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.