New Craft Beverage Tastes Run Afoul of Distribution Laws

By Theodore J. Zeller III and Matthew B. Andersen

Cheers to the bevy of new craft beverages appealing to new consumer tastes and dramatically changing the alcohol manufacturing industry. Craft breweries, local wineries and craft distilleries have taken innovation in the industry to new heights. Some of these craft beverages can be traditional beer with a twist, literally, ciders, mead and the new emerging “kid on the block,” hard seltzer. While these are all defined as malt or brewed beverages for distribution purposes under the Liquor Code, there are also new craft beverages like “canned cocktails” and wine-based beverages having different manufacturing origins that create other legal implications.

While hard seltzer is the new darling of the alcohol ball and it’s typically made by a brewery as a malt base or sugar fermentation, it can also be made with a distillation from a distillery. Craft distilleries are starting to produce some unique “canned cocktails” and wineries continue to push out ciders that also can be made by a brewery license as long as it does not exceed 8.5% alcohol by volume (ABV). Wineries are creating wine-based products that have similar taste profiles to other products offered by breweries and distilleries. The difference in today’s industry is that there was a time when distilleries, wineries and breweries all competed for the same consumer but with distinct flavor profiles and marked ABV differentials. Now, the taste profiles have merged with similar ABV offerings yet, depending upon the category of manufacturer producing the product, the distribution channel can vary greatly.

Pennsylvania is no different and many states face similar challenges to this new emerging marketplace in the alcohol industry. Surprisingly, beer which is generally the lowest ABV product of the three manufacturing categories, faces the most regulation and tax. In Pennsylvania, like many states, breweries (except for the few in-state breweries that choose self-distribution) are bound by franchise laws and must appoint an exclusive beer wholesaler to represent its products in the retail trade in defined territories. The Pennsylvania Liquor Code and Pennsylvania Liquor Control Board opinions mandate that these relationships are perpetual and cannot be terminated except for good cause. These franchise laws were necessary over a half a century ago to protect wholesalers from larger breweries. Now, wholesalers are usually larger than the breweries they represent, and it has become a significant obstruction to smaller breweries that cannot freely change their wholesale partner without the threat of an expensive court battle.

Breweries pay the Pennsylvania Malt Beverage Excise Tax and distilleries do not pay any state excise tax. While wineries pay a promotional board assessment, wineries, like distilleries, are not burdened with franchise laws and enjoy up to five satellite locations, which act as tasting rooms and offer bottle and case sales. Breweries only get two additional taproom locations and have to maintain at least 10 seats and offer food, while wineries and distilleries have no such requirement. These differences are significant and would have an even more drastic effect on the brewery industry in the state but for convoluted distribution laws that affect each category of manufacturer differently.

Beer, cider, seltzer and mead can be made by a brewery license and distributed by an importing distributor (also known as a beer wholesaler) which can sell it to retailers and other smaller distributors. Distributors may sell these products by the can, bottle, six-pack, 12-pack, case and keg and retail licenses can sell up to 192 ounces of these products; our famous Pennsylvania two six-packs rule. If a hard seltzer is made by a distillery, it cannot be sold by distributors or retailers for off-premises consumption since distilled spirits are controlled by our Pennsylvania State Store system. A winery can make mead and cider and, as long as it is below 8.5% ABV, distributors and retailers can sell those products to consumers, but those manufacturers are not bound by the beer franchise laws with its wholesale partner because their licenses are granted under Article 5 of the Pennsylvania Liquor Code, as opposed to Article 4 where the beer franchise laws are located. Wineries that make wine coolers, mead and cider over 8.5% ABV, or traditional wine, can have their product sold by retailers if the retailer obtains a wine expanded permit (WEP), which allows the sale of four bottles of wine to-go.

Distilled spirits remain locked up by Pennsylvania Liquor Control Board wholesale and retail state store system. Just walk into your local Pennsylvania State Store and you will find a loosely organized collection of various products including canned cocktails, “alcohol concentrates” which fit into a Keurig-like machine to make a canned cocktail, wine cooler, canned wine, sparkling canned wine, mead and cider over 8.5%. These state store offerings and their shelf space must be approved by the Pennsylvania Liquor Control Board. At the Pennsylvania Liquor Control Board meeting on Sept. 11, 2019, the board approved 19 new listings for flavored alcohol concentrates for Anheuser-Busch alone. If a retailer wants to sell these items, it must purchase them from the Pennsylvania Liquor Control Board wholesale system (unless they are directly distributed by a “Pennsylvania” limited winery or distillery). If the retailer has a WEP, it can sell the wine-based products for off-premises consumption but cannot sell the distillery- based products in the same manner.

While all three categories of manufacturing do have self-distribution rights directly to retail, those manufacturers have to be Pennsylvania licensed or they do not obtain those benefits. In addition, depending upon whether you are categorized as a malt or brewed beverage, a wine, or a distilled spirit, there are multiple distribution models that do not completely overlap and are certainly unique to some and exclusive to others. Ironically, some canned cocktails and wine-based products are lower ABV than malt beverages that enjoy wider distribution channels than the 600 or so Pennsylvania State Stores.

The alcohol industry is changing rapidly. Seltzer is not a fad and is already a $500 million industry projected to grow to $2.5 billion in just a few years. It is low- or no-carb, gluten free and sugar free. Canned cocktails can make similar claims but are excluded from the Pennsylvania retail and distributor marketplace except for state stores. Yard’s Pynk Sparkling Berry Ale and Troegs 402 Raspberry Lime Tart Ale compete for the same consumer as Cosmic Cider from Lavery Brewery and East End’s Along Came A Cider. Now, along came a seltzer from Sam Adams in Truly. What will this iconic American brewery, which just merged with Dogfish Head with its distillery just across the border in Delaware, do next? Even America’s oldest brewery, D.G. Yuengling & Son, Inc., recently announced a new brand, named Flight, a low-carb and low-calorie light beer. Clearly, consumers are driving the industry to new boundaries.

The alcohol manufacturing industry is vastly different from the era when our distribution laws were framed. In that time period, the stakeholders in the alcohol industry have staunchly defended their ground. It will be interesting to follow whether protectionism yields to progression, consumer convenience and distribution modernization.

Reprinted with permission from the February 16, 2020, edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved.

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