LIONS AND TIGERS AND TWEETS, OH MY!

Today, judging from the number of emails we have received here, the industry is abuzz over the Sacramento Bee article laying out the current ABC campaign against wineries and breweries letting their fans on Facebook and Twitter feeds know that they were part of the “Save-Mart Grape Escape” program, which was produced by the Sacramento Convention & Visitors Bureau this summer to promote Sacramento as a wine destination.

Mike Testa of the Convention & Visitors Bureau was quoted in the article as saying:

“My concern is that when we reach out in January to the wineries and breweries, they think this event is bad news for them… It isn’t.”

Mike, with all due respect, you are wrong.  This is continuing bad news for every winery, brewery, distillery and retailer in California.  This is part of an ABC “crackdown” on what they perceive to be tied-house violations that has been going on now for well over two years. The ABC has challenged events of all sorts, from music festivals, to shows featuring new products, to charitable events where the sponsors’ names (including retailers) are prominently featured on the collateral, to private label products with retailers’ names on them. The penalties include license suspensions that are often stayed on probation or fines (which start at $3,000 for a retailer and $10,000 for a supplier) in lieu of suspension.

However what the ABC doesn’t explain, because they don’t have to, is the collateral consequences of pleading out the accusation, even with just probation.  That is, this becomes a permanent part of the licensee’s record and is reportable to every other alcoholic beverage agency in the United States (including the TTB) whenever updated applications or new DTC (direct to consumer) permits or OSS (out of state shipper) filings need to be submitted.

Remember the line on the applications about alcohol-related violations?  Well, that’s where disclosures about these violations would need to be made. What’s worse are the consequences of failing to disclose the violation (in gruesome detail), which is a felony charge of perjury.  Just as significant, the violation could adversely affect the application.

Is there a defense?

We think so.

The defense is that the supplier must know and intend for the tied house “thing of value” (whether advertising like a tweet or payment to a third party who buys services from a retailer) to actually provide a tangible benefit to the affected retailer in connection with the sale of alcohol to and by that retailer. Basically, the purpose of the thing of value must be to unfairly push the products of the supplier into the retail account to the detriment of competitors’ products. That is the current test for liability under the federal version of the tied house law, and should (in our view) also be the state test for liability.  It punishes corruption (the purpose of the tied house law) but allows truthful and accurate information to be freely disseminated without fear.

This is a basic First Amendment issue.  A twitter feed announcing support of an event is commercial free speech.  While the 21st Amendment often seems to give the states unrestricted authority, their laws must also comply with the First Amendment.  This was our argument in the bottle-signing case, after which the legislature changed the law.

The law is clear with respect to advertising. A supplier’s communication with customers constitutes commercial speech, which the Supreme Court defined as “expression related solely to the economic interests of the speaker and its audience.”  Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 561 (1980). Commercial speech includes a supplier’s ability to “propose a commercial transaction and the . . . listener’s opportunity to obtain information about products.” Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 565 (2001). In this context, the ability of a supplier to send out a tweet to its customers telling them about an event it supports, and where the event is going to be held, regardless of the fact that a retailer also supports the event and is a named sponsor, is the essence of free expression.

As the Supreme Court stated in Central Hudson, commercial speech is entitled to First Amendment protection unless the government can identify a substantial interest that is directly advanced by its speech restriction, and show that this restriction is not more extensive than necessary to serve that government interest. Central Hudson, 447 U.S. at 566. The government bears the burden of justifying its restriction, and that burden is not satisfied by “mere speculation or conjecture.” Instead, the government must demonstrate that the “harms it recites are real and that its restriction will in fact alleviate them to a material degree.”  Within this context, the First Amendment trumps any Twenty-first Amendment power to regulate alcoholic beverages that the government might try to claim.  44 Liquormart, Inc. v. State of Rhode Island, 517 U.S. 484 (1996).  The Twenty-first Amendment, the Supreme Court explains, “does not license the States to ignore their obligations under other provisions of the Constitution” and does not “qualify the constitutional prohibition against laws abridging the freedom of speech embodied in the First Amendment.”  Id. at 516.

Can the ABC identify the harm that a tweet does? Can the ABC justify the restriction without a showing of a corrupt motive and effect? Does this mean that affected licensees will defend on this basis against this latest assault by the ABC on the liberty of California businesses to tell customers what they are doing and where they are doing it?  That remains to be seen but there are those who have not plead out these charges, and it will be their choice.

Stay tuned for the carpenter and the walrus.

AB 2004: Brewer's Incremental Parity with Wine Makers

California’s piece-meal approach to alcoholic beverage regulation continues with AB 2004, which was recently signed by Governor Brown and gives breweries two privileges previously only granted to wineries. Beginning next year, breweries will be allowed to have outside beer and wine during private events, and they will be allowed to sell packaged beer at certified farmers’ markets.

Wineries are allowed to have other beer and wine on their premises for private events, and have been able to sell packaged wine at farmers’ markets for almost 15 years. For the most part, the new privileges (and their parameters) afforded to breweries are similar to those that wineries have enjoyed, although there are some interesting differences.

First, the new private event privilege will allow breweries to have outside beer and wine not only on their licensed premises, but also contiguous unlicensed premises that are operated by and for the manufacturer. This increases the total area of possible space permitted for private events and is not a privilege currently available to wineries.

Second, AB 2004 does not give brewers the privilege of holding instructional tasting events at farmers’ markets, which wineries will be permitted to do pursuant to AB 2488 signed by Governor Brown this past July.

Third, while wineries and breweries must each sell product that they made themselves at farmers’ markets (as opposed to product they contracted for manufacture), breweries are additionally limited in what farmers’ markets they can attend. The brewery’s manufacturing facility must be located within the county or an adjacent county of the farmers’ market. This requirement brings up some interesting issues, especially in the Bay Area where county boundaries are small and the number of producers is high. Beer producers in Santa Cruz, Mendocino, Napa and Sonoma will not be able to sell their products at San Francisco farmers’ markets.

Brewers and distilleries have been turning up their efforts in California to receive the same benefits as wineries, and have been slowly realizing the benefits of these efforts. Stay tuned for more legislative updates from the Booze Rules blog.  

Expanding, Proud Of It, and Wanting to Tell the World

We just sent out this press release to the world!

Leading Alcohol Beverage Law Firm Expands With New Office Space and Personnel

(San Francisco, CALIF)—San Francisco-based Hinman & Carmichael LLP, one of the nation’s leading law firms specializing in Alcohol Beverage Law, recently announced the addition of three new key hires as well as a move to larger offices in San Francisco. Residing now on the seventh floor at 260 California Street in San Francisco, Hinman & Carmichael also announced the redesign of their firm’s website, which includes the well-read “Booze Rules” blog.

Among the new hires is Erin Kelleher who joined the firm as an associate. Previously with Morrison & Forester LLP, where she was an associate in the corporate department, Ms. Kelleher brings significant experience in contract drafting, governance matters and federal regulatory reporting requirements. Additionally, AiLee Ting joined the firm as Director of Operations, bringing over 20 years of high-level administrative management experience with law firms and corporations as well as a substantive legal experience, having worked for eight years as a corporate paralegal in the startup technology sector. Finally, Sean Walters joined the firm as a paralegal after working with the Buchman Law Firm in New York City where he worked on numerous beverage alcohol licensing matters at both the state and federal level.

Outgrowing its former space, Hinman & Carmichael has moved its offices from Suite 1001 to Suite 700 in the Newhall Building located at 260 California Street in San Francisco. The firm now occupies an entire floor of the historic 1910 vintage building in which it has now resided for over 15 years. This provides room for continued growth and, more importantly, room for the firm wine cellar and continued access to the best bars and restaurants in San Francisco.

In line with its steady growth, Hinman & Carmichael also announced the re-launch of its website www.beveragelaw.com, featuring its popular “Booze Rules” blog focusing on legal and regulatory affairs in the alcohol beverage industry. Additionally, the site hosts the “Czar’s Blog,” which chronicles the adventures of the San Francisco Giants (from the firm’s seats behind home plate at AT&T Park), for the enjoyment of fellow fans and friends of the firm. The events page will now feature upcoming presentations and industry events.

About Hinman & Carmichael LLP
Hinman & Carmichael specializes in legal advice relating to the production, distribution and sale of alcoholic beverages in California and across the country. In particular, the firm focuses on licensing and qualification issues, business and marketing practices, distribution counseling, special counsel services for transactions involving licensees and representing clients in front of federal and state agencies that regulate alcoholic beverages. More information is available at http://www.beveragelaw.com.

CONTACT:

John Hinman, Partner
jhinman@beveragelaw.com • (415) 362-1215

Photographs of Erin Kelleher, Sean Walters and Ailee Ting are available upon request.

DC Weighs in Strongly on Third Party Marketer Delivery Services

On August 13th the District of Columbia ABC Board issued an Advisory Opinion directed at third party marketers who develop websites and apps that allow consumers to purchase alcoholic beverages from brick and mortar retailers and have them delivered.  The DC Advisory is not directed at any particular company, but there are a number of such third party providers (“TPPs”) opening up in various cities throughout the U.S. this year and the service they are providing is a fairly new one.  No state regulators have weighed in on this particular model, other than the New York State Liquor Authority in its declaratory ruling last fall on Drizly.

The DC ABC Board does allow TPPs to “connect customers through the internet to a licensed off-premise retailer, as long as the transaction to purchase alcoholic beverages occurs between the consumer and the licensed retailer.”   The retailer must retain control over the transaction funds, and must be the one who makes the decision whether to fill the order or not; the retailer also must be the one who stores, packages, fills, and ships the orders.

The DC Advisory cites three other jurisdictions that have issued advisories on TPPs in general – California, New York, and Texas – but ends up going beyond them all in restricting the permissible activities of TPPs.  The following guidelines illustrate this narrow scope:

• The TPP cannot charge consumers’ credits cards or directly or indirectly collect or receive funds from the consumer.  The Advisory explicitly says it disagrees with the portion of the CA Advisory that allows TPPs to charge the credit card (and pass the full amount of funds to the retailer).
• The delivery person must be either the retailer, an employee of the retailer, or a “contractor of” the retailer.
• The sales transaction must occur directly between the consumer and retailer “through a separate written agreement.”
• The TPP fee cannot “stem from the transaction between the consumer and licensee” – that is, it must either be a flat fee, or else bear no relation to the transactions. It cannot be based on a percentage of the sale price.

The DC ABC Board appears to consider noncompliance with any of the foregoing to constitute (a) a violation by the retailer of the terms of its license (i.e. acting as an agent for a third party who is not a licensee); and (b) a violation by the TPP of DC’s statute prohibiting alcohol sales without a license.

One variation of the TPP delivery models that appears to comply with the DC guidelines is the Drizly model, which received a positive declaratory ruling from the NY SLA last fall.  Drizly is a TPP that markets retailers’ products on its app, and provides the technology necessary for the interface between retailer and consumer via the app, but the consumer’s funds are received directly by the retailer; the retailer or its employees deliver the products; and Drizly’s fees are flat fees rather than a percentage of the sales.

Though not mentioned in the DC Advisory, there is a 1995 Florida regulation that allows certain delivery service providers to act as agents of the consumer and may be helpful to today’s high tech service providers. The California and Texas advisories were directed at TPP models in general, not specifically to smartphone app delivery models, but they provide good guidance for all TPP providers who plan to operate in those markets.  For those looking to service the DC market, the safe harbor just got significantly narrower.

“Visual Links” between Beer, Wine and Spirits Labels and Retailers Ruled Unlawful in California — the tied house laws run amok

In an exceptionally overreaching and disturbing decision issued by the ABC Appeals Board on May 9, 2014 [AB-9358 - American Vintage Beverage], the Board affirmed an ABC finding that a producer’s use of a retail name on a flavored malt beverage (FMB) product violated the California prohibition on supplier-provided “things of value.”  This is so even though the party that licensed the retail name to the producer for use on its FMB labels was not a California retailer but instead was a non-California corporation that owned the right to license the name for use by others. Although the California licensed retailer received no revenue from the licensing of the name – the license royalties went to the non-California corporation that owned the right to license the retail name – the ABC nevertheless found that the producer had given a “thing of value” to the California retailer.

The Board agreed, finding that the existence of a “visual link” between a product sold by a supplier and the name and identifying characteristics of a retailer acted as advertising for the retailer. A visual link could be a logo, trade dress, a common name or any combination of the foregoing. In this case it was the name and logo of the California retailer, which was part of a national restaurant chain. To make matters worse, the findings in the decision that Section 25500(a)(2) [“things of value”], Rules 106 (a) [free advertising] and (f) [cooperative advertising] were violated was not limited to FMB’s but rather encompass the entire spectrum of alcoholic beverage products.

This ruling affects producers and retailers alike and calls into question the common California practice of retailers (especially large multi-state on and off premises chain retailers) commissioning alcoholic beverage products produced under their own intellectual property and trademarks; and often under their own formulas.  The decision made no distinction between broad market products such as the one in this case, which was produced for general retail sale (and, ironically, was not even sold at the California retailer premises themselves) and “private label” products, which are products produced exclusively for sale at a retailer or retail chain using intellectual property owned or controlled by that retailer. In other words, are the latter – hundreds of thousands of products that make up a significant percentage of all alcoholic beverage products sold at retail accounts across the country – suddenly to be banned under the ABC’s rationale?

A few choice quotes from the decision:

[from the ABC on why they didn’t enforce this before] “We are aware that there are some products that are in circulation that should not be, and we are going to look at those going forward…”
 

[on the effect of the violation and the use of shared IP] “The effect of this ‘sharing’ is to create a visual link between the retail licensees and appellants products, and increases the brand recognition for both. This constitutes free advertising for retail licensees in violation of Rule 106 subdivision (a), and cooperative advertising in violation of subdivision (f).”
The appellants raised a number of defenses, all of which were rejected by the Board: (1) the ABC has no authority over labels – not so said the Board; (2) The TTB preempts label art – nope, concurrent jurisdiction says the Board; (3) royalty payments for the use of IP went to a third party, not the retailer – it’s an indirect benefit to the retailer says the Board; (4) Rule 106(a) and (f) don’t apply to labels – not so says the Board, the labels become signs when the products are put on retail shelves; (5) 48 states have approved the labels – so what, says the Board, we are not bound by rulings in other states; (6) identically situated wine, beer and spirits products are being sold throughout the state and enforcement in this case would violate equal protection – The ABC is going to go after all the others (that’s their job) says the Board; and (7) the ABC issued a Trade Advisory [Third Party Providers – October 2011] that acknowledged that a license may receive compensation for licensing  its IP – that’s just an Advisory and cannot trump the statute and the rule, says the Board.

One important constitutional argument that was not raised is that a label and associated intellectual property are First Amendment-protected free speech. While the ABC and the Appeals Board do not have the authority to adjudicate the constitutionality of a statute, under a First Amendment defense the burden would have been on the government – here, the ABC – to provide compelling reasons why its prohibition of these labels outweighed the protections the First Amendment gives to alcoholic beverage labels as commercial speech.

Where does this leave the hundreds and thousands of alcoholic beverage products on California’s shelves and in California’s restaurants bearing visual links with a retailer?  In limbo until this is all cleared up — if it ever is. In the meantime, however, given this outcome the ABC has no choice but to start enforcing this law.  Regardless, this decision is going quickly to the appellate courts so stay tuned for that battle.

But think about it, if you are a producer making Joe’s Wine you had better hope that there is no licensed Joe’s Wine Shop out there because even if the two of you are NOT connected there is now a “visual link” between your wine and Joe’s Wine Shop. Under the rationale of this decision, both of you would be subject to license revocation for violating the tied house laws.