Purser Speaks on Care Act

FILED JULY 15, 2010

Dear Client:

With all the buzz and press about the Care Act lately, we thought we'd go strait to the source; so we dialed up NBWA chief Craig Purser last week to discuss the more controversial parts of the bill to get his perspective. You, my friends, are a fly on the wall.

BBD: How did the CARE Act come about?

Craig Purser: It has been something we have been thinking and talking about for a long time. NBWA first started talking with the Beer Institute in 2006 about the waves of litigation that were coming as a result of the Granholm decision. We were also in the throes of the Costco lawsuit against Washington at the time. But it goes back even before the Granholm decision.

You'll remember that we both heard often from [late industry consultant] Mark Rodman when this litigation was just beginning. I remember sitting with you and him six or eight years ago, and talking about what could be done federally to ensure that the erosion of state powers over alcohol under the 21st Amendment doesn't get out of control. Some of his suggestions were certainly much more ambitious than the CARE Act.

Then came the Granholm decision. Granholm was a very narrow decision about what the court recognized as discrimination between in-state and out-of-state wineries when dealing with direct to consumer sales. Central to Granholm was a compelling argument for market access, as it pertained to differential treatment between in-state and out-of-state wineries. The Supremes ruled in a 5 to 4 decision that states need to treat wineries the same regardless when dealing with direct to consumer sales whether they are located in the state or out.

BBD: But it didn't end there....

CP: If that had been the end of it, then I'm not sure the CARE Act would be necessary. After all, laws passed by state legislatures regulating wine sales are not NBWA's concern. There wouldn't be concern by states about defending their laws, as long as they weren't facially discriminatory against out-of-state wineries. But of course the litigation didn't stop there. In fact, it spurred many more lawsuits seeking to broaden the narrow language of the Granholm decision -- extending it to challenge volume caps and physical presence requirements, online retailers and license restrictions, supplier-owned wholesale operations, in-person purchase requirements and the like. The economic interests wanting to deregulate sought to broaden the interpretation of the dormant Commerce Clause to take down many, many regulations to suit their own economic interests.

During that same time frame, you had the nation's largest wine retailer [Costco], seeking to declare a whole host of existing state regulations on beer and wine -- laws that sought to keep a level playing field between market participants of differing sizes, laws that facilitated an orderly alcohol market, laws that promoted temperance and protected the public interest -- void under the Sherman Act.

Costco didn't like what they got as a result of the litigation, or what they got as a result of their efforts in the state legislature, and now they are seeking their third bite at the apple and turning to a new mechanism, the use of the ballot box through the referendum process, to further deregulate in their own favor.

It's interesting, Harry, but when the most recent discussions with suppliers began over a year and a half ago, someone said to me, 'Craig, nobody is trying to deregulate alcohol.' If you fast forward a year and a half later, and you look at the litigation, you look at the conflicts in the circuit courts, and you look at what's going on in Washington State, I don't think there's any doubt about what these economic interests are trying to do.

BBD: A brewery executive pointed out to me that the CARE Act wouldn't do anything about the situation in Washington State [where Costco is angling to put direct to retail sales, privatization and deregulation on the ballot as a referendum].

CP: That's mostly right. The CARE Act addresses litigation challenges which have impacted more than half the states - not referendums. Both the litigation and the WA referendums are very serious threats to the states' regulatory systems. We have to work to address both the litigation challenges and the Washington state situation because they are related. Whether through litigation or the use of the ballot box, those interested in deregulating alcohol for their economic interest must be countered.

And remember, the CARE Act still allows plaintiffs an ability to sue. The legislation seeks to clarify that state alcohol laws have a presumption of validity and that plaintiffs bear the burden of proof. And look, the CARE Act doesn't amend the FAA Act, because the supporters and co-sponsors don't want to disrupt that delicate balance between state and federal power that is provided by the FAA Act. In fact that balance has been tilted away from the states toward the courts as a result of the litigation.

BBD: But you have that language in the bill saying "any act of Congress". That could presumably include the FAA Act.

CP: If there are concerns about the language and those can be clarified, that's the kind of commentary that we would welcome. There's always going to opportunities for Congress to make changes to legislation but we don't have the pen. We'd love to hear from the suppliers and others directly to make this legislation better for everybody. I'm always concerned when we don't have a direct dialog going on. In the meantime, we will work with Congress to improve the legislation where it can be improved.

BBD: Well, I wonder if the suppliers aren't offering alternative language because without their support they may believe the bill will die in committee anyway.

CP: I think there's a wide variety of tactics being deployed here. Many of the opponents are extremely shrill and some are more reasonable in their criticism. But if we've said it once, we've said it a hundred times this is a marathon, not a sprint. While the legislation is barely three months old, with 124 cosponsors it's certainly something that's viable. It's early in the process. As supporters of the legislation, it's our job to try to move it forward. And that includes listening to the interests of others and working toward a positive result.

BBD: The bill is careful not to tread on lawsuits on laws that are facially discriminatory. But opponents seem to want to go beyond that, and bring down volume caps and face-to-face, like in the Massachusetts case...

CP: Well, facial discrimination is what many experts believe that Granholm was all about. The plain language of the decision says it all. I even remember watching Ken Starr on TV during the Granholm debate saying the case was about the narrow issue of discrimination between in-state and out-of-state wineries and direct to consumer sales. That goes to the whole issue of facial discrimination.

However, differential treatment based on size is something that was not a part of the Granholm decision in my view. You can talk about Massachusetts, but you must also look at Arizona. Both of those cases had very similar volume cap laws, and one was upheld [AZ] and one was invalidated [MA]. The decisions are in conflict, which creates even more confusion and uncertainty. And our concern is that those differential treatments for large and small manufacturers are pretty important to have. Why does it matter to beer? In many states, smaller brewers and brew pubs are allowed to do things that big guys cannot do such as self-distribute. That's something that small brewers are very interested in. That's how many of these great brands got started. That's part of the reason why in 1980 there were 50 breweries and today there are over 1,500. Small brewers also would like to have differential treatment for franchise laws and several states do. States should have the ability to maintain differential treatment laws that aren't facially discriminatory.

As you know, small brewers are pushing for differential treatment at the federal level on taxes. That is essential to HR 4278 and their companion Senate bill. Interestingly, a central talking point for this legislation is differential treatment for smaller producers as they seek to increase that definition of what small is.

BBD: Is this bill about protecting the three-tier system?

CP: The bill is about protecting the states' ability to regulate alcohol. Lord knows there are state alcohol laws that distributors don't like, brewers don't like, retailers don't like. This bill would maintain that the state legislature remains the best venue in which to address these likes and dislikes.

Harry, we have real chaos out there. We have at least four important areas of law that are in conflict, three at the important appellate level. Does a state like Texas have to allow uncontrollableliquorstore.com based in Fairbanks Alaska the exact same rights it allows the local C-Store that it does surprise inspections on? The 2nd Circuit said no, the Michigan district court said yes, and the 5th Circuit kinda said no, but they still haven't made that final yet. Confusion.

Google 'fake ID' and you get 7.9 million results. As states seek to protect minors can they require someone to prove they are 21 by buying alcohol in person? In KY that is unconstitutional, in IN it is ok. They are right across the river from each other. What are other states to make of this as they try to craft laws to protect their citizens?

If a state is concerned about a level retail playing field and/or the potential for vast amounts of cheap alcohol in the market, can they prohibit volume discount sales to retailers? In WA the appeals court said yes, and in MD, no. This is related to an issue in the United Kingdom that has that entire nation talking about alcohol pricing regulations.

Finally, can a state treat big producers differently than small producers, like Feds do on the small brewer tax rate for example? We have 2 courts giving the thumbs up, KY and AZ, but then we have MA saying no. I realize that the facts in these cases are different but Harry, you know that states treat the local brewpub differently than restaurant Mega Restaurant XYZ or Global Brewer ABC. Are states now on the hook for legal fees for these basic differentiations? Where does it stop?

There are other lawsuits too that all challenge state authorities. As a matter of fact within the last year every federal appellate circuit except the 8th and 11th have had a 21st Amendment case. This issue is getting more and more murky and states in these uncertain times need certainty that their core regulatory powers will be upheld.

This doesn't need to wait for another showdown in the US Supreme Court. Congress is a coequal part of government and can help restore the sanity and deference to state legislatures by passing the CARE Act to restore support for state attempts to regulate alcohol and stand up against well heeled economic interests that want to strike down these laws.

BBD: What about the brewers' fears of unintended consequences of the bill?

CP: Facts and fears are two separate things. The fact is this will help preserve the best alcohol regulatory regime in the world and one that works very well for beer. We have the most innovation, choice and variety for beer in the world. That is because of, not in spite of, state based alcohol regulation. Addressing emotional fears is another thing. NBWA's fears are manifested facts because of the real and intentional litigation attacks on the system. Many of the criticisms of this legislation have been centered on hypotheticals. And yet the folks who are affected by the litigation and who are trying to defend their laws, and who support the CARE Act, are dealing with real life facts. Critics want to talk about unintended consequences, while its supporters are dealing with real, intended consequences. With each passing day we are seeing more and more of the real motivation behind many of these deregulators. What's going on in Washington State is extremely intentional. It's not an accident.

BBD: Does the situation in Chicago also come into this?

CP: The CARE Act was in the works long before the Chicago lawsuit, but it's just another more recent example of broadening Granholm, and a troubling one.

Coors has an active lawsuit seeking to end the small brewer tax rate in Puerto Rico. Now in Chicago we've got ABI trying to expand the application of Granholm as they seek to purchase their largest distributor in Illinois. Remember the facts in Granholm included difficulty for out of state wineries to access the market while in state wineries could sell direct to consumers. ABI doesn't have access to market issues but alleges it is being discriminated against because the state denied it a wholesaler license. That is what I mean by expansion of Granholm.

ABI's decision to file a lawsuit under the dormant Commerce Clause has added a lot of stress in the system. Distributors are wondering what the long term intentions are. ABI worked to clarify their intentions through interviews with you and meetings with their distributors but previous comments made about driving more volume through branches, combined with the lawsuit, have created real concern. I wish they had chosen to go another way in Chicago. It will be interesting to see how it goes.

BBD: What about labeling and advertising? Won't this bill allow states to mandate 50 different label designs, like the New York UPC situation?

CP: Let's be clear about what happened in New York. That was about beverage containers as part of a trash law, it was not an alcohol law. The law applied equally to beer and non-alcohol beverages. The CARE Act is about alcohol laws so that's not a good example. The fact remains that states already have the power to regulate advertising and labeling. States can pass laws requiring differences in labels, and some states do. Texas and California already have special requirements for labeling and composition, for example, and the 3.2 states have specific requirements as well. As it relates to advertising, there have been several examples over the years where a state did not like a particular advertising program but advertising enjoys protection under the first amendment. Nothing would change under this law as it relates to granting states any new power or authority. I just don't see states going hog wild and passing punitive laws that would hurt good corporate citizens. And if they tried, I imagine brewers and distributors will work together to stop unreasonable efforts as they have done for 77 years.

BBD: You had the brouhaha about the A-B college fan can....

CP: Yes, but remember the fan can never really became a regulatory issue. It was more of a public relations problem. I think everybody can agree it was a program that maybe wasn't completely vetted and well-thought out. But nonetheless, it had nothing to do with the state's core powers under the 21st Amendment, and nothing in this bill would interfere with that. By not touching the FAA Act, the bill's authors' intention was not to create problems for manufacturers. That's not was this is about.

BBD: You do touch the Wilson Act though.....

CP: Oh yes. The venerable Wilson Act...The genesis of the Wilson Act has to do with the transportation of alcoholic beverages through dry jurisdictions. That was very practical when it was first passed in 1890. It would've been a lot easier to just address the dormant Commerce Clause issue head on. But this bill seeks to protect Granholm and specifically prohibit facial discrimination. Nearly forty states allow direct shipping to consumers in some form, but states should continue to be able to regulate the transportation of that alcohol.

Many states have volume limitations on how much you can personally import into the state. These limits are to ensure several things such as state excise taxes are collected and that the product is appropriately controlled. Folks may say 'that's just to ensure that the wholesaler gets his cut.' That's nonsense. That's to ensure that somebody who's got a big garage doesn't set up as an unlicensed alcohol distributor. If there's no limitation or no requirement, the state has less ability to effectively regulate that.

Ed. Note: Part II of this interview will run tomorrow.

ABI AND MODELO: NO REASON TO HURRY

While it's likely that AB InBev will eventually make a move to fully acquire Grupo Modelo, a new research note from ING says there is no reason to hurry. Now that they have won the arbitration hearing, ABI can "decide on the phasing in of the future steps in closing a deal on Modelo and in the meantime it can strengthen its balance sheet, solve potential anti-monopoly issues and focus on the US top-line recovery," writes ING analysts.

"If ABI could acquire an additional 16% stake in Modelo from the family shareholders, it would get control and roll out ZBB [zero based budgeting], they write. This, says ING "would also be the best scenario for the Modelo family shareholders." In all, they believe ABI and Modelo can reach a "win-win case" and "that the potential outcome for ABI has even improved."

BBD BRIEFS:

STELLA ARTOIS has kicked off a new campaign with the tagline: "She is a thing of beauty," reports Brand Week. Created by Mother New York, the ad kicks off with a shot depicting a 1960 cover of Vogue. Then it shows "a man enamored with a woman who is drinking Stella Artois beer." It will run in print and out-of-home in the U.S. for six months starting this week.

CONSUMER SPENDING SLOWS EVEN MORE. Not surprisingly, the oil spill in the Gulf wasn't good for consumer confidence, reports NRN. First Data's SpendTrend Report said average checks declined overall for the first time since January, down -0.5%, "led by hefty decreases at restaurants and retail outlets." Same-store dollar sales at restaurants grew only 3.3%, compared with growth of 6.3% in May. The article said that some of this is due to a decline in restaurant traffic and tourism at the Gulf during a normally busy time of year.

READERS SPEAK: In response to our article yesterday, many readers speculated that Sapporo could be looking at Rolling Rock. Mind you it's just speculation, but interesting nonetheless.

Until tomorrow, Harry

"Discretion is not the better part of biography."
Lytton Strachey

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