Tied House Laws and Category Management: A Continuing Quandary
On March 16, the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) published a list of frequently asked questions expanding further on a ruling issued in February on application of the federal “tied house law” to industry promotional activities, specifically category management practices employed by retailers.
TTB claims that a formal rulemaking to revise its tied house regulations is not necessary: “TTB Ruling 2016-1 merely provides guidance as to the plain meaning of the existing regulation under 27 CFR 6.99(b). It does not change TTB’s longstanding position, nor does it change the meaning of the plain language of this regulatory exception.” So let’s look at the plain language:
The act by an industry member [supplier or wholesaler] of providing a recommended shelf plan or shelf schematic for distilled spirits, wine, or malt beverages does not constitute a means to induce within the meaning of section 105(b)(3) of the [Federal Alcohol Administration (FAA)] Act.
That statement on its face is an open-ended authorization to provide shelf schematics. It says nothing about the products of other industry members or whether the plan is written on a napkin or in a sophisticated IT system that is used for inventory management at hundreds of stores.
Reading the regulation in the context of related regulations is not helpful. The prior section authorizes suppliers and wholesalers to assist retailers by affixing prices to products. Some may recall President George H.W. Bush being ridiculed because he expressed amazement at a supermarket scanner during the 1992 campaign. TTB regulations were published in 1995, and the end of affixing prices to containers was clearly drawing near.
Other sections of federal tied house regulations and the new FAQs raise the threat to retailer independence as a policy issue. Many alcohol beverage laws are intended to protect retailer independence, but regulators will be hard-pressed to show that the category management poses a threat to the independence of modern retailers who use the same practices for thousands of other items and who have no problem asserting their prerogatives to suppliers and wholesalers.
During the last two decades, the retail tier has changed dramatically. Technology has advanced light years; yet, TTB’s 1995 regulations remain the same. The law cited to authorize the regulations has not been revised since it was signed by President Franklin D. Roosevelt in 1935.
TTB’s FAQs further acknowledge that “the terms ‘category management’ and ‘category captain’ are not defined in the TTB regulations and can mean different things to different industry members.” That statement could be reasonably interpreted to mean that category management is simply not addressed in federal law, which certainly makes sense given the age of the FAA Act.
Category management principles are employed by a wide range of consumer products retailers. In 2015, the White House announced an initiative for the federal government to employ category management from the buyer’s perspective to make smarter purchases in “important spending areas like IT, transportation, travel, and professional services.”
Maximizing use of retail space provides more room for competing beer, wine and spirits offerings to consumers, which should reduce the potential for exclusion. These practices have been openly discussed for years at dozens of industry meetings in the presence of TTB executives. If TTB believes that category management is a pressing alcohol beverage control policy issue, industry members need basic definitions and fair notice of practices that lead to exclusion of competing products and a violation of the FAA Act.
TTB’s press release announcing the FAQs includes a commitment to the laudable goal of ensuring a level playing field through enforcement of the trade practices provisions of the Federal Alcohol Administration Act.” To the extent a federal agency can ensure an even playing field in any endeavor, a set of clear rules is required to provide the industry with fair notice and encourage voluntary compliance.
Absent new regulations or a clear authorization from Congress defining category management and potential problems, Ruling 2016-1 and the FAQs are likely to trigger dozens of new questions from industry members competing in a complex and diffuse area of interstate and international commerce. Beyond attempting to define the “problem,” a rulemaking process would also help TTB determine whether category management actually threatens an even playing field in the alcohol beverage industry or undermines any other legitimate federal policy goal.