Eliot Ness, the famous and incorruptible prohibition agent, bravely led the successful effort to take down the infamous gangster and bootlegger known as Al Capone. In the 85 years that followed, the face of the alcohol industry has changed dramatically; however, some see the regulatory side – especially, those doing business in the craft beer industry – as strangely familiar.
The other day, the Wall Street Journal published an article discussing the antiquated processes in place by the Alcohol & Tobacco Tax and Trade Bureau (or “TTB”). The opinion piece described an encounter in which former Florida Gov. Jeb Bush met a craft brewer and discussed the issue of federal regulation with him. The brewer explained how craft breweries struggle in complying with federal laws that were enacted after the repeal of prohibition.
TTB is tasked with the responsibility of vetting anyone who wants to open a brewery (or make even minor changes to an existing one, such as adding a door). The application process can be daunting, and in many ways is as frustrating as buying a house. The paperwork never seems to end. Applicants are required to list every place they’ve lived and worked in previous years and to give lengthy disclosures about their finances, which many applicants are sensitive to.
Before I went to law school, I spent two summers interning with the agency and learned a great deal about the internal processes. Essentially, the TTB employees who process new brewery applications are charged with tasks that require a fairly in-depth understanding of several areas, including business law, real estate legalese, accounting principles, insurance law (all alcohol producers who pay taxes on their product must also have a tax bond), and a technical understanding of the methods used to produce alcohol. As if that wasn’t enough, the industry was turned on its head in 2010 with the explosion of that craft beer boom. Suddenly, on top of the already demanding expectations of the job, TTB’s workload dramatically increased.
Although clearing the hurdles of the federal government’s licensing process is arduous for many independent breweries, many still find their states’ restrictions to be even more frustrating. In 1933, prohibition was repealed by the 21st Amendment, and Section 2 of the amendment stated that is was up to the states to control alcohol that resided within their jurisdiction. This essentially meant that each state had its own philosophy about how to effectively regulate the newly legal industry. One major concern was trade practice arrangements known as “tied houses”, which were arrangements whereby a brewery would have a proprietary interest in a retail establishment such as a tavern, or would otherwise provide things of value to the retail establishment. Before prohibition, this was commonplace and the market became fiercely competitive. Once prohibition ended, states were determined to avoid this system by implementing the “three tiered system”, where producers, distributors, and retailers must remain independent of each other. As time progressed, these rules have to some degree become more flexible at the state level, as many states have begun allowing exceptions to accommodate the growing craft beer market.
Despite recent progress, the regulatory industry for alcohol is still quite challenged. As an example, just last year a popular wine festival in Sacramento was cancelled due to the California ABC’s reaction to a tweet that purportedly violated the state’s three tiered system as it pertains to alcohol producers promoting retailers.
Another common issue also relates to the regulation of tied houses, and arises where restaurant owners decide to open breweries. Many times the restaurants have already opened a brewery when a state official reads a press release that inadvertently outs the retailer (the restaurant) as also owning a producer (the brewery). Although some states create carve outs for such situations, many states have not and are then tasked with forcing an individual to relinquish ownership and control.
When will the madness end and how do we get there? Simply put, the craft industry has taken off at rocket speed, but is still being governed by a system that was created in the 1930’s. The state and federal governments do not want to be the stick in the mud at all times (no matter how much it seems that way), but unfortunately it will take time and citizen involvement before federal and state legislators fully understand the complicated net of regulations that have ensnared their favorite drinking establishments.
The bottom line is that we’ll get there eventually; it’s just a matter of when and how many unnecessary headaches are caused until then. In the meantime, you may want to go ahead and grab another brew because it could take a while.