Flood of Labeling Lawsuits is Only First Wave

FILED MARCH 18, 2015

"The days where we could just all advertise a brand on the fact that it was beer, wine or spirits and it tasted good... are over," said attorney Chris Cole of Crowell & Moring, who is well-known for defending companies accused of false advertising and deceptive or unfair trade practices.

With the introduction and subsequent boom of craft products, "we are in a world where we are selling taste plus something else. Taste plus it's all natural, taste plus its handmade etc.," he continued. And as a result, the beverage alcohol industry is seeing a flood of new labeling/advertising lawsuits (Tito's, Maker's Mark, Angel's Envy, etc.) that it has never really had to review before.

PAST PRECEDENT: They may be new to alcohol beverage category, but class action lawsuits like these are not uncommon in the food category, which Chris says has been under "absolute attack" in recent years. At last count there were about 200 lawsuits filed over food labeling, many of which are over the term "all natural" because the Food & Drug Administration has never defined the phrase.

The rub is that attorneys are running out of targets in the food category. "I hate to say it... but you have a target on your head," Chris told a room full of suppliers at the NABCA legal symposium this week. He believes the cases filed thus far are only the "first wave."

TYPES OF CASES: As in any industry, there are a range of case sizes over essentially the same issue. Most of the ones we've reported on thus far sound like what Chris calls small, "BS cases" that affect a large swath of the category. For these type of cases attorneys "troll" media reports, FTC orders and state attorneys general actions to look for cases.

He says the reasons these types of labeling/advertising cases are going through the roof are threefold: (1) the recession put a lot of attorneys out of works; (2) these cases cost less to bring than product liability cases because those require experts; (3) class actions are not easily dismissed.

WHO IS A TARGET? One of the leading plaintiff lawyers is Tim Blood of
Blood Hurst & O'Reardon, who tells Chris his No. 1 criteria for picking cases is if the defendant is able to pay their judgement. "If your sales are not really significant, they're probably not going to look at you," he said.

DEFENSE: You may recall, most if not all of the spirits companies involved in these type of labeling lawsuits have argued that the TTB approved their label, so they're protected. "I think there are vulnerabilities to this defense," said Chris. The TTB is only required to pre-clear labels, not all advertising. "While you have a pretty strong argument for labeling, probably less so for advertising."

As we've reported, Chris thinks the cases against Tito's -- because they're the farthest along -- are likely to set the precedent going forward.

FRANCHISE LAWS: PICK YOUR BATTLES WISELY

Franchise laws have become a hot button issue in the beverage alcohol world in recent years, so we couldn't resist sharing some insights from an article in sister publication Beer Business Daily on how franchise laws affect distributor values.

FRANCHISE MATH: First of all, as you might expect, franchise laws enhance distributor values significantly - as much as 50%. "We do deals in the wine and spirits space, inside and outside franchise protected states. We've seen what they go for, and if you can sell your brands in a non-franchised protected state the price is significantly less," John O'Connor, founding partner at OMAC Beverage Advisors and former managing director at First Beverage Group, where he co-lead the mergers and acquisitions division, said during a recent distributor meeting.

He claims the average beer distributor makes 7.2% profit margin, according to the NBWA Distributor Productivity Report. The big wine and spirits wholesalers that aren't franchise protected have EBITDA margins of about 1.5%-4.5%. The McLane's of the world (owned by Warren Buffett), are much smaller at 1.5%-2% margins.

PICKING YOUR BATTLES: John's primary advice to distributors was let's not change the laws. "I'm a proponent of not changing laws and just doing what's right. Transition the brands if they don't like you. If you don't have a good relationship then get divorced from that supplier. If this thing goes to the court of public opinion, I'm not sure you win that one."

He used two examples, one from New York state and one in Missouri to illustrate his point. In New York, they have a carve out law that says if a supplier is less than 3% of a distributors' business, they can move those brands after paying fair market value. "So basically any small brand can kind of be moved back in forth within New York." And if it isn't franchise protected, that particular part of a distributor's business is valued less.

You'll recall, the Major Brands v Glazer's/Diageo case last year was all over both trade and mainstream news. In the end, a judge declared that yes, Major Brands had franchise protection, but the brands' move to Glazer's did not cause 'irreparable harm' to the overall business and they settled out of court.

"Now I don't know Glazer's, but they probably did get what they wanted," said John. But on the flipside, he believes their value went down as a result and possibly the value of every distributorship in the state "because I'm not sure they have franchise protection when you really think about it."

KEY TAKEAWAY: Franchise battles will most likely continue to be fought across all three categories, but the key takeaway from John's speech to distributors is: "think very carefully about what battles you pick to fight and whether you want that to be public or not."

COSTCO JOINS WAL-MART AND KROGER IN EFFORTS TO ADD SPIRIT SALES IN TX

Costco has joined Walmart and Kroger and the Texans for Consumer Freedom in their efforts to overturn laws in Texas that prohibit publicly owned companies from selling spirits. You'll recall, two bills (and one lawsuit) on the subject were filed in the state legislature by Senator Kelly Hancock and Representative Jason Isaac, but there has not been any reported movement on either one.

"Texas is the only state in the nation that allows private companies to participate in the retail sale of spirits but prohibits publicly traded companies from doing so," says Texans for Consumer Freedom spokesman Travis Thomas. "We are glad to be joined by Costco in our efforts to level the playing field for the retail sale of spirits so Texas consumers receive the choice, convenience and lower prices competition provides."

WSD BRIEFS:

AK GROCERY BILL KILLED IN SENATE COMMITTEE. Much to the dismay of Wal-Mart and Kroger, a Senate committee in Arkansas has rejected a bill to allow grocery stores in the state to sell wine from any winery. The current state law prohibits grocer from selling wines from anything other than a "small-farm winery," which is defined as one that makes no more than 250,000 barrels. Senate sponsor Jeremy Hutchinson says he will likely revise the bill and submit it again, reports a local affiliate.

BEAM SUNTORY DEBUTS FLAVORED TEQUILA. Beam Suntory is dipping its toes in the flavored tequila category with the launch of Hornitos Spiced Honey. The flavored variant is 100% blue agave infused with honey flavor and spices. Hornitos Spiced Honey is 70 proof and currently available for a suggested retail price of $20 a 750ml.

WASHINGTON BUD BREAK HISTORICALLY EARLY. Washington grape growers have already entered bud break for 2015. Some grenache at Tertulia Cellars in Walla Walla Valley has seen bud break and Leonetti Cellar and Figgins has seen bud break in sangiovese, according to Washington Wine Report. This year's break is about two weeks ahead of the early bud break last year that started April 5. "All it takes is one major freeze event in the Walla Walla Valley and we would be looking at some serious setbacks," says Ryan Driver, vineyard manager at Tertulia. Although Chris Figgins of Leonetti Cellar says an early bud break gives vines a chance to heal.

BUFFALO TRACE DEBUTS SEVENTH E.H TAYLOR VARIANT. Sazerac subsidiary Buffalo Trace Distillery has released Colonel E. H. Taylor, Jr. Cured Oak Bourbon Whiskey. The 100 proof, special release was aged for 17 years in oak barrels and is the seventh release in the E. H. Taylor collection. It follows the release of Old Fashioned Sour Mash Bourbon, Single Barrel Bourbon, Warehouse C Tornado Surviving Bourbon, Barrel Proof Bourbon, Straight Rye Whiskey, and Small Batch Bourbon. Cured Oak Bourbon will be available in late march with a suggested retail price of $70 a 750 ml.

Until tomorrow,
Emily

"Just living is not enough. One must have sunshine, freedom, and a
little flower." -- Hans Christian Andersen

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