2016 LEGISLATIVE UPDATES: Part II

By Rebecca Stamey-White and Erin Kelleher

This is the second legislative update blog post we are doing to discuss all the fun new laws in store for 2016.  For this edition, we’ll get into the main course of advertising, events and tied house.

SECOND COURSE: ADVERTISING, EVENTS AND TIED HOUSE

Co-sponsoring charitable events with retailers now permitted (AB 776: 23355.3)

While there are a lot of changes to the laws around advertising, events and tied house (a particularly nuanced specialty of our firm’s marketing practice), the new law getting the most attention lately has been AB 776, which purports to provide an exception to the thing of value restrictions on supplier social media posts mentioning retailers.

This kind of social media activity (which is rampant in the industry) led to many ABC accusations against suppliers who advertised their participation in Sacramento’s 2014 Save Mart Grape Escape, which our firm defended in front of the ABC.  While the law does permit licensees sponsoring a charity event to mention retailers who are co-sponsors without it being deemed an unlawful thing of value to the retailer, this law does not permit broad advertising by suppliers of retail accounts, as many mistakenly believe.  

Under 23355.3, licensees (which means everybody – you too, virtual wineries!), can sponsor and participate in non-profit events that a permanent retailer is also sponsoring without giving this charitable retailer a thing of value through their sponsorship… BUT (you knew there was a but, right?):

• The money has to go to the charity (who must also get an ABC license)
• The supplier licensee can’t give the sponsoring retailer anything of value
• A retail licensee can’t sell alcohol to the charity licensee
• A licensee can advertise its participation in the event via social media and can share a retailer’s post about the event, as long as it doesn’t post prices, promote the retailer, or pay or reimburse the retailer for advertising
• Non-retail licensee sponsorships can’t involve exclusive products at the event
• Charity licensees can’t get a benefit from permanent retailers in connection with the sponsorship, and
• Permanent retailers can’t offer supplier advertising, sales or promotions in connection with the sponsorship

All of these conditions raise many questions, such as: How the ABC will interpret contracts between licensees and third-party event producers hired by charities? What kinds of lawful activities might be an impermissible thing of value when combined with an event co-sponsorship? Will retailer in-store promotions related to the event be permissible? And, will a retailer will be liable if the charity purchases alcohol for its event from its retail sponsor without the sponsor’s knowledge?

The passage of this law also served as an excuse for the ABC’s dismissal of a good decision in the Renwood case.  Had the decision been adopted, it would have restricted the ABC’s enforcement of the tied house laws more broadly when there is no evidence of an actual thing of value flowing to a retailer.

Alas, onward and upward… it’s a new year, with new social strategies, and we can’t wait to see how our clients will try to push the envelope in this area!

Retailers may purchase digital advertising on supplier sites and social accounts (AB 776: 25500)

AB 776 also calls out an exception that we’ve written about before (the retailer right to pay exception). This exception was already in the code, but with AB 776 is now expressly applied to digital advertising, and it permits retailers to pay fair market value for advertising in supplier publications and social media accounts. This means that if a retailer wants to promote a supplier product or campaign, it can now pay to do so!

You may be wondering: why is that a thing? This is a concept so foreign to other industries that it’s worth mentioning why an alcohol beverage retailer would have to pay a supplier for advertising when it’s already buying the supplier’s product (isn’t that included in the price?).  In the alcohol industry, a supplier can’t legally give a retail licensee (either on-premises or off-premises) anything of value, including a form of advertising common in other industries – the “retailer shout out.”  While the middle tier members may bemoan the gradual chipping away at these so-called tied house laws, until that happens, this is a decent fix for the current advertising predicament, in which rather than giving a retailer a thing of value, most suppliers just want to be able to let their fans know they’re doing an event.

Minimal changes made to retailer locator laws (AB 780: 25500.1)

Another bill getting a lot of attention is AB 780, which we wrote about in a previous post.  This law does not change the privileges available, but recodifies them into one statute that permits suppliers to advertise two or more unaffiliated retail accounts (sometimes referred to as retailer locators). We find it interesting that in its advisory, ABC makes a point of interpreting what constitutes a "direct communication" with consumers, requiring "some relationship between the non-retail licensee and the consumer(s) to whom the information is provided." Apparently "following" or affirmatively going to the supplier's website qualifies, but taking out an ad in a newspaper does not. While we think this distinction is likely irrelevant based on how suppliers are likely to use this exception, we note that we find little basis for the ABC's interpretation here to distinguish between a website retailer locator and a traditional advertising retailer locator. If anyone gets an accusation for this kind of activity, please give us a call - it would be a fun case to defend!

Napa gets a sponsorship money exception for Bottle Rock Festival (AB 527: 25503.40)

After the Bottle Rock cases we defended this past year and the continuing appeals we will argue this week in front of the ABC Appeals Board related to sponsorships paid for the Bottle Rock Festival 2014 in Napa, we had hoped for an overhaul of the special event provisions in California as an entire state. But alas, AB 1547, which would have created a major event license, didn’t make it out of committee this session. Instead we are left with AB 527, which is one more in a growing list of venue- and event-specific exceptions to the tied house laws rather than a larger fix, this time couched bizarrely as “earthquake relief” for Napa County.

The Bottle Rock cases centered on the allegation that a winery cannot pay an event producer sponsorship funds, meaning it’s on the supplier to conduct event-by-event vetting to determine whether that sponsorship money will somewhere down the line support any retail licensees or whether those event producers happen to have any investments – even distant ones – in retail licensees.  According to the ABC, a supplier can be subject to a $10,000 fine for sponsoring an event if it’s possible that those funds eventually made their way to a retail account—except in Napa under the exception in AB 527, and the dozen or more other venues in the state that have already been granted similar exceptions.

Throw another one onto the pile - Sonoma State Green Music Center and San Diego Del Mar Racetrack Exceptions (SB 462: 25503.6 and 25503.34)

We have long lamented the piecemeal approach to tied-house legislation in California, and this is just another example. SB 462 expands existing tied-house exceptions in 25503.6 of the code applicable to advertising arrangements between licensees at certain venues to include the Green Music Center at Sonoma State University, and fairgrounds with a horse racetrack and equestrian and sports facilities located in San Diego County.

Additionally, 25503.34 was added to the code, permitting alcoholic beverage licensees to make monetary or alcoholic beverage contributions to the Green Music Center under certain conditions.

Brewers can now have instructional tasting events at farmers' markets (AB 774: 23399.45, 24045.6 and 25607.5)

We have blogged before about brewers’ incremental parity with wineries with regard to tasting opportunities at farmers’ markets, and it seems as though they are closing the gap. Brewers who obtain a Type 84 Certified Farmers’ Market Beer Sales Permit may now also hold instructional events for consumers, brief outline of the parameters below:

• Existing off-sale privileges are unchanged;
• Eight ounces of beer can be provided per person, per day;
• The tasting area must be roped off in some way from the rest of the market and consumers may not leave the area with open containers;
• Only one licensed beer manufacturer may conduct an instructional event per farmers’ market;
• Type 84 permits may be issued for up to a year, but are not valid for more than one day a week at any particular farmers’ market, however more than one permit can be held at a time for multiple markets; and
• Annual sales at farmers’ markets cannot exceed 5,000 gallons annually.

Find our next post tomorrow for the third course of our legislative updates series!

2016 LEGISLATIVE UPDATES: Part I

By Rebecca Stamey-White and Erin Kelleher

In 2016, we’ll see a lot of changes to California’s laws regulating alcoholic beverages. As the state’s legal experts on alcohol, we’ve been answering a lot of questions from clients about how they can comply with these new laws and take advantage of the new exceptions, so we decided to compile our analysis of the legislative changes into a series of blog posts to ensure your compliance is off to a great start in the new year.

 In order to help our readers digest the information and understand the changes, we’ve grouped our legislative discussion into four courses:

• First Course: Promotional Activities

Pairing Suggestion: an H&C big bottle of wine; best served with your sweepstakes dinner prize.

• Second Course: Advertising, Events and Things of Value

Pairing Suggestion: Renwood 2014 Old Vine Zin, to be enjoyed while you check-in at our restaurant on social media.

• Third Course: Licensing, Qualification and Tied House Ownership

Pairing Suggestion: White Russian with craft coffee liqueur and locally-sourced vodka, because you can soon enjoy a cocktail when you visit your favorite craft distillery.

• Fourth Course: The Medical Marijuana Regulation and Safety Act from an alcohol industry perspective.

Pairing Suggestion: Cannabis-infused wine… as soon as we can legally get our hands on some! Rebecca will also be speaking on some of these issues at the Women Grow Bay Area chapter meeting this Thursday in Oakland if you can’t wait for this course.

If you get heartburn from any of these courses, please reach out to us for a legal remedy.  

FIRST COURSE: PROMOTIONAL ACTIVITIES

Alcohol may now be part of a prize for contests & sweepstakes (SB 796: 25600.1 & 25600.2)

In big news for a state that only rejoined the rest of the country in 2013 by even permitting alcohol supplier-sponsored sweepstakes and contests, alcohol may now also be given away as a prize in connection with a contest or sweepstakes, provided that it is an “incidental part of a prize package.”

This is a marked departure from California’s previous position of being strictly against the potentially "overly aggressive marketing" of alcoholic beverages in the form of sweepstakes and contests. The state now blazes a trail by permitting the beverages themselves to be a prize (but not without a gray area to interpret!).

What “incidental” means exactly is not clear. While it is still the case that alcohol cannot be the sole prize that is given away in a contest or sweepstakes, it is less clear how marginal the alcohol prize must be and whether it can be specifically advertised or highlighted in the official rules. In our view, while “incidental” likely includes alcohol poured in connection with trips to supplier premises or at hosted dinners that may involve pairing with the supplier’s products, it likely would not include things like prized bottles of wine or a free bottle of wine every month for a year in addition to such trips.

Bottle signing events are here to stay (SB 796: 25502.2)

The sunset provision of this statute was deleted, allowing celebrity bottle signings to occur indefinitely (click here for a link to the previous Booze Rules post on this topic, outlining the requirements).

Still hungry? Good, because there are three more courses to go…

Hinman & Carmichael LLP is Hiring!

Hinman & Carmichael LLP, the nation’s leading boutique law firm exclusively serving the alcoholic beverage and hospitality industries, seeks a San Francisco-based mid-level associate attorney to join our practice of eight lawyers.  The ideal candidate will have 2-5 years of legal experience, not necessarily in alcoholic beverage regulatory law, but in the related specialties of litigation, administrative defense, regulated industries, advertising and trademark and/or complex business transactions at a mid-size to large law firm.  Candidates must have well-developed legal writing and verbal skills, trial advocacy training and excellent academic credentials.  New lawyers to the firm will have significant client contact and must demonstrate skill in both transactional and strategic representation and administrative legal defense.

A sense of humor and the ability to enjoy good food and beverages is a must. Big firm refugees are welcome here.  U.S. J.D. or LL.M. degree required. Candidates must be actively admitted to the California Bar.  Hinman & Carmichael is an equal opportunity employer. 

No calls. Please send your resume, law school transcript, cover letter clearly articulating your specific interest in the practice and our firm and your relevant experience, as well as a sample blog post of a legal issue affecting the alcohol beverage industry by email to HR [recruitment@beveragelaw.com] (addressed to the partners of Hinman & Carmichael LLP) by EOD January 7th, 2016.  Please review our website for additional information about our practice and examples of previous Booze Rules posts.  Applications sent without all of the required information will not be considered.  Interviews will be conducted the week of January 11, with expected availability to begin work on February 1.

John Hinman Presents NBI Webinar on Basics of Alcohol Beverage Law

John Hinman will be teaching a National Business Institute webinar on the basics of alcoholic beverage law on December 30, 2015 from 11:30 am PST to 1 pm PST.

Here is a link to the seminar webpage: Liquor Law

The agenda for the webinar will be:

·         TTB Trends, Recent Developments and Current Issues

·         Current State Level Legal Developments – Tied House Laws and IP use between the tiers

·         Retailer Liquor Licensing – Issues and concerns

·         Producer Liquor Licensing – Issues and concerns

·         Wholesaler Liquor Licensing – Issues and concerns

·         License conditions as regulatory control

·         Accusation and Protest Hearings – APA Procedures

While this webinar is designed for attorneys seeking a basic understanding of the law as it pertains to alcoholic beverage regulation (and therefore includes continuing legal education credit), it will be valuable for any industry member (management, marketing, distribution and compliance) seeking an understanding of the current business model challenges in today’s regulatory environment.

ABC DISMISSES SAVE MART GRAPE ESCAPE ACCUSATION BUT REFUSES TO ADOPT JUDGE’S DECISION FINDING NO STRICT LIABILITY FOR ABC VIOLATIONS

By: John Hinman and John Edwards

For over two decades the ABC has been filing administrative discipline cases against retail and supplier licensees based upon marketing conduct that is lawful under federal alcohol law, and lawful for every other business in California.  The infamous ABC “thing of value” prohibition on relationships between suppliers and retailers has been ratcheted up over the last decade and is now being applied to prohibit normal marketing activities where the purpose of the marketing - to connect brand owners with consumers - is necessary to producer survival in an increasingly competitive marketplace. In our view, lawful marketing activity informs consumers through all available social media and other channels where product can be found, tasted and purchased; such as at special events (concerts for example), at retail stores and restaurants and at fairs and community gatherings sponsored by different sorts of organizations. 

The ABC adheres to what is legally referred to as a “strict liability” test to evaluate these cases. That means the ABC may charge (and sustain) a violation in the absence of any proof that the licensees involved in the marketing activity engaged in the sort of corrupt activities (such as bribery intended to get the suppliers brands into a retail account) that the law was originally intended to address.  The ABC test, essentially, is if there is any media or other connection between a supplier and a retailer that is not expressly authorized by the ABC Act (but may be authorized by other parts of California law, such as the Commercial Code), a violation of the ABC Act exists and may be prosecuted.

In 1993 the federal government (as a result of the landmark Fedway case authored by now Justice Ginsburg) accepted the court’s view that proof of actual corruption was a necessary precursor to regulatory liability and changed the federal regulations in 1994 to accommodate that principle.  That led to today’s world of federal alcohol regulation where the cases being prosecuted are those where there are provable and anti-competitive bad acts.

One glaring example of the ABC’s myopic strict liability point of view was exhibited in the series of Accusations filed against the suppliers that publicized on social media their participation in the 2014 Save Mart Grape Escape wine and food event organized by the Sacramento Convention & Visitors Bureau (“SCVB”). The event had been held for many years and attracted thousands of patrons.  In 2014, Save Market Supermarkets was the title sponsor of the event.  Save Mart is, of course, an off-sale retail licensee.

Some of the participating suppliers published notices on social media informing readers that the supplier would be offering tastings at the “Save Mart Grape Escape,” using the proper name (and, in some cases, the logo) of the event.  The ABC charged those suppliers with having violated Section 25502(a)(2) of the Business & Professions Code by giving a “thing of value,” free advertising on social media, to an off-sale retail licensee, Save Mart.  Ten suppliers (and Save-Mart, accused of accepting a thing of value) pled guilty and agreed to accept license suspensions.  As a direct result of the accusations, the 2015 Grape Escape event was cancelled by the sponsors.

One winery, Renwood Winery, chose to defend itself against the charges arguing that (1) it did not intend to provide, and had not provided, to Save Mart a thing of value prohibited by the statute; and (2) its Facebook posting was protected commercial speech and penalizing that speech is prohibited by the First Amendment.

The Renwood Winery case was tried on April 28, 2015 before ABC Administrative Law Judge Nicholas Loehr, a former ABC prosecutor and long-time ABC Judge.  In his written decision after the hearing (the decision was filed on September 22, 2015 and held quietly by the ABC for two and half months before being released on November 30, 2015), Judge Loehr held, on the basis of California precedent, that the ABC must prove that penalizing a winery under the ABC laws advances the governmental interests underlying those laws. 

In other words, there must be some proof of an actual corrupt effect on the relationship between the participants (the suppliers and the retailers) in order for liability to be found. No such proof was found to exist in the Renwood case so Judge Loehr ordered the case dismissed. In so doing he rejected the ABC’s strict liability approach to California’s ABC laws. 

In essence, the Judge held that purposeless prosecutions of “per se” violations are not permissible.  Because he found the ABC’s case to be deficient on a statutory analysis, Judge Loehr found it unnecessary to address the winery’s First Amendment defense. However, because he held (as explained in previous Booze Rules blog posts - The Grapes Escaped, A Modest Proposal, Commercial Speech And Alcoholic Beverages Part I, II & III) that California precedent compelled him to apply the analytical framework (and to reach the result) mandated by United States Supreme Court decisions applying the First Amendment to commercial speech, his decision recognized that ABC accusations must be analyzed under a governmental interest test - which means that the ABC must show that its prosecution has a basis in advancing the purposes of the original law.

Judge Loehr held that the purpose underlying Section 25502(a)(2) was to prevent an alcohol supplier from exercising influence over a retailer through corrupt means.  In Judge Loehr’s view, applying that statute to Renwood Winery served no legitimate governmental interest.  In other words, Judge Loehr took the position that licensees should not be penalized on a strict liability basis for conduct that was not shown by the ABC to foster any of the adverse effects on competition that the ABC laws were intended to prevent. 

Rather than accept the reasoning of Judge Loehr’s decision, the ABC (On November 30th, and without explanation) issued an Order rejecting Judge Loehr’s decision.  In addition, the Order dismissed the Accusation against Renwood Winery “in the interests of justice.” 

It was noted in the Order that the Legislature had passed a statute (new Section 23355.3) that will permit wineries, beginning on January 1, 2016, to engage in at least some of the activities that gave rise to the Accusation.  That statute was passed in reaction to the public outcry over the ABC’s original prosecutions of the suppliers that had publicized their participation the 2014 Save Mart Grape Escape. 

The ABC did not address how the “interests of justice” were served by the orders of conditional suspension for the ten suppliers that were required by their settlements to admit that they had violated the statute (and that now have those violations on their permanent records subject to disclosure in filings with the alcohol authorities of every state in which they apply for DTC or OSS permits).   

The ABC can certainly be applauded for exercising their prosecutorial discretion and dismissing an unjustifiable Accusation. On the other hand, the ABC’s action leaves open the question of whether licensees will continue to be subject to strict liability prosecutions. The ABC maintains that it is not required to show that its prosecutions of licensees serve any legitimate governmental purpose.  We disagree with that conclusion, and the case law on the issue (as Judge Loehr explained in his rejected decision) has only found liability where there was an actual effect on the supplier-retailer relationship that can be characterized as corrupt within the meaning of the tied-house laws.

This leaves licensees completely vulnerable to being charged (at almost any time) with technical, “per se,” gotcha, type of violations for engaging in normal business relationships with retailers, or with those that own or have an interest in retail establishments (such as was the case in the 2014 Bottlerock prosecutions now before the ABC Appeals Board). 

Likewise, it remains unclear whether the ABC acknowledges that the First Amendment protects the commercial speech of licensees to the same extent as any other commercial enterprise, as in our view it most assuredly does.  By dismissing the Accusation, the ABC avoided the Renwood Winery case being resolved at  a higher level.  However, avoidance of an appeal merely postpones the inevitable appellate resolution of the critical issues underlying that case and many others.

It is far past time for the end of strict liability as the test of licensee conduct with consumers and between the tiers. All that has been accomplished because of strict liability is the need for the legislature to create an increasingly byzantine (and crazy) set of arbitrary tied house exceptions that apply to some industry members, and some promotions, but not to others in ways that even the ABC (much less the licensee community) doesn’t understand. Maybe that helps the campaign war chests of the legislators who get contributions for drafting limited tied-house exceptions but it does nothing for the producers and retailers of this state.