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Coke Gets Served (and Pommelled)

Last week’s U.S. Supreme Court decision, Pom v. Coca-Cola, is not just about juice. It has massive implications for small brewers, big distillers and all other alcohol beverage marketers. It shows that TTB rules and other agency rules set a floor, not a ceiling, on how companies need to market their products. It shows that the government is only a part of the web of review, in concert with competitors. Just as we predicted that Pom would win this case, we now predict that some alcohol beverage companies will soon take legal action against others, even though such cases, other than trademark cases, were very rare in the past 50 years.

It was bad enough for Coke when Pom called out Coke for going quite a bit too far in posing its apple juice as pomegranate juice. It got even worse when various Supreme Court Justices suggested, orally, that Coke was trying to trick people. And on June 12, 2014 it got even worse, when the Supreme Court unanimously disagreed with Coke’s position. In Pom v. Coca-Cola, the Court said, if there is trickery on food labels, and it hurts a competitor, of course they can do something about it, even if FDA (for whatever reason) does not.

Pom and the Supreme Court have made it clear that one company can go after another for dubious labeling, and the government no longer has all the authority in this area.

The Court said, rather than the Food, Drug & Cosmetic Act (FDCA) knocking out the Lanham Act, the two Acts can happily coexist, complement each other, and provide synergy. The former protects consumers as to health and safety. The latter protects competitors as to commercial interests.

We have lots more coverage of this important case, and the background, in this post from earlier this year.

Coke went astray fairly early in the multi-year litigation, trying to invent a theory under which FDA “approved” the label at issue. FDA did no such thing. To approve is an act, and FDA’s posture here was the opposite of an act. FDA did not condone, approve or disapprove the label at issue. Perhaps FDA was busy with many other pressing concerns, or it was a gray area. This is in stark contrast to how TTB handles most labels — with a rigorous, case-by-case, and explicit pre-market approval regime. To say that FDA approved the Minute Maid label is like Donald Trump getting one $500 haircut per week, every week, calling it a business expense and taking an IRS deduction for 10 years — then saying the IRS approves of his hairstyle and his deduction. The IRS would, of course, have done no such thing. Rather, it would be the case that the IRS, simply, had so far refrained from any adverse action. To use the terms in the opinion, there is a difference between approving something and merely tolerating it.

There are not a lot of juicy quotes in the opinion, but the case does have massive implications. The Court noted, in a realistic way, that:

FDA … does not have the same perspective or expertise in assessing market dynamics that day-to-day competitors possess. Competitors who manufacture or distribute products have detailed knowledge regarding how consumers rely upon certain sales and marketing strategies. Their awareness of unfair competition practices may be far more immediate and accurate than that of agency rulemakers and regulators. Lanham Act suits draw upon this market expertise by empowering private parties to sue competitors to protect their interests on a case-by-case basis.

It is very refreshing to see Washington give some credit to those who work in an industry long-term, every day. The huge implications of this case would seem to be:

  1. A massive shift of enforcement authority, from bureaucrats in Washington, to private parties all around the world. Professor John Duffy noted:  “A second important point about POM is that the reasoning in the decision shows the Supreme Court’s increasingly ambivalent approach to administrative regulation.  More than a century ago, administrative agencies were often cast in nearly heroic terms; they were thought to be wise experts who could bring intelligent, centralized regulation to remedy the abusive marketplace tactics.  In yesterday’s decision, however, the Court shows just how little is left of that notion.” Duffy nails it, saying: “It is … hard not to think that some of the reasoning in this case reflects a new skepticism – or perhaps it should be described as a healthy realism – about the capabilities of administrative agencies.”
    1. Justice Roberts, in the oral arguments, actually said, in reference to misleading labels:  “What does the FDA know about that? I mean, I would understand if it was the FTC or something like that, but I don’t know that the FDA has any expertise in terms of consumer confusion apart from any health issues.”
  2. The ready ability of Coke to police Pepsi’s business practices, Bud to police Coors, Gallo to police other wine companies, Bacardi to regulate Diageo — on and on. Not only can the big regulate the big, but the small can regulate the big and vice versa. It could be a free-for-all. Duffy explained that this case, along with another:  “is almost certain to produce a significant expansion in competitors bringing Lanham Act claims against each other over false or misleading statements.”
    1. Even more, this means little craft brewers and distillers can go after big guys with a claim that:  “you are BS’ing about craft, and it hurts us.”
    2. An advertising law expert said:  “It opens the floodgates to increased litigation. The message to marketers is now that compliance with the FDA is only a first step and is by no means insurance against other types of claims.”
  3. This will give us a bit of a taste of what libertarian-style government might look like, and a bit of relief from command-and-control government, perhaps.
  4. Even though there is affirmative pre-market approval for alcohol beverages, and this is not the case for most foods and other beverages, it would seem that the same basic principles apply. It would seem that the FAA Act was likewise not intended to impair or preclude the Lanham Act.
  5. On behalf of food clients, food lawyers now get to serve as mini-FDAs, and private TTB lawyers have been deputized to serve as mini-TTBs (on behalf of any aggrieved beverage company clients).
  6. This makes it easy for TTB and FDA to deflect many complaints, and remind the aggrieved that they have a ready means for self-help.
  7. After many decades to the contrary it may turn out that the federal food and beverage laws are a floor, rather than a ceiling. CSPI said:  “The Court recognized that companies don’t have a safe haven from being sued for deception just by complying with FDA’s minimal regulations.”

It will be ironic indeed when a competing food company goes after Pom. But Pom seems more than able to protect itself and I have rarely seen a better example of a company being on the defensive, after the various FTC inquiries — and turning it into such a major victory. There should be a cliche about turning bitter fruits into profitable fruit juices.

TTB Eases Way Up on Formulas for Many Beers

There is some big news from TTB, via dcbrewlaw. TTB has recently decided to ease up on the formula requirements for malt beverages made with common ingredients and processes such as some barrel aging, as well as various fruits and spices. This should help considerably with TTB’s overwhelming workload, and the related delays.

At dcbrewlaw, Dan reports:

There is good news for brewers who are tired of waiting for formula approvals from TTB (currently 74 days):  you may not need it. On June 5, 2014, TTB issued a fairly significant ruling, Ingredients and Processes Used in the Production of Beer Not Subject to Formula Requirements. The ruling clearly spells out which Exempt Ingredients and Processes are now deemed “traditional” and, therefore, do not require a TTB formula approval.

The new ruling expands upon the rules as of 2013. Here are two good examples of products that needed formula approval under the old rules, before this week, and will continue to need a formula approval prior to label approval:  Bud Light Lime; Joose. By contrast, here are two products that would no longer need formula approval:  Bourbon County, Harlem. On each, the formula is highlighted in yellow. Read more about TTB Ruling 2014-4 at dcbrewlaw and TTB’s site.

101 Days

101

A short while ago I went to see why “that easy label” is still pending, after filing it while snow was still on the ground and waiting well past spring, into summer. I was shocked* and horrified to see the above. The average processing time for spirits labels is now, as of today, way past a month or two. I am startled to see it’s past 100 days. I don’t recall it ever getting past 45 days or so, back in the days of shutdowns, Rep. Gingrich fighting with President Clinton, Tea Partiers fighting President Obama, and so forth. I find myself talking about the same pending labels, over and over again, week after week and month after month.

It is starting to feel like a crisis for many spirits companies, so far as I can tell. Maybe the big ones can plan around this and tolerate this, but waits of this magnitude are devastating for most companies, from what I can see. Why all of a sudden? Wasn’t the power of the internet and computers, and streamlining, supposed to do approximately the opposite? For those highly interested, we have an internally prepared chart showing how this has gradually or not so gradually gotten worse over the past 7 years. It is available upon request.

May 30, 2014 Updatethis now says 69 days, rather than 101, and though painful, that makes a lot more sense.
June 1, 2014 Updateonly 62 days!

My main purpose in grabbing the above screenshot is to hold out the vague, possibly naive, hope that this will mark the low point, and things somehow will get better from here. I look forward to the day when it will be hard to believe it ever took more than three months to get an “easy” whiskey label approved. Just like it is now hard to believe it ever took less than a few days (way back, decades ago). On a brighter note, it is currently taking less than a month to get a wine label approved.

* Even though the number above clearly says 101 days, and the labeling division’s phone message says the same as of today, it seems this can not possibly be correct based on the date to the right of the total. In any event, something is clearly wrong, in a protracted way. Though all this is fairly hard to believe, it is clearly true that TTB approved 667 DSP labels in the 4/26 to 5/26 period of 2013 — and only 41% as many in the same time period of 2014 (272 labels). In the same month of 2012, TTB approved 731 spirits labels. This spirits label, by way of example, took nearly six months.

Palcohol FAQ

surrenderPalcohol is probably the biggest story in my 25 years of working with alcohol beverage law. As much or more media interest as compared to absinthe or Four Loko, or even direct shipping. Palcohol went from zero results on Google as of April 18th to more than 2 million as of this writing (and 4 million as of May 2). By some measures it’s bigger than Rhianna.* So, what happened? This FAQ expands on and updates our original blog post first published on April 18.

  1. What is Palcohol?
    It is powderized alcohol. By the way, we don’t represent Palcohol or speak for them. The technology is explained here.
  2. Why does it matter?
    It is much more portable as compared to heavy liquids. It is not clear that the US Government has ever approved a powdered alcohol in the past, even though the technology has been around since the 1970s.
  3. Is it approved or not?
    The Palcohol company has made a huge amount of progress toward bringing this to stores. They have about five formula approvals and a distilling permit. These are big projects and major accomplishments. Formula approval usually takes a couple of months and involves a thorough review of all ingredients and methods. The permit usually takes six months or more and involves background checks, plant diagrams, lists of equipment and a review of security measures. Beyond all this, the company secured label approval for about five powdered alcohol products on April 8. This is the last step in the federal system. For two weeks Lipsmark (the company) had all federal approvals necessary to make and sell the product. Then, on April 21, Lipsmark “voluntarily” “surrendered” those approvals. It is not yet clear why the Palcohol company would do this. It is not yet clear if or when the company will secure new and replacement approvals. The government has no authority to simply cancel the approvals, so that is not a plausible scenario. The government simply says the approvals were “issued in error.” The company has said it is a technical issue related to the labeling only, not the underlying concept, product or formulas, and they are working with TTB to remove this issue. It probably relates to making it clear how the taxable commodity (the quantity of alcohol) can and should be measured and disclosed on the labels.
  4. Is it good or bad?
    Both.
    The good is, innovation is good and this is innovative and indeed, perhaps, transformative. If you are an active camper, for example, it could be great. The good is, this is likely to encourage a substantial debate about an important public policy issue, and perhaps it can be done in a mature and fruitful way, allowing our system to show that it can still function well. In addition, this could spark the relevant agencies to get with the times and modernize some archaic alcohol control measures, fairly and properly. Also, this may be a great opportunity for the marketplace (of dollars and not just ideas) to play a key role in deciding this, as it has done so often in the past. For almost 100 years, most governments and tut-tutters around the world assumed the sky would fall if absinthe got legalized. The opposite happened. Upon legalization in 2007, a lot of the taboo and fascination evaporated (because, sadly and plainly, American consumers are not wild about anise-type tastes.)
    The bad is, it opens up many new ways to abuse alcohol. For example, it’s just a matter of time before some punk tries to snort this and puts his antics on YouTube. But on a more pedestrian level, think about Applebees and Outback. Last year, most customers would walk in and buy a beer or Margarita for $6 or more apiece. By next year, will they sit down and instead dump a packet of Palcohol into the house-provided tap water — buying zero drinks on the premises? That would be a calamity for the hundreds of thousands of bars and restaurants around the country, in that they derive a huge percentage of revenue and profits from traditional alcohol beverages. The same with cruise lines, airplanes, concerts, sporting events, on and on. This has the potential to be highly disruptive, like Amazon selling books — or Amazon selling wine. (5/8/2014 edit; Mark Phillips does quite a good job rebutting most of this here.)
  5. Why is it so controversial?
    Because of all the bad and good at point 4 above.
  6. When can I get some?
    It will probably be several months, at least. Even if Lipsmark did not surrender the label approvals, they would still have lots of work to do before racking up some sales. They need to find and sell through wholesalers and get a bunch of agency approvals in every state they sell into. I talked to one New York expert, for example, and he tended to say New York would not go fast to allow this. Ironically, Lipsmark probably has all necessary US approvals by which to make this in Arizona and sell this in countries outside the US (or could easily get such approvals).
  7. Is it new?
    sure
    The technology is not new. It has been around since the 1970s. Here is a 1977 newspaper article and a 1978 article about another powderized alcohol product called SureShot. Mike Hill was the force behind SureShot according to the articles; he has recently explained by phone and email that he got past federal approval to test marketing and commercialization, but his company was never able to overcome various technical problems such as clumping, bulk, expense, and the need to use warm water to dissolve the beads. Our earlier post mentions the past patents on similar products. The new part is that, at least for the first time in 30 or more years, Palcohol actually got past federal formula and label approval, even if only temporarily. This is a big and important step and not to be minimized.
  8. What agency?
    TTB did most all the review and approval here. TTB is a sub-unit of the US Department of Treasury and this makes sense in that a huge aspect of alcohol beverage regulation is making sure the taxes get duly collected. Almost always through history, the tax has been based on the volume of alcohol; that’s tough to measure here. In the 1970s this agency was part of the IRS and in the 1980s it was known as ATF. FDA has not played a big role in the Palcohol matter to date, so far as we know. By contrast, in the matters of absinthe and Four Loko, both FDA and TTB played big roles.
  9. What brilliant lawyer persuaded TTB to allow this?
    So far as we can tell, Mark Phillips did this on his own, without help from any lawyers. This is an impressive accomplishment. Mark has said he worked with TTB on this for many years, patiently and cooperatively. Perhaps Mark had a bit of “beginner’s luck” on his side. On the other hand, the same absence of seasoned experts may have led to various stumbles like not realizing all label approvals are public, and that it’s not wise to make light of alcohol abuse, even on a draft web page.
  10. Why would TTB approve this then quickly change course
    It is tough for TTB to withhold approval when the law provides no clear basis to do so. The law probably did not anticipate something new and different like this, just as the relevant rules, most of which were written many generations ago, have failed to anticipate and show the way on many other new things like caffeinated malt beverages, booze with vitamins, gluten-free beer, kombucha, even saké. What would you do if presented with this question? If you are feeling tough and would disallow it, under what rule? And if you can’t find such rule, what specific rule would you write? I think these are tough questions and I don’t think TTB has an easy job when it comes to things like this. Unlike other agencies, TTB is put in the unenviable position of giving a thumbs up or a thumbs down on every cockamamie marketing idea that comes down the pike. TTB does not have the luxury of saying “no action” like so many other agencies use to sidestep the trickiest issues. Why change course? It is possible or even likely that various states, other alcohol beverage companies, various interest groups, doctors, the media, legislators, and others across many segments of our society — screamed bloody murder. To the extent this happened, I submit this is a good thing and supports my point that this is a great opportunity for our system to rise to the occasion and function well to make a good and appropriate policy as to something new and controversial like this.
  11. What next?
    If Palcohol gets new label approvals within a few days, the “surrender” is probably a little speedbump on a long road. But if it goes past a couple of weeks without new and replacement label approvals on the public database, it is a strong sign that it may be tough for Palcohol to re-acquire label approvals. There is no lawful way for Palcohol to sell powderized alcohol in the US without these crucial approvals.
  12. How did you find this?
    John Messinger (a lawyer in our office) was doing routine research on margarita issues (things like, can the food coloring go on the back label). I am sure he expected to find various liquids, like almost always in the past. Instead he saw a big, fat reference to “powdered alcohol” on the front label — with a little pyramid of powder depicted. He found this via the amazing search capabilities of ShipCompliant’s LabelVision service, as well as other specialized search capabilities we have in the office. These tools make it easier for us to scour millions of government records. TTB approves well over 100,000 labels per year and puts them on a Public COLA Registry; we try to review most to keep an eye on new trends and rulings, like this.
  13. Why won’t TTB and Lipsmark say much?
    TTB has publicly said the labels are approved (April 8) and “surrendered” (April 21). TTB has said the label approvals were “issued in error.” TTB is not likely to say a lot more, based on past precedent. A lot of this is highly confidential, as between an applicant and the government. TTB has a good history of keeping confidential information confidential, as is necessary and required, just like IRS. TTB is dealing with tax information and things like recipes. Few things are more confidential or more valuable trade secrets as compared to for example the recipe for Jaegermeister or Kahlua. As for Mark Phillips, I am not sure why he has not said more. He does have a fair amount of information on his website now. I conferred with Mark a few times after he contacted me but we don’t represent Palcohol and can’t speak for them. (5/8/2014 edit; Mark Phillips does quite a good job rebutting most of this here.)
  14. What else?
    Lots of other information and links are set out in our earlier posts on this topic (such as the labels, a sample label approval, a surrendered approval).

If you like booze and the law, it should be fun to watch this further.

* And in a fine moment for lawyers everywhere, let the record reflect that the Today Show crew said they left the Chris Brown hearing early to come talk to me about Palcohol.

Powdered Alcohol

powder
As of April 8-21, 2014, this was approved. The federal government approved this brand of powderized alcohol two weeks ago. The reviewing agency has been TTB (not FDA, as some press accounts have said). TTB is a sub-unit of the US Department of Treasury.

First and for a long time, alcohol was just liquid. Then it was whipped, solidified and almost vaporized. And now alcohol is powderized. A really good TV summary is here.

April 21, 2014, 5 pm ET, Update:  The Palcohol company has surrendered all seven label approvals back to TTB. Here is one of the labels as approved on April 8, 2014 and then the same label as “surrendered” April 21. The differing status is shown at the center of each document. TTB has not said much about the change of course. Palcohol has said:  “We have been in touch with the TTB and there seemed to be a discrepancy on our fill level, how much powder is in the bag. There was a mutual agreement for us to surrender the labels.”

May 8, 2014, 3 pm ET, Update:  Sen. Charles Schumer has blasted Palcohol and pressed FDA to step in, during the past week. Many sources and links on web. And, Mark Phillips does quite a good job rebutting most of the critics here.

I am not astonished that this is a real product — but I am absolutely astonished that this got approved. TTB approved seven versions of this powdered alcohol label on April 8, 2014. It is seven labels covering five products (two rum-like, two vodka-like, one Cosmopolitan-like, one Lemon Drop-like, and one Margarita-like).

Related points:

The person that pushed this through must be very patient or lucky and/or good. The product seems highly likely to raise a large number of legal issues and controversies. The company’s website (as of a few days ago) tended to underscore the controversies, saying:  “What’s worse than going to a concert, sporting event, etc. and having to pay $10, $15, $20 for a mixed drink with tax and tip. Are you kidding me?! Take Palcohol into the venue and enjoy a mixed drink for a fraction of the cost.” And:

We’ve been talking about drinks so far. But we have found adding Palcohol to food is so much fun. Sprinkle Palcohol on almost any dish and give it an extra kick. Some of our favorites are the Kamikaze in guacamole, Rum on a BBQ sandwich, Cosmo on a salad and Vodka on eggs in the morning to start your day off right. Experiment. Palcohol is great on so many foods. Remember, you have to add Palcohol AFTER a dish is cooked as the alcohol will burn off if you cook with it…and that defeats the whole purpose.

The current Palcohol website is much more tame and also has a short bio for Mark Phillips, the force behind Palcohol. Over the weekend Mark confirmed that he was in fact quite patient about this; he said:  “The TTB was cautious. It took us nearly four years to get the approval.”

California seems to have been way out in front of this with Regulation 2557. We are not aware of directly and specifically relevant TTB rules, and this may well explain why no rules blocked the initial approvals. Many thanks to John for finding these Palcohol approvals among millions of obscure government records.

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