TTB Issues Opinion on Broken and Damaged Bottle Returns

From a Sept. 17, 2010 TTB Email

Breakage

On occasion we have been asked whether returns of breakage (empty broken bottles which initially contained products) would be permitted under 27 CFR 11.32 – Defective products (see TTB Regulations).

Specifically, the inquiries often relate to a situation where the breakage occurs after the retailer takes possession of the product. The wholesaler, who is not at fault for the breakage, then accepts the return of the breakage from the retailer.

Section 105(d) of the Federal Alcohol Administration Act (Act) (27 U.S.C. 205(d)) provides for the return of products for “ordinary and usual commercial” reasons arising after the product has been sold. Sections 11.32 through 11.39 of 27 CFR Part 11 – Consignment sales, specify what are considered “ordinary and usual commercial reasons” for the return of products and outline the conditions and limitations for such returns.

TTB does not consider product breakage to be covered by any of the exemplars of unmarketable products specified in 27 CFR 11.32, nor does TTB believe that product breakage is covered by any of the other sections of the TTB regulations that describe circumstances in which products may be returned for “ordinary and usual commercial reasons” within the meaning of section 105(d).

TTB views the providing of cash, credit, or product to a retailer for breakage as a prohibited inducement under the Tied house provisions of the Act under 27 U.S.C. 205(b)(3) and the related Tied house regulations in 27 CFR 6.21(c) and 6.41. The costs incurred by a wholesaler relating to retrieving the breakage from the retailer would also be viewed as inducements under the same Tied house provisions noted above. Should the requisite elements of interstate or foreign commerce, similar State law (for cases involving malt beverages), and exclusion be present, a violation would exist.

Damaged Products

TTB has also received numerous inquiries regarding whether a return would be allowed under 27 CFR 11.32 when damage occurs to a product after the retailer has taken possession of it. It is TTB’s policy that if the damage is caused by the product itself, such as product deterioration which results in leaking containers or damaged labels, the product will be considered a defective product under 27 CFR 11.32, and shall be eligible to be exchanged for an equal quantity of identical products or may be returned for cash or credit against outstanding indebtedness. However, if the damage to the product is attributable to the retailer, for example, an employee of the retailer runs a forklift through a pallet containing cases of vodka, then the product would not qualify as a defective product under 27 CFR 11.32 and therefore, the product would not be eligible for exchange, return, or credit. In this example, the broken empty bottles would be viewed as breakage and be treated as breakage. Other unmarketable products like damaged labels, half-filled bottles, broken caps, as well as any other damages to the products related to the forklift accident, would be viewed as damaged products not qualifying as defective products.

Potential violations concerning the return of damaged products not qualifying as defective products would be pursued as Consignment sales violations of the Act under 27 U.S.C. 205(d) and 27 CFR 11.21(c).
A onetime acceptance of the return of damaged products by a wholesaler from a retailer would not result in a violation unless the privilege of return was extended at the time of sale. However, it is TTB’s position that the acceptance of a second return of damaged products by the wholesaler from the retailer would infer that an implied privilege of return existed at the time of sale and such return could result in violations of the Consignment sales provisions of the Act.

Please direct your questions to the Director, Trade Investigations Division, at (202) 453-2104.