Read the “Hospitality Law” issue of COMMUNIQUÉ (May 2018), the official publication of the Clark County Bar Association online today. This issue features content written by members of Nevada’s legal community, including the following articles:
- “Regulation of Trade Practices in the Promotion of Alcohol by Bars and Restaurants” By Paul Larsen, Esq.
- “The Marijuana Conundrum on the Resort Corridor” By Jennifer Roberts, Esq. and Jessie Papperman
Find more content in this month’s 40-page issue (published in print and PDF versions), including the following columns and highlights:
- “Nevada Supreme Court Fights Potential Guardianship Fraud” By Chief Justice Michael L. Douglas
- “Revising the Nevada Rules of Civil Procedure” By Judge Elissa Cadish
- “’Disagree Without Being Disagreeable’ – More on Civility and Respect” By CCBA President John P. Aldrich, Esq.
- “Nevada Appellate Court Summaries” by Joe Tommasino, Esq.
- “Pro Bono Corner: How Accessible is Justice in Nevada?” By Noah Malgeri, Esq.
- “Departments: Bar Business, Member Moves, New Members, and Court Changes”
© 2018 The content on this page was originally published in COMMUNIQUÉ*, the official publication of the Clark County Bar Association. (May 2018). All rights reserved. For permission to reprint this content, contact the publisher Clark County Bar Association, 717 S. 8th Street, Las Vegas, NV 89101. Phone: (702) 387-6011.
Regulation of Trade Practices in the Promotion of Alcohol by Bars and Restaurants
By Paul Larsen, Esq.
Many Nevada attorneys are surprised to learn that a federal agency, the Alcohol Tax & Trade Bureau (“TTB”), is charged with regulating trade practices within the three-tiered system (i.e. manufacturers, distributors, and retailers) created after the repeal of prohibition for the sale of alcoholic beverages in the states. This is because trade practice investigations are extremely resource intensive, and, until the recent past, the TTB has arguably lacked the resources to aggressively pursue its enforcement mission in all but the most egregious or high profile cases. However, in recent years, Congress has given TTB increased funding for the costs of programs to enforce trade practice violations of the Federal Alcohol Administration Act (“FAA Act”), Title 27, United States Code, Sections 205(a) through (d). It is, therefore, prudent to expect increased regulatory activity in this area.
In the past, TTB enforcement of the FAA Act’s trade practices rules in Las Vegas has focused on “slotting fee” arrangements, which are the payment of fees (or anything of value) to a retailer for prominent product placement in a bar or restaurant, usually to the exclusion of competing brands. For example, in 2011, fines totaling $1.9 million were paid by six liquor manufacturers who participated in the 2008-09 Harrah’s Nationwide Beverage Program. The TTB investigation, which focused on activities in the Las Vegas area, alleged that the industry members furnished nearly $2 million through a promoter to Harrah’s Entertainment hotel and casino subsidiary corporations to obtain preferential product display and shelf space in hotel and casino bars and restaurants for the alcohol manufacturers’ brands. The TTB deemed these payments to be unlawful “slotting fees,” and the liquor manufacturers agreed to substantial fines to settle the cases.
There are multiple prohibited trade practices under the FAA Act, but this article shall focus on the two that most pertain to “slotting fees,” the so-called “tied-house” violations under Section 205(b) and commercial bribery under Section 205(c). “Slotting fee” schemes can fit under the prohibitions of either of these sections and there are two key statutory elements for a violation.
First, there is the element of alleged illegal acts (hereafter “substantive conduct”) by the liquor manufacturer (defined in the FAA Act as an “industry member”). For the purposes of this article, an industry member’s substantive conduct can be the furnishing, giving, renting, lending, or selling to a retailer (i.e., any person or entity licensed to sell alcohol to consumers), any equipment, fixtures, signs, supplies, money, services, or other thing of value (subject to several regulatory exceptions) or an industry member’s paying or crediting a retailer for any advertising, display, or distribution service. Note that for commercial bribery alone, there must be a secret payment to an employee of a retailer’s or the offering or giving of any bonus, premium, or compensation to any officer, employee, or representative of a retailer. Often, these two violations are present in the same fact pattern. As a ridiculous example, imagine a vodka manufacturer giving a bar manager a bag of money to display its vodka most prominently on the bar’s shelves.
The second element is exclusion of competition. There must be a certain anti-competitive impact from the substantive conduct on the retailer’s independence to sell, promote, and display competing brands. The substantive conduct must have resulted in the retailer “purchas(ing) any such products from such person [industry member] to the exclusion in whole or in part of distilled spirits . . . in interstate commerce.” (emphasis added). This element is frequently the most challenging for TTB to establish in an alleged violation. Indeed, TTB industry guidance suggests that a written agreement with a simple clause recognizing and preserving the independence of a retailer to select, purchase, display, and promote liquor brands might suffice to preclude a finding of exclusion in the absence of further quantitative evidence of such exclusion.
State alcohol trade practice laws also similarly prohibit or restrict the substantive conduct of liquor manufacturers and distributors in the retail market, but have no specific bans on slotting fees or brand exclusion arrangements. See, e.g., NRS 369.382 (liquor manufacturers prohibited from wholesaling or retailing alcohol); NRS 369.485 (prohibiting certain transactions between alcohol wholesalers and retailers); and NRS 369.487-369.488 (retailers may only purchase alcohol from wholesalers, not manufacturers).
Exclusion, as discussed above, is a challenging element to establish. For many years, federal regulators viewed it purely quantitatively (i.e., did the quantity of other brands of liquor purchased by the retailer decrease while the charged industry member undertook the substantive conduct?). However, more recent regulations, such as 27 Code of Federal Regulations (“CFR”), Section 6.151, dictate that finding exclusion of competition requires a two-part analysis. Exclusion, in whole or in part, occurs:
- When a practice by an industry member, 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 industry member and retailer or by any other means of industry member control over the retailer; and
- Such practice results in the retailer purchasing less than it would have of a competitor’s product.
The regulations identify certain conduct that, by law, meets the first part of the exclusion standard. For example, 27 CFR § 6.152 articulates specific practices which put retailer independence at risk. While the practices specified in these regulations are examples and do not constitute a complete list of practices that put retailer independence “at risk,” the specific examples include: “The act by an industry member of purchasing or renting display, shelf, storage or warehouse space (i.e., slotting allowance). Any “slotting fee” scheme is therefore deemed by law to put the retailer independence “at risk.” To make a prima facie showing of retailer independence being “at risk,” the TTB need show nothing more than an agreement to give specific, preferential shelf or display space for an industry member’s product or brand.
However, the TTB still must also establish the exclusion element relating to the quantity purchased by the retailer. If the TTB can show decreased purchases of competing brands, by agreement or quantitative evidence of decreased purchase of competitors’ products or brands, then both elements of the prohibited trade practice is established.
The recent congressional increases in TTB funding for enforcement of the alcohol trade practice prohibitions indicate that such enforcement actions may be a new priority for the TTB, since it now has the resources (which it lacked in the past) to carry out these investigations. Past enforcement actions in Las Vegas (such as the 2011 case discussed above) indicate that the TTB emphasis will likely be on “slotting fee” cases. Indeed, the TTB annual report for 2016 stressed this implied priority: “[g]iven the many new, often small, businesses entering the market, the TTB’s enforcement of trade practice laws ensures that industry members can compete in a fair and open marketplace.”
Panic by alcohol compliance attorneys may be unwarranted, however. The TTB has previously held compliance expos and seminars and has issued industry advisory circulars in many areas to foster voluntary compliance. Given the lengthy period that TTB enforcement actions were minimal due to lack of funding, it is very likely that many in the industry (and their attorneys) today are not aware of the federal law, and it would seem appropriate (and with precedent) for the TTB to provide compliance education and guidance to the industry before undertaking aggressive enforcement of the FAA Act.
Paul Larsen is a regulatory and administrative law attorney with the multi-state law firm, Snell & Wilmer. He has specific experience in federal alcohol compliance, business and professional licensing, land use, municipal and state government relations, and general regulatory compliance. He has also drafted state and local government laws and regulations concerning alcohol, regulation of money laundering, gaming, and other regulatory issues.
The Marijuana Conundrum on the Resort Corridor
By Jennifer Roberts, Esq. and Jessie Papperman
When Nevada first legalized medical marijuana during the 2013 Nevada legislative session, followed by recreational marijuana in 2016, few could have predicted the quandary it would create for in-house counsel, outside attorneys, and compliance officers of resort hotel casinos.
It first became evident that the blending of marijuana and casinos would not be permitted when the Gaming Control Board sent a notice on May 6, 2014, to all licensed gaming industry members that those who have an interest in a gaming company, whether it be a strip-mall tavern or a Las Vegas Strip resort, could not also have an interest in a medical marijuana business. See NGCB Notice #2014-39. This left a few in the gaming industry having to make a choice between being in the casino business or in the medical marijuana business.
Why did the Nevada Gaming Control Board have such a concern? Because marijuana remains a Schedule I drug under the federal Controlled Substances Act. See 21 U.S.C. § 801 et seq. This means that there is “no accepted medical use” for marijuana, so doctors cannot legally prescribe it for treatment. See 21 U.S.C. § 812. The Controlled Substances Act categorizes marijuana as being the same as heroin, LSD, and ecstasy. Therefore, it is a violation of federal law to possess, distribute, and use marijuana.
The Nevada regulators can bring disciplinary action against a gaming license for failing to comply with “all federal, state and local laws and regulations” relating to gaming operations. See NGC Reg. 5.011(8). If the gaming regulators were to allow a resort casino to permit marijuana consumption, then they could be viewed as authorizing a knowing violation of federal law, which goes against the expectations set forth in their own regulations.
However, when recreational marijuana was legalized, it suddenly became a lot muddier. Resort casinos were now confronted with patrons having easy access to state-sanctioned marijuana, but still being in the position of policing for use. The challenge is that the state continues to prohibit the consumption of marijuana in any public place, see NRS 453D.400, so tourists staying at Strip hotels really have no place, such as a consumption lounge, to use the marijuana products they purchase.
But there are several other issues that resorts must consider. First, what about employees? It is not uncommon policy for gaming properties to require drug testing of employees. However, NRS 613.333 provides that an employer cannot refuse to hire or terminate an employee for “the lawful use in this state of any product outside the premises of the employer during the employee’s nonworking hours” so long as use does not affect safety or the performance of job duties. Although this law was originally adopted to protect cigarette smokers, the question is whether it applies to marijuana users. Does “lawful” just apply to state laws or does it include federal, too?
Some state courts have answered this. For example, in Coats v. Dish Network, 350 P.3d 970 (Colo. 2015), an employee in Colorado who legally used medical marijuana for treatment could be terminated because marijuana is illegal under federal law. However, other courts have recently ruled otherwise. In Barbuto v. Advantage Sales and Marketing, LLC, 78 N.E.3d 37 (Mass. 2017), the Massachusetts Supreme Judicial Court found an employee who legally used medical marijuana for treatment of Crohn’s disease and irritable bowel syndrome could bring a claim of disability discrimination against a prospective employer. Additionally, in Noffsinger v. SSC Niantic Operation Company, LLC, 273 F. Supp. 3d 326 (D. Conn. 2017), the District Court in Connecticut held a job applicant who legally used medical marijuana could not be terminated or refused employment based solely on medical marijuana use. Nevada has not yet made any ruling in this area.
Second, you have to consider the patrons. You will often see signs that give notice that marijuana cannot be consumed on the casino floor. But what about hotel guests? There is a “reasonable expectation of privacy” within a hotel room during the rental period. See Obermeyer v. State, 97 Nev. 158, 160 (1981). What if a guest complains about the smell of marijuana? What if security sees marijuana smoke coming from a patron’s room?
In August 2017, the Nevada Gaming Commission came out strongly against resort casinos having any associations with the marijuana industry. This included conventions, shows, and doing business with anyone in the marijuana industry. However, as there are many marijuana conventions that target the business side versus the consumption side, resort casinos (and the State of Nevada) could miss out on a lot of tourism opportunities. The Gaming Policy Committee, led by the governor, met in November 2017 and advised the Nevada regulators that marijuana business conventions would be acceptable, but that the risk remained on the gaming licensees to ensure that no illegal consumption occurred during such events.
Patrons may also be subject of reports filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Pursuant to federal anti-money laundering laws and regulations, casinos are required to report on money transactions having no “apparent lawful purpose” or involving if “funds derived from illegal activity.” See FIN-2014-G001. FinCEN’s position is that, because marijuana remains illegal under federal law, if the casino knows or suspects that a patron is involved in the marijuana industry, they would file a “Suspicious Activity Report” without the patron’s knowledge. Id.
Finally, what about entertainers? There are several entertainers who openly advocate for or participate in marijuana use, whether it be Willie Nelson, Snoop Dogg, or Cypress Hill. Although an agreement can certainly include a term prohibiting the use of marijuana during the show, are resorts really expected to stop a show if a performer disobeys the rules?
These are among several questions still lingering in the resort corridor about marijuana. Maybe one day these will simply be resolved through U.S. Congressional action to modify the Controlled Substances Act and remove marijuana from Schedule I classification.
Jennifer Roberts, Esq. is the Associate Director of the International Center for Gaming Regulation at UNLV. She also owns her own boutique law firm, Roberts Gaming Law, Ltd. Her legal practice focuses on federal, state, and local liquor laws, as well as land use and zoning; business licensing and compliance; and regulatory and administrative law. She teaches gaming law at the William S. Boyd School of Law at UNLV and the S.J. Quinney College of Law at University of Utah.
Jessie Papperman is currently an LL.M Candidate at the William S. Boyd School of Law at UNLV where she also received her J.D. and B.A.
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