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Overhauling Pennsylvania's Liquor Code-It's Beer's Turn

Author: Alva C. Mather

Overhauling Pennsylvania's Liquor Code-It's Beer's Turn

Reprinted with permission from the November 21, 2016 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The Pennsylvania General Assembly has once again taken up the Herculean task of modernizing the ­commonwealth's Liquor Code. While this summer's Act 39 was focused on wine, Act 166, which Gov. Tom Wolf signed into law on Nov. 15, zeroes in on beer. Like Act 39, Act 166 brings the promise of more convenience and choice to Pennsylvania's alcohol consumers as well as many new business opportunities both inside and outside the commonwealth.

The Six-Pack Has Been Freed

Act 166, which will go into effect on Jan. 14, 2017, has been dubbed the ­"Six-Pack Law" because it allows beer distributors to sell beer "in any amount," including ­six-packs or in refillable growlers, 47 P.S. Section 431(b). This change gives Pennsylvania consumers more choice and convenience by no longer forcing beer distributors to only sell by the case. It also allows distributors to compete on a more equal footing with grocery and convenience stores as well as bars and restaurants that have had the right to sell up to two six packs to-go as part and parcel of their license. The change should also assist craft brewers both inside and outside Pennsylvania, as the market for a six-pack of craft beer is much greater than the market for a case, given the relatively high price point.

Pennsylvania Manufacturers as The New Bars

Act 166 also continues the ­expansion of privileges to Pennsylvania-based ­manufacturers, now allowing them to sell drinks by the glass of all Pennsylvania ­alcoholic products off of their existing manufacturing licenses. The most important change for breweries puts them on an equal ­footing with limited wineries and distilleries by eliminating the requirement that they obtain a separate brew pub license on top of their manufacturing license to make such sales, 47 P.S. Section 4-446(a)(2). Act 166 also gives breweries the right to sell the products of other Pennsylvania breweries, not just the products of Pennsylvania wineries and distilleries. Pennsylvania wineries and distilleries have been given the same reciprocal privileges, 47 P.S. Sections 5-505.2(a)(6.1), 5-505.4(b)(1), (c)(1). In addition, Act 166 clarifies that all Pennsylvania manufacturers may sell Pennsylvania-produced alcoholic cider.

Act 166 takes away one privilege that Act 39 arguably appeared to grant, which was the right for breweries to sell liquor manufactured by any distillery. Act 39's language allowed sales of "liquor produced by a licensed limited distillery or distillery." On its face, this provision ­appeared to refer to distilleries ­licensed by any state. After Act 39's passage, however, the Pennsylvania Liquor Control Board ­issued an advisory opinion in which it ruled that this language could only be referring to distilleries licensed by the board; otherwise the reference to limited distilleries would be superfluous. In any event, Act 166 closed the potential loophole by adding the requirement that the distilleries must be "licensed by the board."

Finally, Act 166 imposes a new ­limitation on the expanded bar privileges it has granted to Pennsylvania manufacturers. In any given year, sales of other manufacturers' alcoholic products may not exceed 50% of the on-premises sales of a manufacturer's own beverages.

Beer-of-the-Month Club

Act 166 also creates a new Malt Beverage Shipper License. This license is ­similar to the Direct Wine Shipping license created by Act 39, (47 P.S. Section 488) in that it allows shipments directly to Pennsylvania consumers. There are several key differences, however. While the wine shipping license applies equally to in- and out-of-state licensees (47 P.S. Section 488(b)), only out-of-state licensees may obtain the beer shipping license. Id. at Section 448(b). This restriction was imposed to protect the franchise and distribution arrangements among beer wholesalers and retailers existing within the state. In addition, the wine shipping license is limited to wine producers, while the beer shipping license applies to wholesalers and retailers of beer. Finally, the wine shipping license simply imposes a yearly limit of 36 cases, while the beer shipping license imposes a monthly limit of two six-packs, and a yearly limit of one six-pack on any specific brand of beer. This last provision of the beer ­shipping license has the effect of limiting its use to a Beer of the Month Club, whereas, with the wine shipping license a consumer could join a Wine of the Month Club, but is also free to order all 36 cases in one month if desired and purchase all 36 cases of the same type of wine.

Enforcing Geographic Limits

Act 166 imposes a new requirement applicable to retail beer distributors. The Liquor Code has always required that out-of-state beer manufacturers enter into contracts granting importing distributors the right to distribute their products within a specified geographical area, and prohibiting the importing distributors from making sales outside of their designated areas. Similarly, once a Pennsylvania brewers chooses to enter into a distribution agreement with an importing ­distributor, they must also comply with the ­territorial ­requirements. Act 166 adds a new ­provision prohibiting the customers of the importing distributors, who are generally retail distributors, from making sales outside the geographic area of the ­importing distributor from whom they purchased their beer. The purpose of this new requirement is to prevent a retail distributor from purchasing beer in a low-priced area and shipping it to another area of the state undercutting the local distributors. Some retail ­distributors who operate close to the border of designated geographic areas have raised ­concerns about this provision, but not enough to stop passage of 
the act.

Parity for Hard Liquor

Although Act 166 focuses most broadly on beer, it includes two provisions that ­create new opportunities for hard liquor fans. Prior to the passage of Act 166, ­charitable organizations were allowed to obtain permits to auction wine. Act 166 has broadened these permits to cover ­spirits. Similarly, prior the passage of Act 166, the Public Venue License limited alcohol sales at athletic events to beer, but Act 166 has broadened this license to include spirits.

Softening Prohibitions on Interlocking Business

Since the repeal of Prohibition, Pennsylvania law has required separation between the manufacturing, distribution and retail components of the liquor ­business. In particular, the law provided that any person who held more than a 5 percent interest in a retail license was subject to these restrictions. Act 166 softens this restrictions and now allows those holding up to a 10% interest in a retail license to be exempt from the restrictions. Act 166 also newly allows retail licensees to lease land and buildings to distilleries.

Cider and Mead Enter the Fray

Pennsylvania's treatment of cider and mead is a unique hybrid. Under federal law, the products are regulated as wine products. Under Pennsylvania law, their production is regulated as wine, but their sales are regulated as beer. Both Act 39 and Act 166 clarified these regulations. Act 39 brought the maximum alcohol percentage level for cider into agreement with ­federal and ­international law. Act 166 further amends the definition to bring carbonation levels in line with federal and international law. Act 166 also adds mead as a defined alcoholic product, and provides that it will be regulated similarly to cider. Act 166 also clarifies that, going forward, cider and mead will be sold through the state's beer ­distribution network rather than through the state stores.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.