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 EscapedA Modest ProposalCommercial 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.