TRADE PRACTICE ENFORCEMENT
Proprietors of Distilled Spirits Plants, Bonded Wine
Cellars, Taxpaid Wine Bottling Houses, Brewers,
Importers, Wholesale Malt Beverage Dealers, Wholesale
Liquor Dealers, and Others Concerned:
PURPOSE. This circular is to advise members of the
regulated industries of the Bureau of Alcohol, Tobacco and
Firearms (ATF) position concerning "tied house"
arrangements and "commercial bribery" transactions under
the Federal Alcohol Administration Act (FAA Act), 27
U.S.C. sections 205(b) and (c). The circular is issued in
light of Foremost Sales Promotions, Inc. v. Director,
Bureau of Alcohol, Tobacco and Firearms, 860 F.2d 229 (7th
Cir. 1988).
BACKGROUND. The Foremost case arose after an
enforcement action by ATF against an industry member for
making advertising payments to Foremost Sales Promotions,
Inc. (Foremost). Foremost is a marketing company and a
loosely fabricated franchise which, for a fee, provides
advertising for suppliers' products and independent retail
franchisees.
Foremost required payments from suppliers for featured
advertising of the suppliers' products and for associated
promotional services. While the Foremost retailers
neither had control over the products to be advertised nor
were obligated to either carry or price the products as
advertised, ATF determined that the Foremost retailers
regularly honored the advertised prices and stocked most
or all of the advertised products, to the partial
exclusion of nonfeatured products offered for sale by
other suppliers. ATF accepted an offer in compromise in
1981 from a supplier who used the services of Foremost.
The offer in compromise was to settle the violations by
that industry member of 27 U.S.C. sections 205(b)(4) and
(c)(2).
Subsequently, Foremost filed an action in Federal
District Court seeking both an injunction preventing the
Bureau from taking similar actions against other suppliers
and a declaratory judgment that the advertising payments
by suppliers to Foremost did not violate the cited
provisions of the FAA Act. The court did not issue the
injunction.
With respect to the declaratory judgment, the district
court ruled in favor of Foremost, and ATF appealed. On
appeal, the Seventh Circuit addressed the legal standard
for violating sections 205(b)(4) and (c)(2), and concluded
that based on the history and purpose of the FAA Act, it
should not be interpreted literally. Specifically, the
court held that transactions between suppliers and
retailers do not "induce" the "exclusion in whole or in
part" of competing suppliers' products unless "their
purpose or potential effect is to lead to substantial
control by the supplier over ostensibly independent
purchasers."
DISCUSSION. ATF enforcement policy has been, and will
continue to be, based upon the literal statutory
language. Section 205 does not, on its face, call for an
independent evaluation of either the purpose or the
potential effect of any particular trade practice.
Further, in accordance with the legislative history of the
FAA Act, and in consideration of its purpose, it is our
view that Congress, by design, made a judgment and
identified in Section 205, those trade practices which
would have a detrimental effect on fair competition.
Congress, therefore, made such trade practices unlawful
where an interstate commerce nexus is present, provided
that such practice results in even partial exclusion of
any competitor's product(s).
The Court of Appeals decision in Foremost reflects a
substantial departure from over 50 years of consistent
enforcement of the FAA Act based upon this literal
interpretation of both the statute and the elements of an offense. ATF believes the decision is incorrect, and its
enforcement policy outside the Seventh Circuit will not
change. Within the Seventh Circuit (which consists of the
states of Illinois, Wisconsin, and Indiana), ATF will
limit consideration of the Foremost decision to cases
under sections 205(b) and (c), the tied house and
commercial bribery provisions. We do not interpret the
decision as establishing any new standard with respect to
exclusive outlet or consignment sale cases under sections
205(a) or (d).
It is not possible to describe how Foremost will
affect ATF enforcement policies in cases which would be
subject to review by the Seventh Circuit. Both the
analysis utilized and the standard established by the
court will necessitate a case by case approach. On the
one hand, the new standard established by the Foremost
case would not bar every type of enforcement action which
ATF might bring under the traditional interpretation of
the FAA Act. For example, the Foremost decision cites,
with approval, the Ninth Circuit decision in Stein
Distributing Co. v. Department of Treasury, 779 F.2d 1409
(9th Cir. 1986), where ATF suspended the permit of a
wholesaler who supplied retailers with both the diagrams
and the labor necessary to restock shelves. However, this
new threshold requirement obviously makes it less likely
that practices which involve only indirect intrusion into
a retailer's operations, such as the cooperative
advertising arrangement at issue in Foremost, could be
found to violate the FAA Act.
INQUIRIES. Inquiries concerning this circular should
refer to its number and be addresses to the Associate
Director, (Compliance Operations), Bureau of Alcohol,
Tobacco and Firearms, 1200 Pennsylvania Avenue, NW.,
Washington, DC 20226.
Director |