The On-Again, Off-Again Battle Between Tennessee and Diageo Is On-Again

Alcoholic beverages are heavily regulated at the federal and state levels. At the state level, it's each state's Alcoholic Beverage Commission (ABC). Some have slightly different names, but every state has one. ABCs have enforcement authority. They have their own investigators and inspectors. Only in serious criminal cases will the state police also become involved.

We think of the feds as regulating production and the ABCs as regulating sales, but ABCs also license and regulate production when alcoholic beverages are made within their state's borders, such as in Kentucky and Tennessee.

Tennessee, for instance, has a law that says whiskey distilled in Tennessee must be aged in Tennessee, in the same county where it was made, or a county adjacent to that county. That's the law. The reason for it may be obscure but what it requires is clear.

Then why doesn't Keith Bell, the director of Tennessee's ABC, understand it? Why does he think it makes a difference how whiskey removed from Tennessee is going to be used? Sure, if the whiskey is being removed for immediate bottling out-of-state, then there is no violation. But if the whiskey is being removed for aging in another state, such as Kentucky, as 850,000 gallons were, then that company (Diageo-George Dickel) is in violation.

After five years of Diageo sending whiskey made at George Dickel in Tennessee to Stitzel-Weller in Louisville for aging, Tennessee's ABC finally decided to cite Diageo for a violation. Diageo sued in Federal court, saying essentially that it is a dumb law because it serves no purpose.

At a hearing in that case on June 10, George Dickel Master Distiller John Lunn testified that the whiskey stored in Kentucky would be blended with other Diageo spirits, and that no George Dickel Tennessee Whisky had left the state. He further testified that in 2009, Dickel's warehouses were effectively full, so they started to ship newly-made bourbon and wheat whiskey to Louisville, in the meantime making plans to build new warehouses in Tennessee. The alternative would have been to shutter the distillery until new warehouses could be built. Sixteen-thousand barrels of whiskey (about 850,000 gallons) were sent to Kentucky.

That seemed to satisfy ABC Director Bell because when Lunn finished testifying, Assistant Attorney General Kyle Hixson announced that the state would not pursue penalties against Diageo, though he declined to say why. "Then that's it," said Senior District Judge John T. Nixon, and adjourned the hearing.

By the way, the new warehouse at Dickel is open and the removals have stopped.

As is routine, Judge Nixon ordered the parties to write up an agreement for the court to bless, but they couldn't do it. Since the violations have stopped, Tennessee wanted Diageo to pledge never to sin again. Diageo refused. A hearing was ordered for yesterday, at which the judge told the ABC to provide its interpretation of the storage statute in ten days. The ABC objected. It doesn't think the Court has the authority to order that.

The ABC keeps talking about Tennessee whiskey and making sure George Dickel Tennessee Whiskey isn't being aged in Kentucky. Diageo says nothing in Kentucky is intended to be sold as George Dickel Tennessee Whiskey, but that's not the point. Whiskey made in Tennessee is being aged in Kentucky. That's what the law says you cannot do. Diageo is doing it. If the ABC isn't going to enforce the law, it needs to explain why.

So that is where we are. Diageo has 850,000 gallons of Tennessee-made whiskey slumbering in Kentucky, Tennessee ABC Director Bell is deeply confused, and there is nothing a smart company like Diageo likes better than a confused adversary. Surely there is more amusement to come.