McDermott Will & Emery

The business opportunities are plentiful, but so are the regulatory considerations. Whether you are a retailer launching your own wine label or a brewery producing beer for a supermarket chain, the business opportunities are abundant, but so are the regulatory considerations.

What Are Private Labels?

While not formally defined at the federal level, according to the Alcohol and Tobacco Tax and Trade Bureau (TTB), “private labels” are labels “created for purchasers other than the ultimate consumer. They may bear a brand name or artwork that is specific to the purchaser, such as a retail store or restaurant, who is buying the product in order to sell it to consumers.”

With a private label, the intellectual property (IP) used to brand and market the product is owned or under the control of the retailer. The retailer enters into a license agreement that allows a producer to produce products under the retailer’s trademarks and IP. The retailer will often identify an independent wholesaler who is willing to accept a lower markup on the product than the usual. The products are subject to the same labeling requirements as any other TTB-regulated product.

Private labels are sometimes confused with control labels, primarily because of the issue of who owns the IP. The supplier owns the trademark and brand name for a control label. The product is manufactured to the retailer’s specifications and sold to a specific account. Control labels are more often prohibited than private labels, as states object to a manufacturer retaining ownership of a brand that a retailer is controlling. Control labels are more often prohibited than private labels. States object to a manufacturer owning a brand which a retailer controls. While private label arrangements are prohibited by some states (e.g. Arkansas), they are permitted in most. In some jurisdictions, such as New York, the supplier or wholesaler is required to limit sales of the private label only to the retailer who owns the IP. Private label products are a challenge. How can they exist without violating anti-discrimination and tied-house laws? However, private label products present an obvious question: How do they exist without violating tied-house and anti-discrimination laws?

For example:

Private labels can pose tied-house issues if the retailer is deemed to have disproportionate control over the production process (e.g., beyond quality control and IP protections). Or, conversely the manufacturer has undue influence over the retailer (e.g. quota sales, exclusivity outlets). This is not an issue in states where private label products are required to be sold only by the retailer who owns a brand. This is problematic for the private label model. This becomes problematic for the private label model.

Accordingly, the primary areas to be mindful of in this space are:

• Tied-house prohibitions and the flowing of “things of value,” particularly in states that do not have statues or regulations that address these types of brands; and
• Anti-discrimination provisions that prevent sales of a product to only one retailer.

Best Practices

1. Modifying a strategy for selling private labels based on a state’s regulations is the best way to manage risk in this space. With this complex regulatory landscape in mind, certain risk mitigation strategies or arguments may support the continued sale of private label brands:
2. No profit-sharing between the retailer and manufacturer;

Arrangements should be arms-length with no undue restrictions or conditions placed on the retailer by the supplier or producer;

Products should flow through the three-tier system;

• No cross-marketing or tie-in sales for private labels with standard brands;
• No sales below cost to the retailer;
• The IP agreements should remain clear that the retailer has the right to use the brand; and
• Use creative wording and avoid using the term “exclusive” in states where anti-discrimination statutes prohibit exclusive retailer arrangements.
• Conclusion
• While this post does not cover everything that there is to know about the private label space, an industry member’s success will ultimately be based on a combination of (1) taking a granular approach, (2) creating a patchwork of solutions across every jurisdiction, and (3) a determination that the benefits outweigh the risks.

• Story originally seen here