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Alcohol Beverage Control Law

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Elizabeth Bagby

on 12 April 2017

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Transcript of Alcohol Beverage Control Law

Alcohol Beverage Control Law
Stephen G. Amato
Our story begins in 1933...
As Prohibition drew to a close, policymakers sought a way to curb the abuses of an industry that created enormous societal problems. John D. Rockefeller commissioned a study that hit upon the answer, and that work remains the foundational document for all ABC laws today.
The Three-Tier System
Kentucky's ABC system follows the three-tier structure, as do the systems in most states. The validity and integrity of this system have been consistently upheld in the courts and through legislative enactments.
So what is the three-tier system?
The three-tier system divides the alcoholic beverage industry into three distinct segments, each restricted to a particular service:
The three-tier regulatory system is based on an understanding that vertical integration in the industry (brewers/distillers owning distributors and retailers) could create entities so incredibly powerful that they could effectively beyond the influence of alcohol regulation. One of the side effects of this power would be to erode ABC laws and consistently push for deregulation.
How does this system work?
1. Tied-house laws:

a. Prohibit each tier from owning an interest in another tier, and

b. Prohibit suppliers and distributors from giving a retailer anything of value
2. Franchise laws
– designed to level the playing field between suppliers and distributors and, similar to tied-house laws, protect the independence of distributors
Rather than being a pyramid, the system tends to look more like an hourglass.
Distribution is the "constriction point" in the scheme, controlling the flow between the producers and the retailers. Distributors must have an in-state presence.
The two bottom tiers have the most accountability at a local level through compliance checks, audits and community pressure.
Granholm v. Heald,
544 U.S. 460 (2005)
In 2005, the Supreme Court rejected laws in New York and Michigan that allowed only in-state wineries to ship wine directly to buyers under a Dormant Commerce Clause rationale. The court took pains, however, to point out that this ruling would in no way invalidate three-tier systems.
"We have previously recognized that the three-tier system itself is 'unquestionably legitimate.'"
“The decision to invalidate the instant direct-shipment laws also does not call into question their three-tier systems’ constitutionality”
"With vertical integration, a supplier takes control of the manufacture, distribution, and retailing of alcoholic beverages, from top to bottom. The result is that individual retail establishments become tied to a particular supplier. When so tied, the retailer takes its orders from the supplier who controls it, including naturally the supplier's mandate to maximize sales."
Manuel v. State of Louisiana
, 2008 WL 1902437 (April 30, 2008 La. App. 3 Cir.)
"Under the three-tier system, the industry is divided into three tiers, each with its own service focus. No one tier controls another.   Further, individual firms do not grow so powerful in practice that they can out-muscle regulators."
Manuel v. State of Louisiana
Two kinds of laws effectuate this system:
"In addition, because of the very nature of their operations, firms in the wholesaling tier and the retailing tier have a local presence, which makes them more amenable to regulation and naturally keeps them accountable."
Manuel v. Louisiana
Every tier has experienced consolidation
Small producers - Craft brewers, micro-distilleries and small-farm wineries have exploded
These small producers seek exemptions from the three-tier system to distribute and sell their products themselves, and Kentucky law includes multiple examples of them
Also, there is policy debate over whether either of the two alcohol control systems (three-tier or state-based regulatory) are necessary.
Relevant Kentucky Statutes
KRS 243.157 – Microbrewery license

Permits licensee to sell malt beverages produced on the premises for on-premises and off-premises purposes without a distributor

Must have:
1. Retail drink license
2. Retail package license

Subject to reporting requirements

KRS 243.155 – Small farm winery license

Permits small farm winery to make and bottle wines, bottle wines produced at other small farm wineries, hold tastings subject to limits per patron, sell wine by the drink or by the package on the premises or at events, etc.

If it is sold or consumed, it must be in wet territory.

These licenses are exceptions to the three-tier system:

Allowing suppliers/producers to skip distributors and retailers entirely and become retailers themselves
Vertical integration of small producers is allowed under this system
This does put larger suppliers at a disadvantage, leading to some erosion of the three-tier system
KRS 243.0305 – Licensed distillers souvenir package sales

Distiller in wet territory that has a gift shop may sell souvenir packages at retail to visitors of legal drinking age

1. Limited to three liters per day per person

2. Even though the liquor can be delivered directly from the distillery to the gift shop, it is still invoiced to the wholesaler and from the wholesaler back to the distiller. This preserves the tier system on paper in this instance.

KRS 244.602-.606 – Beer franchise license

No brewer or importer can require or request a distributor to pay the brewer, nor can they accept any money from the distributor in exchange for the right to distribute the alcohol

Marketing fees are okay, though

Prevents brewers from basically ever terminating or failing to renew a contract with a distributor absent severe breaches listed under the statute.

Basic intention of the statute is to keep distributors and brewers at arms’ length and preserve the three-tier system

Relevant Kentucky Case Law
Huber Winery, et al v. Wilcher, et al
, No. 07-5128 (6th Cir. 2008)
Kentucky's statutory scheme prohibited out-of-state wineries from direct sales/shipping of wine to Kentucky customers, even though in-state wineries were allowed to do so.

In the wake of
, plaintiffs filed suit against the state over the laws. The state quickly worked to amend the laws, allowing shipping of wine purchased from wineries only if the actual purchase was made in-person.

District court nullified the in-person requirement, effectively opening up direct shipping subject to a two-case limit

Sixth Circuit affirmed, holding that requiring in-person sales effectively gave in-state sellers an advantage over out-of-state sellers and was illegal under the holding in

This holding slightly collapsed the three-tier system where wineries are concerned, as wineries could now ship directly to customers, bypassing the distribution and retail tiers.
Huber Winery v. Wilcher
Maxwell's Pic-Pac, Inc. v. Dehner,

739 F.3d 936 (6th Cir. 2014)
Kentucky bars grocery and convenience stores from selling package liquor and wine, even though drug stores and others can do so. Plaintiff argued that this violated Equal Protection under both the U.S. and Kentucky Constitutions.

The Sixth Circuit disagreed, stating that Kentucky had a legitimate state interest in limiting the widespread sale of package liquor and wine, and this restriction falls squarely within state powers to do so.

If anything, this holding shows the great deference courts will pay to state liquor law regulation schemes (so long as those schemes don't discriminate against out-of-state producers)

“We conclude that reasonably conceivable facts support the contention that grocery stores and gas stations pose a greater risk of exposing citizens to alcohol than do other retailers. A legislature could rationally believe that average citizens spend more time in grocery stores and gas stations than in other establishments."

Maxwell's Pic-Pac, Inc. v. Dehner
H.B. 168 - AN ACT relating to incompatible licenses
Signed into law by Gov. Beshear on March 20th, 2015

Kentucky Beer Wholesalers Association, Inc., v. George Widemann Brewing Company
, 302 S.W.2d 606 (Ky. 1957)

"[I]f the legislature had intended that a brewer's license and a distributor's license should be inconsistent with each other, then it would have so stated."
The new law amends KRS 243.110 to read:
(a) Each kind of license listed in KRS 243.040(1), (3), or (4) shall be incompatible with every other kind listed in KRS 243.040(1), (3), or (4), and no person holding a license of any of those kinds shall apply for or hold a license of any other kind listed in KRS 243.040(1), (3), or (4).

(b) A brewery holding a license listed in KRS 243.040(6) or (9) shall not apply for or hold a license listed in KRS 243.040(3) or (4).”

KRS 243.040 (1) Brewer’s License – Supplier/Producer
KRS 243.040 (3) Distributor's License
KRS 243.040 (4) Nonquota retail malt beverage package license
KRS 243.040(6) – Out-of-state malt beverage supplier’s license
KRS 243.040(9) – Limited out-of-state malt beverage supplier’s license
Essentially, this law closes a loophole that allowed brewers to own in-state distributors in violation of the three-tier system.
SB 81 - AN ACT relating to consumer products
Failed to pass the 2015 General Assembly Regular Session
This bill would have had a profound effect on Kentucky alcohol industry, providing more generous privileges to distillers to bring them more in line with small farm wineries and breweries
Numerous changes were proposed to Kentucky ABC law:
Expanded sampling privileges at distilleries to 3 ounces per customer per day (tripling the current amount).

Enabled small farm wineries to enter into “custom crush” agreements to produce wines for each other

Allowed distillers to give away by-products or non-alcoholic merchandise at a distillery tour

Allowed local option elections for:

1. Distilled spirit souvenir package sales by local distilleries

2. Allowing by the drink sales at marinas

3. Small farm wineries or golf courses

Created a sampling license that includes both free and paid samples

Allowed souvenir package sales at distillers in moist precincts that have authorized those sales

Permitted small farm wineries to sell unmarketable byproducts to distillers (pomace to be made into brandy)

This legislation passed the Senate, but died in the House.
Any questions?

859-231-8780, ext. 104

Stephen G. Amato
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