1. Robert M. Tobiassen, Independent Compliance Consultant and Former TTB Chief Counsel, United States Treasury Department NABCA 22 nd Annual Legal Symposium on Alcohol Beverage Law and Regulations March 16, 2015, Alexandria, Virginia

2. Federal Alcohol Administration Act (FAA Act) (August 29,1935), Title 27, United States Code, Section 205(b)(3) “by furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value, …” Goal and focus of this presentation on “Thing of Value”: (1) What is it?, and (2) What are ways to deal with it? Planning tools for promotional practices and investigation factors.

3. History of where the “thing of value” concept came from. National Industrial Recovery Act (June 16, 1933) and Executive Order No. 6474, Creation of the Federal Alcohol Control Administration (December 4, 1933) to administer the Codes of Fair Competition that were promulgated by industry committees. These Code of Fair Competition introduced the concept of “thing of value.” Essentially, an industry created concept.

4. For example, Code of Fair Competition for the Distilled Spirits Industry (April 19, 1935 edition): Article V, Unfair Methods of Competition, Section 7, “Prizes and Premiums—To offer any prize, premium, gift, or other similar inducement to either a trade or a consumer buyer.” (Emphasis added.) Code of Fair Competition for the Alcoholic Beverage Wholesale Industry (April 19, 1935 edition):  Article VI, Unfair Methods of Competition (Applicable to Products of the Brewing Industry),  Section 6(b), “Loans and Guarantees—To furnish, give, or lend money or other thing of value, directly or indirectly…” (Emphasis added.)  Section 6(d), Signs, “(2) To pay any money or other thing of value for the privilege of placing or painting assign on the premises occupied by anyone selling products of the brewing industry for consumption…” (Emphasis added.)

5. So, how did “other thing of value” get into the FAA Act?  A practical response to urgent need for Federal legislation governing the alcohol industry following the Supreme Court decision Schechter Poultry Corporation v. United States on May 27, 1935, holding that the National Industry Recovery Act was unconstitutional. House Report No. 1542 (Committee on Ways and Means), 74 th Cong., 1 st Sess., on the Federal Alcohol Control Bill (H.R. 8870) explains the role of the previous Codes of Fair Competition and states: “In general it may be said that the bill incorporates the greater part of the Federal system of control which was enforced by the Government under the code.” See, Legislative History of the FAA Act, Appendix II (page 134) at https://archive.org/details/legislativehisto00unit https://archive.org/details/legislativehisto00unit  Suspect that many State alcohol laws adopted the terminology from the Codes of Fair Competition and/or the FAA Act.

6. What is a “thing of value?” Very broad concept.  FAA Act, 27 USC section 205(b) “Tied house”  To induce through any of the following means, any retailer…(3) by furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value, subject to such exceptions as the Secretary of the Treasury shall by regulation prescribe, having due regard for public health, the quantity and value of articles involved, established trade customs not contrary to the public interest and the purposes of this subsection;

7. So, how do you deal with it? (1) Prospective planning approach to developing promotional activities, and (2) Reactive or defensive response approach to TTB investigation.

8. Prospective Planning Approach. First…FAA Act regulations: Only a few specific examples of “thing of value” in the regulations in 27 Code of Federal Regulations (CFR) sections 6.41 to 6.45, such as special equipment price, free warehousing, or assistance in acquiring a license. Stein Distributing Company (9 th Circuit 1986) – Schematic diagrams (predates regulatory change) and labor for retail store reset. More important are the exceptions by regulations are authorized. Legislative history of FAA Act indicates that various Members of Congress had various ideas on exceptions but ultimately passed the problem to the agency to resolve by regulations.

9. Regulatory exceptions are codified at 27 CFR, Part 6- Tied-house, Subpart D, Exceptions. Note ATF Industry Circular 82-12, Question 4, advising that the failure to maintain the records under section 6.81 results in losing status as exception and becomes an “other things of value.” Administrative Procedure Act, 5 USC section 553(e) and 27 CFR section 70.701(c) allow any interested person to petition an agency like TTB to issue, amend or repeal a regulation such as the Subpart D, Exceptions.

10. Second…Is it really a pricing arrangement and not a “thing of value?” National Distributing Company (D.C. Circuit 1980) holding that sales below laid in cost throughout its sales area without conditions are not money or a thing of value but pricing arrangement) and Fedway (D.C. Circuit 1992) suggesting that giving of electronic goods based on quantity purchased by the retailer is “a pro-competitive ‘quantity discount,’ albeit one paid in electronic goods instead of by direct price discounts.” See, NPRM and Final Rule on initial unfair trade practice regulations in 1977- 80, on discounts and pricing arrangements at Notice 327, 44 Federal Register 45298, 45300-01 (August 1, 1979, and Final Rule in T.D. ATF- 74, 45 Federal Register 63242 (September 23, 1980) withdrew proposed regulations on pricing and discounts. No subsequent rulemaking and IRS Revenue Ruling 54-161 continues to govern as the general rule.

11. Resources on “pricing arrangements.” Rev. Ruling 54-161 Price Reductions, Rebates, Refunds, and Discounts Price reductions, rebates, refunds, and discounts given by a wholesale liquor dealer to a retail liquor dealer pursuant to an agreement made at the time of the sale of the merchandise involved are considered a part of the sales transaction, constituting reductions in price pursuant to the terms of the sale. Such transactions do not fall within the purview of section 5(b) of the Federal Alcohol Administration Act, provided they do not involve the imposition of any requirement upon the retailer to take and dispose of a certain quota of the wholesale dealer's products, or do not involve any of the other practices set forth in section 5(a) to 5(d), inclusive, of the Act. This view would hold irrespective of whether the quantity discount was prorated and allowed on each delivery, given in a lump sum after the entire quantity of merchandise purchased had been delivered, or based on dollar volume or on the quantity of merchandise purchased. Ordinarily, "free" goods are nothing more than price reductions in the same status as discounts and, similarly, are not within the purview of section 5(b) of the Federal Alcohol Administration Act. For example, if a wholesale liquor dealer agreed to "give" a retail liquor dealer a "free" case for each 10 cases purchased, such transaction is essentially a reduction in the usual price. However, if the amount of the product given free with the order is such that the pricing aspect is merely a subterfuge, the transaction would constitute a "gift" within the meaning of this section of the Federal Alcohol Administration Act.

12. Resources on “pricing arrangements” (continued). ATF Ruling 74-12, Unlawful Inducements. ATF Industry Circular 81-2, Pricing (Alcohol Pricing Type Transactions Under the FAA Act, (January 20, 1981). ATF Industry Circular 82-12,Questions and Answers on Unlawful Trade Practices Under the Federal Alcohol Administration Act, (November 11, 1982), Question 17, on Cumulative Discounts. ATF Ruling 83-3, Use of Dissimilar Goods as "Free Goods“. ATF Industry Circular 87-2, Depletion Allowance, (April 13, 1987).

13. Third…Do other specific provisions of the regulations apply to negate the scope of the Subpart D, Exceptions for a “thing of value?” That is, the section 205(b)(3) exceptions ONLY apply to section 205(b)(3) prohibitions. For example, the regulatory exceptions allow a temporary retailer (27 CFR section 6.85) BUT if you enter into an exclusive outlet arrangement with that retailer you violate FAA Act, 27 USC Section 205(a). Similarly, a slotting fee is a 27 USC 205(b)(4) violation so it is outside of the regulatory exceptions to section 205(b)(3).  “Pay to play” situation. * * * * * Ruling Request for Guidance: 27 CFR section 70.471 allows “(a)ny person who is in doubt as to any matter arising in connection with,” among other things, the FAA Act “may request a rulings thereon.”

14. Reactive Response or Defensive Strategies to TTB Investigation. What are the elements of a violation?  Industry Member (not a Retailer);  Means to induce (“thing of value” in the Section 205(b)(3) context);  Products offered for sale by others in interstate or foreign commerce are excluded (Primary Clause);  Exclusion, in whole or in part; and  Jurisdictional Clause: one of the three interstate or foreign commerce clauses.  Malt beverages violation requires additional element of similar State law. Balance of Power Shifts Since 1935: Industry member and Retailer.

15. Sanctions.  Warning/Admonitory Letter.  Offer in Compromise.  Suspension (first violation) or Revocation of Basic Permit. (Brewer as non-permit holder.)  Consent Decree.  Injunction.  Criminal Prosecution (Misdemeanor). (Title 27, U.S.C. Sections 204 (permit holder) and 207 (“person”))

16. First, consider regulations and pricing arrangement defenses as discussed earlier. Second, administrative action against a basic permit requires willfulness (Section 204(e)(1)). Willfulness standards by the courts: Arrow Distilleries (7 th Circuit 1940), Rex Wine (2 nd Circuit 1955), Distilled Spirits Brand (2 nd Circuit 1955), and Stein Distributing Company (9 th Circuit 1986). Versus Brown-Forman (6 th Circuit 1979) and Fedway Associates (D.C. Circuit 1992).

17. Third, building the investigation and case. Very resource intensive investigations for TTB and potentially disruptive to industry and retailers so decision to initiate unfair trade practice investigation is significant one.  TTB Trade Investigations Division – 55 to 60 investigators. Subpoena under 27 USC section 202. See, Serr v. Sullivan (3 rd Circuit 1968) and the regulations on Administrative Provisions promulgated in the 1994-95 rulemaking in Notice No. 794, 59 Federal Register 21698,29701 (April 26, 1994) and Final Rule in T.D. ATF-394, 60 Federal Register 20402, 20410-11 (April 26, 1995).  Friendly and unfriendly subpoenas.

18. Conclusions.  “Thing of Value” is a broad concept.  Ways to plan around in promotions.  Ways to defend in investigations. Thank you robert.tobiassen@gmail.com February 26, 2015