NATIONWIDE: An Introduction to Food & Beverages: Alcohol
By: Robert F. Lewis & Marbet Lewis, Spiritus Law
Prior to last year, alcohol lawyers throughout the country frequently joked about the “recession proof” nature of the alcohol industry in general. Now, the word endurance embodies the alcohol industry’s performance and survival throughout 2020. Despite initial panic and long months of closure for the on-premise retail sector in particular, the alcohol industry endured collectively through one of the worst financial and public health crises to materialize in our lifetimes. Yes, consumers clearly safeguarded their access to alcohol during hard times and helped drive spikes in off-premise and to-go alcohol sales, especially during the early months of quarantine. However, it is the industry’s ability to adapt, pivot, and innovate collectively that enabled the industry to emerge from the pandemic with strength and motivation toward regulatory modernization.
Alcohol, in any form, is one of the most highly regulated legal products sold throughout the world. Alcohol products cross jurisdictional boundaries internationally and domestically under a very large, often overreaching, regulatory umbrella that includes federal, state, and local county and municipal regulations governing the production, distribution and retail sale of alcohol. Here in the US, we regulate who can invest in an alcohol business along with how and where alcohol can be produced, sold and consumed. Newcomers are frequently overwhelmed by lengthy license applications and processing procedures, and even discouraged by restrictions on cross-tier investments. Alcohol remains one of the few legal products that cannot be freely negotiated between its producer and retailer because our three-tier system largely prevents the benefit of quid pro quo exchanges between industry members that should be able to engage directly and more effectively as business partners. The industry has frequently turned to our courts to balance regulatory and commercial interests, but ultimately the way forward is through aggressive legislative redesigns.
The US’ overly complex, and arguably outdated, alcohol regulatory system at times serves more to restrict and prevent rather than regulate and enable freedom of commerce. Many federal and state laws can be traced back to the perceived evils that plagued the Prohibition years and are founded on moral and commercial principles that no longer apply in the modern world. The various emergency orders issued and extended throughout 2020, and into 2021, taught us that flexibility is necessary and that integration of online commercial transactions and direct-to-consumer shipping is vital for the industry’s long-term strength. If there is any light at the end of the pandemic tunnel, it is in the massive legislative efforts being undertaken to bring our industry back on solid ground. These legislative efforts focus on areas like adding flexibility in license privileges, offering financial relief and tax credit incentives to aid in reopening efforts, focusing on diversity and inclusion initiatives, enabling small producers to build brand loyalty with on-premise sales and in relaxing restrictions against cooperative advertising.
Almost immediately after on-premise closure orders swept across the world in early 2020, the industry has been buzzing with support for greater flexibility for on-premise retailers to sell alcohol to-go and more easily with third-party delivery service providers. Prior to Prohibition in the US, bars served the dual purpose of serving as the primary source for both on- and off-premise consumption. However, post-Prohibition law makers believed this dual role added to overconsumption and gave bars too much of a strong hold on consumer access to alcohol products. Consequently, post-Prohibition laws across the country aimed at bifurcating, not just alcohol production and distribution, but also consumer access to on-premise consumption and package sales of alcohol. However, the 2020 pandemic brought consumer access issues to the forefront globally.
Since the early stages of the pandemic, jurisdictions throughout the US have embraced a more consolidated retail system that enables traditional on-premise-only venues to compete in the direct-to-consumer market with respect to alcohol sales. In June 2020, Iowa became the first state to adopt to-go sales of mixed cocktails and alcohol beverages as a permanent privilege. Since then, various states including Colorado, Kentucky, New Mexico, Ohio, and Oregon have adopted similar legislation and a plethora of other states, including Florida, have introduced “alcohol to-go” legislation in 2021. The proposed legislative remedies include creation of new license privileges and compliance procedures. But, what will this mean for the strictly off-premise market? New privileges for one type of retailers can create an unfair advantage or impose a financial burden on other categories of retailers. Accordingly, safeguards are needed to protect the interests of strictly off-premise licensees that are not able to engage in on-premise activities. The safeguards being adopted vary, but frequently include requirements that to-go orders be accompanied with a food order or caps on annual to-go order sales. Whether these safeguards will be sufficient to balance the loss of the exclusive right to sell packaged alcohol to-go for off-premise retailers remains to be seen, but it is clear that the industry needs to be able to recreate the on-premise dining experience for consumers choosing to stay home.
The $28.6 billion Restaurant Revitalization Fund (the “RRF”) is also providing a much-needed lifeline for restaurants and exemplifies the industry’s commitment to advancing diversity and inclusion. One of the RRF’s most remarkable provisions is that it prioritizes financial grants to small businesses owned and controlled by women, veterans, or socially or economically disadvantaged groups. These funds will help the on-premise industry recuperate losses and invest in new technology to facilitate ecommerce and integrate better sanitation and air filtration systems to guard against future pandemic concerns.
Aside from aggressive legislative relief on the retail side, craft producers are also pushing for more flexibility in on-premise sales and ecommerce. Proposed legislative changes in some states are aimed at increasing productions caps, allowing more flexibility in operating tasting rooms, reducing caps for on-premise package sales, and allowing direct-to-consumer (“DTC”) deliveries. Opponents argue that these changes in longstanding license privileges weaken the three-tier system. However, conversely, modernizing license privileges supports consumer access to new products and levels the playing field for entrepreneurial craft producers struggling to build brand loyalty, which can only help increase sales collectively across tiers.
Another area of recent, yet long overdue, legislative activity falls within the area of trade practice, also known as “tied-house” laws. These laws are traditionally aimed at preventing one industry tier from having undue influence or control over another. Historically, trade practice laws prevent one tier from financially assisting another. However, as evidenced this past year more than any other, each tier is necessarily tied to the financial stability of its industry partners. Accordingly, it should follow that the industry should have greater flexibility and freedom in negotiation of brand support. Currently, the more hopeful legislative initiatives in this area center on the ability to engage in cooperative advertising. Specifically, alcohol producers, primarily malt beverage producers, have taken the lead in requesting the ability to negotiate brand naming rights for on-premise venues. Again, various safeguards are proposed to prevent against exclusivity agreements or other illegal quid-pro-quo arrangements.
What can we expect though 2021? Endurance. The industry will continue to endure through recovery and emerge leaner, stronger, and more focused on freedom of commerce and keeping pace with advances in technology.