AB 1128: The “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale

Welcome to your worst nightmare: You serve a customer at a winery tasting room (or at a party at a winery) who turns out to be younger than 21, and who later gets into an accident or commits a crime like assault where alcohol is a factor and you end up with a felony, which bars you from the wine industry for the foreseeable future. AB 1128 (currently on a fast track to pass through the California legislature) amends Business & Professions (“B&P”) Code Sec. 25658 and ups the potential penalty for sales to a minor (from a misdemeanor to a felony) when the minor causes an injury, death or damage to others. Civil damages for selling or furnishing alcohol to a minor who gets into an accident or causes harm is already part of the law and the potential consequences of a current incident include license revocation for a licensee (Sections 25602 and 25602.1).

The hidden cost of this statute will be paid by business owners (restaurants, convenience stores and, yes, wineries) who (knowingly or otherwise) serve or sell wine to customers who present false ID or who appear to be over the age of 21. Once an individual has a felony on their record they are pretty much forever after barred from being an alcoholic beverage licensee, or an officer, director or shareholder of a corporate licensee.  Proving rehabilitation is possible, but typically not for at least a decade or more afterwards (if then). AB 1128 is more than license suspension or revocation; it’s a death penalty for individual and corporate alcoholic beverage licensees.

And yes, corporations can commit crimes (to quote Mitt Romney “corporations are people, my friend” and the AB 1128 statute applies to “every person”). See also Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).  The application of this penalty statute to corporate entities is easy to imagine (does anyone remember Arthur Anderson LLP or Enron Corporation?); especially in a situation where the damage caused by the minor is extraordinary (for example, a few months ago at a Temecula winery, there were reports of a drunken brawl involving a group of young people that resulted in numerous injuries – what if one of the young people had been under 21 and one of them was seriously hurt?).

What really happens today is that the under 21 crowd have really good false identification available and use those fake IDs to drink or buy alcohol at a tasting room or restaurant or to buy alcohol from a liquor store.  Then, when they get caught drunk driving or are involved in an accident or another crime, they show their real identification and ditch the fake ID (because using false identification is a crime also). It becomes their word against the word of the server, clerk, winery employee or winery owner serving wine as to whether or not B&P Code Section 25660 (reliance upon bona fide proof of ID) was satisfied.  Usually it isn't satisfied because of a lack of proof, lack of availability of the fake ID or minor differences between the ID and the person presenting it (ID defense cases have been lost over eye and hair color, and minor weight or height differences).

We tried a case like this in 2005 involving a girl who was four months shy of 21 and using her sister’s ID at a well-known establishment in wine country.  It was a tragic case.  She crashed into a guardrail at 2:30 AM on a foggy night and died.  She had had two drinks (the last one at 10 pm); the accident was the result of speed and fog, not alcohol (which we had to prove).  We prevailed on behalf of the venue after a very contentious and extended trial but we had to face testimony from the older sister and her parents that the victim couldn't have been using the false ID: it was a swearing contest against the venue owners and everyone in the establishment on the night in question.  If the AB 1128 felony penalty rule had been in place in that case, the matter would have escalated to the Superior Court and the owners could have faced jail time and could have permanently lost their business.  It is cases like this that make us shudder at the implications of AB 1128.

Now consider the retailer exception to AB 1128 that requires a retailer to KNOW that the minor is under the age of 21 in order to face a felony penalty.  This predicate defense, by the way, is NOT available to wineries, who are not retailers.

Has anyone out there ever given a glass of wine to a 20-year-old, married to someone older? Imagine an accident or an incident later in the day or evening.   If AB 1128 passes, conduct that occurs every day in wine country, but on one unlucky day is followed by an accident or an injury, could result in the potential loss of the winery or the business.

And consider further the young person over 21 dating and sharing a bottle of wine with an 18, 19 or 20-year-old; whether in a tasting room, at a restaurant or at home. That young person over 21 would also be liable for a felony in the event of an accident, crime or similar tragedy involving alcohol. The lives that would be ruined would be those caught up in tragic situations; without regard to intent or actual causation.  Suddenly we are exposing young people to jail and potentially marking them for life as felons for drinking with their friends anywhere (because this doesn't just involve venues). These incidents are tragic enough and carry enough consequences without convicting everyone involved in the party of a felony for “furnishing alcohol”.

Is this going to stop those younger than 21 from drinking?  No way. This is a really bad bill that should be vigorously opposed by every thinking parent and by every licensee in the state.

The New York SLA and Online Wine Sales: A Work in Progress

On April 9th, the New York State Liquor Authority (SLA) issued a declaratory ruling describing limits on the activities of national advertisers (marketing websites) who advertise the availability of wine for sale to consumers in New York from licensed NY retailers. While the system presented to the SLA was not the first Internet marketing platform designed to operate within the three-tier system in New York (and to attempt to comply with all of the NY laws and regulations associated with selling wine through the three-tier system), it was the first time anyone had requested a declaratory ruling from the SLA to obtain guidance on how to operate such a marketing platform.

In its eight-page ruling, the SLA analyzed an actual relationship from an earlier iteration of the model that was submitted to the SLA for the declaratory ruling. The SLA noted that the relationship did not comport with the model presented to the SLA for approval (that was because the relationship existed before the model was developed and submitted), and found that the historic day-to-day business relations between that Internet advertiser and that NY retailer violated ABCL §111, which “prohibits a licensee from making its license available to a person who has not been approved by the Authority to hold that license.” In other words, the SLA believed the advertiser in the relationship they examined was too involved with, and had too much control over, the retailer’s business.

This is far from the death knell of Internet wine marketing platforms in New York; indeed, the SLA went out of its way to acknowledge that the Internet, and Internet marketing, is of vital importance to the NY marketplace.  In announcing its ruling, the SLA said it will continue to conduct public meetings and gather more information to further address the issues raised by the more sophisticated model described in the declaratory ruling request, as well as more generally, the issues raised “by the involvement of unlicensed parties in the Internet sale of alcoholic beverages to consumers in this state,” in an Advisory to the trade.

In the meantime, there are a number of important takeaways in the ruling itself that provide helpful interim guidelines to Internet wine marketers and NY retailers.  According to the SLA, a third party advertising arrangement with a licensed NY retailer selling wines through the three-tier system should abide by the following guidelines:

(a) Flat fees to retailers (paid by the Internet advertiser to compensate for a sale) are prohibited;

(b) Advertisers may not decide what wines will be offered for sale by the NY retailer (this is a function reserved to the retailer);

(c) Advertisers may not set the website prices for the wines offered for sale by the NY retailer (this is a function reserved to the retailer);

(d) Advertisers may not perform essential retailer functions such as deciding how consumer funds are controlled and disbursed, and deciding what the retailer’s profit margin will be; and

(e) Advertisers may not retain a “substantial” portion of the sales price for their services.

Thus, a retailer who selects the products that are going to be advertised on its behalf, sets the prices for the products that are going to be advertised, determines and receives normal business margins for the products that its sells, controls the funds received from consumers, and takes normal business risks (for example from loss or breakage of product, or credit card fraud) may utilize Internet advertising services facilitated by third parties.  (These elements were all present in the advertising platform described in the request for declaratory ruling, but the SLA focused on the prior system in its ruling).

There were also some unquestionably safe harbors mentioned by the SLA as a precursor to its Advisory to come:  a third party may host and maintain a retailer’s website and perform "related services," and a retailer may advertise its own products on a third party’s website, so long as consumers are directed to the retailer's website to place orders and the advertiser’s compensation is a flat fee that is "not contingent on the number of sales or the amount sold.”

While this ruling answered some questions, it raised many others that still need to be addressed - such as, is it acceptable for an advertising and marketing fee to be something less than a substantial portion of sales made by the retailer, or must it always be a flat fee?  What kinds of banking arrangements may the retailer use to receive consumer funds?  To what extent may a retailer coordinate with an Internet advertiser who is running a national advertising program? These are all tricky questions and we look forward to further guidance on these issues from the SLA.

California SB 635: What the 4am Bill Really Means for California Communities

SB 635 is a bill that has been introduced by Senator Mark Leno to give communities the ability to  determine the hours of on-sale licensed premises (bars and restaurants).  The bill is community empowerment at its best. It enables local communities (in SF the BOS and the Planning Commission) to decide if there will be extended hours at all and, if so, the exact location where those extended hours would be allowed. These decisions should be made at the local level, not by legislative fiat in Sacramento, which is currently the case. The plan could authorize extended hours applications on one or two streets (like the Embarcadero in certain blocks, or the nightlife corridor in the new SOMA plan on 11th street) or be confined to existing areas of high density nightlife where the need for adjustable planning exists today. The community plan could require some clubs to close at 2 am, some at 3 am and some at 4 am. This would be for the purpose of spreading out the closing time traffic. This would reduce the current burden on law enforcement to handle large crowds being forced out on the street, all at 2 am. The community could also place other conditions on the exercise of an extended hours permit, such as provisional status that could be revoked in the event that the venue did not act responsibly.

The other part of the bill requires that any venue (which could include late night restaurants that cater to "the other 9 to 5") desiring to apply for extended hours to apply to the ABC for the extended hours permit.  The existing ABC protocol that requires notice to neighbors and permits protests (by anyone) to applications for extended hours at any particular venue would apply to these permit.  If the ABC upholds the protest based on interference with quiet enjoyment (or for other reasons) the application may be denied or further conditioned (which is what happens with new venues now).

In short, the City decides if and where extended hours would be allowed and the ABC decides who may hold extended hours permits and under what conditions extended hours permit applications would be allowed.

SB 635 is state wide community empowerment; it’s not just about San Francisco. For example, the Gaslamp district of San Diego, portions of LA and entertainment areas in other major cities and resort communities in CA would be eligible to adopt community plans that address their local situation. There are many high density restaurant and club areas in the state where this option would be a useful tool. The "nanny state" theory of controlling local zoning and land use by state regulation because local communities can't be trusted has no place in California when it comes to entertainment, food and nightlife.

SB 635 allows local communities to take control of these important community decisions and will elevate San Francisco in particular, and California in general, to a level equal to or surpassing the great entertainment areas of the nation and the world. Optional 4 am hours (which require a special permit from the NY State Liquor Authority) has certainly never hurt New York. San Francisco and California deserve no less.

Electronic Invoices in California: Welcome to the 19th Century

Electronic invoicing is one of the simplest and most effective ways to efficiently run a modern business. You can create, send, and archive electronic invoices in a fraction of the time it takes to do the same task with traditional, paper-based methods.  Electronic invoices eliminate the problems that inevitably come with paper-based processes such as misplacing paper, duplicating or overpaying invoices, or making late payments.  Electronic invoicing services can be set up to include online notifications that remind approvers that an invoice needs to be processed.  Electronic invoices also help facilitate audits, because AP departments can more quickly provide access to electronic invoices than to paper invoices buried in files. Last but not least, electronic invoicing is better for the environment.  Hundreds of thousands of trees are harvested each year to support paper invoicing in the US alone, not to mention the related energy and pollution costs; and although digitizing a single invoice may not lower greenhouse gas emissions significantly, the cumulative effect of removing millions of paper invoices from the financial supply chain would have an impact.

However, despite these benefits, despite the fact that there is no California law or regulation that explicitly prohibits electronic invoicing, and despite the fact that many other states’ alcohol regulatory agencies permit it (at least 25 other states by our rough count), the California Alcoholic Beverage Control does not allow suppliers (including wholesalers) to use electronic invoices instead of paper-based invoices when making sales and deliveries to retailers:

“Neither the Alcoholic Beverage Control Act nor the Department’s business regulations specifically authorizes electronic invoicing. A written invoice must accompany the alcoholic beverages when sold by a supplier to a retailer and theses invoices must be maintained on the licensed premises for inspection by Department personnel.”  (Email from the Trade Enforcement Division of the California ABC on December 12, 2012)

As a state agency in a state that is a world leader in developing information technologies and considers itself an environmental leader as well, the ABC’s position on electronic invoicing demonstrates a frustrating reluctance to adapt to the modern world, and effectively keeps alcoholic beverage licensees decades behind other businesses in the modern use of their accounting systems.  As more and more businesses cross state lines, the requirement that in California all suppliers and retailers must maintain (at the risk of license revocation) paper-based and manually-filed invoices seems strangely anachronistic and, for those who have adopted electronic invoicing systems without checking with the ABC, dangerous to their continued licensure.

The History of Amazon and Wine: What Has Changed?

Amazon is back in the wine business. During its first foray, in the Wild West dot com days of the late 1990’s when Amazon invested in WineShopper.com, the idea of Internet technology being used to sell and direct ship wine to consumers terrified alcohol regulators (and wholesalers) and ran into a wall of resistance. The dot com bust then finished off the WineShopper program. Shelving the plans for almost a decade, Amazon’s second foray into the wine marketing and direct shipping business was in 2009 with New Vine Logistics, one of the pioneers of warehousing, compliance and logistics services for wineries. That attempt failed because the CA ABC, having gotten wind of Amazon’s plans, released an Advisory in 2009 that gutted the crucial components of Amazon’s proposed program, including service fees “based upon a percentage of the sale of alcoholic beverages.” That bankrupted New Vine Logistics and set back the program until a new ABC Trade Advisory addressing Third Party Marketing was released on November 1, 2011. By this time the marketing channel had gotten so important to the industry that the ABC was forced to address it head on. Amazon had, by 2012, gotten smarter and learned how to navigate the regulatory minefields, so they are coming at it now with a very different approach – the Amazon Marketplace model. The winery will have an Amazon storefront and the winery will be totally responsible for shipping and compliance – not Amazon.

What it means is that (a) the consumer knows they are purchasing the products from the winery; (b) the winery makes the decisions regarding selection and pricing of products; (c) the winery accepts and fulfills the orders from the winery or another authorized shipping point and (d) although Amazon can collect the consumer funds (including credit card information and payment authorization), it must pass the full amount onto the winery and cannot retain any fee for itself out of those funds. Rather, Amazon bills the winery.

Amazon’s Wine Marketplace fee structure thus appears to have been tailored to strictly comply with the 2011 Advisory. Based on press reports Amazon will be charging wineries $39.99 per month to enroll in the program, a "cooperative fee" of $49 for each $350 sold (which will kick in next year), plus a 15% commission on each sale. The 2011 ABC Advisory simply says that Amazon’s service fee must be “reasonable” and commissions based on sales price appear to be permitted as long as they are reasonable. From what we have seen, this works.

Sara Mann, Hinman & Carmichael LLP. Sara, who has been in the alcoholic beverage industry since 1998 and joined Hinman & Carmichael LLP for the second time in 2011, was Corporate Counsel of both WineShopper.com and New Vine Logistics from the beginning to end of each company.