January 27, 2016

Food and Beverage Law Update: January 2016

Holland & Knight Update
Nathan A. Adams IV | Thomas W. Brooke | Michael Brill Newman | Jason Hartley Barker

Key Issues Facing Food Retailers

Compliance and Cybersecurity: Consero Group surveyed the general counsel of Fortune 1,000 companies in June 2015 and learned that 60 percent still lack the proper preparation for a possible data breach. General counsel listed data privacy/security as a top priority, just behind compliance and ethics, including bribery and corruption training. Expect all three of these issues to remain on the front burner in 2016.

Mergers and Acquisitions: No large mergers and acquisitions occurred in the food industry in 2015, as they did in 2014 with the merger of Burger King and Tim Hortons, as well as Gold Gate Capital's acquisition of Red Lobster. As a result, 2016 is primed for more M&A activity. In 2015, several smaller acquisitions were of new concepts. For example, Whole Foods Market Inc. invested in Mendocino Farms, and KarpReilly LLC made three investments in 2015: in the 14-unit Fitlife Foods, the nine-unit Taylor Gourmet and the 14-unit Eureka! Restaurant Group LLC. Revolution Growth, owned by former America Online CEO Steve Case, invested in Sweetgreen and Cava Mezze Grill. Similarly, Hain Celestial Group Inc. partnered with Catterton to invest in the salad chain Chopt. Urban Outfitters Inc. bought the Vetri Family group of restaurants including the three-unit Pizzeria Vetri.

Uberizing Retail: New entrants into the food industry such as UberEATS, Amazon Prime Now, Postmates, GrubHub and Yelp – none of which make food – want to connect grocers, restaurants and other food retailers with customers on demand. Retailers such as H-E-B supermarkets are also moving quickly to develop apps to enable consumers to order food and have it delivered to their doors. Similarly, companies such as Blue Apron, Chefday, The Purple Carrot, Plated and HelloFresh are preparing meal kits or dinners-in-a-box for home delivery. Healthier menus and fewer preservatives and additives are common denominators. Others are developing apps simply to customize food orders.

Tips and Wages: Wage and hour and, in particular, tip litigation will continue to be central in the industry as reported in our previous issue. (See Holland & Knight's "Food and Beverage Law Update: October 2015.") In addition, local governments are passing "living wage" laws, which lift minimum wages and raise labor costs. Some restaurants are moving to a no-tipping policy, thereby raising wages for front- and back-of-the-house staff, and raising prices to compensate.

Key Issues Facing the Craft Beer Industry

According to the Brewers Association, as of the close of 2014, more than 3,400 craft breweries were operating in the United States. As the craft beer market continues its growth in 2016, craft breweries face a variety of obstacles, including regulatory issues at the state and federal level. Some of these key concerns are highlighted below.

Big Beer: In November 2015, global beer giants Anheuser-Busch InBev and SABMiller agreed to the terms of a massive combination transaction involving the two suppliers. The deal, which is subject to regulatory approval and likely to be consummated in the second half of 2016, will give the consolidated company an estimated 29 percent of the global beer market and will have a wide-ranging impact on the U.S. craft beer market. Areas that are likely to be affected include beer pricing and access to the hyper-competitive package beer market, the cost of critical inputs including hops and cans, and distribution. Anheuser-Busch InBev is not only the largest existing beer supplier in the U.S. (a position that will be fortified as the result of the transaction), but also the largest beer wholesaler in the U.S.

"Craft Brewer" Definitions: Many state laws establish production limits to qualify as and hold the privileges of a craft brewer (such as operating a restaurant or tasting room for direct sales to consumers). The Brewers Association has a definition of up to 6 million barrels per year, but many states have established different classifications.

Distributor Trade Practices: State laws generally prohibit distributors from offering inducements to retailers for shelf/tap handle placement or to carry certain beer brands over others. Federal and state laws and regulations prohibit or restrict the furnishing of things of value to retailers – including "pay to play" payments, "slotting" fees or allowances to secure shelf space, tap handles or free draft systems. These laws are designed to ensure a level playing field for all brands to compete in the marketplace. However, bars and stores often solicit payments for tap access or shelf space anyway. The U.S. Department of the Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB) and state alcohol beverage control agencies in California, Arizona, Florida, New York and Texas have conducted significant industry investigations and fined alcohol beverage suppliers and distributors for violations. The TTB has also been investigating supplier and distributor "category management" and "category captains," but has not brought any cases. This remains a gray area for federal and state regulatory enforcement.

Franchise Protection Laws: State laws governing the contractual relationships between breweries and their distributors impose restrictions on the ability of a brewery to change or negotiate better terms with a distributor. These laws generally require "good cause" and notice for termination of distributors or payment of fair market value compensation. Craft brewers seek "carve-outs" to exempt them from restrictions. Examples of carve-out states include Arkansas (less than 30,000 barrels per year) and Nevada (selling less than 2,000 barrels within the state in a calendar year).

Excise Taxation: Recent legislation sought by the Brewers Association would lower the federal excise tax for craft breweries. The Craft Beverage Modernization and Tax Reform Act introduced in the U.S. Senate in June 2015 would reduce federal excise taxes (and compliance burdens and regulations) on breweries. For domestic breweries that produce less than 2 million barrels per year, the excise tax would be reduced to $3.50/barrel on the first 60,000 barrels and $16/barrel on quantities between 60,000 and 2 million barrels. For domestic breweries that produce more than 2 million barrels per year, the excise tax would be to $16/barrel on their first 6 million barrels. The federal excise tax would remain at $18/barrel for breweries producing more than 6 million barrels annually.

Labeling:For labeling purposes, federal TTB regulations contain no definition of the term "craft." Private class actions by consumers have sought to challenge use of "craft" and similar terms by large-volume manufacturers as consumer fraud. For example, a consumer class brought a case against MillerCoors, claiming that consumers purchased Blue Moon beer, believing that Blue Moon was a "craft" beer in reliance on its advertising, its placement among other craft beers and the premium price that it commanded. MillerCoors' defense has been that there's no legal definition for "craft beer." In October 2015, the suit was dismissed and the plaintiff was granted leave to amend.

Participation in Beer Festivals/Farmers' Markets: States regulate brewery participation and permitted activities at beer festivals, samplings and farmers' markets. States generally require non-profit temporary licenses to authorize sales or service of beer at beer festivals or similar events. Maryland, California and some other states also require special licenses or permits for sales of beer at farmers' markets. New Jersey recently introduced legislation that would permit breweries to sell beer for off-premise consumption and sampling at farmers' markets. California will allow sampling next year.

Sales at the Brewery/Growler Sales: An increasing number of states authorize tap rooms and sales for off-sale consumption of beer, including by filling "growlers" (refillable containers brought by consumers). State laws generally prohibit "tied houses," where manufacturers control retail outlets. However, state law exceptions can allow for breweries to operate tap rooms or beer gardens at the breweries or at off-site locations. State laws are also expanding to allow both breweries and brew pubs to sell growlers.

Self-Distribution: States generally prohibit vertical integration by mandating a "three-tier" system separating manufacturing, distribution, and retail, but self-distribution laws in 34 states provide a work-around subject to production or self-distribution volume limits. For example, a "craft brewer" in Illinois can self-distribute if the brewer is either a licensed brewer or licensed non-resident dealer that does not manufacture more than 465,000 gallons of beer per year. In North Carolina, a brewery that sells fewer than 25,000 barrels per year may self-distribute.

Spent Grain: The U.S. Food and Drug Administration (FDA) recently announced that it would hold off on proposed rule changes on handling and transporting spent grain that would have increased costs of up to $13 million per brewer for breweries that sell spent grain for animal feed. Under the proposed rule, such breweries would be classified as animal food producers and be subject to a new set of rules and regulations.

Trademark/Intellectual Property: There are a variety of ongoing conflicts among brewers relating to use of the beer brand names and label designs. The proliferation of craft breweries has created confusion in the market and led to various trademark and trade dress infringement legal actions. See, e.g.,Brooklyn Brewery Corp. v. Black Ops Brewing, Inc., No. 1:15-cv-01656, 2016 WL 80632 (E.D. Cal. Jan. 7, 2016) (enjoining use of the mark "Black Ops Brewing, "Black Ops" and "blackopsbrewery.com").

The foregoing list is not meant to be exhaustive and, as evidenced above, many of these issues need to be evaluated on a state-by-state basis. As craft beer continues to proliferate, more regulatory issues are certain to emerge.

Regulation and Legislation

FDA Deciding Whether to Regulate Use of "Natural" in Food Labeling

On Dec. 24, 2015, the FDA extended the period for public comments on the use of the term "natural" on food labeling. The FDA is asking: 1) whether it is appropriate to define the term "natural"; 2) if so, how the agency should define "natural"; and 3) how the agency should determine the appropriate use of the term on food labels. The deadline for comments is now May 10, 2016.

Retail Delicatessens to be Audited

The U.S. Department of Agriculture's (USDA) Food Safety and Inspection Service (FSIS) has launched a year-long, nationwide pilot project to determine whether retail delicatessens are following best practices to control Listeria monocytogenes. Investigators will assess practices for product handling, cleaning and sanitizing, facility and equipment controls, and employee practices.

Bill Proposes Eliminating Strict Liability for Misdemeanor Offenses

The Criminal Code Improvement Act of 2015, introduced in November 2015, proposes to eliminate the strict liability standard for misdemeanor offenses that the FDA has utilized since at least 2010 in criminal prosecutions of corporations and officers to bring charges not requiring proof that the defendants had a criminal state of mind. In recent months, for example, government attorneys accepted guilty pleas from Eric and Ryan Jensen (cantaloupes), Austin "Jack" DeCoster and Peter DeCoster (eggs), and ConAgra Grocery Products Co. (peanut butter) simply because these executives and corporations were in charge when allegedly contaminated products reached the market.

60 Legislators Ask USDA to Delay Hog Slaughter Rule

Legislators have asked the U.S. Secretary of Agriculture to delay releasing a proposed modernization of hog slaughter inspection rules related to the hog Hazard Analysis and Critical Control Point-based Inspection Models Project.

Intellectual Property

Federal Court's Decision on Registering Offensive Trademarks Could Impact Choice of Names for Beverages and Restaurants

In a case involving the name of a band, "THE SLANTS," the U.S. Court of Appeals for the Federal Circuit recently held that the federal ban on registration of "scandalous" trademarks is unconstitutional. See In re Tam, No. 2014-1203, 2015 WL 9287035 (Fed. Cir. Dec. 22, 2015). This decision garnered a great deal of media attention, as it likely will impact the pending decision of the U.S. Court of Appeals for the Fourth Circuit over continued registration of trademarks used by the National Football League's (NFL) Washington, D.C., team. (See Holland & Knight's alert, "Federal Circuit: Statutory Bar on "Disparaging" Trademark Registrations Violates Free Speech," Dec. 23, 2015.) Depending on what happens in the Washington NFL case, the issue could end up before the U.S. Supreme Court.

Disputes over possibly offensive trademarks have not been restricted to the U.S. Patent and Trademark Office. Last year, the Flying Dog Brewery had to contend with the Michigan Liquor Control Commission's refusal to allow it to use the "RAGING B*TCH" trademark for one of its ales. The U.S. Court of Appeals for the Sixth Circuit rejected the state's authority to control the content of the label and found in favor of Flying Dog. See Flying Dog Brewery, LLP v. Mich. Liquor Control Comm'n, 597 Fed. Appx. 342 (6th Cir. 2015).

Should the Supreme Court affirm a ruling overturning the ban on scandalous marks, or not take a relevant case, more names not likely to be heard in polite conversation could be registered. One area where that is already happening is the craft beer market. Small brewers have long used double entendre and clever puns to attract attention and customers. Some have struggled to obtain registrations. For instance, the owners of the "LEFT NUT" and "NUT SACK" trademarks both had to spend considerable time and money in order to get federal protection.

If the First Amendment allows it, look for more racy, naughty and possibly offensive names for beers, ales and perhaps even restaurants and bars.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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