Key Takeaways | 2024 Recap and What’s on Tap for Alcoholic Beverage Companies

The alcohol beverage industry experienced a transformative year, marked by notable shifts in consumer behavior, innovative product launches, and regulatory changes. During this webinar, McDermott’s Alcohol Group provided a retrospective on the pivotal moments of 2024 that impacted the industry, a preview of what’s to come in 2025, and insights into how your company can stay ahead in this dynamic market.

Top takeaways included:

1. The Rapid Growth of the Non-Alcohol Movement Provides Numerous Opportunities for Traditional Alcohol Industry Members to Expand Into This New Space, but Unique Regulatory Considerations Exist. Consumers are increasingly looking to drink less, and the abundance of new non-alcohol (NA) (e.g., 0.5% ABV) and never-alcohol (NV-A) (e.g., tea, energy drinks, water) product launches is pushing innovation forward to ensure there is something for everyone. Traditional alcohol suppliers can expand into the NA/NV-A beverage space in a variety of ways, from innovation and brand extensions to investments and acquisitions. But the convergence of NA/NV-A and alcohol product portfolios raises key considerations for alcohol industry members to keep top-of-mind, including production processes, labeling and packaging, franchise, route-to-market, and trade practice restrictions. Most importantly, many activities that are expressly prohibited in the alcohol space are common in the NV-A beverage business, and regulators have spoken openly about their concerns to assure that companies with both traditional alcohol and NV-A products do not seek to do indirectly that which they cannot do directly. Industry members that are considering bringing these products into their portfolios should maintain operational, sales, and financial separation as much as possible so as to assuage regulators’ concerns of leveraging one side of the business against the other.
2. Hemp/Low-Dose THC Beverage Guidance and Regulation Are Taking Shape. 
   1.  At the federal level, work on the next Farm Bill is underway. The US House and Senate Agriculture Committees have submitted their versions of the Farm Bill (known as the Farm, Food, and National Security Act of 2024 and the Rural Prosperity and Food Security Act of 2024, respectively). The key difference is that the House Bill would ban all products with any level of tetrahydrocannabinol (THC), whereas the Senate Bill would not directly affect cannabidiol (CBD) products or Delta-9 beverages. The differences between the two bills, if passed in 2025, will need to be reconciled by the House and Senate Conference Committees before a final vote.
   2. Running parallel to the Farm Bill is the proposed “Cannabinoid Safety and Regulation Act,” which offers a regulatory pathway forward rather than an outright ban. The Act calls for preserving the rights of the states to set tighter regulations and requiring the heads of the US Department of Agriculture, US Food and Drug Administration, US Department of Justice (DOJ), and Alcohol and Tobacco Tax and Trade Bureau (TTB) to work together to create a report with recommendations on regulating the sale of beverages containing THC.
   3. The Beer Institute – the national trade association for the brewing industry representing both large and small brewers as well as imports and suppliers – recently publicly announced its guiding principles on intoxicating hemp and cannabis, focusing on four key areas:
      1. Federal excise tax rates that are higher than alcohol beverage products;
      2. A robust regulatory framework;
      3. Responsible labeling, testing, and advertising; and
      4. Consumer safety.
3. The Year Saw a Number of Key Litigation and Enforcement Developments.
   1. TTB Offers in Compromise: In 2024, the TTB received approximately $3.3 million dollars in offer-in-compromise payments for violations including inaccurate tax payments, improper reporting of change in control, trade practice violations (consignment sales), and failure to timely pay excise taxes.
   2. Distributor Termination Disputes: On November 8, 2024, the US Court of Appeals for the Eighth Circuit overturned an $11.75 million dollar verdict (plus attorneys’ fees and costs) against Mast-Jägermeister and Southern Glazer’s in Major Brands, Inc. v. Mast-Jägermeister, et al. A copy of the full opinion can be found here. Although it remains to be seen whether Major Brands will continue to litigate this matter in the lower court, the Eighth Circuit’s opinion should comfort suppliers entering into distribution agreements with Missouri distributors that (1) a community of interest is required to establish a franchise agreement (therefore, an agreement alone may not be sufficient to later claim franchise protections); and (2) a community of interest is not established solely because of a distributor’s investments in the supplier’s brand. Instead, there must be some degree of economic dependence or exertion of economic control, and a determination of whether, if the supplier ended the relationship, the distributor would suffer severe economic consequences. Ohio-based distributor, The House of LaRose (LaRose), filed suit against its larger supplier, Rhinegeist, for failing to reasonably consent to LaRose’s potential sale to Columbus Distributing Co. According to the complaint, LaRose played a “key role” in the craft brewer’s growth and expansion via “substantial investments” including “employing additional sales and discovery personnel, acquiring additional rolling stock and equipment, and incurring substantial advertising, marketing, and promotion expenses.” Larose claims that as a stock deal “House of LaRose will continue to exist” and “all of its assets, facilities and employees, including top management, who service the Rhinegeist brands, will remain in place.” LaRose is seeking declaratory judgment that Rhinegeist cannot reasonably withhold consent under state franchise law. A case management conference is scheduled for February 6, 2025.
   3. Home Distilling: On July 10, 2024, a judge in the US District Court for the Northern District of Texas ruled that the 1868 federal law banning home liquor distillation was unconstitutional and that distillers should be allowed to make alcohol in their homes, sheds, and garages. In Hobby Distillers Association v. Alcohol and Tobacco Tax and Trade Bureau, Hobby Distillers argued that the regulations were unconstitutional overreaches of Congress’s powers. The court agreed, ruling that these regulations exceeded the scope of Congress’s enumerated powers under the Tax and Commerce Clauses. The court found that the regulations did not generate revenue and were not part of a comprehensive regulatory scheme that justified federal oversight of local behavior. As a result, the court declared the federal ban on at-home distilling unconstitutional and granted a permanent injunction against its enforcement. The DOJ filed an appeal to the US Court of Appeals for the Fifth Circuit. We will likely learn the results of that appeal sometime in 2025. Despite the ruling, home distilling remains illegal under most state alcohol beverages laws leaving the practical application of this federal fight potentially more academic than substantive.
   4. Expansion of Direct-to-Retail (“Self-Distribution”) Abilities: Granholm and Tennessee Wine laid the groundwork for the interplay between the state’s rights under the 21st Amendment and the Dormant Commerce Clause, which prohibits laws on the books that economically protect and favor in-state interests to the harm of out-of-state interests.  Out of Tennessee Wine there was exacting standard that built on Granholm that said the Dormant Commerce Clause and 21st Amendment have to live together, such that if a law is discriminatory on its face, the state has to come forward to demonstrate there is a non- protectionist interest attached. After a string of losses by out-of-state retailers with courts upholding the importance of the three-tiered system within the state, plaintiffs have now pivoted toward differential treatment at the producer tier. While the majority of these cases are still winding their way through the courts, at least one court has found in favorite of the plaintiffs following closely the reasoning in Granholm to determine that the Dormant Commerce Clause had been violated by allowing in-state producers (in Iowa) to sell direct to retailers and preventing out-of-state producers from doing the same for their own products. Similar lawsuits have been filed and, if successful, could reshape the legal landscape for self-distribution across state lines.
4. What Can We Expect in 2025? Overall, tariffs, trade wars, and sanctions are still a looming threat. Industry-member appetites for M&A may play a smaller role, with an emphasis on portfolio gap-filling and innovating for new market segments in the NA, NV-A, and hemp/low-dose THC beverage space.