Robert C. Lehrman

Very Possibly, Your Approved Label is Wrong

April 13, 2015 by Robert C. Lehrman Leave a Comment

From the demise of Prohibition until about a year ago, you could fairly safely assume your label was right, if it was approved by TTB. Most people assumed they had a “safe harbor,” created upon approval, even if some of the claims were dubious.

This has been changing, and fast. The causes are numerous. One big one is the Pom case, decided in mid-2014. Another is an onslaught of class action lawsuits (such as Tito’s, Makers Mark, Beam, Angel’s Envy, Templeton). I am not discussing these factors in detail in this post because we have covered them a lot in many other blog posts, readily findable. A third factor is the rise of whiskey. The whiskey rules are quite a bit more complicated than those for other leading categories such as vodka.

The details about this trend are set out in the April-May 2015 issue of Beverage Master – Craft Spirits & Brew Magazine. The article is entitled, Why Your Whiskey Label is Probably Wrong.

Some people don’t like hearing this message and think it sounds a tad alarmist. But for every one of those people, there are experts who understand this confluence of circumstances can take your company down (and perhaps some who are eager to do so). On a less somber note, the article explains some easy ways to tamp down the threats presented.

Label Audits
And here is something else you can do to push these threats away from your business. Get your labels audited. In response to the markedly changed situation, we are pleased to announce our 2015 label audit program. The details are here.

The list of labels deemed ok and approved, and then not ok, grows longer every day (Skinnygirl, Black Death Vodka, Palcohol, etc.). Wouldn’t it be nice to stay off that list? You should think about having a knowledgeable person review your labels, before this chap (Thomas Zimmerman, the man behind many of the lawsuits) does it for you.

Louisville, Flavorman, Tito, Locke Lord, ADI

April 11, 2015 by Robert C. Lehrman Leave a Comment

Louisville is great. Such a nice break from the clamor of DC. I think I am nearly qualified to make this call because I have been going to Louisville half a dozen times per year for a few years now, and I have now hit all the top 50 or so bars and restaurants. I just got back from a 10 day stay.
Some highlights of course are the great people at Flavorman, Moonshine University, Challenge Bottling, Grease Monkey Distillery, and the Distilled Spirits Epicenter (all seeming to be one big happy family).

Another highlight was speaking at ADI. More on that in a few days.

A major highlight was meeting Tom Cunningham and Simon Fleischmann from Locke Lord (a big Chicago law firm). They are handling some of the whiskey disputes, on the defense side, and I learned more about class action lawsuits during a few drinks with them, and their speech, as compared to three years in law school. For those who missed the boat on attending the 2015 ADI convention, here is a summary of Locke Lord’s presentation, Spirits Industry Under Fire: What You Need to Know About Class Action Litigation.

The most illuminating parts of this booklet (a companion to the speech), in my opinion, are as follows:

Plaintiff class action lawyers thrive on ambiguity in the law and jump in where regulators don’t. For example, the federal government has not done much with defining such basic concepts as “natural” or “handmade” and so this part of the bar jumps in — in the form of actions such as the Skinnygirl and Tito lawsuits.
In startlingly strong language, the Locke lawyers assert:

Plaintiffs’ class action attorneys by and large don’t care whether your product is truly “handmade” or made in “small batches” or is “craft.” They trade in what is essentially blackmail and terrorism. If they have a basis for alleging that your product is not what you claim it to be, even if you fervently believe that it is, they will sue you. Very few cases go to trial. Especially class action cases, which can easily kill a company. They have the power to put you out of business simply by making a claim. Therefore, you are likely to pay them to simply drop their claim, even if it’s bogus.
Not big fans of their brethren on the other side of the class action bar, and with refreshing candor, the Chicago lawyers explain:

Plaintiffs’ class action attorneys are either inherently lazy or extremely efficient, depending on your perspective. For most of them, the goal is to maximize their fees by expending the least amount of effort. They are a creative breed of attorney, but after one comes up with a legal theory that pays off, others will tend to simply file copycat cases and “paint by numbers” to receive their reward.
The same lawyer and plaintiff are behind many of the cases: Templeton, WhistlePig, Angel’s Envy, and Tin Cup. There is also a herd mentality.

If these cases are settled with any significant amount of attorneys’ fees recovered, many more cases will likely follow. Any spirits producer who uses ambiguous terms on its label or in its marketing will likely be a target. More plaintiffs’ attorneys will join the frenzy. Big settlements are like blood in the water – they will attract more sharks.
The truth is not always a complete defense and it’s not only falsity that puts the blood in the water.

Knowing where you cross the line between [puffery and deception] is an art, not a science. That line is fuzzy. A claim does not need to be outright “false” to be actionable … [If] it tends to be misleading or deceptive, even if strictly true, a plaintiffs’ class action lawyer will likely seize upon it and file a lawsuit.
Easy precautions are avoiding risky or ambiguous claims, being transparent, and having a knowledgeable person review your marketing materials. You can also trip up the herd by changing your labels periodically — making it much harder for the herd to declare that all in the nationwide class suffered on account of the same labels and claims.
Another strategy is to block the plaintiffs’ effort to certify a class.

If a plaintiff is suing for disgorgement of the proceeds of the allegedly deceptive marketing, which the plaintiff argues is $5 per bottle, and you have sold 1,000,000 bottles of your product, the exposure is $5 million if a class is certified that consists of everyone who purchased those 1,000,000 bottles. But if the court decides that the case is not appropriate for class certification, the plaintiff’s damages are $5. The case is a serious threat if a class is certified, and no threat at all if one is not certified. So even if you were to lose the case on its merits, if no class is certified you still “win.” [But, because of] the typically high potential exposure and the high cost to defend these cases, the plaintiffs’ attorneys don’t really need to win. All they have to do is survive that initial motion to dismiss and they will be in a position to use their leverage to negotiate a lucrative settlement. Essentially, you can’t win. If you get sued, you’ve already lost, unless you happen to have a very deep pocket. And even then, you still lose. … It is a dirty business.

I reached out to Simon and Tom to ask what is new during the past few weeks in these matters. They pointed out:

The Tito’s vodka plaintiffs are seeking to consolidate a handful of Tito cases as of a few days ago. Consolidating class actions makes a lot of sense. When multiple cases are filed in different places, the defendant has to fight the same battle numerous times. An argument that carries the day in one judge’s courtroom might not carry the day in another. Multiple cases also expose witnesses to multiple depositions. The plaintiff’s lawyer gets the advantage of reviewing the first transcript and using it to develop better or more clever questions in the next deposition. For these reasons and others, having all the cases brought together in a single courtroom is a sound defense strategy. It often also helps facilitate a settlement.
In other news, while the pace of the new class action filings has slowed, they continue to be filed. Breckenridge Distilling was sued in Chicago by one of the groups of lawyers that previously sued Templeton Rye. In addition, Anheuser-Busch has been sued in an interesting “hybrid” case that includes aspects of the numerous “Made in the USA” cases that have plagued other manufacturing industries for several years and the cases against the spirits industry that involve claims related to the sourcing of ingredients from places other than the place the product is “made.” Fully briefed motions to dismiss are pending in the majority of the cases against the spirits industry. The next six months should see a number of opinions that will give us a good idea of where these cases are headed. If judges generally accept the defendants’ arguments, we may see the wave of cases against the industry dissipate. If judges generally reject those theories, we expect to see more cases filed.

We will continue to watch all these cases closely because when it comes to alcohol beverages, “the herd’s” actions are as important as anything the federal government is doing. That is new and epochal.

Scrapple Flavored Vodka

April 5, 2015 by Robert C. Lehrman 3 Comments

I am a tad late for April Fools Day but it’s one of my favorite national holidays and so, we present the above. Is it real or fake? Would you drink it?

[polldaddy poll=8780766]

[polldaddy poll=8780772]

[polldaddy poll=8780794]

[polldaddy poll=8780773]

No cheating or Googling allowed. A very good clue, and/or the answer, is here.

28 Proof and Not Beer, Wine or Spirit

March 28, 2015 by Robert C. Lehrman 15 Comments

It looks like moonshine.

But it’s not spirits. It’s not even beer or wine, and yet it is 28 proof.

I stumbled on Great America “Carolina Clear” at a gas station in Bardstown, Kentucky, of all places. It was just a couple miles from Jim Beam and Four Roses. I would have assumed the heart of Bourbon Country is roughly the last place for a product such as this to thrive. And yet, the guy loitering and smoking out front advised it is an excellent product and will get one messed up almost as good as the illegal stuff. The display had about 40 jars of the product, in various flavors, a couple days ago. When I went back today, only one jar was left.

And so, if it’s not beer, wine or spirits — what could it possibly be? It took me a few minutes, and a return trip, to sort it out, because this is indeed an unusual product.

The front label describes it as Carolina Clear, Malt Specialty. There is no mention of beer, and there is no TTB label approval, because the product apparently lacks the hops and malted barley required to fit within the U.S. definition of a “malt beverage.”

The back label explains, in the FDA-style ingredient list, that the product only has three ingredients. I don’t think anyone will be surprised, at least at this point, that those ingredients are not the ones elevated in the Reinheitsgebot (the German Beer Purity Law of 1487, allowing beer to be made with water, barley and hops only). The North Carolina-made “malt specialty,” selling for $5.99 a jar, is made only with high fructose corn syrup, distilled water, and sodium benzoate. It is tough to imagine an alcohol beverage that could be produced at lower cost.

The product can’t fit within TTB’s label rules for beer-type beverages due to the lack of hops and barley. It falls outside the spirits labeling rules due to the lack of distillation. It is harder to see why the product falls outside TTB’s wine labeling rules, because it is like saké, at least in the sense that is also fermented from grain, and the federal government treats saké as wine, for labeling purposes. It is clear that Great America views the product as outside the TTB labeling rules because:

TTB would have required a label approval. I see one label approval for this company, but none that match this product.
TTB might have eventually said it looks too much like a spirits product, and might have required a clearer and more prominent statement of identity on the front label.
The product seems to do a decent job of complying with the FDA food labeling rules (as opposed to the somewhat different TTB labeling rules). The serving size, however, at 3 ounces, seems very small (and the 7.8 servings per container seems absurdly large). This Joose-brand flavored malt beverage has a similar net contents and alcohol content, and yet is sold in single-serve cans.

Notwithstanding these distinctions, the federal taxes and permit requirements would be the same for this product as compared to typical beer.

This product is put out by Stout Brewing Company and also comes in common moonshine flavors such as peach, apple pie, and strawberry. Stout also markets similar products in 3 ounce tubes (as in the image immediately above).

Tito Case Moves Forward, Not in Tito’s Favor

March 19, 2015 by Robert C. Lehrman Leave a Comment

3/23/2015 Update. Caution. The above headline seems fairly skewed. See below for what we think really happened last week. The case is not halted at all.

Tito had another bad day yesterday, this time in federal court in San Diego. This further makes it obvious that the world of labeling has changed markedly since the Supreme Court’s Pom decision of June 12, 2014. On March 18, 2015, Judge Jeffrey Miller (of the U.S. District Court for the Southern District of California) ruled that the Tito’s vodka case, relating to deception and the term “handmade,” should move forward. Since the case was filed on September 19, 2014, Tito has argued that the case should be dismissed.

The judge did agree with Tito on a few points, but agreed with the complainants on the larger points. Tito had argued that the case should not move forward because there was no real damage to anyone. In response, the court’s Order Granting in Part and Denying in Part Tito’s Motion to Dismiss, noted some consumers care a lot about “processes and places of origin” when deciding what to buy. By way of example, the court pointed to past controversies about kosher, halal, diamonds from conflict zones, and wine appellations.

Background about the case is here (the main complaints) and here (the main defense). This posting is a short version, and more commentary will be available at Wine & Spirits Daily, later today (or upon request). The nub of the matter is, the label and indeed the main selling proposition for Tito’s vodka, all the way back to its inception, center on its “handmade” aspects. This claim (the biggest word on the label) is now the subject of at least five lawsuits all over the U.S. They are 1) Hofmann (as here), 2) Pye (filed in federal court in Florida), 3) Aliano (filed in Cook County and removed to federal court), 4) McBrearty (filed in New Jersey state court and removed to federal court), 5) Cabrera (filed in San Diego, federal court), and 6) Grayson (filed in Las Vegas, federal court).

The Hofmann court said the class action claimants need not show that the vodka was defective or that the vodka was worth the price paid. Instead, the relevant inquiry is whether consumers were deceived about the “handmade” claim, and persuaded to buy on the basis of that deception. In essence, the judge is saying the plaintiffs made a mistake by arguing that class member would pay less – instead of arguing that they would not buy the product at all – but for the label claim at issue.

The Order has a funny typo on page 11 (stemming from the plaintiff’s brief), referring to the label term as “homemade,” when in reality the label shows the term “handmade.” A pillar of Tito’s defense, so far, is that TTB has approved the label on many occasions and after careful review. The court was not impressed by this point: “the court concludes that [Tito] has not shown that the safe harbor bars Plaintiff’s claims.” The court said TTB’s review was peripheral and informal at most, especially in view of the fact that TTB does not even have standards or rules for the term at issue.

The order seems careful and even-handed, but then seems to lean against Tito more, by saying:

In the court’s view, the representation that vodka that is (allegedly) mass-produced in automated modern stills from commercially manufactured neutral grain spirit is nonetheless “Handmade” in old-fashioned pot stills arguably could mislead a reasonable consumer. This is not, therefore, an issue that can be resolved at this stage.

Judge Miller further ruled that the 2013 Forbes article, that largely raised the questions about the Tito claim, is reliable enough, to form a basis for the allegations. Relatedly, the court was not too impressed with Tito’s argument that this article sufficiently alerted consumers that the claim might be dubious.

Finally, the court asserted that the complaint is not too vague for Tito to prepare an adequate response. The court said Tito’s “cogent” responses prove it. The court sided with the plaintiffs in most areas, but went against the plaintiffs in dismissing three major claims, on the basis that they were not pled properly. The court also, however, provided the plaintiffs with 14 days to fix those deficiencies and so this order is overwhelmingly helpful to the plaintiff side.

Simon Fleischmann (a top class action litigator at Locke Lord in Chicago) explained:

While this is a disappointing ruling from a defense standpoint, it is important to remember that this is just one trial court decision on the pleadings in what will likely be a broader war waged in several courts across the country on similar issues. And perhaps most importantly, the opinion emphasizes the highly individualized nature of that particular plaintiff’s purchasing decisions in a way that will make it difficult to certify a class of similarly situated consumers later on in the litigation.

Simon knows the context well. He is litigating very similar issues on behalf of Templeton Whiskey.

The court’s order is here.

Palcohol is Back

March 10, 2015 by Robert C. Lehrman Leave a Comment

Palcohol is back.

After approval from out of nowhere about a year ago, and cancellation of the same approvals a few days later, it is back. I have it on good authority that TTB has ironed out the kinks and approved the labels this week. Sen. Schumer will not be pleased (aka, he may be very pleased to have this whipping boy back within striking distance). Many states have already banned it. But this gives new life to this new category. Hats off to Mark Phillips for weathering the storm and persevering.

Below is the approved label as of 2014 alongside the label as approved on March 10, 2015. There are small, technical changes, mostly relating to how to measure the taxable commodity. Boxes 20 and 23 reconfirm that it took Mark almost a year to get this approval. The back label makes it look like an awful lot of work and controversy for a small amount of alcohol (when prepared, it only has half the liquid of a beer, and 1/4 the abv compared to vodka?!?).

In an email on the day of re-approval, Mark, the force behind Palcohol, explained:

Yes, Palcohol is back. It’s been quite a journey, over four years to get Palcohol approved by the TTB. I do want people to know that the TTB has been great to work with. Very fair and professional. And I’m not just saying that to kiss up to them as they have now approved Palcohol and it’s done.

The next challenge is trying to stop the states from banning it based on misinformation and ignorant speculation. It is a mistake for a state to ban Palcohol because…

[Read more…] about Palcohol is Back

Robert C. Lehrman

Very Possibly, Your Approved Label is Wrong

Louisville, Flavorman, Tito, Locke Lord, ADI

Scrapple Flavored Vodka

28 Proof and Not Beer, Wine or Spirit

Tito Case Moves Forward, Not in Tito’s Favor

Palcohol is Back

Federal District Court Declares Federal Ban on At-Home Distilling Unconstitutional

Foreign Producers Should Get Ready for Big CBMA Tax Benefits

No Beer for Putin

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Federal District Court Declares Federal Ban on At-Home Distilling Unconstitutional

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