After a January 2016 Ninth Circuit decision, there was a big question mark in California over whether the state could justify its laws creating and protecting the three tier system. The decision raised a real issue over whether the First Amendment right to free speech might triumph over three tier laws preventing supplier-paid advertisements in retail stores. In January 2016, no position was taken by the court on whether the law was justified, but the language of the opinion strongly suggested that the court had doubts that it could be. A June 2017 decision lays that question to rest, and affirms California’s right to legislate to prohibit suppliers from paying retailers for advertising, based on its powers under the Twenty-First Amendment, and thus issuing a strong reinforcement of the validity of the three tier system and the laws that maintain it. On June 14, the Ninth Circuit handed down a ten-to-one en banc decision, rejecting a First Amendment challenge to California’s law preventing suppliers from paying for advertising on licensed retail premises (Retail Digital Network v. Prieto, No. 13-56069). The plaintiff/appellant, Retail Digital Network, LLC (“RDN”), operates a business supplying digital screen displays to retailers across California, most of which are licensed to sell alcoholic beverages. The screens show short advertisements for various different consumer products, and the income received by RDN from those advertisers is shared with the host retail store. Frustrated at their difficulty in selling advertising slots to alcoholic beverage suppliers, RDN brought an action against the California Department of Alcoholic Beverage Control (ABC), in the U.S. District Court for California, asking the Court to find the law stopping suppliers from paying for ads on their screens unconstitutional. In order to succeed in the case, RDN had to overcome a thirty year old decision by the Ninth Circuit in a very similar case, where the company in question sold ads on shopping carts used in retail stores (Actmedia, Inc. v. Stroh, 830 F. 2d. 957 (9th Cir. 1986)) (“Stroh”). The same statute at issue in the RDN case, which prevents anything of value from being provided by a supplier or wholesaler to a retailer in return for advertising, had been challenged in that case, based on the same argument that it infringed the advertiser’s First Amendment right to free speech (the statute in question is California Business & Professions Code §25503(f)-(h)). Back in 1986, the Ninth Circuit concluded that the state’s right to regulate the commercialization of liquor pursuant to the Twenty-First Amendment, and, in particular, to legislate to achieve goals like the promotion of temperance and protection of the three tier system, provided sufficient justifications to uphold the constitutionality of the law. The court used the recognized, four-part, intermediate scrutiny test for analyzing content-based restrictions on non-misleading commercial speech, known as the “Central Hudson” test (based on the Supreme Court’s decision in Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980)). In order to get around the Stroh precedent, RDN argued in its claim that an intervening 2011 Supreme Court decision had changed the Central Hudson test for a First Amendment commercial speech review, creating a more demanding level of Court scrutiny over legislative restrictions on such speech, referred to as “heightened” scrutiny (Sorrell v. IMS Health Inc., 564 U.S. 552 (2011)) (“Sorrell”). After receipt of RDN’s claim, the ABC filed for, and was granted, summary judgment on the basis that the Stroh precedent was not irreconcilable with Sorrell. RDN appealed to the Ninth Circuit, where three judges agreed that Sorrell had changed the level of scrutiny to be applied to limits on speech, and remanded the case to the District Court to hear more evidence on the reasons asserted by the state to justify the law. The District Court was directed by the Ninth Circuit to apply heightened rather than intermediate review to those reasons, on the basis of the decision in Sorrell. In addition to reversing the decision, the Ninth Circuit also took time to point out some concerns for the District Court to consider on remand, in its assessment of whether the ABC could legitimately raise any justification for the law, in part because of the large number of special interest exceptions created by the Legislature over the years. When the initial Ninth Circuit decision was handed down in January 2016, it generated a huge industry response, with many concerns raised over its implied challenge to the integrity of the three tier foundational protections. In a highly unusual circumstance, the Ninth Circuit agreed to a rehearing of the case with eleven judges en banc, which hearing took place in January this year. In the decision issued in June, the Ninth Circuit reversed its own January 2016 ruling, with ten judges confirming the original District Court summary judgment ruling, and one judge dissenting. Of the three judges who originally heard the case in the Ninth Circuit, only Chief Judge Thomas was part of the bench for rehearing, and he was the lone dissent. The court reviewed and essentially reaffirmed its decision in Stroh, and the applicability of the Central Hudson intermediate scrutiny test. The Ninth Circuit majority confirmed that the law in question was as narrowly drawn as possible to serve the state’s important goal of protecting the three tier system, by preventing possible illegal payoffs from suppliers to retailers, disguised as advertising payments, and by preventing suppliers and wholesalers from exerting undue influence over retailers. They diverged from Stroh only to state that they did not endorse the state’s other listed goal of promoting temperance by limiting point of purchase advertising, as being a legitimate justification for the law. The argument raised by RDN, and referred to in the initial Ninth Circuit decision, that the special interest exceptions undermine the purpose of the tied house law, was rejected by the court on the basis that they only affect a small minority of licensed retailers, and have a minimal effect on the entire regulatory scheme. The majority’s decision leaves little question remaining as to the validity of the three tier system, and its legislative and regulatory protections in California. If you have any questions about your alcohol business’ advertising practices or its relationships with retailers, contact one of the attorneys at Strike & Techel.
It’s that time of year when the ABC announces priority applications, and this year’s numbers are sure to make a lot of retail business owners very happy! Every year the California ABC announces which counties are eligible for new on-sale and off-sale general licenses based on population growth versus existing license ratios within each county. The 2016 figures have been released, and the numbers this year are higher than usual. What is a Priority application? General retail licenses authorize the sale of beer, wine, and distilled spirits. They are restricted by county population and must typically be purchased on the open market from an existing licensee, often for a very high premium. Licenses are usually confined to the county in which originally issued, so prices vary drastically across the state. Every year, the ABC announces a ‘priority application period’ when they will accept new license applications. In addition, they announce a number of inter-county transfer allowances – where a business owner in a priority county can purchase a general license from a licensee in any other county and transfer it into the priority county. If you’re in the market for an Off-Sale General Package Store License (Type 21), an On-Sale General Eating Place License (Type 47), or a Special On-Sale General Club License (Type 57) within a county where licenses are available, you should apply. Licenses Available by County The maximum number of priority applications the ABC typically authorizes for each category (new on-sale, new off-sale, inter-county on-sale, inter-county off-sale) is twenty-five. The ABC has authorized the maximum number of priority applications in several counties, including Alameda, Contra Costa, Los Angeles, Orange, Riverside, Sacramento, San Bernardino, and San Diego. For a complete list of license available by county, click here. 2016 Filing Period ABC District offices will accept priority applications by mail or in person from September 12-23, 2016. If by mail, it must be postmarked on or before September 23rd. If the ABC receives more applications than licenses available, a public drawing will be held at the District office. Successful applicants will have 90 days to complete a formal application for the specific premises. Fees Priority application fees are $13,800 for new general licenses and $6,000 for inter-county transfers. A certified check, cashier’s check, or money order must be submitted along with the priority application. Unsuccessful applicants will be refunded the application fee, minus $100 service charge. Residency Requirements Every applicant must have been a resident of California for at least 90 days prior to the scheduled drawing. Exact drawing dates vary by District office, but all are in mid-late October. For corporations, limited partnerships, and limited liability companies, the 90-day residency requirement starts ticking upon registration with the California Secretary of State. Individual and general partnership applicants must submit proof of California residency. If you’re interested in applying for a new or inter-county on- or off-sale general priority license, contact an attorney at Strike & Techel.
Effective January 1, 2016, the California ABC Act contains a new section that loosens the restrictions suppliers face when mentioning a retailer in a social media post. Newly added Business and Professions Code § 23355.3 is aimed at clarifying how suppliers and retailers can co-sponsor nonprofit events. It was drafted, in part, as a response to the backlash that occurred after the ABC filed accusations against several wineries for advertising sponsorship of the “Save Mart Grape Escape” charity fundraising event in 2014. In that instance, several wineries posted or tweeted their support and sponsorship of the event on social media. The ABC reasoned that the suppliers were impermissibly advertising for Save Mart, a retailer, even though the event was held under a nonprofit permit issued to a bona fide nonprofit organization. The ABC alleged that by posting or tweeting about the event, the suppliers were giving a thing of value to the retailer, a practice that has long been considered a violation of California’s tied house restrictions. California law has long permitted supplier licensees to sponsor nonprofit events if the nonprofit gets an event license, and the new law does not fundamentally change that. However, the new section clarifies that a supplier may advertise sponsorship or participation in such events even if a retailer is also a named sponsor of the event. Payments or other consideration to the retailer are still considered a thing of value, and are not allowed, but social media postings no longer fall under that broad category. There are restrictions on what the supplier is permitted to post about the retailer; posts cannot contain the retail price of alcoholic beverages and cannot promote or advertise for the retail licensee beyond mentioning sponsorship or participation in the event. The supplier can share a retailer’s advertisement for the event on social media, but the supplier is not permitted to pay or reimburse the retailer for any advertisement and cannot demand exclusivity of its products at the event. In short, the new section will allow exactly the type of supplier social media support that occurred in the Save Mart Grape Escape situation.
On October 8, 2015, California Governor Brown signed the Craft Distilleries Act of 2015 into law, which creates a new license for craft distilleries. AB 1295 is a step forward for craft spirits producers, who will no longer be subject to the same strict restrictions that apply to traditional Distilled Spirits Manufacturers (Type 4 licensees). The new Craft Distiller’s license allows the production of up to 100,000 gallons of distilled spirits each year and also includes several other key privileges not available to larger distilleries that hold Type 4 licenses: Craft Distillers will be able to sell distilled spirits to consumers, operate restaurants from their premises, and hold interests in on-sale retail licenses. AB 1295 adds several sections to the California Alcoholic Beverage Control Act, including Business and Professions Code Sections 23500 through 23508. Those sections include the following privileges for Craft Distillers:
Craft beer continues to be all the rage in California and across the country. With the increase in demand for local craft beers, we’ve been getting a lot of questions about how to get licensed as a brewery in California. The California Department of Alcoholic Beverage Control (“ABC”) issues three primary license types that permit beer production, including Beer Manufacturer licenses (Type 1), Small Beer Manufacturer licenses (Type 23) and the increasingly popular On-Sale General Brewpub license (Type 75). The license privileges of each type of brewery license vary, and the brewpub license is a good choice for brewers that primarily want to operate a brewpub or microbrewery restaurant rather than sell their beers for consumers to drink off the brewery’s premises. A Type 75 brewpub license authorizes the sale of beer, wine and distilled spirits for consumption at a bona fide eating place, which essentially requires that the facility be a restaurant with its own kitchen that serves meals. The ability to sell distilled spirits as a brewpub is a privilege that many find attractive in deciding between brewery licenses. Type 1 and Type 23 breweries may, but are not required to, operate bona fide eating places, but they are limited to beer and wine, and cannot sell distilled spirits. Additionally, beer, wine, and distilled spirits restaurant licenses (i.e., Type 47 On-Sale General for Bona Fide Public Eating Place) are often extremely expensive as the number of licenses issued is limited per county based on population. There is no cap on the number of Type 75 licenses that can be issued, so the Type 75 license can be an attractive option for businesses that want to sell distilled spirits, although all Type 75 licensees must meet certain brewing requirements. Brewpubs must produce at least 100 barrels of beer per year and can produce no more than 5,000 barrels of beer per year. That production cap is substantially lower than the production allowances for Small Beer Manufacturers (less than 60,000 barrels per year) and Beer Manufacturers (60,000 barrels per year or more). Additionally, a Type 75 brewpub premises must have brewing equipment that has at least seven-barrel brewing capacity. The ABC has recently been looking into the brewing equipment of Type 75 licensees and enforcing against brewpubs that aren’t actually brewing beer or don’t have the requisite brewing capacity. Other key features of Type 75 brewpub licenses include the following: • Cannot make sales from the brewpub premises for off-premises consumption. This means that a brewpub cannot sell bottles, cans, growlers or other containers for consumption away from the brewpub. • Can sell beer produced by the brewpub to California licensed wholesalers. • Must buy all wine, distilled spirits, and beer not produced by the brewpub from a licensed wholesaler or winegrower. Note that brewpubs cannot buy or sell beer or other alcoholic beverages from other brewpubs or retailers. The initial fee for a brewpub license is currently $12,000, which is more expensive than most California license types. The annual fee is determined by the population where the brewpub is located, and varies between approximately $500 and $1,000 per year. Additionally, local rules where the brewpub is located may require additional permitting or other approvals before the brewpub can operate. Lastly, all breweries, including brewpubs, must obtain a brewery basic permit from the Alcohol and Tobacco Tax and Trade bureau, the federal agency that regulates alcoholic beverages. There is no fee for the federal permit, but a bond is required. Contact one of the attorneys at Strike & Techel if you have any questions about starting a brewery!
The California ABC actively enforces the alcoholic beverage laws of the state. We’ll be posting a series of “ABC Violation Round-Up” items discussing some of the violations we have seen in recent enforcement actions. This week….. sale to a true minor. The Violation: You cannot sell or serve alcohol to anyone under 21 years of age in California. The ABC is constantly visiting retailers to make sure this law is enforced. Violations of the law can occur two ways; via a law enforcement decoy sting or via sale to a “true” minor. We covered decoy stings in an earlier post. How to Avoid It: Identification must be requested if there is any question regarding the age of a person requesting access to alcohol. Licensees and their staff must be trained in proper review of identification. Any identification presented must be bona fide, and must match the person presenting it. It is common for ABC investigators to stake-out parking lots at off-sale retailers and follow-up with any young-looking people exiting the retailer with alcohol in tow. It is also common for the ABC to visit on-sale retailers or winery tasting rooms and check the identification of young-looking people with alcohol. In college areas, it is not uncommon for investigators to enter a licensed business and request identification from every patron. Did the Minor Present Bona Fide ID? Reliance on bona fide proof of majority is a defense under Business and Professions Code Section 25660, but it is very difficult to prove in the case of a true minor because the licensee must prove that reliance on the identification was reasonable, and it is difficult to prove reliance on the identification if you don’t have a copy of it. If this is a possible defense for your business, be sure you record every known detail regarding the presented identification. Will the Minor be Present at the Hearing? The minor must show up at the hearing on the accusation against your license for the accusation to move forward. Statute: California Business and Professions Code § 25658 Standard Penalty: 15 day suspension for 1st offense, 25 day suspension for 2nd offense within 36 months, license revocation for 3rd offense within 36 months. Fines can typically be paid for the first two “strikes” in lieu of serving a suspension. The fine for the first strike is capped at $3,000, and raised to $20,000 for the second strike. Imbiblog is published for general informational purposes only and is not intended as legal advice.
The California ABC actively enforces the alcoholic beverage laws of the state. We’ll be posting a series of “ABC Violation Round-Up” items discussing some of the violations we have seen in recent enforcement actions. This week…. sale to a minor decoy. The Violation: You cannot sell or serve alcohol to anyone under 21 years of age in California. The ABC is constantly visiting retailers to make sure this law is enforced. Violations of the law can occur two ways; via a law enforcement decoy sting or via sale to a “true” minor. This post covers law enforcement decoy stings, which are run by the ABC or by a local law enforcement agency. In a decoy sting, a minor (19 years of age or younger) will visit your premise under law enforcement supervision and attempt to purchase alcohol. We will cover sales to a “true” minor in a later post. How to Avoid It: Identification must be requested if there is any question regarding the age of a person requesting access to alcohol. Licensees and their staff must be trained in proper review of identification. Any identification presented must be bona fide, and must match the person presenting it. Minor decoys are required to answer questions about their age truthfully, so if you ask a decoy “Are you 21 or over?” they are obliged to say no. Decoys are also required to be 19 years of age or younger, and are required to present their true identification or none at all. It is common for a decoy to confidently present their true ID and trip-up a server who is not careful. Servers must be trained to check the red “Age 21 in 20__” indicator on every ID presented to them. Recently, ABC stings at on-sale premises have involved two decoys working in tandem. Statute: California Business and Professions Code § 25658, ABC Rule 141 Standard Penalty: 15 day suspension for 1st offense, 25 day suspension for 2nd offense within 36 months, license revocation for 3rd offense within 36 months. Fines can typically be paid for the first two “strikes” in lieu of serving a suspension. The fine for the first strike is capped at $3,000, and raised to $20,000 for the second strike. Imbiblog is published for general informational purposes only and is not intended as legal advice.
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