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The Tito’s Lawsuit: When Approval is Not Approval

t

Tito’s vodka was doing great for the past 15 years, then hit a gigantic speedbump this week in the form of a class action lawsuit.

Tito’s therefore provides a good example of when an approval is not really an approval. Tito Beveridge has more than 30 TTB label approvals for his vodka from 1997 to 2013 (as in the above image, from LabelVision). They may not do him much good in this lawsuit, even though, in years past, most would assume the federal approval would be dispositive. It’s a good thing most TTB approvals are not paper anymore because these would “not be worth the paper they are printed on.”

summonsSummary:  in Hoffman v. Fifth Dimension, Inc., Gary Hoffman (a consumer) sued Tito’s vodka on behalf of all Tito’s customers in California, claiming that the company misleads people about whether the product is “handmade.” The lawsuit was filed September 15, 2014 in San Diego county court. The federal government reviewed and approved the Tito’s labels, but has no definition for the term at issue.

The classic case of an approval that is not really an approval would be your garden variety Napa Valley Chardonnay, Vintage 2010. TTB will take almost every one of those italicized words at face value. To the extent any one of those words is not true, your approval is not going to help you too much, in the event of an inquiry. Like an IRS tax return, the COLA (and any formula approval) is, to a surprisingly large degree, something of an honor system, stapled together with the penalty of perjury on every such document.

Updates:
9/16/2014: Judge Eddie C. Sturgeon is assigned to handle the case.
9/23/2014
: Tito’s apparently put out a press release, sketching out a defense. I sure hope they have more. They took a jab at the plaintiff for botching the defendant’s proper name, Fifth Generation, Inc. Shanken points out that the brand is at 1.3 million cases per year (that’s a lot of hands!). Tito says “he will vigorously contest the lawsuit.” Tito largely hangs his hat on the fact that TTB approved the labels.
9/25/2014:  the plaintiff amended the defendant’s name, from Fifth Dimension, Inc. to Fifth Generation, Inc. In so doing the plaintiff declared being ignorant of the company’s true name, when filing the complaint on 9/15/2024. This is odd because the plaintiff used the correct name on the Affidavit of Venue filed the same day. Plaintiff did a good job covering this point, though, in the original complaint, by saying:  “Plaintiff is ignorant of the true names and capacities of the defendants sued herein as DOES 1-100, inclusive; therefore, Plaintiff sues these defendants by such fictitious names. … Plaintiff will amend the complaint to allege their true names and capacities when ascertained.”

The Forbes article explains:  “Tito’s has exploded from a 16-gallon pot still in 1997 to a 26-acre operation that produced 850,000 cases last year, up 46% from 2011, pulling in an estimated $85 million in revenue.” The article strongly suggests Tito is about to be a victim of his own success. You can say this post is a prime example of a lawyer taking something clear, like an affirmative, direct approval, and blurring it up to say it’s not really an approval. That would not change the messy, complicated reality, that TTB is not the only sheriff in town. We have a “system” and though it may be cumbersome, it actually does work pretty well. TTB approves Palcohol. Fine. That’s only one level. Then the private sector jumps in (i.e., us). This triggers the states, legislators, media, trade associations, on and on, to take action. TTB can’t and probably does not need to “do it all.” Customs jumps in on imports, states jump in on Santa and bitch issues, and now there is a clear right of private action in all such disputes. The floodgates are well open. A few weeks ago, in light of the Pom v. Coke decision, we predicted a flood of lawsuits around label claims. Some said “the sky is not falling.” Well, the water is starting to rise pretty high. Tito is up to his waist. Templeton is up to its knees. Bass and Becks are up to their ankles. All from private action with no trace of governmental intervention. Skinny Girl got dunked a few years back and we will need to go back and look to see how much water she swallowed.

The Tito’s lawsuit (Hoffman v. Fifth Dimension, Inc.) is here. Some juicy highlights are as follows.

This is a class action case brought on behalf of all purchasers of all vodka (“Vodka”) manufactured, distributed, marketed, and/or sold by FIFTH DIMENSION, INC. dba Tito’s Handmade Vodka (hereinafter “TITO’S”). Through a fraudulent, unlawful, deceptive and unfair course of conduct, TITO’S, and DOES 1 through 100 (collectively “Defendants”), manufactured, marketed, and/or sold their “TITO’S HANDMADE” Vodka to the California general public with the false representation that the Vodka was “handmade” when, in actuality, the Vodka is made via a highly-mechanized process that is devoid of human hands. There is simply nothing “handmade” about the Vodka, under any definition of the term,1 because the Vodka is: (1) made from commercially manufactured “neutral grain spirit” (“NGS”) that is trucked and pumped into TITO’s industrial facility; (2) distilled in a large industrial complex with modern, technologically advanced stills; and (3) produced and bottled in extremely large quantities (i.e., it is “mass produced”).

The Oxford Dictionary defines the term “handmade” as “[m]ade by hand, not by machine, and typically therefore of superior quality.”

On information and belief, the Vodka was made, manufactured and/or produced in “massive buildings containing ten floor-to-ceiling stills and bottling 500 cases an hour” 2 using automated machinery that is the antithesis of “handmade” that is in direct contradiction to both the “Handmade” representation and the “Crafted in an Old Fashioned Pot Still” representation on the product. Discovery will further reveal the specific automated manner in which the Vodka is made.

Defendants also concealed the fact that the Vodka is no longer made in old fashioned pot stills of the variety TITO’s proudly displayed in the 2013 Forbes article (i.e., in a shack containing a pot still cobbled from two Dr. Pepper kegs and a turkey-frying rig to cook bushels of corn). The disclosure of this information was necessary in order to make Defendants’ representations truthful and not misleading.

Consumers are particularly vulnerable to these kinds of false and deceptive labeling practices. Most consumers possess very limited knowledge of the likelihood that products, including the Vodka at issue herein, that are claimed to be “Handmade” are in fact: (1) made from commercially manufactured NGS that is trucked and pumped into TITO’s industrial facility; (2) distilled in a large industrial complex with modern, technologically advanced stills; and (3) produced and bottled in extremely large quantities (i.e., it is “mass produced”). This entire process is devoid of the caring touch of human hands. This is a material factor in many individuals’ purchasing decisions, as they believe they are purchasing a product made in small amounts that is of inherently superior quality.

As a direct and legal result of their unlawful, unfair and fraudulent conduct described herein, Defendants have been and will be unjustly enriched by the receipt of ill-gotten gains from customers, including Plaintiff, who unwittingly provided their money to Defendants based on Defendants’ fraudulent “Handmade” representation.

The plaintiffs are asking for all the money, plus attorney fees, punitive damages, interest, costs, and taxes:  “all monies acquired by means of Defendants’ unfair competition.”

Right about now, every beer, wine and spirits company should be re-examining their labels, new and old, approved and prospective, and making sure every part is on firm ground. If you lack TTB approval it may hurt you a lot, but if you have it, it may not be sufficient to save you.

* A small disclaimer is, I have no idea about the underlying facts here. I am evaluating this from my couch, based on TTB approvals, public records, the plaintiff’s allegations, and the press. We look forward to presenting Tito’s side of the story, when it comes out.

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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.

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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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Beer, Pot and the Government

potJoe Sixpack this week has a good and thorough look at the many beer labels that talk about and tip a hat to their colleague, marijuana. The numbers and audacity are surely growing, as the old and antiquated laws fall by the wayside a bit. I like the quaint and funny reference to coats of arms:

With this month’s ballyhooed legalization of marijuana in Colorado, some beer makers are adding playful drug references to their brand names and labels, and regulators can do little to censor them.

Label oversight, a quirky if contentious area of federal alcohol law, has confounded breweries for years with often capricious standards that bear little on consumer protection.

Federal law, for example, oddly prohibits the use of coats of arms or wording that promises ‘pre-war strength,’ whatever that means.

Mr. Russell (aka Joe) also helped educate me that a safety meeting is not necessarily boring and dire:

Yes, there are limits. Dark Horse Brewing, in Michigan, lost its bid for Smells Like Weed IPA, though its hops, in fact, smell like pot. The name was later changed to Smells Like A Safety Meeting IPA. (A ‘safety meeting’ is slang for taking a break on the job to light up a doober.)

But expect to see fewer of those objections as more states move toward legalization.

Joe Sixpack has at least 16 label examples here and here.

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malt beverage


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Oxygen Enriched Bourbon

oxygen

This Bourbon label caught our eye because it makes several big claims. It says:

  1. FINISHED WITH AN OXYGEN ENRICHED, ACCELERATED AGING PROCESS
  2. Patent Pending
  3. Pressure-Aged
  4. “we use rapid pressure changes and oxygen infusion to control the aging process”
  5. “age is no longer relevant and taste is all that matters.”

That’s a lot of envelope-pushing and innovation for one label. We happen to know a person who is both an experienced patent lawyer and an experienced whiskey distiller. So, in a future post, we hope to have him review the patent claims and assess whether this is closer to an innovation or a gimmick. The Bourbon is produced and bottled by Cleveland Whiskey, LLC of Cleveland, Ohio. The approval is here. Terressentia’s closely-related patent, also for aging spirits quickly, is described here.

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