“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.