Introduction of Three-Tier System of Beer Distribution Law

INTRODUCTION OF THE THREE-TIER SYSTEM

Prior to the passage of the 18th Amendment in 1919, brewers and producers of other alcoholic beverages sold directly to retailers and often held ownership interests in taverns, known as “tied houses”, which led to anti-competitive business practices and unscrupulous marketing tactics aimed at inducing excessive consumption. To combat that problem, the States ratified the 18th Amendment, ushering in the prohibition era and outlawing the manufacture, distribution and sale of all alcoholic beverages. The 21st Amendment repealed the 18th Amendment in 1933 and gave the states the primary authority to regulate the distribution of alcoholic beverages, including beer, within their borders. The three-tier system of beer production, distribution and sale was born establishing (1) suppliers (brewers and importers), (2) distributors and (3) retailers as the three tiers. State schemes regulating the three-tier system vary substantially; however, states generally fall into one of two categories: “license states” and “control states”. License states are the most prevalent and regulate beer distribution by issuing different licenses to businesses in each tier. Control states obtain a direct interest in the revenues generated from distribution by taking an ownership stake as distributors or retailers of beer products. Control states typically exert greater control over the sale and promotion of beer products.

HOW THE THREE-TIER SYSTEM WORKS

Large and powerful brewers dominate the beer distribution industry and most states aim to balance power in favor of distributors by requiring good faith dealings between brewers and distributors. The three-tier system works to prevent pre-prohibition style marketing tactics, generate revenues for the states, facilitate state and local control over alcoholic beverages and encourage temperance. Brewers produce the product and sell it to distributors who then sell the product to retailers (retail stores, taverns, etc.), who, in turn, sell the product to consumers. Distributors warehouse product to facilitate the efficient delivery to retailers, establish local markets for a brewer’s brands, enforce product quality control standards, police retailers’ sale of beer to the public, and provide the states with a platform for the taxation of beer products.

Considering the complexity and differences among the states’ beer statutes, licensing schemes and implementation of the three-tier system, it is easy to see why the beer distribution industry is an intricate maze, fraught with peril for the unwary navigator, and why specialized legal advice is essential for those doing business within the three-tier system.

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