California Legislative Roundup 2014

A new year brings new California laws regulating the alcoholic beverage industry and in our first Booze Rules post of 2014, we’re highlighting some of the biggest changes. AB 1116: Supplier Entertainment of Consumers Events

An issue near and dear to many of our clients engaging in consumer tasting events, Assemblymember Hall’s AB 1116 extends and slightly opens up B&P Code § 25600.5, which provides a mechanism for suppliers to entertain consumers off their premises and without charge.  Previously, these events were restricted to in-state licensees (distilled spirits manufacturers, winegrowers, rectifier, distillers or their authorized agents) and could only be conducted at premises not licensed for retail sale with the supplier purchasing the alcohol for the event from a licensed caterer.  Under the new law:

- Events may now be conducted by out-of-state distilled spirits shipper’s certificate holders. Note that wholesalers, beer manufacturers, out-of-state wineries and beer manufacturers are still excluded from hosting these events.

- Suppliers may now hold events on licensed hotel premises, except for lobby areas and areas designated as a club, nightclub, or other similar entertainment and alcohol may be purchased directly from the hotel, rather than using a caterer.   This is in addition to venues without a permanent retail license.

- The total number of consumers and their guests allowed at an event may be up to 600 people, instead of the previous limitation of 400 people.  Event hosts are still restricted to 12 events per calendar year with an attendance of more than 100 people and 24 events per calendar year with attendance of under 100 people.

This opens up areas like hotel restaurants and cafes (and permits hotels to cater these events), as long as the hotel keeps other areas open to the public not attending the event.  This is a welcome development for qualified suppliers who were struggling to find venues for their events.

We expect the ABC to issue a trade advisory outlining the changes to this section in the near future. In the meantime, for guidance about the other requirements for conducting these types of events, please see the ABC’s previous trade advisory here.

AB 636: More Bottlesignings!

AB 636 from Assemblymember Hall amends B&P Code § 25503.4, the winemaker’s dinner law, allowing you to add even more signed bottles to your collections.  According to the law that went into effect last year (B&P Code § 25502.2), suppliers and their agents may sign bottles at promotional events at off-sale retailers, but the same privilege was not explicitly extended to on-sale locations in the ABC Act (despite winemakers so commonly signing bottles at winemaker’s dinners that many believe the practice was implicitly authorized by the ABC).  With AB 636, winegrowers, wine importers and their agents may now also sign bottles at on-sale locations such as a restaurant where a winemaker hosts a winemaker’s dinner (B&P Code § 25503.4).  Note that beer and spirits suppliers are not included in this section—the privilege for on-premises bottlesignings is only held by wineries and importers.  This will continue to expose the on premise venues that allow celebrities to autograph bottles of cognac, tequila, vodka and other spirits products to regulatory discipline.

AB 933: Distillers Can Charge for Tastings

AB 933, sponsored by Assemblymembers Skinner and Hall, amends B&P Code § 23363.1 (distilled spirits tastings) and adds § 23363.3 (brandy manufacturer’s tastings).  These sections create a limited privilege that enables distilled spirits manufacturers and brandy manufacturers, respectively, to charge consumers for up to six ¼ ounce tastes of the manufacturer’s own products on its licensed premises. Using the tastes at the distillery in cocktails is expressly prohibited. This will create difficulty for distillers who market their products for use in cocktails.

AB 647: Regulating Beer Growlers

AB 647, sponsored by Assemblymember Chesbro, amends the container labeling requirements for beer containers provided by the consumer to be filled for off-premise consumption (aka “growlers”) by beer manufacturers (also referred to here as breweries), who are more clearly defined by this bill as those who use their facilities and equipment to manufacture beer for commercial purposes.  The new law allows consumers to re-use growlers they previously purchased and had filled by one brewery, at different brewery, though each brewery can decide for themselves whether or not to adopt this practice.  If the brewery does adopt the practice, it must affix a new label to the growler containing all the mandatory information (brand and type, manufacturer and bottler), and completely obscuring all information related to the first beer that had filled the container (brand/name of manufacturer, etc.).

AB 779: Cider Rules

Assemblymember Bocanegra sponsored AB 779, which permits a beer manufacturer who produces more than 60,000 barrels of beer per year to manufacture cider or perry (pear cider), and sell to any licensee authorized to sell wine.  This is interesting, because California regulates cider the same way as wine, as cider is fermented from fruit.  California law also limits the alcohol manufacturer to one category of beverage per manufacturing site, meaning before this bill, cider could only be made by winegrower licensees.  Now large beer manufacturers with the facilities to make cider can do so, although note that the privilege does not go the other way—cider manufacturers do not now have the privilege to make beer.

Also on the Horizon…

Proposed Rulemaking: ABC Rule 106(d)

This isn’t a legislative update, but we wanted to mention that the ABC has proposed amending Rule 106(d), which currently permits suppliers to furnish alcoholic beverage lists to retailers, up to $25 per unit cost to the supplier.  If adopted, the proposed rule will raise the limit to $50 per unit.  Comments closed on December 30, 2013, so an update should be coming out soon.

AB 520: Streamlining the Consumer On-Sale Tasting Law

The Wine Institute and Assemblymember Chesbro are sponsoring a bill to update B&P Code § 25503.5 and add § 25503.57 to permit a supplier or its representative and the on-sale retailer to independently advertise a tasting event, and permits a wine and spirits wholesaler to conduct consumer tastings on behalf of the supplier without prior ABC approval.  These changes provide more flexibility for who may conduct tastings and enables industry members to advertise more easily to consumers without potentially violating the tied house laws.

We’ll be delving into some of these topics in more detail in future postings, so stay tuned for more Booze Rules in 2014!

Build It and They Will Come: Craft Products Get New Privileges in CA and TX

Big news for craft producers in California and Texas, two of the biggest consumer markets in the United States: Texas craft brewers and distillers now have expanded retail sale and on-sale consumption privileges and California craft distillers have expanded tasting privileges as a result of newly enacted legislation.  But why does this matter?  Why is it important to give craft producers more control over the experience consumers enjoy on their premises? While now such an essential part of California culture, it is almost hard to remember that the big business of California wine country tourism is a relatively new phenomenon.  It was less than forty years ago in 1976 that the Judging of Paris famously put California wine on the global map and helped shape what is now the fourth largest wine-producing region in the world.  The demand for California wine in the 1970’s fueled rapid growth and the number of wineries in the state ballooned from 227 in 1966 to more than 3,400 in 2010, according to the Wine Institute.  Strength in numbers and burgeoning state revenue created a powerful lobbying force, and California wineries pushed for legislation to give wineries broad privileges to allow consumers to experience California wine country by tasting and buying wine directly from the beautiful winery properties for both on-premises and off-premises consumption (and later, the privileges of shipping directly to consumers, but that’s another bedtime story).  Other states soon followed suit, and wine countries popped up across the country, to give the new American wine consumer access to small producers who didn’t have mass distribution in America’s retail establishments.

But under an alcohol regulatory system in which everything is prohibited unless expressly permitted, these tasting and retail privileges did not always extend to local brewers and distillers, whose sectors were dominated by the mass-produced national and international brands, most of whom did very well through the traditional three-tier system and had little interest in bringing consumers to experience their production facilities.

As craft breweries grew in popularity in the 1980’s, California granted the same privileges to local breweries, brewpubs and microbreweries to conduct on-premise tastings and sell to consumers for off-premises consumption.  See Cal. Bus. & Prof. Code § 23357.  We’ve since seen a massive explosion of craft beer that just keeps growing at exponential rates across the country.  The Brewers Association estimates the number of craft brewers to have grown from 8 in 1980 to 537 in 1994 to over 2300 in 2012, with more than 1500 in development around the country.

As a sign of this ever-expanding growth, earlier this year Texas expanded the privileges of brewpubs and microbreweries to permit consumers to tour and taste at the licensed premises and to permit expanded routes to market for small brewers:

• Brewpubs can manufacture up to 10,000 barrels annually instead of 5,000 and can sell to distributors and up to 1,000 barrels to retailers, in addition to consumers who visit their premises (SB 515).
• Brewers and manufacturers who sell less than 125,000 barrels can self-distribute up to 40,000 barrels directly to retailers (SB 516 and SB 517).
• Brewers and manufacturers who produce less than 225,000 barrels annually can sell up to 5,000 barrels of malt beverages produced on the premises for on-sale consumption to consumers (SB 518).

See TABC Press Release, “New craft beer laws signed by Governor Perry, go into immediate effect,” available at https://www.tabc.state.tx.us/home/press_releases/2013/20130615.asp

Craft spirits are growing too, especially with Millennials, who can be seen across the country in bars ordering exclusive specialty cocktails prepared by mixologists, key influencers for growing small batch brands.

As a result of this growth in craft spirits, this year Texas also opened up its laws to include local distillers and rectifiers, who are now able to sell or give away samples of their products to consumers for on-sale consumption up to 3,000 gallons annually, and sell up to two 750ml bottles of their products every thirty days to a consumer who visits the premises, up to 3,500 gallons annually. (SB 905).

This year in California, Governor Brown signed AB 933, which will permit distilled spirits manufacturers to charge each consumer for up to six ¼ ounce tastes of the distillery’s own products on its licensed premises.  The bill will become law in January, meaning distillers will be able to begin charging for tastings, without the necessity of using a work-around protocol like charging for glassware but not the tasting.

It is worth noting that AB 933 does NOT permit distillers to charge for or provide mixed drinks as part of the tastings, specifically stating that these tastings “shall not be given in the form of a cocktail or a mixed drink.”  This is an unfortunate restriction because it deprives consumers of the ability to taste the distilled spirits in the form they are most likely to consume it—in a cocktail.  Moreover, in our current cocktail culture, many distilled spirits manufacturers have very specific drink recipes and mixer recommendations intended for their products that they will not be able to share with consumers on site as part of these tastings.

Additionally, while neither current California law nor AB 933 will permit California distilled spirits manufacturers to sell bottles of their products directly to consumers from tasting rooms—all products will be required to be sold from a retail-licensed premises through the three-tier system—we hope this privilege will not be far behind, despite strong opposition from the distribution tier.

Will craft beer and spirits follow the example set by the American wine industry?  If you build it, will they come?  We hope that the expanded experiential marketing and retail sale privileges that helped the American wine industry tell its story to consumers will now extend to the craft beer and spirits industries, giving consumers the opportunity to fall in love with more small, local and creative brands than ever before.

For more information about craft beverages, please check out the Craft Beverage Expo in May 2014 in San Jose, California.  Hinman & Carmichael’s Rebecca Stamey-White serves on the Advisory Board.

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

On May 20th we wrote a blog on the dangerous nature of AB 1128, which would have elevated the penalty for furnishing alcohol to a minor from a misdemeanor to a felony.  This was one of the most pernicious anti-alcoholic beverage industry (and anti-parent) bills in the history of California. It snuck through the legislature because most folks simply didn’t want to be seen as encouraging in any way youth alcohol use; regardless of the circumstances or the context. We are pleased to report that Governor Brown vetoed the bill and sent the following message:

BILL NUMBER:  AB 1128

VETOED       DATE: 10/12/2013

To the Members of the California State Assembly:

I am returning Assembly Bill 1128 without my signature.

This bill would allow a felony to be charged if a person knowingly provides alcohol to an underage drinker, whose alcohol consumption thereafter causes injury or death.

The behavior targeted by this bill is already a misdemeanor and I am not convinced it should be made into a felony.

Sincerely,

Edmund G. Brown Jr.

We attribute this veto to the good sense shown by the Governor and, just as likely, to the strong messages delivered to the Governor by all of the industry trade associations that this bill was not necessary or advisable.   This is a good reason to continue to support your industry retailer and supplier trade associations.

California Grocers Association v. ABC, Part 2: California Appeals Court Vacates ABC’s Adoption of a Trade Advisory That Correctly Guided Licensee Conduct

In Part 1 of this blog post, we reported on a September 19^th case from the CA District Court of Appeal (DCA) finding that sales of alcoholic beverages could not be made from any checkout stands operated by customers.  See Cal. Grocers Ass'n v. Dep't of Alcoholic Beverage Control, C070375, 2013 WL 5278729 (Sept. 19, 2013). The California Grocers Association (CGA) challenged the CA ABC industry advisory interpreting Business and Professions Code Section 23394.7, which prohibited sales of alcohol from customer-operated checkout stands.

The Trade Advisory at issue interpreted the section to mean that no alcohol could be sold through any checkout stand that the customer operated at any point during the check-out process.  While the DCA agreed with the CA ABC’s interpretation, it also found that the advisory was invalid and violated the APA’s rulemaking requirement for public notice and comment, because “the interpretation is more than a simple paraphrase of section 23394.7.” Id. at *7.

This case thus calls into question whether or not industry members can rely on any CA ABC Trade Advisory that reaches interpretive conclusions about permitted and non-permitted activity and that are adopted without going through the APA rule-making process.

The legacy of this case thus may be more troubling in the long run than the prohibition on self-checkout, because the CA ABC has adopted dozens of Trade Advisories over the last decade interpreting new and complex statutes and policies, from contests, sweepstakes and autographs, to gambling, direct shipping and third party marketing.  For this reason, the CA ABC itself may appeal this case in order to protect the agency’s ability to use advisories to set compliance policies without having to go through the very time-consuming APA rule-making process; which includes public notice, public comment and extensive public hearings.

Hinman & Carmichael LLP lawyers are available should you need assistance complying with Section 23394.7 or with any ABC Trade Advisory.

California Grocers Association v. ABC, Part 1: California Appeals Court Prohibits Alcohol Sales at Self-Check Out Stands

Beginning October 18^th, 2013, California law will prohibit grocery and liquor store customers from purchasing alcoholic beverages at self-checkout stands.  Retail stores with self-checkout stands that currently permit customers to purchase alcoholic beverages from these stands (even those that currently require employee face-to-face ID verification prior to purchase), will be required to send customers with alcohol to traditional checkout stands operated by cashiers. This is the result of a case decided on September 19^th by the California District Court of Appeal (DCA), which ruled that sales of alcoholic beverages could not be made from any checkout stands operated by customers, even if the stands featured a lock on alcohol purchases until a clerk completed a face-to-face verification of identification and released the transaction with an employee code.  See Cal. Grocers Ass'n v. Dep't of Alcoholic Beverage Control, C070375, 2013 WL 5278729 (Sept. 19, 2013).

The case arose from the California Grocers Association’s (CGA) challenge to the CA ABC Trade Advisory interpreting Business and Professions Code Section 23394.7, passed by the legislature in 2011, effective January 1, 2012.  Section 23394.7 provides: "No privileges under an off­sale license shall be exercised by the licensee at any customer­operated checkout stand located on the licensee's physical premises." The industry advisory interpreted the section to mean that no alcohol could be sold through any checkout stand that the customer operated at any point during the check-out process. The CGA maintained that if the checkout stand was locked upon the scan of an alcoholic beverage and required an employee to check ID and release the transaction, then it was no longer a customer-controlled checkout stand and therefore complied with the statute; an entirely reasonable conclusion in the view of most industry members.

The DCA, however, found the CGA argument unpersuasive, and used the plain text and legislative history of the statute to find that alcohol sales may not be completed at any customer-operated stand because “[t]he phrase ‘customer­operated checkout stand’ thus describes the kind of checkout stand ‘at’ which the sale of alcoholic beverages is prohibited.”  Cal. Grocers Ass’n, 2013 WL 5278729, at *2.  While finding that the Department correctly interpreted the statute, the court also found the Trade Advisory was invalid and violated the APA’s rulemaking requirement for public notice and comment, because “the interpretation is more than a simple paraphrase of section 23394.7.” Id. at *7.

Regardless, one result of this case is clear: alcohol transactions will need to take place at employee-operated stands, so that purchases are made “through a face-to-face transaction from beginning to end, [and] the state of California can ensure that the necessary age verification steps are being taken to keep alcohol out of the hands of minors.” Id. at *4

While the case may be appealed to the California Supreme Court by the CGA or the CA ABC, we are nonetheless advising our clients to take all necessary steps to comply with Section 23394.7 in time for the October 18^th, 2013 effective date of compliance and deadline for appeal.

Hinman & Carmichael LLP lawyers are available should you need assistance complying with Section 23394.7 or with any ABC Trade Advisory.