Reprinted with permission from the March 15, 2018 issue of The Legal Intelligencer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
In a recent article, the New York Times featured the role craft brewery expansion is having on reviving formerly downtrodden commercial districts and bringing a new wave of tourism into states through locally focused trails and tours. The popularity and positive impact craft breweries, distilleries and wineries bring to local economies has not gone unnoticed by state legislatures who have relaxed traditional alcohol beverage laws to both support these important local businesses and to meet the demands of modern alcohol consumers. While each state has shifted toward opening up their regulatory structure to support the craft alcohol movement, over the past several years Pennsylvania has positioned itself a highly desirable location to both strike out as a craft producer as well as a favorable destination for out-of-state manufactures to expand their footprint.
Destruction of the Three-Tiered System
When Prohibition ended in the mid-1930s and states were faced with deciding on how to regulate the manufacture, distribution and sale of alcohol, each state and the federal government enhanced regulations to prohibit the intermingling of the three tiers of alcohol manufacturers, wholesalers and retailers. Known as “tied house” laws, these laws seek to maintain strict separation between each tier to lessen concerns regarding undue influence and control. By way of example, Sections 4-411 and 4-443 of the Pennsylvania Liquor Code makes it unlawful for any alcohol entity, including its individuals owners and employees, from having an interest, direct or indirect in another alcohol entity of a different tier. Aside from strict ownership considerations, these laws together with related provisions also extend to other areas such as the supplier’s inability to set or control the price of its product through the route to market or to influence the on-site advertising or marketing of its products. In short, these restrictions have been particularly onerous on alcohol manufacturers given the philosophical belief underlying these legal restrictions that strict separation is necessary and that wholesalers and retailers need to be protected from negative influences by a more powerful manufacturing class. These laws, however, have been significantly relaxed throughout Pennsylvania when it comes to in-state craft alcohol producers.
Under Pennsylvania law, wineries that produce less than 200,000 gallons of wine, cider or mead per year can qualify as a “limited winery” pursuant to 47 P.S. Section 5-505.2. In calculating this production, the PLCB does not set a minimum (only a maximum) for production and does not count production by the winery via its ownership structure outside of the Pennsylvania. Coupled with Pennsylvania’s lack of a residency requirement for in-state wineries, this means that an out-of-state winery can be licensed as a Pennsylvania limited winery with the related privileges identified below without having to fully set up production in the state.
Once licensed, a Pennsylvania limited winery is able to do business in each tier despite the general prohibition of tied house laws. More specifically, a limited winery is able to sell its wine directly to the PLCB, to other Pennsylvania alcohol manufacturers such as distilleries and breweries, to retail licenses and to the public for on-premise and off-premise consumption. In other words, a limited winery is able to function simultaneously as a manufacturer, wholesaler and retailer allowing it to control and maintain all profits and related advertising from its products.
Due to recent legislation, limited wineries are also allowed to sell other Pennsylvania produced alcohol products from other in-state manufacturers so long as the total sales of the other Pennsylvania products do not exceed 50 percent of the wineries own annual sales. This is significant, as it allows limited wineries to function nearly like a full retail licensee without shelling out the $100,000 to $500,000 required to purchase a retail restaurant (R) license. But if a winery were interested in acquiring a retail license, including a full R license or hotel license, which would allow the winery to sell any and all alcohol products, it is explicitly permitted to do so.
In addition, limited wineries are afforded five board-approved locations off of their original winery license where they can sell their products, other Pennsylvania manufacturers products, and/or develop a full restaurant or hotel.
Pennsylvania limited distilleries likewise share a number of the rights outlined above for limited wineries. To qualify as a limited distillery under Pennsylvania law, the distillery may not produce more than 100,000 gallons of distilled liquor per year, 47 P.S. Section 505.4. Similar to wineries, however, there is no minimum or residency requirement allowing for greater flexibility for qualifying as a limited distillery.
Once licensed, a limited distillery may operate its business through each tier by selling its product at both wholesaler and retail to the PLCB, to other Pennsylvania alcohol manufacturers such as distilleries and breweries, to retail licenses and to the public for on-premise and off-premise consumption. Limited distilleries are also permitted to open “Pennsylvania bars” by selling the products of other Pennsylvania manufacturers subject to the 50 percent threshold or go onto the market for a full retail license. Limited distilleries are further given the opportunity to open five board approved locations with the same rights as those its primary location.
Limited distilleries, as well as limited wineries and breweries, are further allowed to obtain an annual farmer’s market permit which allows them the ability to participate in an unlimited number of farmer’s markets throughout the year to offer samples of their products and sales to-go. Limited distilleries, limited wineries, and breweries are also permitted to participate in, i.e. sample and sell products for on-premise and off-premise consumption, alcohol and food expositions off their licensed premises so long as the intent of the event is to promote and educate attendees regarding Pennsylvania products.
Pennsylvania brewers share a number of the same privileges as limited wineries and distilleries, but to a lesser extent. First, like limited wineries and distilleries Pennsylvania brewers are able to initially self-distribute their products to beer retailers as well as the public for on-premise or off-premise consumption. However, unlike limited wineries and distilleries, if a brewery chooses to sign on with a beer wholesaler and grants that wholesaler primary distribution rights for its products then the brewery forever relinquishes its rights to self-distribute. Second, while breweries are similarly afforded secondary locations, they are limited to two such additional locations instead of the five given to limited wineries and distilleries. And third, while breweries are able to sell other Pennsylvania alcohol products (subject to the same 50-percent restriction) if they want to obtain a full retail privileges they are limited to doing so at their primary location either through applying for a brewpub license, hotel and/or restaurant license.
Despite receiving arguably less benefits than their wine and spirits counterparts, breweries who set up operations in Pennsylvania still receive a number of advantages over and above what is afforded in similar states. For this reason, Pennsylvania has not only taken the lead as the No. 1 producing state for craft beer according to the Brewers Association over major players like California or Colorado, but out-of-state brewers are looking to set up their own in-state breweries to take advantage of Pennsylvania’s favorable legal structure. For example, Goose Island, a Chicago-based brewery owned by Anheuser-Busch InBev, just set up their own Brewhouse in Philadelphia to reap the benefits of Pennsylvania’s favorable laws.
Given the flexibility and extent of the rights afforded to Pennsylvania alcohol producers there is little question that other wineries, distilleries and breweries will look to Pennsylvania as a lead candidate for opening or expanding their locations.
Alva C. Mather is a partner in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum.She is chair of the firm’s Alcoholic Beverage Industry Practice Group and co-chair of the Food and Beverage Industry Practice Group.
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.