EPA Hits Brewery Hard: Is Your Brewery In Compliance With CWA Standards?

This post was guest authored by Stoel Rives summer associate Olivier Jamin.

Last week the Environmental Protection Agency (EPA) and the Department of Justice (DOJ) announced that D.G. Yuengling and Son, Inc., a Pennsylvania brewery, settled Clean Water Act (CWA) violations involving wastewater discharge into public treatment facilities for $2.8 million and a commitment to spend over $7 million to reduce environmental impacts of its brewery operations.

Breweries generally need to obtain a permit to discharge industrial waste into municipal treatment facilities. Breweries’ wastewater is considered industrial waste because the water discharged usually contains high concentrations of nutrients which, although they are not toxic, lead to more costly treatment. In many cases, a permit has limits on the discharge and requires pretreatment of waste before it is discharged. Although Yuengling obtained had the permit required by Section 402 (b)(8) of the CWA for both of its Pottsville breweries, they violated the terms and conditions of the pretreatment program. The Greater Pottsville Area Sewer Authority (GPASA) referred the case to EPA, and the United States identified 141 instances between 2008 and 2015 where Yuengling violated pretreatment permit requirements, and discharged biological oxygen demand (BOD), phosphorus, and zinc to the GPASA treatment plant in quantities exceeding their permit limits.  The resulting fine was hefty, resulting not only in a cash penalty but Yuengling agreeing to make significant facility upgrades and operational changes.  Such measures include having to design and implement an environmental management system for its breweries, conduct environmental audits, or optimize and improve operation and maintenance of the pretreatment system.

Breweries use, on average, 7 gallons of water to produce 1 gallon of beer, which means wastewater discharges can quickly become problematic if not properly monitored pre-discharge. Although it is uncertain whether EPA will start investigating breweries for CWA violations more regularly, this case reinforces the importance of breweries double checking their compliance plans and operational protocols to make sure they are staying in compliance with their discharge limits and that pretreatment systems are adequate to reduce the risk of potential violations.

Idaho District Court finds beer and wine “sub-distributorships” should be afforded same protections for distribution rights as distributor

Beer and wine distributorships are protected under Idaho franchise laws, like the majority of other states, from having their distribution rights terminated unless the reason falls within one of those enumerated under Idaho franchise laws. Without one of the listed reasons, a distributor cannot involuntarily lose its distribution rights.  This franchise protection has increased the marketable value of the distribution rights, so that the distributor’s investment in creating the brand and outlet for that particular product is protected as a transferrable right (one that is bought and sold for up to four times the annual gross revenues).  Once a beer or wine distributor is granted distribution rights, the supplier has little opportunity to unilaterally decide to terminate the distribution rights, short of purchasing those distribution rights for an amount agreed upon by the distributor.

Recently, the Idaho District Court found that the same protections are afforded to “sub-distributors” of beer and wine products, limiting the first distributor’s ability to terminate any sub-distribution. With Idaho’s three-tier system, each tier’s role is broken down as:  (1) a supplier, (2) a distributor, and (3) the retail outlet.  In Idaho, there can be more than one supplier for the exact same product, and an entity can be considered both a supplier and a distributor, depending on its actions and how it handles the product.  An entity’s statutory role determines that entity’s obligations in how it engages in its business activities and how its relationships with its buyers must be handled.

Here is how it works. A producer, supplier, manufacturer, or importer is the original “supplier” of the beer or wine.  The person or entity who receives the product, with the intention to resell to retail outlets, is usually the “distributor.”  In some instances, however, a distributor will buy large volumes of product from a supplier, distribute some of that product, and then enter into an agreement (verbally or in writing) with another distributor to “sub-distribute” the product.  In this situation, the original “distributor” also becomes a “supplier” to the “sub-distributor.”  And the original distributor (now also a supplier) becomes subject to the prohibitions and obligations of a supplier when interacting with its “sub-distributor.”

In the case of Bill Jones Distributors, Inc. v. Boise Sales Co., d/b/a Hayden Beverage Co. and Young’s Market Company of Idaho, LLC d/b/a Hayden Beverage Co., the First Judicial District Court for the State of Idaho held that a sub-distributor’s rights to distribute the product could not be terminated by the original distributor when the original distributor wanted to take back its product.  The court found that the original distributor was considered the “supplier” or “dealer” under the respective beer and wine acts, and as the supplier and dealer, it could not terminate the distribution rights without complying with the enumerated statutory grounds for termination.  While Idaho had not previously addressed the “sub-distributor’s” rights under the franchise laws, it was a logical conclusion based on the clear and unambiguous language of the franchise laws.

For more background, please read the court’s decision here (PDF).

Oregon Now Accepting Applications for Recreational Marijuana Licenses

Yesterday, January 4th, 2016 marked the start of the Oregon Liquor Control Commission (OLCC) accepting online applications for recreational marijuana licenses. Producers, laboratories, processors, wholesalers, retailers, and handlers are now lining up to receive OLCC licenses under Oregon’s new regulatory framework. Many cities and counties, however, are not enthusiastic with the new regulatory framework and have “opted out” by prohibiting, by ordinance, the establishment of licensed recreational marijuana producers, processors, wholesalers, and/or retailers. To date, over 80 local jurisdictions have exercised the “opt out” provision under HB 3400.

Licensing resources are available here.

Congress Passes the CIDER Act

Good news for the cider industry with today’s passage of the CIDER Act.  The CIDER Act provides a much needed update to the tax and regulatory framework cider.  To date, the regulatory framework and tax structure for cider has been known to cause cider makers angst given how cider is characterized under the law.  Now, ciders with up to 8.5 percent alcohol will fall in the definition of “hard cider” and be regulated as such instead of being subject to the Tax and Trade Bureau’s wine labeling and packaging requirements.  In addition, the law lessens the tax burden on cider makers by expanding the definition of hard cider to include higher alcohol content ciders and by increasing the amount of carbonation allowed in hard cider before it is taxed at a higher rate that applies to champagne.

For more on the reaction of the cider industry, see   http://www.nwcider.com/news/2015/3/6/press-release-passage-of-cider-act-in-senate-finance-committee.

Issues that private equity firms should consider before acquiring alcohol beverage producers

By Chris Hermann and Bernie Kipp:

Type of Transaction – Asset Purchase versus Stock Purchase. Very important if the acquiring entity wants an immediate continuing operations privilege. Specifically If a PE firm  purchases the assets of the target company  (including the operating name, equipment, IP, inventory and the current brewery  building) and intends to do business post-closing through a new legal entity, TTB will consider that a Change in Proprietorship and 27 CFR 25.72 applies. That means about a 90-100 day delay in order to get the approval from TTB and during that time the new entity cannot commence operations on its own until the new notice is approved by TTB.

If on the other hand, the PE firm purchases the stock of the target company  and operates the business going forward using the existing legal entity, as is, with the only change being the new stockholders and potentially new personnel, then 27 CFR 25.71 and .74 apply and there is no discontinuance of operations because the entity holding the approved permit/notice continues in business.  The company will have to file an amended application within 30 days of the stock purchase. Any new company officials will also have to be vetted and information on the new shareholder(s) and a list of current officers and directors must be provided, but the approximate 90-100 day delay between applying for a new basic permit to produce wine or spirits or registration of a  brewery is avoided.  A new bond will also be required. Main issue:  Does the acquiring firm want/need to be able to produce and sell wine/beer/spirits under the auspices of the acquired company/facility immediately upon closing?  If so then there are several structural issues to consider.

Type of entity – If the entity acquiring the business is a Limited Liability Company very specific personal information regarding background, residences, employment, and source of funds will have to be provided by members (potentially all of them) of the LLC regardless of the level of ownership. TTB’s position is that it requires all members be listed in the Owner Officer table and complete an OOI questions (Place of birth, date of birth, SSN, Criminal history (arrests, convictions) source of funds, etc. ) At a minimum, a list of all members must be provided.  With corporations, the vetting process is limited to Officers, Directors, and holders of 10% or more of outstanding stock. This is important to potential investors that don’t want to go through the vetting process. Main issues are: Have any of the principals in the company ever been arrested for any violation of federal or state law? If so have they been convicted of a felony or a misdemeanor involving taxation of alcohol or tobacco ? and Are the funds invested in the company from known legitimate sources that can be documented?

Potential Tied House issues – Potential issue if the PE firm or any of its principals already own any interest in retail businesses that sell alcohol.  That is very much an issue both at the federal and state level, especially if the PE firm’s  interest is used to influence the purchases of the retailers. (This is the heart of the 3 Tier system). The key regulations are Tied House and Exclusive Outlet sections of the business practices laws. Some states will not allow any common ownership (no matter how diluted)  of a producer and a retailer at the same time while other’s may allow it as long as there is no undue influence on the retailer’s purchasing decisions. It’s mainly a “top down” statute which means there is more concern of a producer controlling a retailer than the other way around. The federal statute is very specific about a Brewer/Winery/Distillery owning or controlling partial interest in a retailer, especially if that interest affects the purchasing patterns of the retailer. Main issues are:  Does the PE for or any of its members own hold interests in restaurants, bars, retail stores or shops that hold state licenses to sell on or off premises, alcohol beverages.

Current standing of Target company – The PE firm should request confirmation as part of its due diligence of the target company that:

The Target Company:

  • Is in possession of approved federal and state licenses from the TTB and state regulatory agency
  • Is in possession of approved  Bonds
  • Is current on its excise tax obligations as of time of purchase
  • Is current in its filing of required and has timely filed all required reports for last three years.
  • Is eligible for any tax credits taken  as small producer for last three years and has filed required notices to establish eligibility.
  • Is in possession of copies of filed excise tax returns, Brewer’s Reports of Operations, exportation documents, and supporting cellar records for brewery operations that occurred in 2012, 2013, and 2014.
  • Is in possession of Certificates of Label approval and Statements of Process approved by TTB which related to products currently produced and sold by the target company.

 

 

Licensed beer/wine Distributors also selling non-alcohol beverages in Washington state

Due to the explosive growth of craft beer sales in many states, including Washington, many distributors are combining non-alcoholic and alcoholic beverage sales into their distribution business.  A key point for Washington distributors is to be aware that the Washington Liquor Control Board (WLCB) contends that the so-called “Tied-House” rules governing the sale of alcoholic beverages apply to any such distributors sale of non-alcoholic, as well as, alcoholic beverages. While the WLCB may not be actively enforcing the rules because they are overwhelmed with marijuana production and sale issues, a  distributor in Washington state selling non-alcohol and alcoholic beverages, must be aware that all of the Tied House restrictions on things provided to retailers (Slotting fees, free goods, free fills) apply to the non-alcohol products as well as beer and wine. The only exception is a 30 day credit period for non-alcohol sales.

 

2nd annual Pacific Northwest Cider Awards: A celebration of creativity and diversity.

The Pacific Northwest Cider Awards (PNWCA) held its second annual cider competition on June 5 and 6 in Seattle. On Friday, June 5, a panel of twenty judges made up primarily of media and cider enthusiasts headed to Seattle Capitol Cider to taste about 145 products in multiple cider categories. Over 35 cideries from the Pacific Northwest participated in the PNWCA. On Saturday, June 6, following the awards, Seattle Cider Company opened its tasting room doors — “The Woods” — to the public and featured 30 ciders from the cideries participating in the PNWCA festival.

The ciders were registered in 14 distinct categories, with gold, silver and bronze medal awarded in almost every category. Each judging panel was made up of 4 or 5 judges who tasted through 2 or 3 categories each. All judges then participated in a second tasting featuring the gold medals of each category to designate the “Best in Show” medal for the 2015 competition. This year’s winner was Wandering Aengus Ciderworks “Bloom,” a cidery based in Salem, Oregon. The complete results of the PNWCA can be found here.

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Implementation of Measure 91: the OLCC is Picking up the Pace

The OLCC announced on May 1st its approach for addressing the implementation of recreational marijuana in Oregon. The OLCC appointed a Rules Advisory Committee (“RAC”) made up of 15 members. The RAC will meet once a month starting June 19, and represents the marijuana industry, local government, law enforcement and the general public.

In addition to the RAC, the OLCC appointed subcommittees to develop draft rules for the different areas related to the regulation of the marijuana industry: Growers, Processors, Extracts, Retail, Advertising/Labeling, Licensing. The subcommittees began meeting the week of June 1. The Growers subcommittee met for the first time on June 1st. The goal of the meeting was to establish an agenda for the next couple of months, addressing issues like: production limits, tracking, licensing, waste disposal, use of natural resources, security and transportation. According to the reaction of the subcommittee, it seems like the main points of discussion will be the establishment of a tracking system, the level of tax to apply, as well as the impact on natural resources (water law, electricity, land use).

The OLCC staff also plan on hosting meetings with other agencies to discuss the impact of recreational marijuana on different areas: land use, banking, energy, and other issues. Continue Reading

Raising water conservation awareness by drinking beer

Clean Water Services (CWS), a water resources management utility in the Tualatin River Watershed, has been creatively exploring a new opportunity for the brewery industry. CWS is taking beneficial reuse of water to a new level by proposing the reuse of recycled water in the brewing process, a proposal first approved by the Oregon Health Authority in September 2014.

The reuse of recycled water in the brewing process has found support in various Oregon organizations: tests showed that the proposed treatment presents very low risk to human health, promotes the importance of conserving water, promotes the need to engage a dialogue about potable reuse, and would help meeting the growing demand for beers. The proposal has the potential to create a new market but raises a few issues.

Health and Sanitary Concerns

The recycled water must be treated to meet or exceed all regulated drinking water contaminant criteria. The analysis regarding the recycled water used to brew small batches of beer revealed that the water was at least as pure and clean as regular water used from municipal resources, and the Oregon Environmental Quality Commission approved the experimentation. A round of public comments on the question was held mid-April 2015. One of the concerns was that wastewater contains “emerging contaminants” that are not regulated by the Safe Drinking Water Act or the Clean Water Act, and consequently, while the recycled water could meet technical drinking water requirements, it still could pose a threat to human health because some of the contaminants are not addressed in those requirements.

The Oregon Department of Environmental Quality (DEQ) is currently revising CWS’s permit requirements to address these issues and make sure that all risks to human health are eliminated when using recycled water in beer production. Continue Reading

Washington State Liquor Control Board Kicks Off Youth Access Compliance Check Program

Attention Washington state retailers: the Washington State Liquor Control Board is kicking off a youth access compliance check program this month. Here’s a guidance the WSLCB recently issued about the program.

The Washington State Liquor Control Board (WSLCB) Enforcement and Education Division’s youth access compliance check program will be beginning in May 2015. The purpose of this letter is to share with you some basics of our compliance check program so that you understand how it works and will be successful in preventing youth access.

Investigative Aides
Our underage compliance checks are conducted using 18-21 year old men and women. These underage people are considered investigative aides (IA), and are employees of the WSLCB. We do not allow IAs to be deceptively mature, and they appear similar to others in their respective age group. The easiest way to pass a compliance check is to check the identification (ID) of anyone appearing youthful. A common regulated industry standard is to check the ID of anyone appear 30 years of age or younger.

If you ask for ID, the investigative aide will either tell you he/she does not have ID with them, or will present their true state issued ID. This will show the store employee the IA is under the legal age to frequent your business, or purchase marijuana. It is very important to check and verify ID. If you ask our IAs how old they are, he/she will respond they are 21 years old. Simply asking for someone’s age is not ensuring compliance, so ID must be checked to verify legal age.

Checking Identification
The best practice for youth access compliance is to always ask for ID, and have the customer take the ID out of the wallet and hand it to you. Next, inspect and verify the picture to ensure the ID belongs to the person presenting it for proof of age. Keep in mind it is common for vertical format ID to be issued to a cardholder before they turn 21 years of age. Any vertical format ID should be closely scrutinized. Also, be sure the ID is not expired, as expired IDs are not valid for proof of age. Last, be sure the ID is one of the acceptable forms of ID. Please visit www.lcb.wa.gov for additional information on acceptable ID.

Penalties
Be sure to check ID at the point of sale, even if someone is checking ID upon entry into the business. Multiple people checking ID at different locations (ex: main entrance and counter) increases success rates for compliance. If the counter clerk relies on the door person to check ID, and an illegal sale occurs, both employees are liable for the violation. The door person could be charged with allowing a minor to frequent, and the employee who made the sale could be changed with furnishing marijuana to the minor, which is classified as a felony criminal offense. Remember that ultimately the licensee is responsible for the acts of their employees, and administrative penalties can also be assessed for non-compliance.

Youth access compliance in retail marijuana stores cannot be successful without your active interest in safe and responsible business practices. Please reach out to your area officer with any questions about checking IDs, acceptable forms of ID, or any general compliance related questions.

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