“Visual Links” between Beer, Wine and Spirits Labels and Retailers Ruled Unlawful in California — the tied house laws run amok

In an exceptionally overreaching and disturbing decision issued by the ABC Appeals Board on May 9, 2014 [AB-9358 - American Vintage Beverage], the Board affirmed an ABC finding that a producer’s use of a retail name on a flavored malt beverage (FMB) product violated the California prohibition on supplier-provided “things of value.”  This is so even though the party that licensed the retail name to the producer for use on its FMB labels was not a California retailer but instead was a non-California corporation that owned the right to license the name for use by others. Although the California licensed retailer received no revenue from the licensing of the name – the license royalties went to the non-California corporation that owned the right to license the retail name – the ABC nevertheless found that the producer had given a “thing of value” to the California retailer.

The Board agreed, finding that the existence of a “visual link” between a product sold by a supplier and the name and identifying characteristics of a retailer acted as advertising for the retailer. A visual link could be a logo, trade dress, a common name or any combination of the foregoing. In this case it was the name and logo of the California retailer, which was part of a national restaurant chain. To make matters worse, the findings in the decision that Section 25500(a)(2) [“things of value”], Rules 106 (a) [free advertising] and (f) [cooperative advertising] were violated was not limited to FMB’s but rather encompass the entire spectrum of alcoholic beverage products.

This ruling affects producers and retailers alike and calls into question the common California practice of retailers (especially large multi-state on and off premises chain retailers) commissioning alcoholic beverage products produced under their own intellectual property and trademarks; and often under their own formulas.  The decision made no distinction between broad market products such as the one in this case, which was produced for general retail sale (and, ironically, was not even sold at the California retailer premises themselves) and “private label” products, which are products produced exclusively for sale at a retailer or retail chain using intellectual property owned or controlled by that retailer. In other words, are the latter – hundreds of thousands of products that make up a significant percentage of all alcoholic beverage products sold at retail accounts across the country – suddenly to be banned under the ABC’s rationale?

A few choice quotes from the decision:

[from the ABC on why they didn’t enforce this before] “We are aware that there are some products that are in circulation that should not be, and we are going to look at those going forward…”
 

[on the effect of the violation and the use of shared IP] “The effect of this ‘sharing’ is to create a visual link between the retail licensees and appellants products, and increases the brand recognition for both. This constitutes free advertising for retail licensees in violation of Rule 106 subdivision (a), and cooperative advertising in violation of subdivision (f).”
The appellants raised a number of defenses, all of which were rejected by the Board: (1) the ABC has no authority over labels – not so said the Board; (2) The TTB preempts label art – nope, concurrent jurisdiction says the Board; (3) royalty payments for the use of IP went to a third party, not the retailer – it’s an indirect benefit to the retailer says the Board; (4) Rule 106(a) and (f) don’t apply to labels – not so says the Board, the labels become signs when the products are put on retail shelves; (5) 48 states have approved the labels – so what, says the Board, we are not bound by rulings in other states; (6) identically situated wine, beer and spirits products are being sold throughout the state and enforcement in this case would violate equal protection – The ABC is going to go after all the others (that’s their job) says the Board; and (7) the ABC issued a Trade Advisory [Third Party Providers – October 2011] that acknowledged that a license may receive compensation for licensing  its IP – that’s just an Advisory and cannot trump the statute and the rule, says the Board.

One important constitutional argument that was not raised is that a label and associated intellectual property are First Amendment-protected free speech. While the ABC and the Appeals Board do not have the authority to adjudicate the constitutionality of a statute, under a First Amendment defense the burden would have been on the government – here, the ABC – to provide compelling reasons why its prohibition of these labels outweighed the protections the First Amendment gives to alcoholic beverage labels as commercial speech.

Where does this leave the hundreds and thousands of alcoholic beverage products on California’s shelves and in California’s restaurants bearing visual links with a retailer?  In limbo until this is all cleared up — if it ever is. In the meantime, however, given this outcome the ABC has no choice but to start enforcing this law.  Regardless, this decision is going quickly to the appellate courts so stay tuned for that battle.

But think about it, if you are a producer making Joe’s Wine you had better hope that there is no licensed Joe’s Wine Shop out there because even if the two of you are NOT connected there is now a “visual link” between your wine and Joe’s Wine Shop. Under the rationale of this decision, both of you would be subject to license revocation for violating the tied house laws.

California Legislative Roundup 2014

A new year brings new California laws regulating the alcoholic beverage industry and in our first Booze Rules post of 2014, we’re highlighting some of the biggest changes. AB 1116: Supplier Entertainment of Consumers Events

An issue near and dear to many of our clients engaging in consumer tasting events, Assemblymember Hall’s AB 1116 extends and slightly opens up B&P Code § 25600.5, which provides a mechanism for suppliers to entertain consumers off their premises and without charge.  Previously, these events were restricted to in-state licensees (distilled spirits manufacturers, winegrowers, rectifier, distillers or their authorized agents) and could only be conducted at premises not licensed for retail sale with the supplier purchasing the alcohol for the event from a licensed caterer.  Under the new law:

- Events may now be conducted by out-of-state distilled spirits shipper’s certificate holders. Note that wholesalers, beer manufacturers, out-of-state wineries and beer manufacturers are still excluded from hosting these events.

- Suppliers may now hold events on licensed hotel premises, except for lobby areas and areas designated as a club, nightclub, or other similar entertainment and alcohol may be purchased directly from the hotel, rather than using a caterer.   This is in addition to venues without a permanent retail license.

- The total number of consumers and their guests allowed at an event may be up to 600 people, instead of the previous limitation of 400 people.  Event hosts are still restricted to 12 events per calendar year with an attendance of more than 100 people and 24 events per calendar year with attendance of under 100 people.

This opens up areas like hotel restaurants and cafes (and permits hotels to cater these events), as long as the hotel keeps other areas open to the public not attending the event.  This is a welcome development for qualified suppliers who were struggling to find venues for their events.

We expect the ABC to issue a trade advisory outlining the changes to this section in the near future. In the meantime, for guidance about the other requirements for conducting these types of events, please see the ABC’s previous trade advisory here.

AB 636: More Bottlesignings!

AB 636 from Assemblymember Hall amends B&P Code § 25503.4, the winemaker’s dinner law, allowing you to add even more signed bottles to your collections.  According to the law that went into effect last year (B&P Code § 25502.2), suppliers and their agents may sign bottles at promotional events at off-sale retailers, but the same privilege was not explicitly extended to on-sale locations in the ABC Act (despite winemakers so commonly signing bottles at winemaker’s dinners that many believe the practice was implicitly authorized by the ABC).  With AB 636, winegrowers, wine importers and their agents may now also sign bottles at on-sale locations such as a restaurant where a winemaker hosts a winemaker’s dinner (B&P Code § 25503.4).  Note that beer and spirits suppliers are not included in this section—the privilege for on-premises bottlesignings is only held by wineries and importers.  This will continue to expose the on premise venues that allow celebrities to autograph bottles of cognac, tequila, vodka and other spirits products to regulatory discipline.

AB 933: Distillers Can Charge for Tastings

AB 933, sponsored by Assemblymembers Skinner and Hall, amends B&P Code § 23363.1 (distilled spirits tastings) and adds § 23363.3 (brandy manufacturer’s tastings).  These sections create a limited privilege that enables distilled spirits manufacturers and brandy manufacturers, respectively, to charge consumers for up to six ¼ ounce tastes of the manufacturer’s own products on its licensed premises. Using the tastes at the distillery in cocktails is expressly prohibited. This will create difficulty for distillers who market their products for use in cocktails.

AB 647: Regulating Beer Growlers

AB 647, sponsored by Assemblymember Chesbro, amends the container labeling requirements for beer containers provided by the consumer to be filled for off-premise consumption (aka “growlers”) by beer manufacturers (also referred to here as breweries), who are more clearly defined by this bill as those who use their facilities and equipment to manufacture beer for commercial purposes.  The new law allows consumers to re-use growlers they previously purchased and had filled by one brewery, at different brewery, though each brewery can decide for themselves whether or not to adopt this practice.  If the brewery does adopt the practice, it must affix a new label to the growler containing all the mandatory information (brand and type, manufacturer and bottler), and completely obscuring all information related to the first beer that had filled the container (brand/name of manufacturer, etc.).

AB 779: Cider Rules

Assemblymember Bocanegra sponsored AB 779, which permits a beer manufacturer who produces more than 60,000 barrels of beer per year to manufacture cider or perry (pear cider), and sell to any licensee authorized to sell wine.  This is interesting, because California regulates cider the same way as wine, as cider is fermented from fruit.  California law also limits the alcohol manufacturer to one category of beverage per manufacturing site, meaning before this bill, cider could only be made by winegrower licensees.  Now large beer manufacturers with the facilities to make cider can do so, although note that the privilege does not go the other way—cider manufacturers do not now have the privilege to make beer.

Also on the Horizon…

Proposed Rulemaking: ABC Rule 106(d)

This isn’t a legislative update, but we wanted to mention that the ABC has proposed amending Rule 106(d), which currently permits suppliers to furnish alcoholic beverage lists to retailers, up to $25 per unit cost to the supplier.  If adopted, the proposed rule will raise the limit to $50 per unit.  Comments closed on December 30, 2013, so an update should be coming out soon.

AB 520: Streamlining the Consumer On-Sale Tasting Law

The Wine Institute and Assemblymember Chesbro are sponsoring a bill to update B&P Code § 25503.5 and add § 25503.57 to permit a supplier or its representative and the on-sale retailer to independently advertise a tasting event, and permits a wine and spirits wholesaler to conduct consumer tastings on behalf of the supplier without prior ABC approval.  These changes provide more flexibility for who may conduct tastings and enables industry members to advertise more easily to consumers without potentially violating the tied house laws.

We’ll be delving into some of these topics in more detail in future postings, so stay tuned for more Booze Rules in 2014!