Competition in the Beverage Alcohol Industry Under the Microscope – Part 2
Adjusting and Focusing the Microscope Lens
By Robert M. Tobiassen[i]
“In basic research, the use of the electron microscope has revealed to us the complex universe of the cell, the basic unit of life.”
Gunter Blobel (1936 – 2018) Silesian German and American biologist and 1999 Nobel Prize laureate in Physiology
“The eye of a human being is a microscope, which makes the world seem bigger than it really is.”
Khalil Gibran (1883 -1931) Lebanese Poet and Writer
Activity and chatter around President Biden’s executive order on competition continues to grow.[ii] As you recall, of the 72 action items in the executive order (EO), two involve alcohol beverages.[iii] Essentially, the first covers consolidation in the industry at all tiers and the second covers whether the current unfair trade practice rules impede or pose obstacles for new entrants into the tiers. The Treasury Department is tasked with submitting a report on consolidation to the White House within 120 days from the date of the EO and Treasury and the Alcohol and Tobacco Tax and Trade Bureau (TTB) are tasked with submitting a report on unfair trade practices within 240 days. Consultation with the Federal Trade Commission and the Antitrust Division of the Justice Department is required.
Where is this microscope going? As the writers of the above quotations (with minds greater than mine) explain, the microscope enlarges things and magnifies the core features or components of the thing being closely examined.
Last Thursday morning, the Treasury Department published a Request for Information in the Federal Register[iv] for comments by “participants in the beer, wine, and spirits markets, consumer groups, public interest groups, and interested private parties” on both report topics. Comments are due no later than August 18, 2021, a short timeframe compared to other public comment opportunities published in the Federal Register. Personally, I was surprised that the Treasury Department published this Request for Information because it is not required by the EO and in-house personal at the relevant Federal agencies and commissions have the expertise to prepare the two reports.
Let’s take a look at scope of the Request for Information and what does it tell us about the focus of the microscope. The Supplementary Information discussion in the notice explains:
Section 5(j) directed the Secretary of the Treasury, in consultation with the Attorney General and the Chair of the Federal Trade Commission (FTC), to submit a report within 120 days ‘‘assessing the current market structure and conditions of competition [for beer, wine, and spirits], including an assessment of any threats to competition and barriers to new entrants.’’ The report is to include discussion of unlawful trade practices; patterns of consolidation in production, distribution, or retail markets; and ‘‘any unnecessary trade practice regulations of matters such as bottle sizes, permitting, or labeling that may unnecessarily inhibit competition.’’
Further, Section 5(k) of the Order directs the Treasury Secretary, through the Administrator of the Alcohol and Tobacco Tax and Trade Bureau (TTB), to consider within 240 days rulemaking updating TTB’s trade practice regulations, revising or rescinding any regulations that ‘‘unnecessarily inhibit competition,’’ and ‘‘reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries.’’
Consequently, to inform these efforts, we are seeking comment on these topics from participants in the beer, wine, and spirits markets, consumer groups,
public interest groups, and interested private parties.
Unfortunately, no reading of the tea leaves here in this text. Just a reiteration of the executive order. Normally, it is commendable for an agency to reach out to the public and interested parties for business and operational comments at the start of a regulatory process to best inform the agency as it moves forward.
However, there are a few differences here. First, the notice provides approximately a three-week comment period and one that falls within the high vacation season (even in the time of COVID vacations are happening this summer). In-house acquisition of relevant data and preparation and review of substantive comments by the public and interested parties is not likely or reasonable to expect here. Second, the notice makes clear that all comments and commenters will be posted on the TTB website, unlike public comments sought by the Office of the United States Trade Representative where business information may be identified as “business confidential” and not disclosed publicly.
This notice is asking companies and individuals for detailed information from all three tiers of the beer, wine, and distilled spirits industry about challenges and difficulties they face in the United States marketplace from consolidation and/or enforcement of unfair trade practice rules. Really??? Are commenters going to “spill the beans” about industry members and retailers upon whom they rely for the economic vitality of their businesses?
As a “modest proposal,”[v] there is a better two step approach here. On both topics mandated in the executive order, the Treasury Department, Alcohol and Tobacco Tax and Trade Bureau, Federal Trade Commission (FTC), and the Antitrust Division of the Justice Department currently hold a wealth of information. For example, on consolidations over the past two decades or more, the latter two Federal entities possess volumes of files on the review and approval (and in a few cases, the disapproval) of mergers and acquisitions in the beverage alcohol industry. A post-mortem review of those decisions would provide valuable information on whether the assumptions and conclusions of those approvals have played out as anticipated. This is particularly important at the retailer level given the reality that retailers fall outside of the unfair trade practice provisions of Federal Administration Act of 1935, except for consignment sales.
Moreover, as is well known in the beverage alcohol industry at all tiers, during the past five years (with designated funding by Congress through the appropriations process), TTB has undertaken intensive and nation-wide investigations of alleged unfair trade practice violations and pursued numerous enforcement actions and settlements. Yet TTB has produced only data-analytic conclusions of success and, at least to my knowledge, no analysis has been undertaken by TTB of the actual compliance impact of these numerous investigations and settlements. Mere numbers of offers in compromise (OIC) and the total dollars collected via the OICs, along with numerous stipulated suspensions tells the public nothing about the effectiveness of the expenditure of millions of dollars on these investigations during the past five years.
Professor Tim Wu, leading this EO project on the National Economic Council (NEC) at the White House stresses in his book “The Curse of Bigness: Antitrust in the New Gilded Age” that we need a “democratization of the merger process” where the public is better informed about the actions and decisions of the Federal Government in the antitrust arena.[vi] The four Federal Government entities cited above possess a wealth of information that should be compiled in the two required reports AND once those reports are public, then and only then, is it reasonable to expect public and interested party comments such as those sought by the Federal Register notice.
So, the tea leaves in the Federal Register notice do not really tell us much. But rarely do matters in Washington, DC operate in a vacuum; rather, frequently there are interconnections.
At the end of June, the Treasury Department released its report[vii] on the preliminary thinking about the new refund claim process for importers effective on January 1, 2023. Buried in the report, on pages 10-11, is a detailed discussion with data on how the CBMA tax benefits flow in a greater percentage to large companies and not the small and medium size enterprises thought to be “craft.” This discussion has absolutely no bearing on the refund claim framework. Looking back now, it is clear that the Treasury Department was preparing the CBMA report at the same time it was working with the White House on the EO. The core or essence of this short but detailed discussion in the CBMA report highlights an example where a benefit originally designed for “craft” aka small and medium size producers to make them more competitive within their industry, ultimately turned out to negate any pricing advantage to the “craft” players. Will there be an effort to revise (but not repeal) the CBMA? Not with the present Congress, for sure. But who knows where the White House and Congress will be on “competition policy” after the mid-term elections?
Stayed tuned…there may be a brave new world out there.[viii] What is the adjustment and focus of the microscope? Returning to the wisdom of our two quotation writers, what lessons will you learn about the object you may view and magnify by the microscope lens to understand its full details, features, and actions?
[i] Mr. Tobiassen is the former TTB Chief Counsel and is currently the President of the National Association of Beverage Importers (NABI), Washington, DC. The views expressed in this article are solely his views and are not the views of NABI or its Members. With respect to the discussion of the unfair trade practice review required by Section 5 (j) of the executive order, Mr. Tobiassen was a consultant for law firms and industry members during the recent and extensive TTB enforcement program and his comments about those investigations are based on public information from, the TTB website on the resolution of those investigations or other public information.
[ii] https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/
[iii] For more details on the executive order, please see the previous Booze Rule blog article on this matter from July 12, 2021 at https://www.beveragelaw.com/booze-rules/competition-in-the-beverage-alcohol-industry-now-under-the-microscope
[iv] https://www.govinfo.gov/content/pkg/FR-2021-07-28/pdf/2021-16115.pdf [iv] With apologies to Dr. Jonathan Swift at https://en.wikipedia.org/wiki/A_Modest_Proposal
[v] TTB letter report to Congress on unfair trade practice enforcement program, in October 2020 at https://www.ttb.gov/images/pdfs/tradepractice/fy20-report-faa-act-enforcement.pdf. TTB ends the letter report stating it cannot advise Congress of the impact on compliance by the alcohol industry.
[vi] The Curse of Bigness: Antitrust in the New Gilded Age (Columbia Global Reports 2018), pages 129-30.
[vii] https://www.ttb.gov/images/pdfs/treasury-cbma-import-claims-report-june-2021.pdf
[viii] With apologies to Aldous Huxley at https://en.wikipedia.org/wiki/Brave_New_World
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