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  The ILCC Legal Division

TPP Index  |  Next TPP No.

TPP-1:
“Of Value” Standards (“Tied House”)

I. Purpose

To set the procedures of the Illinois Liquor Control Commission whereby the term “of value” (also referred to as “tied house”) shall be defined, and to determine what constitutes items “of value,” and not “of value,” under the Illinois Liquor Control Act, Rules and Regulations of the Commission, case authority, and prior interpretive opinions.

II. Policy Statement

It is the policy of this Commission to enforce the provisions of the Liquor Control Act in relation to prohibiting manufacturers, distributors and importing distributors from giving anything “of value” to retailers, and simultaneously prohibiting retailers from accepting anything “of value” from manufacturers, distributors and importing distributors, unless such transactions are specifically allowable pursuant to Illinois Statute, Rule, Regulation, case law, or Trade Practice of this Commission.

III. Precedent

  1. Statutory History. The term “of value” originates in the Federal Tied House Laws (Federal Alcohol Administrative Act (FAAA), 27 U.S.C. 205 (a), (b) and (c)), which sections respectively refer to “Exclusive outlet,” “Tied house” and “Commercial bribery.” By granting gifts and loaning money to retailers, manufacturers, distributors and importing distributors had effectively “tied” themselves to retailers to the point of excluding competitors. This form of vertical integration between manufacturers, distributors and retailers allowed the distributors to exercise virtual control over the retailers. The federal Tied House Laws prohibited manufacturers and distributors from giving equipment, fixtures, signs, supplies, money, services, or other things “of value” to retailers. The federal Tied House Laws also prohibited manufacturers and distributors from inducing retailers to purchase alcoholic products from them only, to the exclusion of other suppliers. The Congressional objective sought by passage of the federal Tied House Laws, was the prevention of this wholesaler control of retailers. The concern was that buying decisions of the retailers were in actuality being made by the wholesalers, or by retailers too strongly influenced by the wholesalers, so that no independent business decision was being made. Congress also intended that the Act would promote a competitive alcohol market. The underlying premise being a genuinely competitive market led to lower prices, and lower prices removed the incentives for the creation of a black market. This federal law was implemented by rules, found at 27 CFR 1, et seq., as well as Trade Practice Regulations.

    The Illinois General Assembly enacted its own “tied house” provisions in 1934, with the enactment of Laws 1933-34, 2nd. Sp. Sess., p. 57, art. VI, subsec. 4; subsequently Ill. Rev. Stat., ch. 43, par. 122 and 123; now known as 235 ILCS 5/6-5 and 5/6-6. These statutes have been interpreted in single subject opinion letters and most recently by these Trade Practice Policies. Also directly related to this “tied house” concept, Sec. 5/6-4 of the Illinois Compiled Statutes deals with prohibited “Retail Sales by Distillers, Manufacturers, Subsidiaries or Affiliates -Prohibited Transactions and Interests - Exemptions,” which is dealt with elsewhere in these policies.235 ILCS 5/6-5 states, in summary, that no retail licensee may accept, receive or borrow money, or anything else of value, or accept or receive credit for greater than 30 days, directly or indirectly, from any distributor or manufacturer. And, no distributor or manufacturer may give or lend money or anything of value, or extend credit for greater than 30 days, directly or indirectly, to any retail licensee.
    235 ILCS 5/6-6 states that no manufacturer or distributor shall, directly or indirectly:
    1. sell, supply, furnish, give, pay for, or loan or lease any furnishing, fixture or equipment to a retail licensee;
    2. pay for or advance, furnish, lend or give money to a licensee for payment of a license;
    3. purchase or become owner of a note, mortgage or other indebtedness of a retail licensee;
    4. be interested in the ownership, conduct or operation of a retail licensee;
    5. be interested as the owner of a premises upon which a retail licensee is operating.

235 ILCS 5/6-6 does, however, allow manufacturers, distributors and importing distributors to supply retailers with designated types of signage and advertising materials, all such items being subject to additional statutorily prescribed dollar limitations.

[Note: Always consult the most recent version of these statutory provisions when examining individual transactions against the “of value” standard.]

  1. Relationship between federal laws and regulations and Illinois law and regulations. Although the Tied House provisions were developed at the Federal level, the 21st Amendment to the U.S. Constitution granted each State the right to self-determination in regard to the transportation, importation and possession of intoxicating liquors. Therefore, Illinois statutory and regulatory provisions will generally override Federal law and regulation, especially in situations in which strictly intrastate transactions are involved. Where, however, there is no specific Illinois statutory or regulatory guidance regarding a specific issue in the area of “of value” transactions, this Commission will look to Federal law and regulation as a guide in interpreting Trade Practices under which Illinois licensees shall operate.

  2. Commission discretion in determining trade practices under which Illinois licensees shall operate. Federal and State case laws clearly demonstrate that this Commission’s exercise of its “reasonable discretion” will be given “wide latitude” in its interpretation of the statutes and regulations which it is responsible to enforce. Courts give “substantial weight and deference” to interpretations of this Commission. Precedent indicates that this Commission will be granted such deference because of its considerable experience and expertise in administering and enforcing provisions of the Illinois Liquor Control Act. Case law indicates that courts will reverse decisions of this Commission only in the event the decision is “arbitrary and capricious” or if the sanction imposed is “overly harsh.”

  3. Concept of “exclusion” of retail licensees as it applies to the “of value” provisions

    Case Law
    In National Distributing Co. v. United States Treasury Department, 626 F.2d 997 (D.C. Cir., 1980), the Court of Appeals ruled that selling alcoholic product below cost was not something “of value” under the FAAA. Tied House provisions did not prohibit suppliers from cutting prices, even selling below cost, “so long as the price cut [was] not connected with an agreement or understanding to purchase products from one wholesaler to the exclusion of others.” The primary purpose of the “Tied House” sections of the FAAA was the prevention of a form of vertical integration whereby wholesalers or producers might gain effective control of ostensibly independent retail outlets. Thus, price cuts did not violate the FAAA unless they were accompanied by an agreement or understanding to exclude other suppliers’ wares, or by some reasonable prospect of domination or control of a retail outlet by the supplier. The operative term in this analysis was “exclusion.” While a change in purchasing habits of any retailer may certainly have the effect of “exclusion” without the proof of an agreement
    to exclude, the practice of selling below cost was found not to be a violation.

    In Sharpenter v. Illinois Liquor Control Commission, 119 Ill.2d 169, 518 N.E.2d 128 (1988) the Illinois Supreme Court ruled that suppliers allowing differential price discounts between on-premises and off-premises retail establishments did not violate the “of value” provisions of 235 ILCS 5/6-5, if such discounts were not established to create a tied house, but only to increase the volume of alcohol sales. “Price cuts are prohibited by the Act only when they are coupled with an agreement or understanding that a retailer will buy other products of the wholesaler or producer to the exclusion of competitors, or when they lead to domination and control of a retail outlet by the wholesaler or producer.” The Court held that Section 5/6-5 was not violated where the producer maintained such a preferential discount pricing policy only for the purpose of increasing the volume of sales. Please note that the term “exclusion” does not appear in the Illinois “of value” statutory provisions, so the Supreme Court heavily relied upon cases construing the federal standard of “exclusion.”

    In Foremost Sales Promotions, Inc. v. Director, Bureau of Alcohol, Tobacco, and Firearms, 880 F.2d 229 (7th Cir.,1988), the Seventh Circuit held that it was not a violation of the “of value” provisions of the FAAA for wholesaler to advertise in a promotional newspaper distributed by a retail liquor chain. The Court believed that “inducing” a retailer to deal with a particular supplier, “to the exclusion in whole or part” of that supplier’s competitors, as that language is used in the FAAA, must be construed to incorporate some threshold requirement. The Court found that transactions between suppliers and retailers did not induce the “exclusion in whole or part” of competing suppliers unless their purpose was to lead to supplier control over ostensibly independent purchasers. The “exclusion” did not occur merely because an inducement ultimately led to a participating retailer buying less of a competing product. Again, this case appears to have been decided as it was due to a lack of proof of any “bad intent” on the part of the wholesaler.

    And finally, in Fedway Associates, Inc. et al v. United States Treasury, Bureau of Alcohol, Tobacco and Firearms, 976 F.2d 1416 (D.C.Cir., 1992), the Circuit Court of Appeals ruled that a distributor’s promotion of giving away videos and televisions to retailers purchasing large quantities of its brands of liquor was allowable. The Court decided that the FAAA did not prohibit a distributor from giving such items to retailers as inducements to purchase quantities of the distributor’s alcohol. The “exclusion” criterion had to give due credence to the significance of competitive wholesale promotions. Such promotional practices not only fostered the traditional benefits of competition in terms of lower prices and improved product quality, but also supported a competitive alcohol market thereby helping to deter the formation of a black market. Again, this case stands for the proposition that a violation of any of the federal “tied house”
    standards must be proven. This Court specifically noted that the BATF in zealously attempting to control inter-tier relationships neglected to actually
    prove its case with competent evidence.

    Federal Regulations. In April 1995 the Bureau of Alcohol, Tobacco and Firearms (BATF) modified its “tied house” regulations. In making such revision, the BATF utilized the criterion promulgated under the Fedway decision to set the standard under which the “exclusion” of retail licensees would be found to exist. “Exclusion” was defined under a two-prong test of whether:
    (1) “a practice by a manufacturer or distributor, whether direct, indirect, or through an affiliate, places (or has the potential to place) retailer independence at risk by means of a tie or link between the manufacturer or distributor and the retailer or by any means of manufacturer or distributor control over the retailer;” and, (2) “the practice results in the retailer purchasing less than it would have of a competitor’s product.” (27 CFR, Subchapter A, Subpart E, Section 6.151(a)(1) & (2))

    In determining whether “exclusion” has occurred, the regulatory body must determine whether: (a) the practice restricts or hampers the free economic choice of the retailer in deciding which products to purchase or the quantities in which to purchase same for resale; (b) the manufacturer or distributor obligates the retailer to participate in the promotion to obtain the industry member’s product; (c) the retailer has a continuing obligation to purchase or otherwise promote the product of the manufacturer or distributor; (d) the retailer has a commitment not to terminate its relationship with the manufacturer or distributor with respect to purchase of the manufacturer or distributor’s products; (e) the practice involves the industry manufacturer or distributor in the day-to-day operations of the retailer; (f) the practice is discriminatory in that it is not offered to all retailers in the local market on the same terms without business reasons present to justify the difference in treatment (27 CFR, Subchapter A, Subpart E, Section 6.153)

IV. Procedures

  1. This Commission possesses broad discretion in making “of value” determinations. Under both Federal and Illinois case law, this Commission possesses reasonable discretion and wide latitude in determining whether activities of licensees violate the “of value” provisions of the Illinois Liquor Control Act.

  2. Absent specific Illinois statutory or regulatory language, this Commission will look to Federal law and regulation for guidance in making determinations regarding “of value" violations. If there is an Illinois statute or regulation specifically determining whether a trade practice violates, or is allowed under, the “of value” provisions of the Illinois Liquor Control Act, this Commission enforces such provision as written. However, where the Illinois statutes and regulations are silent regarding a particular trade practice, this Commission will review federal law and regulation for guidance in making determinations whether a particular trade practice is a violation of the “of value” provisions of the Illinois Liquor Control Act.

  3. Products and services presumed to be “of value.” Unless specifically enumerated as being allowable under the Illinois Liquor Control Act, the Rules and Regulations of this Commission, or Trade Practice enunciated by this Commission, products and services provided by manufacturers, distributors and importing distributors to retailers, as well as such products and services being asked for or received by the retailer, shall be presumed to be “of value” and in violation of the Illinois Liquor Control Act. This Commission recognizes that there may be specific situations in which trade practices which provide something of value to retailers may nonetheless be allowable, and such practices shall be reviewed on a case-by-case basis. Practices which have not received prior determination as being allowable shall be presumed to be “of value,” and in violation. The Commission is attempting to expeditiously update this policy as such case-by-case determinations are made. [See TPP-2 for specific practices upon which the Commission has made determinations whether the practices violated state “tied house” provisions.]

  4. Trade Practices may not be discriminatory. Manufacturers, distributors and importing distributors cannot enter into transactions with retailers, or a class of retailers, which are discriminatory in favor of such retailers, or which allow a particular retailer, or class of retailers, a competitive advantage. However, this Commission recognizes the holding of the Sharpenter case which allowed quantity discount price differentials between on-premises and off-premises retailers, so long as such promotions did not lead to the exclusion of competitors and domination and control over retailers. This Commission will enforce the proposition that promotions which induce exclusion of products in whole or in part are not to be entered into.

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