ABC Declaratory Rulings – A Modest Proposal Whose Time has Come

By John Hinman and John Edwards

The Problem – New Technology and Process Innovation

Today’s alcoholic beverage industry is marked by technological and process innovation at every level, and in ways that were unfathomable even a decade ago. Information retrieval, accounting systems, ordering and delivery systems, social media and other new technologies pose challenges for regulators around the country attempting to fit new initiatives into statutes and regulations enacted in an earlier era. 

The regulatory challenge usually involves determining what the controlling statute or regulation means in the context of the business facts presented. The problem with quick conclusions is that facts are often not presented clearly or in an orderly fashion, which results in difficulty for both the agency and the business attempting to discern if the new business falls within the permitted activity portions of the ABC Act. 

What a statute or regulation means in the context of approving or prohibiting creative industry programs is always a challenge – new technologies usually do not neatly fit into the narrow legislative and regulatory enactments crafted for a different time. 

That results in a system where approval of new and innovative business concepts, often ones that are permitted by other states or the federal government, are routinely denied, or are undertaken under a cloud, which impacts regulators, investors, managers and licensees.

Many regulators take the position that whatever process or innovation is sought cannot be permitted unless the legislature has expressly permitted it. However, sponsoring legislation is an expensive and time consuming process and new legislative exceptions often create more problems than they solve. 

The Solution – Create a Forum for Program Analysis; NY does it and so can California

We propose a solution where the burden is on the new technology or system developer to prove to the ABC that the system is legal, and to provide an efficient forum for presenting that case.

This was brought home in a recent (January 19, 2017) declaratory ruling by the New York State Liquor Authority approving the Instacart internet marketing platform and product delivery protocols in New York.  The importance of the ruling to Instacart and those using similar marketing platforms and delivery protocols cannot be overstated.

Significant investment of time and money in a marketplace can only be justified by industry member (and service provider) confidence that what they are doing will not threaten the licenses of the participants in the system or, worse yet, expose the participants to criminal charges for violating the state alcoholic beverage laws (for example, all violations of the California ABC Act are statutory criminal misdemeanors, and that could conceivably include liability for aiding and abetting the offense).

New York is one of many states that have a specific alcoholic beverage declaratory ruling procedure.  California, however, has no specific procedure for obtaining rulings on alcoholic beverage business proposals.  The lack of such a procedure hobbles innovation and introduces unjustifiable and unnecessary risk into the process of investing in, and managing, California businesses.  Given the importance of the industry to the State, California’s regulation of alcohol can and should be made more transparent and should provide guidance on which industry members can rely.

Creating a Declaratory Rulings Protocol – it can be done

California has an administrative ruling statute that provides for declaratory rulings (through an agency not used by the ABC). We propose that the authorizing statute be amended to specifically include the ABC, to provide for ABC Appeals Board review of the ABC’s action in accordance with the California Constitution, and to provide for designating rulings as “precedent.”

Here is our proposed language. Please note that the Section 1 exclusion of the ABC from the general Government Code section is what allows the Section 2 inclusion of the ABC into the new procedure that we propose.  That’s how the Government Code works.

Section 1

Government Code Section 11465.10 is hereby amended as follows:

Subject to the limitations in this article, an agency, other than the Department of Alcoholic Beverage Control, may conduct an adjudicative proceeding under the declaratory decision procedure provided in Sections 11465.10 to 11465.70 of this article.

Section 2

The following sections are added to Article 14 of the Government Code:

Section 11465.80

(a) Any person may file a Petition with the Department of Alcoholic Beverage Control for a declaratory decision with respect to the applicability to any person, property, or state of facts of any statute or rule enforceable by the Department.

(b) Petitions for a declaratory ruling by the Department shall:

(i) Contain a statement of the declaratory ruling requested;

(ii) Include a concise statement of the state of facts or uncertainty with respect to which a declaratory ruling is required and may include a statement by the petitioner of the outcome sought and the reasons therefor; and

(iii) be filed with the Department and directed to the attention of its General Counsel.

(c) The Department of Alcoholic Beverage Control shall reject any Petition for a declaratory decision as to which any of the following applies:

(i) The Petition does not comply with requirements of subsection (b) of this section;

(ii) The decision would substantially and directly prejudice the rights of a person who would be a necessary party and who does not consent in writing to the determination of the matter by a declaratory decision proceeding;

(iii) the Petition presents a matter that is the subject of pending administrative or judicial proceedings.

(d) Unless the Department of Alcoholic Beverage Control rejects a Petition pursuant to subsection (c), the Department shall:

(a) Publish the Petition on its website; and

(b) Provide a period of not less than 30 days for interested parties to file comments with respect to the relief requested and a period of not less than 10 days for the petitioner to file responses to the comments of interested parties; and

(e) The Department of Alcoholic Beverage control may, in its discretion, schedule a public hearing on the issues presented by any Petition for a declaratory decision, at which it may permit the introduction of evidence.

(f) The Department shall issue a ruling on the Petition in writing within not less than 80 days after the date of the filing of the Petition.

(g) The Department shall designate each of its rulings on Petitions for a declaratory decision as Precedent and index all such precedents, including any subsequent rulings thereon by the Alcoholic Beverage Control Appeals Board or any court, as precedent pursuant to Government Code Section 11425.60.  The index and all rulings on Petitions for a declaratory ruling shall be published on the Department’s website.

Section 11465.90

The ruling issued by the Department shall constitute a “decision” within the meaning of Bus. & Prof. Code Section 23080.  The Petitioner or any person who filed comments with the Department may appeal the ruling to the Alcoholic Beverage Control Appeals Board pursuant to Bus. & Prof. Code Sections 23080 to 23089.

The Key Concept – Create a body of decisional law - Precedent

The most important word in this proposal is “precedent.” 

Precedents in the purest sense are examples of how the statutes and regulations are applied in actual cases. As precedents are developed they create a body of law that can be relied upon by legal practitioners, industry members and trade associations alike.  This removes uncertainly and provides an avenue for a reasoned consideration of new and innovative proposals against a background of established examples that can be used to guide conduct. 

Please note that under our proposal a petition could not be filed with the ABC after a violation has already occurred and an accusation or other proceeding initiated.  That, as well as assuring that the ABC retains essential discretion to approve or disapprove proposals, assures the integrity of the ABC’s accusation process, and insures that the ABC's other powers are not compromised.

The ultimate result will be a body of published decisions that every industry member and service provider can rely upon in making important investment and business decisions, and a mechanism for seeking illumination in those situations where the answers are unclear.  That would enable continued innovation and provide the kind of certainty that one of the most important industries in California deserves.

It’s a win-win.

Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees

By: John Edwards & John Hinman

This blog post concerns a very significant piece of legislation (Senate Bill 378) currently being considered by the California Legislature.  For over 60 years, licensees have had the right to challenge ABC license suspensions before they go into effect; SB 378 takes away that right. SB 378 removes existing and basic due process rights of all types of alcohol beverage licensees to challenge potentially arbitrary and capricious ABC action in a neutral forum – actions that are often undertaken at the behest of local authorities or neighbors with an axe to grind against the licensee involved.

The tension between local authorities, neighbors and licensed establishments has never been higher and can be seen in licensing and enforcement decisions involving wineries, distilleries, breweries, retail stores and nightclubs throughout the state.  If the basic rules of engagement in place since the 1955 adoption of the ABC Act are going to be significantly changed then at the very least the licensees of this state should be adequately informed of the reasons for basically doing away with the Appeals Board by stripping away the Board’s power to do pre-penalty review.

Historical Background: the ABC Act and the Appeals Board

The ABC Act was adopted in 1955 to create a clear interface between the power of the state to regulate alcohol and the rights of California alcohol licensees to operate their businesses free of discriminatory, arbitrary and unfair enforcement.  This followed a period where establishments (particularly gay bars in San Francisco in the infamous 1950’s era “Black Cat” cases) had been singled out by law enforcement for special undercover State Board of Equalization (then the alcohol licensing and enforcement authority) investigations aimed at wiping out the perceived “immorality” that had started to blossom in the San Francisco entertainment community, and in other places throughout the state.

The history of alcohol enforcement up until that time had been marked by the indiscriminate, and often arbitrary, use of the state police power to punish those whose activities were deemed “immoral,” a phrase that covered a lot of activities, including personal sexual preferences. The result after reform was Article XX, Section 22 of the California State Constitution. This article created an independent agency (the Department of Alcoholic Beverage Control or “ABC”), which itself was to be checked by an oversight board called the “Alcoholic Beverage Control Appeals Board,” which was made up of three members appointed by the Governor, who serve at the Governor’s pleasure. The purpose of the Appeals Board was to establish limited review as a matter of right of ABC decisions in cases assessing punishment where the decision was alleged to be unlawful, unfair, arbitrary or capricious. The following constitutional standard now applies to Appeals Board review:

“Review by the board of a decision of the department shall be limited to the questions whether the department has proceeded without or in excess of its jurisdiction, whether the department has proceeded in the manner required by law, whether the decision is supported by the findings, and whether the findings are supported by substantial evidence in the light of the whole record. In appeals where the board finds that there is relevant evidence which, in the exercise of reasonable diligence, could not have been produced or which was improperly excluded at the hearing before the department it may enter an order remanding the matter to the department for reconsideration in the light of such evidence. In all other appeals the board shall enter an order either affirming or reversing the decision of the department.” Article XX, Section 22, California Constitution.

This articulation of the ABC Appeals Board review power is as basic a description of “due process” rights as one can imagine. Who can argue with requiring findings, or substantial evidence, or prohibiting punishment based on evidence improperly excluded? Without this level of available review the ABC could proceed in an arbitrary and capricious manner, could punish licensees based upon the whim of whoever was in power at the time or, even worse, based on false allegations from disgruntled local neighbors and authorities.  Testing allegations of misconduct before punishment is imposed in a fairly conducted judicial hearing is a fundamental right.

The system has worked well for the last 60+ years, but not without occasional tension between the ABC and the Appeals Board. Even though the ABC probably prevails in 95%+ of the appeals that are filed, the ABC still does not like being overruled by the Appeals Board. In recent years, the ABC has made clear on many occasions its displeasure with Appeals Board decisions requiring that the ABC observe basic legal rights (including its own regulations). In fact, as explained below, the ABC currently takes the position that the Appeals Board decisions cannot be relied upon by licensees seeking guidance as to what is and is not lawful in an increasingly complex world.  That itself is a serious issue.

What Does Senate Bill 378 Do?

This brings us to State Senator Anthony Portantino’s Senate Bill 378. This bill threatens the livelihoods and due process rights of alcoholic beverage licensees throughout California.  Senate Bill 378:

●      Empowers the ABC to issue “temporary” restraining orders suspending licenses;

●      Provides that the “temporary” restraining orders can last up to 22 days (or even longer) before a hearing is held by the Department (which itself has just issued the order) on whether to expand that order to a preliminary injunction, which, in turn, would last until a hearing on the merits, which is scheduled at the discretion of the ABC (which in our experience, usually takes three to four months to calendar);

●      Strips the Appeals Board of its constitutionally-created power to review “temporary” restraining orders of the ABC and, instead, relegates licensees to petitioning a Court of Appeal to issue a discretionary writ of review;

●      Allows “temporary” restraining orders to be issued at the behest of the Department or a city attorney; and

●      Allows the ABC to issue the “temporary” restraining order on the strength of an affidavit signed under oath by a police chief, county sheriff or mayor/city manager.

What Could Go Wrong?

The bill would make possible the following scenario:  A city official reacts to a local resident who complains about an establishment by filing an affidavit accusing the licensee of violating the ABC laws.  The Department issues a “temporary” restraining order suspending the license, and the first opportunity that the license may challenge that order does not occur for 22 days, during which its business is shut down.  The Department can then issue a preliminary injunction continuing the shut-down until a hearing on the merits, which will be scheduled at the Department’s discretion—could be a month, could be a year.  Even if the charges are ultimately proven to be false at the hearing on the merits, few licensed businesses are likely to survive the prolonged shut-down.  A licensee’s only avenue of redress is to seek review from a Court of Appeal, which may or may not grant the petition, and certainly not until the damage from the shut-down has already happened.

Good luck to the investors in that business.

Even aside from the substantial question of whether Senate Bill 378 violates the California Constitution, it would make dangerous and unnecessary changes to California law for the following reasons:

1.      The ABC already has the power to act quickly to forestall violations by filing accusations and scheduling prompt hearings.  There is no need to empower it unilaterally to issue suspension orders on the say-so of city officials operating in a political arena.  There are many cases on the books in which the Appeals Board or the courts have rejected the allegations of complaining local officials after they had been tested under oath in a contested hearing, or discovered a lack of evidence to prove a local resident or ex-employee’s allegation. 

2.      As noted above, the Appeals Board has a constitutionally-created role of appellate jurisdiction over actions of the Department.  The drafters of the California Constitution wisely decided that some direct oversight of the enormous discretion vested in the ABC was necessary.  That judgment has been vindicated by many years of practice.  The advantages of Appeals Board review are that appeals can be taken as a right, the process takes far less time than a typical appeal to the busy Courts of Appeal and the members of the Appeals Board are well-versed in industry practice and ABC law.

The Courts of Appeal are already busy and often reject appeals from the ABC Appeals Board as it is.  Senate Bill 378 would require licensees whose licenses have been suspended by a “temporary” order to seek review in a Court of Appeal, with the Court having the discretion to grant or deny such review.  The Courts of Appeal have general appellate jurisdiction over all civil and criminal appeals, and their dockets are crowded. 

How likely are the Courts to put aside appeals from murder convictions and multi-million dollar civil cases to give expedited treatment to the “temporary” suspension of an ABC license, even though the consequences to the licensee’s livelihood may be devastating?  To ask that question is to answer it.

What, Then, Is the Motivation Behind This Bill? 

SB 378 appears to be a continuation of the ABC’s ongoing effort to free itself from appellate oversight by the Appeals Board.  Last year, the ABC took the position that decisions of the Appeals Board are not “precedent” and that referring to prior decisions is illegal and unethical.  The Appeals Board rejected that fatuous argument in a lengthy opinion, noting that:

[T]he only potential beneficiary in a world where prior decisions of the Board must be ignored and the Department has issued no precedential decisions itself, is the Department….  ‘If no one can cite or rely upon decisions of the Board, the Department is free to disregard them and create its own “shadow world” of unrestrained discretion—precisely what the Legislature sought to eliminate’….[1]

Senate Bill 378 appears to be yet another attempt by the ABC to achieve unrestrained and effectively unreviewable discretion.  This attempt is as unmeritorious and dangerous as the prior one.

How significant is this? As the first section of the ABC Act provides:

Section 23001 . . . It is hereby declared that the subject matter of this division involves in the highest degree the economic, social, and moral well-being and the safety of the State and of all its people. All provisions of this division shall be liberally construed for the accomplishment of these purposes.

You can’t get much more important than that.

Licensees should not have their livelihoods put at risk on the unchallenged say-so of municipal officials usually operating based on local political beefs, without any means of redress for at least 22 days and, more likely, much longer, and without any guarantee of the timely appellate review that has been a hallmark of ABC practice for many years.  Senate Bill 378 would put the entire alcoholic beverage industry at the mercy of municipal officials, angry neighbors and the unrestrained discretion of the ABC.  Licensees and their trade associations should make every effort to ensure that it does not become law. 

What Can You Do about This? 

Call or write State Senator Anthony Portantino and share your view on the merits (or lack thereof) of SB 378 and then call your trade association leaders and let them know your views.  Here’s a likely incomplete list of some of the alcohol industry trade groups we have supported in the past to get you started.

[1] BMGV, LLC v. Dept. of Alcoholic Bev. Control (Appeals Board 11/17/16) AB-9568, p. 25.  The ABC, represented by the Attorney General, has petitioned for a writ of review of portions of the Appeals Board’s decision, excluding the portion addressing the issue of the Board’s prior decisions as precedent.

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.

“Better Late Than Never”-- Judge in Illinois Dismisses 201 Sales Tax Cases against Retailers

Is This the End of the Road for Steve Diamond's One-Man Crusade to Become Wealthy from Suing the Wine Industry?

By John W. Edwards II and John Hinman 

We have been reviewing the progress of the Illinois “Whistle-Blower” sales tax on shipping fees cases for well over a year while the cases have been pending [Illinois Qui Tam Lawsuits - Private Enforcement of a State Claim: A Bonanza for a Plaintiff's Lawyer & a Rip-Off of Retailers; IL Attorney General’s Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers; IL Finally Offers Certainty & Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases; Relief at Last! IL Moves to Fix the Sales Tax Lawsuits Against Out-Of-State Sellers But Proposes to Penalize Wineries & Retailers That Ship Without Permits]. 

We are now pleased to report that the end of the line for the plaintiff appears to be getting closer.  The plaintiff Chicago law firm headed up by Steve Diamond had most of his cases against retailers dismissed last week. Diamond has been enriching himself for ten years through “settlements” with out-of-state producers and retailers (in recent years involving many producers and retailers of alcoholic beverages) by claiming a failure to pay sales taxes on shipping and handling charges paid by Illinois residents who purchase wine from out of state retailers and wineries for shipment to their homes, and then suing the producers and retailers on behalf of the state.   His scheme, at least as it involves retailers and producers without Illinois permits or licenses, may finally be ending.

Illinois Attorney General Lisa Madigan moved to dismiss 201 cases against out-of-state retailers in the trial court of Cook County.  The cases included many that were still “sealed,” meaning that the State had not decided whether to intervene.  The Attorney General had previously moved to dismiss 350 other cases filed by Diamond.  The Attorney General’s motion to dismiss these 201 cases asserted that that they were “unlikely to be viable…because the relator’s [Diamond’s] complaints contained no allegations that the defendants had any presence in Illinois that could establish tax liability.” What this means is that without a state license or a state direct shipping permit (which establishes an agreement to submit to the jurisdiction of the state), or affirmative acts of marketing to Illinois residents, the seller was not doing business in Illinois and therefore could not be sued in Illinois. The motion was granted by the trial court on May 23, 2016.

Diamond opposed the Attorney General’s motion.  The Court ruled, however, that Illinois law provides discretion to the Attorney General to dismiss qui tam (Latin for “whistle blower”) cases brought on behalf of the State. The court said that the decision to dismiss can be overruled only upon a showing of “glaring bad faith” by the Attorney General.  Left unsaid, of course, was what the result should be when it is shown that Diamond has acted with “glaring bad faith.”

Diamond can appeal the trial court’s decision.  However, given the uniquely high standard of proof that Diamond must meet (“glaring bad faith” by the Attorney General), the prospects for a successful appeal appear bleak.  That is very good news for those that have been brought kicking and screaming into the Illinois courts by Diamond – their ordeal may finally be coming to an end!

Looking inside the decision of this court, however, we see the application of a principle that may protect retailers who are legally prohibited from obtaining direct shipping permits from states such as Illinois, as well as the wineries that ship wine purchased by their winery visitors to the buyers home without direct shipping permits (which is the case with many very small wineries throughout the US).  That is, if the seller doesn’t (or is not permitted to) register with the state, and the seller requires the purchaser to be the party legally sending the wine to the address desired by the purchaser, then the receiving state doesn’t have an adequate “nexus” (connection) with the out of state seller to assert liability for taxes. This also presumptively applies to other forms of liability (such as criminal or civil liability against the seller for assisting the state resident buyer’s violation of the relevant direct shipping protocol).  This would certainly validate the common seller (retailers and wineries alike) practice of paying sales taxes on sales in their home state and putting the onus on the buyer to be responsible for taxes in the state of the buyer. This makes the common invoice admonition “title passes to the buyer at the winery (or the store)” a potentially very powerful legal protection.

However, this compounds the uncertainly that is currently playing out in states such as New York over initiatives to hold retailers (such as Empire wine in Albany) responsible for violating the laws of other states by permitting (or assisting) customers buying in New York to ship to themselves in other states. Did the Illinois court really find that Illinois has no jurisdiction over New York (or California, or other states) retailers or producers with customers from Illinois if the goods are actually imported by the buyer as a technical contractual matter? A strong argument can be made that this is exactly what happened on May 23rd (which, if true, may soon be known as direct shipping freedom day in Illinois).

The stakes continue to rise across the US as retailers, international producers and small wineries without direct shipping permits continue to accommodate consumer demand for their products by allowing consumers to ship wine to themselves regardless of where they live. Stay tuned because this Illinois battle is not yet over.  There is too much money in it for Diamond who, rumor has it, is very well connected politically in the Illinois capital.

The Arsenic in Wine Class Action Dismissal – what it means

On March 23, 2016, the Superior Court for Los Angeles County entered an order dismissing Charles, et al. v. The Wine Group, et al., the last remaining class action lawsuit based upon the presence of minute quantities of arsenic in wine.  (For a discussion of arsenic in wine, see our earlier blog post “A Layperson Looks At Arsenic in Wine”).  Several other class actions in other states had earlier been dismissed voluntarily by the plaintiffs. 

The dismissal was at the pleading stage of the case, which means that there was no discovery and no trial.  The Court essentially said that even if everything the plaintiff’s claimed was true they didn’t have a case. That is what the appeal (already announced by the plaintiffs) is going to be all about. This case will be important to establishing the parameters of the safe harbor that compliance with Proposition 65 is supposed to provide to the wine industry.*

The Charles plaintiff’s claimed that the defendant wineries violated Proposition 65.  That is, of course, the law that gave rise to the proliferation of signs at every cash register at every store in the state stating: “This product contains [or---This facility uses] chemicals known to the State of California to cause cancer and birth defects or other reproductive harm.”   Plaintiffs claimed that Prop 65 required the defendant wineries to disclose specifically that their wines contain small quantities of arsenic.

Those claims were rejected because plaintiffs did not allege any physical injury resulting from arsenic. Further, the plaintiffs conceded that “the danger of arsenic varies with the level of concentration (as it does with every toxin) and that arsenic can be present in safe drinking water, so long as the concentration level is low.”  In other words, these lawyer-driven claims didn’t show that any real harm existed from the low levels of arsenic that exist in almost all wines.

The court then said that Proposition 65 doesn’t require disclosure of the specific chemicals that give rise to the duty to post the general warning.  This is important because there are over 800 compounds “known to the State of California” to be potential carcinogens or teratogens, and the list is available on-line.  Can you imagine what a label listing 800 chemical compounds would look like?

Turning to specifics, the Judge noted that the list “includes, for instance ‘Aloe Vera, non-decolorized whole leaf extract,” “Aspirin,” “Oral Contraceptives, sequential,” ‘Salted fish, Chinese-style,” “Unleaded gasoline (wholly vaporized),’ ‘and “Wood dust.’”  The point the Judge made was that California law requires only the general warning.  At that point the consumer is the one responsible or obtaining information about minute (and here the parts per billion is truly minute) specific compounds “from the party responsible for the exposure after the warning, rather than through the warning.” 

The Judge then made the obvious point that requiring disclosure of specific compounds would make the warnings “too congested and cumbersome to read and understand.”  That was an understated observation by the Judge.

Wine does not include the “known to the State of California” warning.  Instead, all bottles carry the warning prescribed by both federal and California law:

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

The Court then held that the warning given is “a designated safe harbor provision that specifically applies to ‘wine’” and is sufficient by itself.  This is important to every producer in the wine industry because it is a guide to lawful conduct. Everyone wants to know how they can be complaint. The Judge here answered that question: make sure that the Proposition 65 warning requirements are observed.

For those reasons the Judge dismissed the complaint and told the plaintiff’s that there was no way they could amend it to actually prove a case.  That order can be appealed (and the plaintiff’s said that they will appeal it), but, in our view, the dismissal should be affirmed. Keep in mind that an appeal that results in the Judge’s order being affirmed would not be a bad thing because then the decision would have a broader precedential effect. The message to the plaintiff’s here is be careful what you ask for.

The bottom line is that the decision both terminates a meritless claim and provides an important precedent for the industry.  There are undoubtedly traces of some of the 800-plus compounds on the “known to California” list, other than arsenic, in many products, including wine.  Putting the prescribed warning on the bottle protects producers from having to disclose specific compounds and from future frivolous lawsuits. So make sure your labels are compliant!

Finally, when you raise your next glass, please remember to toast the Superior Court and this Judge for a sound, well-reasoned rejection of what is hopefully the last lawsuit based upon the presence of minute quantities of arsenic (or anything else) in wine.  Salut!

*n.b. Hinman & Carmichael LLP represented defendants in the arsenic cases, and served as regulatory counsel to the joint defense committee