New TTB Labeling Requirement Regulations: Out-of-State Bottling Is Not Created Equal and Consumers Right to Know Where the Grapes in their Wine Come from is Compromised

By: Jeremy Siegel and John Hinman

We are going to unpack the impact of the TTB’s proposed rule changes concerning the current exemption available from the normal labeling requirements for wine sold solely in-state made from grapes or wine that are brought in from other states.

The current exemption permits winemakers to include information on in-state labels that they would ordinarily be foreclosed from including on national labels, such as: appellation of origin, varietal and vintage year.  Strict compliance with AVA regulations is being cited by certain vintners who believe it is necessary to eviscerate the in-state exemption in order to protect their valuable AVA’s. This has the consequence of preventing small wineries in remote states from providing their consumers with truthful and accurate information about the wine they are drinking locally.

Regardless of the position of the reader on these issues, we encourage all members of the industry to submit comments to the TTB before the August 22, 2016 deadline.  This is an important debate and worthy of attention.

The TTB Proposed Notice of Rulemaking

There has been a lot of confusion and much spilled ink about this topic since the TTB’s announcement on June 21 that, due to “concerns raised by wine industry members and members of Congress regarding the accuracy of label information” (read the press release here) the TTB is proposing a rule change that places restrictions on what information will be permitted to appear on the labels for these wines.

Winemakers NOT affected

Please note that winemakers who currently apply for certificates of label of approval (“COLAs”) for wines using grapes from the same state where they make their wine will not be impacted by these changes, and they can all stop reading here if they like.  For the rest of the wine industry that does rely on the exemption from label approval process, or cares about the exemption maybe because they are a small winery in a remote state, read on. 

Winemakers who ARE affected

The proposed changes will severely limit the usefulness of the exemption from the normal label approval process for winemakers and bottlers who only sell their wines in-state. 

The current beneficiaries of this exemption fall in to two camps: (1) those who want to include information about the source of the grapes, and the varietal and vintage of their wine but ordinarily may not because the wine is not made in the same or adjacent state as where the grapes are grown, and (2) those who are not concerned with identifying the source of the grapes or wine they purchase from out of state but do want to inform their consumers of the varietal and vintage of the wine they are selling. 

If the proposed changes are adopted, the ability of both of these types of winemakers/bottlers to effectively market their products will be severely hampered, and consumers will be forced to make wine purchasing decisions for locally produced wines without access to such important information as where the grapes came from, the type of grapes used to make the wine, and the year the grapes were harvested. 

The Current Labeling Regulations

Under the current regulations, a wine producer may apply for and receive an exemption from the standard labeling requirements if their wine will NOT enter interstate commerce. See 27 CFR § 4.50(b).  Ordinarily, prior to a wine that is more than 7% alcohol by volume being labeled and sold, the winemaker must apply for a COLA from the TTB if it wants to list on the label, among other things, the grape varietal (§4.23), the appellation of origin (§4.25), the vintage (§4.27) and the type designation of varietal significance (§4.28).  Each of these labeling attributes has specific requirements that must be met before the TTB will issue the COLA.  For example, in order for a wine label to list an appellation of origin, “[a]t least 75 percent of the wine [must be] derived from fruit … grown in the appellation area indicated, [the wine] must be fully finished … if labeled with a State appellation, within the State or an adjacent state; or if labeled with a county appellation, within the State in which the labeled county is located; and it [must conform] with the laws and regulations of the named appellation area governing the composition, method of manufacture, and designation of wines made in such place.” 

In order to include grape varietal, vintage and/or designation of varietal significance, the label must ALSO include an accurate appellation of origin, meaning appellation of origin is really the baseline labeling requirement.

The Hole (some consider it a hole anyway) in the Regulations that the Proposed Rule Change would close – Use of the Technique of selling the wine only within the state in which the winery exists

Currently, if the bottler or winemaker of a given wine can show to the TTB’s satisfaction “that the wine to be bottled or packed is not to be sold, offered for sale, or shipped or delivered for shipment, or otherwise introduced in interstate or foreign commerce” then the bottler/winemaker can apply to be exempt from the above listed requirements, and may include information on the wine label that would not normally conform with the baseline appellation requirements for information.  This is very useful for the small winery with limited access to good fruit from its own vineyard because of bad weather, bad crop years or other causes that routinely plague small wineries in remote states outside of the major grape growing states.

For example, in the ordinary course, if a winemaker in New York purchases and ships pinot noir grapes from a vineyard in Sonoma County to make and bottle the wine in New York, the wine could not be labeled as Sonoma County Pinot Noir, nor could it be labeled as New York Pinot Noir.  This is because, while the wine was derived from grapes grown in Sonoma County, it was finished in New York, so the wine ends up somewhat of a TTB pariah that neither state can claim as its own. The wine was not “fully finished” in Sonoma County but rather in New York.  If this winemaker wishes to label the wine as Sonoma County Pinot Noir, however; he or she can apply for an exemption from the COLA requirements so long as the wine was sold solely in New York and is labeled “For Sale in New York Only.”  This exemption process permits the winemaker to indicate the provenance of the wine made even though it does not meet the strict federal labeling requirements of 27 CFR §4.25.  A prime example of a winery that would be impacted by these rule changes is Brooklyn Winery, which makes well-received Cabernet Sauvignons from grapes sourced from the Napa Valley. 

Labeling with the current exemption, and without the current exemption

Without the exemption: Currently, a winemaker or bottler that doesn’t want to apply for the intrastate exemption from the requirement that the appellation of origin be listed, while still listing grape varietal and vintage, may use the national appellation.  For example, if the New York winemaker above doesn’t feel that it is important to disclose that he or she is using California grapes or wine, but still wants to include the grape varietal and vintage, without an exemption, the label would have to indicate at a minimum that the wine was an “American” Pinot Noir, 2016 vintage, which is the most general appellation of origin allowed. 

With the exemption: However, with an exemption, the label for this wine could include the varietal and vintage, and a descriptive name such as “Big Apple Winery” without any actual appellation of origin. The concern here is that this type of labeling could lead consumers to believe that the wine was in fact made in New York from New York grapes.  This type of exemption is widely used in Texas by wine bottlers who purchase wine in bulk from California (where fully 85% of wine is produced in the United States) and bottle it in Texas “for sale in Texas only” and call it something like “Lone Star Winery 2016 Pinot Noir” without an appellation of origin. Again,the concern here is that this type of labeling may mislead consumers into believing that it is a Texan wine.    

Grape Sourcing Safe Harbor Not Affected by the Proposed Rule Change

It is worth reiterating that wineries that must source grapes from out of state because of weather, grape availability or other reasons may still label their wines as “American” and include the varietal and vintage date under regular COLA regulations.  So, a wine made in New York with pinot grapes from Sonoma in 2016 could be labeled as “American Pinot Noir, 2016 vintage” without applying for an exemption. 

Why is the Change Being Proposed?

The intended effect of this proposed change is to limit the ability of out-of-state winemakers with grapes or wine from a state like California to reap any of the identification benefits of using grapes from California and other well-known appellations.  This is an extension of the successful legislative efforts by California winemakers in Napa, Sonoma and other AVA areas that heavily market their AVAs to protect their geographical appellation rights.  For example, California state law (the “conjunctive labeling” laws found at B&P §§ 25241 and 25242) currently mandates that wineries located outside of specific AVAs may not use certain geographical terms on their labels unless all steps of the winemaking process take place within the specific AVA. 

These regulations were put in place to protect the concept that “for more than a century certain California counties have been widely recognized for producing grapes and wine of the highest quality” and to ensure that consumers are not “confused or deceived” by these geographical terms appearing on labels of wines that were not produced completely within the confines of the AVA.  Because California state law does not apply beyond California borders, the conjunctive labeling laws are not binding on winemakers in other states.  This is one of the problems that the TTB Rule change appears to be intended to address.

The Current exemption as a work-around

The current exemption process provides an in-state work-around for winemakers that purchase grapes from remote AVAs to indicate the source of their grapes and to provide consumers with accurate information about what is actually  in their wine, no matter where the grapes were actually grown or ultimately fermented into wine. The proposed rules will completely eliminate this exemption.

This change has the additional effect of preventing winemakers and bottlers who are not concerned with disclosing the source of the grapes they use to make wine from still being able to call out the varietal and vintage except through the identification of the wine as “American.”

Consumer and Winery Concerns

One major concern is that both camps of winemakers and bottlers (typically small wineries) could soon be faced with holding significant inventories of wine that, because they lack the type of information on their labels that consumers rely to make their purchases, will be worth much less money and will be difficult or impossible to sell even within their local market area.   Consumers, for their part, generally have the right to know basic information about what it is that they are consuming, and where it comes from.  This Rule change affects those rights.

Alternatives for comment – there is no middle ground

We encourage all involved in the current system of wine production to make their views known to the TTB right away.  While we are proponents of truth in labeling and full disclosure, we also understand the importance of protecting AVA rights. There are most definitely two sides here.

If this rule change is adopted there will be no middle ground for small wineries to disclose the source of out of state grapes used in their wine. Thus, maintaining the current exemption is one alterative that should be seriously considered.

The Potential First Amendment Impact of the Proposed Regulation

Another alternative if the proposed regulatory changes are adopted, which the TTB is aware of from its experience with the Cabo Distributing “Black Death” First Amendment case, would involve potential First Amendment litigation on behalf of small wineries in remote states asserting a winery right to inform consumers of truthful information under 27 CFR 4.38 (a) [“…In addition, information which is truthful, accurate, and specific, and which is neither disparaging nor misleading may appear on wine labels.”] and general First Amendment jurisprudence. Right now Section 4.38(a) disclosure is limited by the caveat that no additional information provided may conflict with other required label information.  

For example, if a winery includes narrative information on the back label of an “American wine” providing the consumer with disclosures about where the grapes that went into the wine were sourced, it would be in violation of the law.  These restrictions would also impact any advertising and marketing materials wineries put out because,under Section 4.64(g), advertisements of wine cannot include any “statements indicative or origin” unless that same information appears on the label. Thus a winery website, blog or twitter post that discloses the source of grapes in the wine is also a violation of the law under the proposed regulation.

It is currently unclear what position the TTB would take if a First Amendment claim was asserted following the denial of a back label narrative submission, or following advertising (which has the same restrictions and privileges) that informs consumers of where grapes for a particular wine were sourced.  It is quite clear that communication of the constituent ingredients in food products is commercial free speech and the test would then be to weigh the winery right to communicate truthful information to consumers against the TTB policy of protecting AVA designations by squelching information that conflicts with the labelingregulations, regardless of the truthfulness of such information.

This may be a situation where the proponents of the rule change should be careful what they ask for, because they might get it.

Interested parties can file comments with the TTB regarding the proposed changes here.  

Isn't A Written Agreement With A Distributor Worthless In A Franchise State?

We get this question all the time from clients, and we understand the pessimism. Why bother to draft an agreement when state law would trump any contract that conflicted with franchise laws designed to protect distributors?

If you’re a producer who sells your products in multiple states, you are probably already acquainted with alcohol franchise laws –legislation protective of distributors that seems more appropriate for, say, a McDonald’s franchisee whose entire livelihood rests on its right to use the McDonald’s name than for an alcoholic beverage distributor that sells dozens or even hundreds of brands.

Lawmakers might once have been able to make the dubious claim that alcoholic beverage franchise laws were needed to counter the “intimidation, bullying and abuse” (as one franchise state’s law puts it) of the small and powerless distributor at the hands of the big bad supplier.

Of course that notion is laughable now, when distributor consolidation and the proliferation of small craft producers have flipped that power dynamic on its head. Now it’s the giant distribution companies that wield the power, and suppliers find themselves without leverage or even a route to market in many states. Yet these outdated protectionist laws remain on the books in many states – in fact they have been recently added to the books in certain jurisdictions -- in part due to robust lobbying by the distributor tier. It’s no wonder our clients have resigned themselves to thinking the only way out in these states is through protracted litigation or expensive buyouts.

But that’s not the whole story. In the August issue of Practical Winery & Vineyard, we lay out in detail some of the reasons why a written distribution agreement can provide important protections even in franchise states, and we provide real-life tips for tracking distributor performance and managing your brand in franchise states.  Read more here.

Crowd Funding for Alcohol Producers and Retailers – Down the Rabbit Hole with the Tied House laws

Crowdfunding is the most intriguing recent method of raising capital for the development of small new business ventures; typically in small amounts of money from a large number of people.  Couple crowdfunding with the phenomenal increase in small craft producer start-ups in the wine, beer and distilled spirits industries over the course of the last five years and the result is a looming regulatory qualification and tied house nightmare for alcohol agencies operating under decades old rules designed for a past age. 

Because cross-tier relationships are generally prohibited by federal and state laws going back to the repeal of Prohibition, persons investing equity funds through crowd funding sites such as Kickstarter are not permitted to have conflicting inter-tier interests.  The simplest example of a conflicting equity interest would be a person with an ownership interest in a wine, liquor or beer producer investing in a restaurant crowdfund or a person with an ownership interest in a restaurant investing in a small craft producer crowdfund. 

This is not an academic issue. In Texas right now there are several currently pending law suits (Cadena, McLane’s – see below) challenging what has been called the Texas “one-share” rule where investors in industry members on one tier (such as retailers) have investors (often public investment funds) with interests in other tiers (such as international producers).  While the Texas lawsuits (involving very large entities with complex ownership structures) hold the potential of changing the rules dramatically in states like Texas, the small investor Kickstarter type space is where cross-tier tied house challenge across the country is going to face its most serious test.

This conundrum was explored at the recent (end of June) National Conference of State Liquor Law Administrators conference in Chicago. The result was more questions than answers.

What is Crowdfunding?

There are two types of crowdfunding.  One type seeks to raise equity funds in small amounts from a large number of investors.  This is called “equity crowdfunding.” The second type is where items, experiences, products and services are offered in return for funds processed through the crowdfunding website.  This is called “Reward” crowdfunding. The two are different in many ways but also similar with respect to the tied house laws.  Equity funding implicates the basic tied house laws.  Reward funding (especially when products are included) is a form of selling transaction that implicates normal regulatory issues related to product sales, invoices, event restrictions at production and other locations as well as middle tier fulfillment requirements.  Depending on the form of the reward transaction, and the value involved, the “thing of value” (anti-corruption) portion of the tied house laws may also be implicated.

The New Federal Crowdfunding Regulations

Congress enacted “The Jumpstart Our Business Startups Act” (the “JOBS Act”) in April 2012. It included the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” (the “CROWDFUND Act”) as Title III. This set forth a basic structure for legal equity crowdfunding under the Securities laws.

On May 16, 2016, the SEC implemented regulations setting forth the basic investment rules.

The new regulations limit investment amounts and restrict transfers, while allowing crowdfunding for only certain types of companies; and require that investment be conducted through a crowdfunding portal (like Kickstarter, although there are many others) or a licensed broker.

The restrictions are that a company cannot raise more than one million dollars in a twelve-month period and annual financial disclosures are tiered based on the amount raised.

For example: if $100,000 or less is raised, financials are certified by the principal executive officer of the company. If $100,000 to $500,000 is raised, or up to $1,000,000 if it’s the first time crowdfunding, financials are reviewed by an independent public accountant. For repeat funding in the $500,000 to $1,000,000 range the financials must be audited by an independent public accountant.

The purpose of these regulations is to prevent an investment bubble and to protect individual investors.

There are also limits on the amount an individual can invest:

For example: If either annual income or net worth of the investor is less than $100,000, then during any 12-month period, an individual can invest the greater of $2,000 or 5% of the lesser of annual income or net worth. However, if the income and net worth of the investor are over $100,000, then during the 12-month period, the person can invest up to 10% of annual income or net worth, whichever is lesser, but not more than $100,000 total.

The protections include a provision that the investor can change their mind and undo funding up to 48 hours before offer closes and cannot sell the equity investment for at least a year (this is to avoid speculation).

The Tied House Law Requirements

While the JOBS Act does an admirable job of creating a new form of investment market it has nothing to say about investment in regulated industries (such as alcohol, and soon Cannabis). Rather those requirements are left to the state, and they are different in every state.

Equity Issues

The consequence of any equity purchase, however structured or consummated, is to implicate the tied house laws and basic ABC and federal qualification protocols.

First, because equity buyers into licensees are required to undergo state required qualification (and federal qualification if a producer or wholesaler level entity is involved), that fact should be disclosed in the offering documentation and considered by the equity buyer before the investment is made. This is a major trap unless the offeror carefully vets the investors and fully discloses the regulatory qualification requirements.  This is because a failure to vet (and to qualify where qualification is necessary) could not only mean a loss of the investment but could also lead to an enforcement action by the relevant regulatory authorities. In almost every state there is an affidavit submitted as part of the licensing process (and attested to as true and accurate under penalty of perjury as part of the annual license renewal process). The affidavit represents that no owner of the company has an interest in another license on another tier except as disclosed, and failure to disclose is a crime.

Second, unless the state has a relevant minority shareholder or public company ownership exception (i.e., that share ownership is under some small number, like 5%, or the shares are publicly traded - most states do NOT have these exceptions), the licensee should be counselled to submit requalification documentation at the completion of the offering program with appropriate certifications of compliance with the tied house laws or other laws or regulations.

Third, other laws in many states may also limit or prohibit ownership interest in a particular license type or licensed business; such as the prohibitions on the number of premise licenses in which any one person may hold an interest. Each state has its own regulations and limitations.  In California, for example, a winegrower may have an interest in no more than two on-premises licenses (subject to conditions) and in many other states there is a limitation on how many off-premises licenses may be held (such as NY, where the limit is one, NJ two, etc.).  This is why all investment offerings should be cleared with legal advisors before being finalized.

Reward issues

Reward crowdfunding, not involving equity, refers to transactions where consideration is exchanged for things and experiences (such as holding events at the producer location, the right to post or be featured on artwork, the right to receive special products in the future, the right to assist in production – the imagination knows no bounds for the marketer).

Rewards should always be treated as a sale of merchandise, goods or services (including tax, invoicing and accounting consequences). There are many other potential issues with crowd-sourced rewards. For example, rewards offered by suppliers (small craft producers) and purchased by retailers (or vice versa) implicate the tied house law “thing of value” regulations as well (if product is involved) as the basic three-tier system requirements (including brand registration, invoicing, non-discrimination rules and price posting) in the state at issue for the flow of product into the marketplace.  

Every Reward should be analyzed in the context of existing regulations in the state. The best way to start the analysis is to ask if you can sell the goods or services for the price expected in the normal course of business; if you can, then it is likely that you can also crowd fund the reward.

Texas – A Laboratory for Inter-tier ownership Issues

There are two pending Texas cases involving inter-tier licensing issues now in the courts, one involving a retailer and one involving a wholesaler, and both raising the thorny issue of how much (if any) remote inter-tier cross ownership is permitted. 

In Cadena, an application for licensure of a convenience store chain (OXXO) was denied because the Mexican owner of the chain (FEMSA) has a 20% interest in Heineken in Europe.  Cadena lost its fight to be licensed at the lower court level and is now appealing to the Texas Supreme Court. The claim there is that the Texas one-share rule (which the TABC, by the way, denies is a rule) is unconstitutional, arbitrary, vague and, generally speaking, absurd.  Here is a link to the lower court decision. 

In McLane’s, a national food distributor (McLane’s is a major public company substantially owned by Berkshire Hathaway with somewhere around $48 billion in annual sales from 39 distribution centers covering all 50 states) is seeking a wholesale distributor license in Texas following its licensure as a distributor in several other states (including Tennessee). The TABC denied licensure on the grounds that Berkshire Hathaway (a public company) also has ownership interests in public investment funds that own shares in major retailers. McLane’s is now suing the TABC on various constitutional grounds that run the gamut of claims (equal protection, arbitrary and capricious, due process, Commerce Clause, etc.) but boil down to the observation that if McLane’s is in violation of the law so is every major pension fund in the US, including the one for the TABC employees. The "absurd" argument is also made in this case. Here is a link to the lawsuit filing announcement. 

While these cases are Texas specific the results could very well frame the next generation of tied house analysis in all the rest of the states with respect to inter-tier equity analysis.

Conclusion

Crowdfunding under the new SEC rules is an exciting development in the on-going effort to capitalize small businesses, such as restaurants and craft producers. With proper attention to basic detail (qualification and vetting of proposed participants and through explanation of the limitations in the offering material) this can be the answer to the capital dreams of many entrepreneurs.  However, given the danger posed by the country’s antiquated tied house laws, any budding businessperson looking to the crowdfunding capital markets for a growth solution is strongly encouraged to carefully clear their material through their accountant and their attorney.  Nothing is worse than raising money and then having to give it back because due diligence was not done. Maybe one thing is worse: committing a crime (violating the tied house laws is a statutory misdemeanor in most states) without knowing about it, exposing your investing friends in the process and then having to give the money back.

Remember, as the old Sargent on Hill Street Blues said over 35 years ago: “Be careful, it’s dangerous out there.”  We would add to that admonition: Do your due diligence when you raise money.

Everything you ever wanted to know about the BPA Warning Statement but were afraid to ask

By John Edwards and John Hinman

This is about BPA and the emergency regulation that was adopted in May by the California Office of Environmental Health Hazard Assessment (“OEHHA”). Many trade associations, Family Winemakers and the Wine Institute most prominently, have sent bulletins to their members advising them of the new regulation.

Our goal is to pass on the best recommendations for protecting your license against public and potential private enforcement. The penalties if the signage is required and is not up could be as much as $2,500 per day, and in the background loom the plaintiff’s lawyers looking for an easy payday (as happened in the arsenic cases that are now on appeal after being dismissed - see blog).

Who is required to post a sign and where does it have to be posted? Every manufacturer, importer or retailer that sells canned and bottled foods and beverages, including alcoholic beverages, that MAY contain BPA must post the warning at the point of sale. This includes out of state wineries and retailers with customers in California. The point of sale definition includes the check-out page of the seller’s website, as well as winery tasting rooms, bars, restaurants, supermarkets and wine and spirits merchants.

Who does NOT have to post the sign? If the products that you sell do NOT contain BPA, no sign is needed.  However to be protected by this exception you must know for certain that no product you sell (or material included in the products you sell) contains BPA. This is difficult to determine because BPA is found in so many different products.

How do you know if the product contains BPA?  You ask your vendors or have the products tested. The Wine Institute recommendation is that sellers and manufacturers ask their vendors for affirmative certification that there is NO BPA in their products (“We hereby certify that there is no Bisphenol A (BPA) in [name of] product”).  That is prudent advice. If you are a manufacturer you would be asking your product vendors (bottles, capsules, etc.).  If you are reseller (such as a retailer) the certification would be asked for from the manufacturer (winery, brewery or distillery) directly or through the wholesaler. Licensees should both require the certification and post the warning statement. The downside of the vendor certification is that if it turns out to be not true the licensee relying on the certification might have a lawsuit against the vendor but is not relieved from liability from the warning statement requirement.

The “Emergency Regulation” and the Warning Statement

On May 16th OEHHA adopted emergency regulations that require manufacturers and retailers of food and beverage containers containing a compound known as Bisphenol A or “BPA” to provide a specific warning about that compound. The Emergency regulation will be in place for an 18-month period while final regulations (probably the same as the emergency regulations) are being drafted and adopted.

OEHHA is the agency responsible for enforcing “Proposition 65,” the California law that requires warnings to the public about compounds that OEHHA determines may cause cancer (carcinogens) or reproductive harm (teratogens). 

Typically, the warning requirements are satisfied by posting the signs we see everywhere in California (even in hospitals) warning that a facility or a consumer product contains compounds “known to the State of California” to cause cancer or reproductive harm.  Naming all of the listed compounds in the facility is not generally required, which is fortunate, because the list of “known” carcinogens and teratogens contains hundreds of compounds.

The purpose of the emergency regulations is to provide warnings to consumers about BPA either on product labels or at the Point of Sale during the anticipated 18-month interim period.  The Regulations require a manufacturer of any canned or bottled beverages that contain BPA either to:

• Place a warning label on the product itself stating: “WARNING: This product contains a chemical known to the State of California to cause birth defects or other reproductive harm;” or
   
• Notify all California retailers of any of its products that may result in an exposure to BPA and provide a sufficient number of compliant Point of Sale warning signs.

The Regulations require retailers to display compliant warnings at each Point of Sale, which includes not only cash registers and checkout lines, but “electronic checkout functions on internet websites.”  The warning signs must be at least 5” X 5” and contain the following

WARNING

Many food and beverage cans have linings containing bisphenol A (BPA), a chemical known to the State of California to cause harm to the female reproductive system. Jar lids and bottle caps may also contain BPA.

You can be exposed to BPA when you consume foods or beverages packaged in these containers.

For more information, go to: www.P65Warnings.ca.gov/BPA.

The BPA warning is, of course, in addition to the warning signs that retailers of alcoholic beverages are already required to display, which state:

WARNING: Drinking Distilled Spirits, Beer, Coolers, Wine and Other Alcoholic Beverages May Increase Cancer Risk, and, During Pregnancy, Can Cause Birth Defects.”

These warning signs should soon be going up in tasting rooms, restaurants and retail stores throughout the state.  But if the product at issue is shipped to the consumer the “Point of Sale” is considered to be the check-out page of the internet website of the seller.       

What is BPA?

BPA is a compound that is used in the manufacture of polycarbonate plastics and epoxy resins.  Polycarbonate plastics are used to make bottles, bottle caps, and flasks.  Epoxy resins are used to coat metal cans containing food and beverages, and they may also be used to coat metal caps used on glass bottles.  Given the widespread use of plastics and epoxy resins in packaging for alcoholic beverages, the new OEHHA regulation affects both manufacturers and retailers of those beverages.

BPA is also used in the manufacture of carbonless copy paper—including the paper used in printed sales receipts.  For this reason the BPA warning requirement is particularly relevant to retailers and in tasting rooms.

Why do the agencies think that BPA is bad?

BPA has been accused of causing fetal and developmental abnormalities, endocrine systems abnormalities, and cancer.  The compound has been studied extensively, with inconclusive results.  The FDA has concluded that the use of BPA at current levels in the nation’s food supply is safe and has approved the use of BPA in food and beverage containers (except for baby formula), notwithstanding that minute amounts of BPA may leach from the container into the contents.  The EU has reached the same conclusion.  On the federal level, the only substantive action has been a ban on the use of BPA in baby formula cans, baby bottles and toddler cups.

In 2009, the California OEHHA unanimously decided that BPA would not be listed as a “known” teratogen.  In 2015, however, the OEHHA reversed that decision and decided that the State now “knows” that BPA causes reproductive harm. 

Prop 65 provides a year for compliance after a compound is listed, because listing imposes an arduous process on affected businesses.  Each business must determine whether any of its products expose individuals to the compound above a regulatory safe harbor, if any has been set.  If so, the business must then provide the generic warning conspicuously on the label, shelf tags, menus or any combination of those.  Identification of the specific compound in the product is not generally required.

OEHHA decided that emergency action was needed in the “unique” situation of BPA because:

• BPA was widely used in food and beverage containers prior to the 2015 listing.  Many of those containers are still in the stream of commerce and have no warnings at all.  Removal of these items from commerce because of enforcement concerns could jeopardize the food supply.
   
• OEHHA has not set a safe harbor for oral exposure to BPA, because there is no consensus on the Maximum Allowable Dose Level for that exposure.  OEHHA expects to have the results of federally-sponsored research on that issue by late 2017 or 2018.
   
• The listing of BPA could cause a plethora of warnings on products and shelves that might alarm or confuse consumers.
   
• The general Prop 65 warning could create “a uniquely high potential for confusion” about BPA.
   
• Interim regulations will inform and protect the public and allow manufacturers to reduce or eliminate BPA exposure.

OEHHA will replace the emergency regulations with likely identical interim regulations, which will are expected to be in effect for about 18 months.

What does OEHHA want to accomplish with these Emergency Regulations?

Keeping in mind that the OEHHA already “knows” that alcohol itself can be a carcinogen (if abused) and a teratogen, you may ask what the OEHHA hopes to accomplish by duplicating the existing warning with one specifically targeting minute amounts of BPA that may have leached from the container.  Frankly, we can only guess at the end-game, and our best guess starts with the phrase “regulatory overkill.”

A Current BPA Issue —Sales Receipts and “Unclean Hands”

As noted above, the OEHHA has not yet been able to set a Maximum Allowable Dose Level for oral consumption of BPA.  It has, however, set a Maximum Allowable Dose Level for dermal exposure to BPA from solid materials at 3 micrograms/day, and that level goes into effect in October of this year (2016).  Once in effect, potential higher exposure will trigger a warning requirement for dermal exposure.

BPA is being used in carbonless copy paper, which is used to make the multiple copies of receipts that emerge from cash registers and charge card readers.  One of the “private enforcers” of Prop 65 has already raised a new issue of concern to on-site sellers of alcohol: dermal exposure to BPA from sales receipts. 

Even before the OEHHA had announced its 3 mg./day Maximum Allowable Dose Level for dermal exposure to BPA, an “environmental advocacy group” had issued a Notice of Violation to a fast food restaurant, alleging that its sales receipts violated Prop 65 because of dermal exposure to BPA. 

No one knows whether that group can prove that a sales receipt results in dermal exposure to more than 3 mg. of BPA per day or whether that Notice portends additional action relating to BPA in copy paper.  If it does, printing the notice, “WARNING: This product contains a chemical known to the State of California to cause birth defects or other reproductive harm” on the receipt will likely be the result.  We can only imagine what the credit card equipment manufacturers will do with such a requirement.

We recommend that:

• Manufacturers selling products in California analyze their packaging or require certifications about BPA content from their suppliers.  Ongoing monitoring is required to protect against suppliers that change their formulas or their own suppliers and thereby introduce BPA where none existed before.  If BPA is being or has been used on products in retailers’ inventories, manufacturers should immediately notify their California retailers and provide the required Point of Sale warning signs.
   
• Retailers should post the required BPA warning, unless they have certifications from every supplier that none of the products in their inventories contain BPA, which is an unlikely occurrence.  Retailers with a large number of items in inventory (including items made before May 2016) and suppliers from outside California are unlikely to have the certainty that their products are free from BPA.  Providing the warning is a prudent protective measure.
   
• Our final recommendation is that all affected sellers spend some quality time with their trade associations to see if some sanity can be brought into the OEHHA system of regulation.  BPA may be a problem, but there should be a better way to address it than to require extensive warning signage that most consumers (if they read it) will ignore.

AB 2082 - A Hunting License for Police and a Lethal Weapon for Politicians that Deprives Licensees of Currently Available Due Process Rights

Every licensee in California will be at risk of closure without an effective right of defense if the legislation proposed in AB 2082 (Campos) takes effect.  AB 2082 authorizes an immediate shutdown of any licensee by the ABC and effectively suspends all current due process protections and rights to a hearing in the interim.  All that it takes to close a business down would be a complaint made by a police department or public official to the ABC that there is “direct evidence” of an “immediate threat” to the public safety. This “threat” could either be the result of the operation of the premises, or a result of potentially dangerous conditions in areas close to the affected business.  Under this bill most licensees in cities like Oakland, San Francisco, LA, Fresno and San Jose could be at immediate risk of being put out of business simply because of the dangerous neighborhoods they are located in.

This bill is a hunting license for the police and a lethal weapon for the politicians. While we believe that most police departments and political officials act in good faith and in accordance with their responsibilities to the public, it is also unfortunately the case that an active minority do not. What this bill does is empower the minority of enforcement officials who do not respect, and are frustrated by, the due process safeguards built into the current system.

Unlike current law, which requires notice of violation and a hearing at which a licensee can defend itself, as well a right to an appeal to the ABC Appeals Board (the governing agency over the ABC, and often the only real source of justice because ABC hearing officers are all retired ABC prosecutors), AB 2082 permits the business to be closed first and defenses raised later. This presupposes (of course) that the licensee can immediately find and engage a lawyer; all the while avoiding going bankrupt from being out of business during what will most certainly be months if not years of litigation. This is regardless of the attempt to build impossible to manage expedited procedures into the legislation. Few licensees can make payroll and rent if they can’t remain open, and getting expedited hearings is next to impossible considering the nature of the current hearing system.

This bill is also an open invitation to public official and law enforcement abuse of licensees whose businesses are not well liked because they attract young people, people of color, or the licensee hosts events that irritate neighbors because they create noise, or have experienced substance abuse problems or cause allegedly hazardous traffic conditions.  This includes nightclubs, restaurants that provide entertainment, dancing and music to the younger crowd as well as supplier licensees (such as wineries, breweries and now distilleries) that host events where traffic, noise and substance abuse are alleged to be a problem for the neighbors.  This can also include grocery and liquor stores in undesirable neighborhoods where the clientele is poor and struggling.

All it takes to close a business under AB 2082 is an alleged “immediate threat to public safety.”  Who interprets what the threat really is and what really caused it are at the heart of the danger that this bill poses. For example, we are involved in a current case where the police allege that public safety was threatened because patrons of a club where a hip-hop entertainer played went to a pizza parlor across the street after the club closed and got into a fight with a police officer. How was that the fault of the club?  Yet that is what the police alleged and attempted to prove. Their theory is that the fight would not have occurred had the Club been closed and no patrons been at the show.

Oher “threats” to public safety that have been alleged in recent cases include fights in a parking lot down the block from a nightclub (but not part of the premises, and that services multiple clubs), assaults causing serious injury by one girl against another at a bachelorette party at a winery, incidents on the sidewalk in front of a grocery store involving teen-agers hanging out and harassing passers-by, being caught with drugs at a rock concert in a licensed venue, and a fatal auto accident in the middle of the night on a road in wine county where the driver had been drinking at the licensed premises earlier in the evening. 

These are all incidents which could, under AB 2082, have resulted in the immediate closure of the subject licensed business. In our experience, some police officers (usually acting as surrogates for public officials) consider any licensed business that offers alcohol, music and/or dancing to be a potential threat to public safety.  The fact that due process currently exists forces law enforcement to adopt measured responses to situations that they believe threaten public safety. AB 2082 strips away measured responses, as well as due process, and leaves in its place the potential for arbitrary and punitive reactions.

Do you trust public officials and police to be free from bias against specific businesses, or specific operators?  While the great majority of police officers and public officials are responsible and act in good faith, our experience is that there are a minority of police and public officials who hold grudges for all kinds of reasons. This legislation gives the minority who are frustrated by the concept of due process and having to prove their case the cover they need to go after those who opposed them in the past with immediate retribution.

This is a bill that must be defeated for the licensed alcohol industry to be able to stand up to overzealous officials, whether law enforcement or politicians.  This bill is not intended to solve a public safety problem but rather to hand law enforcement and politicians a lethal weapon to use against licensees.