Presentation M2_ 2014-2015

Alcoholic Beverages Statutes and Rules in the United States of America

Master 2 Professionnel « Droit, commerce et gestion des spiritueux »

Promotion 27

Année universitaire 2014-2015

October 1, 2014

1 Julien Courtey-Fevrier

Contents

I.  Overall Presentation of the U.S. Market (figures)

II.  Overview of the U.S. Legal System (basics)

III.  History of the Prohibition

IV.  Importation and Sales Regulations

V.  Distribution Regulations

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Overall Presentation of the U.S. Market for Wine (2013)

1.  Wine consumption

¡  1st wine consuming market since 2013 with 29,1 millions of hl.

¡  Imports represent 22% of the total consumption

2.  Wine production

¡  Fourth largest world producer (CA represents 90%)

¡  Sixth largest world exporter

¡  Exports represent 20% of the total production

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Overall Presentation of the U.S. Market for Spirits (2013) ¡  Leading market for consumption

¡  Imports represent 42 % of the total consumption

¡  Most consumed spirits : ¡  #1 Vodka: 34% of total spirit consumption

¡  #2 Rum: 13%

¡  #3 Bourbon: 10,4%

¡  Key states : CA, FL, NY, TX and IL. They represent 1/3 of the total consumption in the U.S.

¡  Leading producer and exporter of Bourbon

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Overview of the U.S. Legal System (basics) 1.  The Supreme Court

§  Created by Judiciary Act, 1789

§  Art III of the U.S. Constitution

§  Highest Federal Court

§  Justices nominated by the President by and with the advice and consent of the Senate

§  9 Justices since 1869 (at the origin 6)

§  Chief Justice : John Roberts since Sept, 2005

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Overview of the U.S. Legal System (basics)

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John Roberts, Chief Justice, Born in 1955 Nominated in 2005

Antonin Scalia, Born in 1936 Nominated in 1986

Anthony M. Kennedy, Born in 1936 Nominated in 1988

Clarence Thomas, Born in 1948 Nominated in 1991

Ruth Bader Ginsburg, Born in 1933 Nominated in 1993

Stephen G. Breyer, Born in 1938 Nominated in 1994

Samuel A. Alito, Born in 1950 Nominated in 2006

Sonia Sotomayor, Born in 1954 Nominated in 2009

Elen Kagan, Born in 1960 Nominated in 2010

Overview of the U.S. Legal System (basics) 2.  The U.S. Constitution

¡  Adopted in September 17th, 1787

¡  Effective in March 4th, 1789

¡  7 articles

¡  Articles mentioned in this presentation:

¡  Art I, Section 8, Clause 3 : Commerce clause : cf. infra Granholm v. Held, 544 U.S. 460 (2005)

¡  Art V: Amendment of the Constitution

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Overview of the U.S. Legal System (basics) 3.  Amendments to the U.S. Constitution

¡  27 amendments in total

¡  The Bill of Rights(1791): the 10th first amendments

¡  Reconstruction Amendments: 13th, 14th and 15th (1865 –1870)

¡  Prohibition : 18th and 21st amendments

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Overview of the U.S. Legal System (basics) Options to amend the U.S. Constitution (Article V)

1.  Proposal by Congress (2/3) + Ratification by State Legislature (3/4): used all the times except once

2.  Proposal by Congress (2/3) + Ratification by State Convention (3/4): used once for the XXI Amendment

3.  Proposal by Constitutional Convention + Ratification by State Legislature: never used

4.  Proposal by Constitutional Convention + Ratification by State Convention: never used

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History of the Prohibition : (Origins) ¡  Excessive consumption of alcohol.

¡  Men’s lack of interest about family obligation

¡  Consequences : unemployment, violence, poverty.

¡  Political (and religious) movements in favor of the prohibition since the middle of 19th Century:

¡  1826: American Temperance Society ¡  1850’s: The Methodists dry movements

¡  1880’s: Women’s Christian Temperance Union ¡  1880’s: Prohibition Party

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History of the Prohibition (The XVIII Amendment)

¡  Enacted in January 16th, 1919

¡  Effective in January 16th, 1920

“After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.”

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History of the Prohibition (The Volstead Act of 1919) ¡  Commonly called the National Prohibition Act

¡  Enacted on October 28, 1919 (vetoed by President Wilson but override the same day by the Congress).

¡  Reinforced the XVIII Amendment.

¡  New definition of intoxicating liquor ad any beverage containing over 0.5% of alcohol.

¡  Exception: homemade wine and cider from fruits was allowed up to 200 gallons (approx. 800l) per year.

¡  Justice Prohibition Enforcement Agency : 1,500 Federal Prohibition agents.

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History of the Prohibition (Consequences)

§  Illegal supply from Canada, St-Pierre et Miquelon (FRA) and Bahamas.

§  Black market and decrease in quality

§  Birth of “bootleggers” and development of the Speakeasies

§  Corruption of police officers, judges and politicians.

§  Significant increase of (1) crimes, (2) healthcare and social issues

§  Tax: Lack of revenues(est. up to $500 million per year)

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History of the Prohibition (Contestation)

§  Necessity of Alcohol for therapeutic purposes

§  Increase of “repeal associations” across the country.

§  Support for repeal from former partisans of Prohibition :

§  John D. Rockefeller Jr.

§  Pauline Sabin, founder in 1929 of WONPR (Women Org. for National Prohibition Reform).

§  Republican and Democrat Parties plans for Presidential Elections 1932 included an anti-prohibition plan.

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History of the Prohibition (the Repeal) §  Feb 10, 1933 : the Congress proposed the XXI

amendment

§  76% in favor, 24% against in Congress (threshold 2/3)

§  December 5th, 1933 : Ratification by states conventions completed (3/4, i.e. at least in 38 states)

§  The National Prohibition Act of 1919 was amended by the Blain Act of February 17th, 1933

§  Cullen-Harrison Act of April 7th, 1933 : a federal law allowed the manufacture and the sale of beer up to 3,2% of alcohol

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History of the Prohibition (After the Repeal)

¡  States allows municipalities to enact law enforcing local prohibition.

¡  Local prohibitions allowed in 33 of the states.

¡  Kansas, Mississippi and Tennessee are states dry “by default” : the municipalities MUST enact a statute allowing alcoholic beverages production, sales and trade.

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History of the Prohibition (Further Federal statutes)

§  March 10, 1934 : Justice’s Prohibition Enforcement folded into the ATU (Alcohol Tax Unit) reporting to the Treasure

§  National Industrial Recovery Act of December 5, 1933 : establishing the FACA (Federal Alcohol Control Administration)

§  Federal Alcohol Administration Act of August 1935: Creation of FAA, replacing the FACA, agency in charge, after the Repeal, to regulate the alcohol industry.

§  1940 : Merge of the ATU and the FAA : part of he ATF and later TTB

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Importation and Sales Regulations (Federal Agencies)

¡ Chronology of the Agencies ¡  DOJ: Department of Justice

¡  DOT: Department of Treasury

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ATU (DOJ) 1934-1940

ATF (DOT) 1940-2003

ATF (DOJ) Since 2003

FACA (DOT) 1933- 1935

FAA (DOT) 1935-1940

TTB (DOT) Since 2003

Importation and Sales Regulations (Federal Agencies) 1.  The ATF: Bureau of Alcohol, Tobacco, Firearms and

Explosives

¡  Born from the merge ATU + FAA in 1940 ¡  Dependent of the U.S. Department of Justice, 2003

(previously dependent of the U.S. Department of Treasury) ¡  Missions: ¡  Preventing terrorism ¡  Investigate and reduce crime involving firearms and

explosives, acts of arson ¡  Fight against illegal trafficking of alcohol and tobacco ¡  Until 2003, collection of Federal tax (transferred to TTB)

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Importation and Sales Regulations (Federal Agencies) 2.  TTB: Alcohol and Tobacco Tax and Trade Bureau

§  Created by the Homeland Security Act of 2002 (Enforced in 2003).

§  Agency part of the U.S. Department of Treasury

§  Goal: protect the consumer and collect the excises and tax

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Importation and Sales Regulations (Federal Agencies) 3.  FDA: Food and Drug Administration

§  Created in 1906

§  Dependent of the U.S. Department of Health and Human Services

§  Responsible for protecting the public health

§  Assuring the safety, efficacy, and security of human and veterinary drugs

§  Since Bioterrorism Act of June 12th, 2002, all imported products have to be registered to the FDA

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Importation and Sales Regulations (Federal Agencies) ¡ Non-U.S. Facilities (i.e. foreign producers) can

designate a U.S. Agent for the registration (generally the importer)

¡ Designation to the FDA

¡  The U.S. agent may be an individual, partnership, corporation, or association

¡  The agent must have a place of business or residence in the U.S. and be physically present in the U.S.

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Importation and Sales Regulations (State Agencies) 4.  ABC: Alcoholic Beverages Control Bureau

§  Each state has an ABC Bureau

§  In New York this is the NY Liquor State Authority (LSA)

§  Missions of ABC Bureau :

ü  collect the taxes

ü ensure the respect of the State and/or local laws in the alcoholic beverages industry

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Importation and Sales Regulations (Federal Statutes) 1.  The U.S. Code (USC) http://uscode.house.gov

§  Title 26: Internal revenue code, Subtitle E, Chapter 51 for excises

§  Title 27: intoxicating liquors (e.g. FAA is included in 27 USC Chapter 8)

2.  The Code of Federal Regulations (CFR) http://www.ecfr.gov §  Title 19: Customs Duties for all the goods

§  Title 21: Food and Drugs

§  Title 26: Internal Revenue

§  Title 27: Alcohol, Tobacco Products and Firearms

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Importation and Sales Regulations (Federal License) Basic Permit for Importers or Producers (from FAA Act of 1935)

¡  Required for: ¡  Importers

¡  Manufacturers

¡  Wholesalers, only if they sale to retailers

¡ Delivered by TTB

¡ Application process is up to 120 days

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Importation and Sales Regulations (State License) ¡  State License required to manufacture, produce or sale

Alcoholic Beverages

¡  Delivered by ABC Bureau

¡  Time process : up to 120 days (CA : 90 days)

CAUTION :

¡  Local restrictions (e.g. dry counties) in some states

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Importation and Sales Regulations (Federal Labeling)

Certificate Of Label Approval (COLA)

1.  Application: the Pre-COLA evaluation

§  Materials to support the application

(a)  Proposed label with adequate and non-misleading elements

(b)  Chemical and lab analysis must be submitted

(c)  Product ingredients and formulation

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2.  Goals of Pre-COLA product evaluation:

§  No alcohol beverage contains a prohibited ingredient;

§  Limited ingredients are used within prescribed limitations or restrictions;

§  Appropriate tax and product classifications;

§  Alcohol beverages labeled without a sulfite declaration contain less than 10 parts per million (ppm) of sulfur dioxide.

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3.  The 5 types of pre-COLA product evaluation :

¡  Laboratory analysis (750 ml or equivalent volume product sample and a statement of production)

¡  Pre-importer letter (only to imported alcohol beverages)

¡  Formula (only to domestically produced wines and distilled spirits)

¡  Statement on process (domestically produced malt beverages, rice wine and sake)

¡  Sulfite analysis (750 ml or equivalent volume product sample) October 1, 2014

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4.  COLA approval : application

¡  Application after the pre-COLA product evaluation

¡  Application :

¡  Online: 7 to 10 days to process

¡  Via mail send to Advertising, Labeling and Formulation Division (ALFD): 4 weeks to process

¡  Notification by TTB officer of the approval or denial within 90 days of receipt of the application

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5.  COLA Denial (27 CFR 13.25 and Seq.)

¡  Written appeal sent to the TTB officer within 45 days after the date of the notice of denial

¡  TTB Officer decision within 90 days Decision after appeal may be appealed

¡  Second Appeal possible (27 CFR 13.27) : same procedure

¡  Judicial review (Federal Courts) : allowed after appeal to the TTB officer

6.  COLA Revocation

¡  Same procedure than denial October 1, 2014

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Importation and Sales Regulations (State Labeling)

§  Statutes by state by state

§  Non compliance with state statutes can bar the access to the state market

§  In Control States : sale and distribution are partially or in full controlled by the State

§  In Open States: sale and distribution are partially or in full controlled by private operators

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Importation and Sales (Summary)

Steps Federal Agencies State Agencies

Registration of Imported Product FDA n/a

Designation of the U.S. Agent FDA n/a

Basic permit application TTB State ABC

COLA (Labeling) TTB State ABC

Taxes AFT State ABC

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Distribution Regulations (The three-tier system) §  System for distributing alcoholic beverages in the U.S.

established

§  The by Webb-Kenyon Act of 1913

§  the FAA Act of 1935.

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Producers or Importers

Wholesalers & Distributors Retailers

Distribution Regulations (Exception to the three-tier system) 1.  Direct Distribution (DD):

¡  Allows shipment from a Producer directly to a Retailer

¡  14 states and DC have some form of DD

¡  Only allowed for in-state supplier in many states

¡  Opposition of the Wholesalers lobbies (NBWA & WSWA)

¡  The Costco case: Costco challenged in 2004 several key provisions of Washington state three-tier regulations

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Distribution Regulations (Exception to the three-tier system) 2.  Direct To Consumer (DTC)

¡  Shipment from a Producer, Importer or Retailer directly to the Consumer

¡ Consequence/result of : ¡  Growing domestic market

¡  Californian wineries lobbying

¡  Online orders and direct delivery (internet)

¡ Allowed in 42 states and D.C. for in-state and out-of-state

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Distribution Regulations (Exception to the three-tier system)

Source: www.winespectator.com July 14, 2014.

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Distribution Regulations (Exception to the three-tier system) 3.  Restrictions to DD/DTC

§  Requirement of state permit

§  Restriction on quantity (NY: 36 cases per year)

§  Presence of “dry counties”

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Distribution Regulations (The Dry Counties) ¡  10% of the United States surface area

¡  18 millions people (5,5% of the U.S. population)

¡  33 states have a law which allow localities to prohibit the sale of liquor, including NY, CA and FL

¡  Kansas, Mississippi, Tennessee are states “dry by default”

¡  21 states have dry counties (around 500 localities) : the most important states are Arkansas, Kentucky (55/120), Texas(74/254) and Virginia.

¡  Only 17 states have laws which preclude the existence of any dry counties

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Distribution Regulations (The Dry Counties Map)

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Red : Dry Yellow : Moist Blue: Wet Grey: no data

Distribution Regulations (Legal: Granholm v. Held) 1.  Facts

¡  NY and MI laws allow in-state wineries to ship wine DTC (direct to consumer)

¡  But both prohibited out-of-state wineries from doing the same

¡  Small wineries challenged the state law of Michigan and New York state alleging that the state statues violated the Dormant Commerce Clause (Art I, Section 8, Clause 3)

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Distribution Regulations (Legal: Granholm v. Held) 2.  Procedural history

¡  District Courts :

¡  S.D.N.Y. denied plaintiff’s complain

¡  No data for MI

¡  Cours of Appeal:

¡  2 nd Cir. (NY): affirmed in part and reversed in part

¡  6th Cir. (MI) denied plaintiff’s complain

¡  Certiorari granted to the Supreme Court

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Distribution Regulations (Legal: Granholm v. Held) 3.  Supreme Court Holding

§  Both NY and Michigan statutes violated the Commerce clause, therefore are unconstitutional

§  No power for the state to enact anticompetitive laws discriminating sellers in others states

§  NY and MI were overruled and had to amend their statutes.

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Distribution Regulations (Federal Statutes: CARE Acts) 1.  the Comprehensive Alcohol Regulatory Effectiveness Act of

2010 – Status DIED

2.  the Community Alcohol Regulatory Effectiveness Act of 2011 – Status DIED

¡  Recognizing alcohol as a different from other consumer products

¡  Reaffirm the primary authority of the states to regulate Alcoholic Beverages

¡  Can allow state to enact statutes restricting or banning direct shipping

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Distribution Regulations (Federal Statutes: CARE Acts)

§  Bills supported by wholesalers associations (NBWA & WSWA)

§  Strong opposition of Representatives from California (including the Former Speaker Nancy Pelosy)

§  Neither voted by the Congress, probably never

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Sources ¡  http://www.vinexpo.com

¡  http://www.oiv.int

¡  http://www.supremecourt.gov

¡  http://www.-ttb.-gov

¡  http://www.sla.ny.gov

¡  hppt://www.wineandjurisprudence.org

¡  http://www.wineinstitute.org/

¡  http://westlaw.com

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Documents

Presentation M2_ 2014-2015