understanding, implied or explicit, that the money or thing of value will be passed on to the officers, employees, or representatives, or
- It is obvious by the very nature of the item given (such as a free trip) that a pass through to the officers, employees, or representatives is clearly contemplated, or
- The records of the recipient wholesaler do not accurately reflect such money or item as an asset of the wholesale entity, thus being subject to all ensuing tax consequences as distinguished from the receipt of the money or item as a personal asset of an officer, employee, or representative.
Moreover, the TTB noted potential concern on trips or other incentive compensation noting that the TTB could look at various factors including records on tax payments. As a reminder, by federal law, wholesalers are required to keep their records for three years.
The records of the recipient wholesaler do not accurately reflect such money or item as an asset of the wholesale entity, thus being subject to all ensuing tax consequences as distinguished from the receipt of the money or item as a personal asset of an officer, employee, or representative.
Like all parts of the federal trade practice law, these federal rules only apply for beer transactions if there is a similar state law for beer. As such a threshold issue for anyone in a beer transaction is determining what the state law on commercial bribery is. Unfortunately, the TTB does not provide a public list of the state laws it considers “similar” for these purposes. There are other elements that the TTB must prove such as exclusion in whole or in part of goods that are not discussed here.
Upcoming TTB Educational Seminars on Trade Practices
The TTB has recently announced a series of public seminars to help the alcohol industry better understand trade practice laws including commercial bribery. With over 30,000 federal basic permit holders plus thousands of breweries, I believe there is a large gap in practical understanding of the federal laws. A clear majority of permit holders are relatively new to the industry and understanding of the law and regulations governing this industry is presumably low. I encourage any supplier, wholesaler, retailer or state regulator to attend these conferences to better understand the law, ask questions, find out where TTB is prioritizing its efforts and how to develop best practices. The first session will take place in Miami, Florida on April 10. Additional sessions will be held in San Francisco on May 9, Chicago on June 13 and Boston on July 18. Registration is now open for these sessions.
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