Monday, June 6, 2011

Motion 414 - A Summary

Before I get into the meat of the analysis, remember 2 things:

1. This is not legal advice. Do not rely on it. If you want legal advice, talk to a lawyer.

2. This is just a Motion; it lays out an outline of what legislation would be attached to the Budget Bill; it is not legislation and none of this is law or even potentially law; nothing certain will be known until we have the final draft of the Budget Bill so any and all of this is likely to change in some respect before it hits Governor Walker's desk.

So, with that said, here is, in very summary form, what Motion 414 says:

Convert Local Wholesaler's License to a Statewide Permit - currently Wholesale licenses are issued by a local municipality affected by the distribution area of the Wholesaler; this would make a central agency (the Department of Revenue) responsible for licensing Wholesalers. There is a really lame "grandfather" that would let Brewers keep their wholesale licenses until Jan. 1, 2013.

Wholesalers' Permits - First, it eliminate the Wholesale Permit from the grasp of the Brewer. Brewers currently hold a panoply of permits/Licenses: Brewer/Brewpub Permits, Wholesale Licenses, Warehouse Licenses, Class B Liquor Licenses, Restaurant Licenses (potentially), among others. This particular provision eliminates the Wholesale License, but other provisions will strike all of the others as well and consolidate all of these activities under the Brewer/Brewpub Permit.
-- Interestingly, this provision does contain a "grandfather clause" that eliminates the right of Wholesalers to have retail licenses; although any Wholesaler currently holding a retail license [ed note: all of them] are allowed to keep theirs.
-- This provision also happens to be the one that allows this legislation to be in the Budget Bill at all, since it establishes a state funding source ($2500/Permit, up from $25/License) and one State Employee (Wholesale Czar).
-- Finally, no wholesaler can have any ownership interest in a brewery; though any current ownership interests may be kept. There was some debate about whether Wholesalers would have to actually divest these interests and this is one area to keep an eye on for the final draft. Luckily for the Brewers, Wholesalers aren't interested in divesting; unfortunately for Brewers, MillerCoors wants to prevent their distributors from investing in small breweries.

Bona Fide Wholesalers - Perhaps the biggest change to the law, this provision would require that any Wholesaler have a warehouse facility "capable of warehousing beer" and that beer must be physically unloaded and "at rest" before delivery to retail. Who does this impact? Wholesalers that simply pick up at an account and deliver straight to retail: Contract brewers; big-box retail/wholesalers (Costco/Sam's Club); Importers - in other words, people who gain a lot of efficiencies by not having a physical location. E.g., "the competition."
- This provision requires that a wholesaler must sell and deliver beer to "at least 25 retail licenses or to other wholesalers that do not have any direct or indirect interest in each other or in the wholesaler." I have no idea what this means. I suspect you don't either. Does the 25 include retailers and wholesalers? Or, can you be a wholesaler with only 1 wholesale account and 0 retail accounts? Can you be a wholesaler with only 1 wholesale account and 10 retail accounts or do you always need at least 25 retail accounts to deliver to any retail? "Direct or indirect interest in each other" - do you know what this means? A small list of "retailers" that count as 1: All Copps/Piggly Wiggly/Kroger/etc. in the state; all Steve's Liquors in the city of Madison; any restaurant chain with common ownership - Riley's/Samba/Brickhouse or Food Fight for example; all Walmart/Walgreen/Target in the State; all TGIFridays/Appleby's/Chili's in the state; etc.

Say you are a new Contract Brewer in Madison - essentially your business is to have beer made for you according to your recipe and then you deliver, Wholesale, because your beer is new and no distributor will touch you with a 10 foot pole - and you manage to score accounts with 3 Steve's Liquors, Riley's, Brickhouse, Samba, both Woodman's, The Cooper's Tavern, Bluephies, Johnny Delmonico's, Malt House, Barriques Fitchburg, Barriques Middleton, Barriques Monroe, Vintage Brewing, Vintage Downtown, Weary Traveler, Natt Spiel, Maduro, Argus, Star Liquor, Alchemy, Dexters, and Brasserie V. You'd have your 25 retail accounts right? Not so fast, you'd only have, at most, 13 under the law because of "direct or indirect ownership interests" shared by many of these (who knows what hidden cross-ownership is out there); you'd still need at least another 12 accounts. Good luck.

Of course, you could just get 1 distributor to do that for you, but how hard do you think they are going to work to sell and market your brand new beer, assuming they would even agree to distribute you (of course, you could sign over your distribution rights in Madison, in perpetuity, for free and they'll think about adding you to their account list that gets dropped off on an account's counter by some lackey who has no idea what your beer tastes like)? Yeah. Good luck.

Class A Licenses - A bit of Wholesaler arcanity that would make it harder for holders of Class A licenses (grocery stores and liquor stores that happen to hold Wholesale Licenses) to transfer those licenses.

Brewers - Of course, this is the part you are interested in, so let's dig in:
- Brewers can no longer hold Class A (off-premise only) or Class B (on or off-premise) Licenses. It also strips away a number of other rights that  brewer currently has, like: transport between premises, provide taste samples, hold a wholesale license, or hold a restaurant license (if issued after the Great Dane bill).
- The DOR must issue Brewers Permits and "create laws authorizing all of the following activities" [ed note: WTF? I don't think the DOR can "create laws" - only a legislature can do that, if I remember my civics correctly]
-- make beer
-- bottle/package/store beer [ed note: presumably "beer manufactured on the premises" and not just any beer]
-- transport beer between brewery premises
-- deliver to wholesalers
-- retail sale (on-premise) of beer manufactured on premises
-- retail sale (off-premise) of beer manufactured on the premises
-- retail sale (on or off-premise) of beer "manufactured on another brewery premises in this state"
-- provide free taste samples on the brewery premises or at a Class A premises (grocery store)
-- sell beer at the state fair or any county fairground

It also provides that a Brewer can have up to one other off-site retail premises where any of these activities (except brewing related activity) may take place.

Next, it discusses when a Brewer may self-distribute: if they manufacture less than 300K barrels (New Glarus is 100K bbls) "provided the brewer complies with the ... laws governing restrictions on dealings ... and ... distribution restrictions on wholesalers ... including those imposed on wholesalers." Does this mean that the Brewer must comply with the Wholesaler Permit requirements (e.g., 25 min retail accts, etc.?) or does this mean that the Brewer must comply with the Subheaded Sections below entitled "Restrictions on Dealings..." and "Distribution Restrictions..."? This kind of poor draftsmanship is epidemic throughout this entire document; one can only hope that any final draft of legislation would be somewhat more clear.

The next two don't make a whole lot of sense, but bear with me:
1) A brewer may now hold a Restaurant License. This is a good thing, Breweries can have restaurants on-site. Fantastic! But the Brewery can only serve beer (or non-alcoholic drinks). Remember? Breweries can't hold Class B licenses. Want to take your wife out, or your wine-snob friend? Great, but if they don't want beer, they can't have wine, or a mixed drink with dinner. How many restaurants succeed if they only serve beer or non-alcoholic drinks? I'll give you a hint: not many.

2) A Brewer can't hold an ownership share in a Wholesaler. Except a Brewer can hold an ownership in a Wholesaler - it just has to be less than 50%. Wait? What? A Wholesaler can't own any piece of a Brewer, but a Brewer can own up to 49% of a Wholesaler (as long as it is divested within 3 years)?! That makes no sense whatsoever. Except that Miller wants to own Wholesalers, even if for only 3 years at a time. And Wholesalers want Miller's money.

Out-of-State Shippers Permits - Basically, this says that any out-of-state brewery (let's call it Anheuser Busch) cannot deliver from the out-of-state brewer to the in-state brewery premises; it must deliver to a Wholesaler, unload it, and physically come to rest at the Wholesaler. And in any event, only entities without in-state address may get "Out-of-State Shippers" Permits. And, to comply with the Commerce Clause, any out-of-state shipper brewing less than 300K bbls may self-distribute here provided they comply with all of the restrictions imposed on Wholesalers (e.g., 25 min retail accounts or don't self-distribute, etc.)

Multiple Licenses - Brewers can't. Period. If it isn't under the Brewers' License you can't do it.

Restrictions on Dealings - redefines what a "successor wholesaler" is, in other words, redefines when Wholesalers get compensated for doing a shitty job and having their brand "discontinued" by the Brewery and the distribution sent to a different Wholesaler. I'll give you a hint on how it redefines when this happens: it's not "less often." This provision also liberally states that a Wholesaler must purchase from the "primary source of supply" for a brand. Nothing actually defines what a "Primary Source of Supply" is though. So, who knows what that means? Is a brewery a Primary Source of Supply? What about another distributor? What about another distributor in another state? What is a Secondary Source of Supply (implied by the existence of a "Primary")?

Distribution Restrictions - Brewers and Out-of-State Shippers are not Wholesalers [ed note: geez, just rub it in why don't ya]. Beer must be "unloaded and at rest" prior to delivery to retail accounts (i.e., Bona Fide Wholesaler)

So, that's about it. There's some details in there, but that's a pretty decent summary of a terribly written motion that will likely become a terribly written piece of legislation. Conspicuously, it says nothing about Brewpubs. So, presumably, Brewpubs will still be able to do everything they can currently do. Unless, of course, the final draft legislation is different from the Motion. That would never happen, though, would it?

6 comments:

  1. I thought the big complaint was that breweries wouldn't be able to sell/sample beer. It seems like they still can (in addition to being able to go sample it at stores).

    It also looks like they can still distribute their own beer (3 New Glarus Breweries worth). I see how the 25 unique licenses is a big hurdle for a brand new brewery (how long do they have to get up to 25? A year, a month, a week, a day?) How long did it take Lake Louie to get up to 25 licenses?

    My next question is: What's the difference between having a brewpub, and a brewer owning a restaurant? I assume that the idea of owning a restaurant is that it's located somewhere other than where the beer is made. But wouldn't this also prevent MillerCoors from starting/buying restaurants and controlling the selection there? Wouldn't food, wine, liquor and beer still be allowed to be served at Ale Asylum, Vintage Brewing, etc. since they could be considered brew pubs? Couldn't New Glarus Brewing could have a full scale restaurant on their premise, just not somewhere else? Even now, I didn't think a brewery could own a restaurant.

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  2. Couple of things:
    the 25 (unrelated) accounts for a wholesaler = Brennans. they have a wholesalers license if I remember correctly (all that boulder beer and avery products). this screws their 'exclusive' brands and ability to buy in bulk for all their stores.

    Hadn't thought about the contract brewers angle, so I'll have to think about that a bit.

    Brewers License: If the brewers license actually allows all those activities....great! But the motion states the the DOR can 'permit' the creation of regulations regarding blah, blah, blah. It doesn't say they have to do anything other than 'permit' (allow) the creation of laws regarding those activities. I know...splitting hairs.

    WholesalingBrewers: It doesn't mention the 25 account clause in that portion of the motion, so I don't think that's an issue. I didn't read any assumption that if they self-distribute they need to follow the same regulations of a 'bona-fide wholesaler'

    The restaurant thing is interesting. Can brewpubs self-distribute??? If so, call yourself a brewpub and all issues go away. What this does allow is for a brewery taproom to serve some kind of food (that's all a restaurant is afterall). If you want to serve anything other than prepackaged food (bags of chips or beef-sticks) you need a restaurant license. But it's just for the food. If you want liquor or wine - go to a brewpub (hinterland is another example besides great dane).

    As for the 300k barrel limit: I'm thinking Leinenkugels could self-distribute with this limit in place (as could NG).

    It's been interesting hearing distributor reps talking about this...'we want to keep abinbev from buying a distributor' Who Cares if ABINBEV owns a distributorship??? How much of their business is craft beer? If they purchase a distributorship and bury the craft beer book, don't breweries already have the ability to break ties if the loss of sales isn't caused by the brewery?

    The issues with the 3-tier system in wisconsin are better solved by modifying current laws, not by throwing them out and staring over with this very poorly written idea. It's a bit issue and a complicated system, all parties need to be in on the conversation (brewers, wholesalers, retailers).

    This is going to be fun to follow - cheers!

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  3. John,

    Regardless of whether people think of a place as a brewery or brewpub, the government defined the difference in the legal sense back in 2007 (another bill that was added to the budget behind everyone's backs). In short, a brewery can't serve food and can have a maximum of two brewing locations if they brew more than 4,000 barrels/year. A brewpub must serve food, can have a maximum of six locations and can't brew more than 10,000 barrels/year across its entire company. However, breweries that existed before the law was passed are exempt from the "no food" clause. Because of that, very few of Wisconsin's breweries are legally defined as brewpubs. Great Dane is because the company brews more than 4,000 barrels/year and has more than two locations, and Vintage is because the company wasn't a brewery of any sort before the 2007 law passed (and therefore needed to be a brewpub to serve food).

    Dave, the 10,000 barrel/year cap on brewpubs is why most breweries probably won't want to declare themselves as brewpubs to avoid the new legislation if it passes.

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  4. -- Interestingly, this provision does contain a "grandfather clause" that eliminates the right of Wholesalers to have retail licenses; although any Wholesaler currently holding a retail license [ed note: all of them] are allowed to keep theirs.

    My reading of Chp 125.28 shows that wholesalers already can't have retail license:

    (b) Except as provided in par. (c) and s. 125.29, beginning on May 5, 1994, a wholesaler’s license may not be issued to any of the following:
    1. A person holding one or more of the following licenses or permits:
    a. A Class “A” license issued under s. 125.25.
    b. A Class “B” license issued under s. 125.26, except as pro- vided in s. 125.29 (4).
    c. A Class “B” permit issued under s. 125.27, except as pro- vided in s. 125.29 (4).
    d. An industrial fermented malt beverages permit issued under s. 125.275.
    e. A brewpub permit issued under s. 125.295.
    2. A person who has a direct or indirect ownership interest in a premises operating under one or more of the licenses or permits listed in subd. 1. a. to e.
    (c) 1. A person who holds a wholesaler’s license and a license or permit specified in par. (b) 1., all of which licenses or permits were issued before May 5, 1994, may, subject to ss. 125.04 and 125.12, renew and continue to hold all of the licenses or permits.

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  5. -- This provision also happens to be the one that allows this legislation to be in the Budget Bill at all, since it establishes a state funding source ($2500/Permit, up from $25/License) and one State Employee (Wholesale Czar).

    My interpretation:
    The fee may not exceed $2,500. Therefore it could be anything less than or equal to $2,500, and it will probably be proportionate to the brewery's output.

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  6. The issue of "at least 25 retail licenses or to other wholesalers that do not have any direct or indirect interest in each other or in the wholesaler" is probably more defined than we think. Similar language appears in later in Chapter 125 relating to intoxicating liquors: 125.54 (7) 2.

    "A permittee under this section shall annually sell and deliver intoxicating liquor to at least 10 retail licensees or permit- tees that do not have any direct or indirect interest in each other or in the permittee under this section."

    As for the "direct or indirect" interest. That language is used throughout Chapter 125 and has been clarified by the Department of Revenue in Tax 8.87 of the Wisconsin Administrative Code. It gives a long list of examples of direct and indirect interests.

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