Last year’s Executive Order on Promoting Competition in the American Economy caused a great deal of buzz within the beverage alcohol industry. However, for all that buzz, it still remains unclear what effect the Order will actually have moving forward.
—Alex Koral, Senior Regulatory Counsel, Sovos ShipCompliant
Announced by the Biden Administration last July, the Order sets out “to promote the interests of American workers, businesses, and consumers” with a focus on federal support for a “fair, open, and competitive marketplace.” The Order refers to decades of consolidation and weakening competition in dozens of industries, including agricultural, pharmaceuticals, and telecommunications, along with the beverage alcohol industry. As part of the Order, the federal regulatory agency for beverage alcohol—the Tax & Trade Bureau (TTB)—is charged with soliciting comments from the industry and community and finding regulatory solutions to “protect the vibrancy of the American markets for beer, wine, and spirits.”
In the months after the publication of the Order, hundreds of comments were submitted to the TTB from producers, distributors, industry advocacy groups, and the public at large. While there are clear, consistent patterns within those comments on what changes certain industry members and the public want (and what they don’t want), it is utterly uncertain what parts of those comments the TTB might act on or even if it is within the TTB’s remit to make certain changes.
While there is tremendous value in assessing the current state of beverage alcohol regulation and finding ways to remove barriers to market and consumer access, it’s also important to keep a clear head on what is actually possible under the Order and, perhaps, not to expect too much from it.
What is in the Order?
As with so many things, it is necessary to start with the basics and understand just what the Order is looking for when it comes to modernizing beverage alcohol regulations. To that end, the Order states that, based on the comments it receives, the TTB is to:
- undertake rulemaking to update trade practice regulations;
- rescind or revise regulations that unnecessarily inhibit competition; and
- reduce barriers to market access for smaller and independent domestic producers.
Admittedly, this could be a very broad remit. However, it’s also important to understand that the TTB is limited to only affecting federal alcohol regulations. While there are plenty of federal rules on the alcohol industry, under the dictates of the 21st Amendment, most of the direct regulations that affect where and how alcohol can be produced, sold and consumed are created and enforced at the state level.
This means that, while someone could have reason to complain about not being able to purchase select whiskeys in Missouri or unfair parameters Virginia places on negotiating distributor agreements (and reading through the public comments, plenty of people do have complaints about these things), it is extremely unlikely that the TTB can do much about them.
Why won’t the Order solve direct-to-consumer shipping?
A major topic brought up repeatedly in the public comments is consumer desire to purchase alcohol from out-of-state sources, both directly from producers and from remote retailers. There is clearly a tremendous amount of interest and demand for this market, seen in the almost $4 billion direct-to-consumer (DtC) wine shipping market and polls indicating more than 80 percent of beer and spirits consumers wanting greater access to the market.
However, the federal government does not directly regulate that market. The TTB’s most recent publication on direct shipping of alcohol—from 2012—clearly says that it is a matter for the states to decide what can be shipped where and by whom, though the TTB reserves the right to investigate a Basic Permit holder for repeated violation of state laws. The only real federal rules around DtC shipping of alcohol are a ban on the US Postal Service from carrying alcohol, and the so-called “Federal On-Site” permissions found in the Patriot Act (which have largely been superseded by state DtC shipping laws). There is a lot of interest currently in removing the ban on alcohol shipping by USPS, but that will require an act of Congress to fix, and so is out of the TTB’s hands.
The interest shown in the public comments for the Order in expanding DtC shipping permissions is heartening, but bringing up that interest to the TTB is largely misdirected. Instead, consumers and suppliers wanting to expand DtC shipping permissions for brewers, distillers, and retailers, or wineries looking to remove some of the complexity and confusion in existing DtC laws, would be better served focusing their efforts at individual state legislatures. It is at the state level where DtC laws are written and enforced and so that is where attention should be directed.
Similarly, there are numerous complaints in the public comments about the unfairness of franchise rules, which restrict suppliers’ ability to freely negotiate and contract with their distributors. There are requests for expanded self-distribution rights. There are even numerous comments demanding the abolition of the three-tier system. While there may be some value in these comments, it is again extremely unlikely that the TTB will, or even can, do anything to change these rules.
However, that doesn’t mean that the comments are frivolous. The federal government does play a role in influencing national alcohol policies. By bringing these issues to the attention of the TTB, there is some chance that, through moral suasion or the bully pulpit, they can inspire states to pass their own laws and regulatory changes to enable greater competition in the American beverage alcohol industry and even create a more even landscape for suppliers and retailers to operate on a national scale.
What could the Order resolve?
Within the comments are a number of valuable and pointed suggestions that the TTB would do well to act on. These are issues that are very much in the scope of the federal government to work on and are seriously limiting competition in the beverage alcohol industry.
Key among these is increased attention to trade practice enforcement and proportional penalties for violations that occur.
Eliminating undue influence and unfair business practices has been a central principle of beverage alcohol regulations since the 1930s. Yet there are constant reports of retailers demanding “slotting fees” for preferred shelf space or tap lines or of distributors conditioning access to valuable brands on purchase of other products. And often enough when enforcement action is taken against these activities, the results are a relative slap on the wrist; a multi-billion dollar international company can easily write off even a few million dollars in penalties. Paying increased attention to these violations and imposing consequences that matter could do a great deal to improve competition in the industry.
Similarly, there has been tremendous consolidation within the industry, particularly in the distributor and retailer tiers. This is in extreme contrast to the producer tier, where there have never been so many players making so many varied products. However, as the producer tier has exploded and become replete with small, independent businesses, they have had to deal with an increasingly narrow field of wholesalers and retailers to work with.
A central piece of the Order is a focus on expanding options for consumers and enabling smaller businesses to access more markets. As such, the TTB should recognize the constraints on the market that are caused by massive, national wholesalers boxing out or ignoring small producers. While the fixes here may be difficult to conceive or implement—self-distribution being a matter, like DtC shipping, for the states, and the prospect of trust busting or regulating distributors into servicing smaller producers daunting to say the least—by at least recognizing the bottleneck and working toward a solution, the industry can be made more equal and healthier.
A major review of federal regulations like the Executive Order does not come around very often, so it is natural that it has spawned interest from the industry and the public. While there are a lot of notable and valuable suggestions that have been proffered in the public comments, it is necessary to keep in mind exactly what could come from this effort. A lot of the recommendations, while they may be beneficial, are likely better directed at state legislatures that can change local laws which more directly restrict the day-to-day of the industry. Nevertheless, there is also clearly much that the TTB and the federal government could affect directly to improve competition and consumer access within the beverage alcohol industry, and it is sincerely hoped that the Order leads to positive, effective change and isn’t just a writing exercise for lawyers.
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Alex Koral is a Regulatory General Counsel for Sovos ShipCompliant. He actively researches beverage alcohol regulations and market developments to inform development of Sovos’ ShipCompliant product and help educate the industry on compliance issues. Alex has worked with the company since 2015, after receiving his J.D. from the University of Colorado Law School.
