California Grocers Association v. ABC, Part 2: California Appeals Court Vacates ABC’s Adoption of a Trade Advisory That Correctly Guided Licensee Conduct

In Part 1 of this blog post, we reported on a September 19^th case from the CA District Court of Appeal (DCA) finding that sales of alcoholic beverages could not be made from any checkout stands operated by customers.  See Cal. Grocers Ass'n v. Dep't of Alcoholic Beverage Control, C070375, 2013 WL 5278729 (Sept. 19, 2013). The California Grocers Association (CGA) challenged the CA ABC industry advisory interpreting Business and Professions Code Section 23394.7, which prohibited sales of alcohol from customer-operated checkout stands.

The Trade Advisory at issue interpreted the section to mean that no alcohol could be sold through any checkout stand that the customer operated at any point during the check-out process.  While the DCA agreed with the CA ABC’s interpretation, it also found that the advisory was invalid and violated the APA’s rulemaking requirement for public notice and comment, because “the interpretation is more than a simple paraphrase of section 23394.7.” Id. at *7.

This case thus calls into question whether or not industry members can rely on any CA ABC Trade Advisory that reaches interpretive conclusions about permitted and non-permitted activity and that are adopted without going through the APA rule-making process.

The legacy of this case thus may be more troubling in the long run than the prohibition on self-checkout, because the CA ABC has adopted dozens of Trade Advisories over the last decade interpreting new and complex statutes and policies, from contests, sweepstakes and autographs, to gambling, direct shipping and third party marketing.  For this reason, the CA ABC itself may appeal this case in order to protect the agency’s ability to use advisories to set compliance policies without having to go through the very time-consuming APA rule-making process; which includes public notice, public comment and extensive public hearings.

Hinman & Carmichael LLP lawyers are available should you need assistance complying with Section 23394.7 or with any ABC Trade Advisory.

California Grocers Association v. ABC, Part 1: California Appeals Court Prohibits Alcohol Sales at Self-Check Out Stands

Beginning October 18^th, 2013, California law will prohibit grocery and liquor store customers from purchasing alcoholic beverages at self-checkout stands.  Retail stores with self-checkout stands that currently permit customers to purchase alcoholic beverages from these stands (even those that currently require employee face-to-face ID verification prior to purchase), will be required to send customers with alcohol to traditional checkout stands operated by cashiers. This is the result of a case decided on September 19^th by the California District Court of Appeal (DCA), which ruled that sales of alcoholic beverages could not be made from any checkout stands operated by customers, even if the stands featured a lock on alcohol purchases until a clerk completed a face-to-face verification of identification and released the transaction with an employee code.  See Cal. Grocers Ass'n v. Dep't of Alcoholic Beverage Control, C070375, 2013 WL 5278729 (Sept. 19, 2013).

The case arose from the California Grocers Association’s (CGA) challenge to the CA ABC Trade Advisory interpreting Business and Professions Code Section 23394.7, passed by the legislature in 2011, effective January 1, 2012.  Section 23394.7 provides: "No privileges under an off­sale license shall be exercised by the licensee at any customer­operated checkout stand located on the licensee's physical premises." The industry advisory interpreted the section to mean that no alcohol could be sold through any checkout stand that the customer operated at any point during the check-out process. The CGA maintained that if the checkout stand was locked upon the scan of an alcoholic beverage and required an employee to check ID and release the transaction, then it was no longer a customer-controlled checkout stand and therefore complied with the statute; an entirely reasonable conclusion in the view of most industry members.

The DCA, however, found the CGA argument unpersuasive, and used the plain text and legislative history of the statute to find that alcohol sales may not be completed at any customer-operated stand because “[t]he phrase ‘customer­operated checkout stand’ thus describes the kind of checkout stand ‘at’ which the sale of alcoholic beverages is prohibited.”  Cal. Grocers Ass’n, 2013 WL 5278729, at *2.  While finding that the Department correctly interpreted the statute, the court also found the Trade Advisory was invalid and violated the APA’s rulemaking requirement for public notice and comment, because “the interpretation is more than a simple paraphrase of section 23394.7.” Id. at *7.

Regardless, one result of this case is clear: alcohol transactions will need to take place at employee-operated stands, so that purchases are made “through a face-to-face transaction from beginning to end, [and] the state of California can ensure that the necessary age verification steps are being taken to keep alcohol out of the hands of minors.” Id. at *4

While the case may be appealed to the California Supreme Court by the CGA or the CA ABC, we are nonetheless advising our clients to take all necessary steps to comply with Section 23394.7 in time for the October 18^th, 2013 effective date of compliance and deadline for appeal.

Hinman & Carmichael LLP lawyers are available should you need assistance complying with Section 23394.7 or with any ABC Trade Advisory.

AB 1128: The “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale

Welcome to your worst nightmare: You serve a customer at a winery tasting room (or at a party at a winery) who turns out to be younger than 21, and who later gets into an accident or commits a crime like assault where alcohol is a factor and you end up with a felony, which bars you from the wine industry for the foreseeable future. AB 1128 (currently on a fast track to pass through the California legislature) amends Business & Professions (“B&P”) Code Sec. 25658 and ups the potential penalty for sales to a minor (from a misdemeanor to a felony) when the minor causes an injury, death or damage to others. Civil damages for selling or furnishing alcohol to a minor who gets into an accident or causes harm is already part of the law and the potential consequences of a current incident include license revocation for a licensee (Sections 25602 and 25602.1).

The hidden cost of this statute will be paid by business owners (restaurants, convenience stores and, yes, wineries) who (knowingly or otherwise) serve or sell wine to customers who present false ID or who appear to be over the age of 21. Once an individual has a felony on their record they are pretty much forever after barred from being an alcoholic beverage licensee, or an officer, director or shareholder of a corporate licensee.  Proving rehabilitation is possible, but typically not for at least a decade or more afterwards (if then). AB 1128 is more than license suspension or revocation; it’s a death penalty for individual and corporate alcoholic beverage licensees.

And yes, corporations can commit crimes (to quote Mitt Romney “corporations are people, my friend” and the AB 1128 statute applies to “every person”). See also Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).  The application of this penalty statute to corporate entities is easy to imagine (does anyone remember Arthur Anderson LLP or Enron Corporation?); especially in a situation where the damage caused by the minor is extraordinary (for example, a few months ago at a Temecula winery, there were reports of a drunken brawl involving a group of young people that resulted in numerous injuries – what if one of the young people had been under 21 and one of them was seriously hurt?).

What really happens today is that the under 21 crowd have really good false identification available and use those fake IDs to drink or buy alcohol at a tasting room or restaurant or to buy alcohol from a liquor store.  Then, when they get caught drunk driving or are involved in an accident or another crime, they show their real identification and ditch the fake ID (because using false identification is a crime also). It becomes their word against the word of the server, clerk, winery employee or winery owner serving wine as to whether or not B&P Code Section 25660 (reliance upon bona fide proof of ID) was satisfied.  Usually it isn't satisfied because of a lack of proof, lack of availability of the fake ID or minor differences between the ID and the person presenting it (ID defense cases have been lost over eye and hair color, and minor weight or height differences).

We tried a case like this in 2005 involving a girl who was four months shy of 21 and using her sister’s ID at a well-known establishment in wine country.  It was a tragic case.  She crashed into a guardrail at 2:30 AM on a foggy night and died.  She had had two drinks (the last one at 10 pm); the accident was the result of speed and fog, not alcohol (which we had to prove).  We prevailed on behalf of the venue after a very contentious and extended trial but we had to face testimony from the older sister and her parents that the victim couldn't have been using the false ID: it was a swearing contest against the venue owners and everyone in the establishment on the night in question.  If the AB 1128 felony penalty rule had been in place in that case, the matter would have escalated to the Superior Court and the owners could have faced jail time and could have permanently lost their business.  It is cases like this that make us shudder at the implications of AB 1128.

Now consider the retailer exception to AB 1128 that requires a retailer to KNOW that the minor is under the age of 21 in order to face a felony penalty.  This predicate defense, by the way, is NOT available to wineries, who are not retailers.

Has anyone out there ever given a glass of wine to a 20-year-old, married to someone older? Imagine an accident or an incident later in the day or evening.   If AB 1128 passes, conduct that occurs every day in wine country, but on one unlucky day is followed by an accident or an injury, could result in the potential loss of the winery or the business.

And consider further the young person over 21 dating and sharing a bottle of wine with an 18, 19 or 20-year-old; whether in a tasting room, at a restaurant or at home. That young person over 21 would also be liable for a felony in the event of an accident, crime or similar tragedy involving alcohol. The lives that would be ruined would be those caught up in tragic situations; without regard to intent or actual causation.  Suddenly we are exposing young people to jail and potentially marking them for life as felons for drinking with their friends anywhere (because this doesn't just involve venues). These incidents are tragic enough and carry enough consequences without convicting everyone involved in the party of a felony for “furnishing alcohol”.

Is this going to stop those younger than 21 from drinking?  No way. This is a really bad bill that should be vigorously opposed by every thinking parent and by every licensee in the state.

The New York SLA and Online Wine Sales: A Work in Progress

On April 9th, the New York State Liquor Authority (SLA) issued a declaratory ruling describing limits on the activities of national advertisers (marketing websites) who advertise the availability of wine for sale to consumers in New York from licensed NY retailers. While the system presented to the SLA was not the first Internet marketing platform designed to operate within the three-tier system in New York (and to attempt to comply with all of the NY laws and regulations associated with selling wine through the three-tier system), it was the first time anyone had requested a declaratory ruling from the SLA to obtain guidance on how to operate such a marketing platform.

In its eight-page ruling, the SLA analyzed an actual relationship from an earlier iteration of the model that was submitted to the SLA for the declaratory ruling. The SLA noted that the relationship did not comport with the model presented to the SLA for approval (that was because the relationship existed before the model was developed and submitted), and found that the historic day-to-day business relations between that Internet advertiser and that NY retailer violated ABCL §111, which “prohibits a licensee from making its license available to a person who has not been approved by the Authority to hold that license.” In other words, the SLA believed the advertiser in the relationship they examined was too involved with, and had too much control over, the retailer’s business.

This is far from the death knell of Internet wine marketing platforms in New York; indeed, the SLA went out of its way to acknowledge that the Internet, and Internet marketing, is of vital importance to the NY marketplace.  In announcing its ruling, the SLA said it will continue to conduct public meetings and gather more information to further address the issues raised by the more sophisticated model described in the declaratory ruling request, as well as more generally, the issues raised “by the involvement of unlicensed parties in the Internet sale of alcoholic beverages to consumers in this state,” in an Advisory to the trade.

In the meantime, there are a number of important takeaways in the ruling itself that provide helpful interim guidelines to Internet wine marketers and NY retailers.  According to the SLA, a third party advertising arrangement with a licensed NY retailer selling wines through the three-tier system should abide by the following guidelines:

(a) Flat fees to retailers (paid by the Internet advertiser to compensate for a sale) are prohibited;

(b) Advertisers may not decide what wines will be offered for sale by the NY retailer (this is a function reserved to the retailer);

(c) Advertisers may not set the website prices for the wines offered for sale by the NY retailer (this is a function reserved to the retailer);

(d) Advertisers may not perform essential retailer functions such as deciding how consumer funds are controlled and disbursed, and deciding what the retailer’s profit margin will be; and

(e) Advertisers may not retain a “substantial” portion of the sales price for their services.

Thus, a retailer who selects the products that are going to be advertised on its behalf, sets the prices for the products that are going to be advertised, determines and receives normal business margins for the products that its sells, controls the funds received from consumers, and takes normal business risks (for example from loss or breakage of product, or credit card fraud) may utilize Internet advertising services facilitated by third parties.  (These elements were all present in the advertising platform described in the request for declaratory ruling, but the SLA focused on the prior system in its ruling).

There were also some unquestionably safe harbors mentioned by the SLA as a precursor to its Advisory to come:  a third party may host and maintain a retailer’s website and perform "related services," and a retailer may advertise its own products on a third party’s website, so long as consumers are directed to the retailer's website to place orders and the advertiser’s compensation is a flat fee that is "not contingent on the number of sales or the amount sold.”

While this ruling answered some questions, it raised many others that still need to be addressed - such as, is it acceptable for an advertising and marketing fee to be something less than a substantial portion of sales made by the retailer, or must it always be a flat fee?  What kinds of banking arrangements may the retailer use to receive consumer funds?  To what extent may a retailer coordinate with an Internet advertiser who is running a national advertising program? These are all tricky questions and we look forward to further guidance on these issues from the SLA.

California SB 635: What the 4am Bill Really Means for California Communities

SB 635 is a bill that has been introduced by Senator Mark Leno to give communities the ability to  determine the hours of on-sale licensed premises (bars and restaurants).  The bill is community empowerment at its best. It enables local communities (in SF the BOS and the Planning Commission) to decide if there will be extended hours at all and, if so, the exact location where those extended hours would be allowed. These decisions should be made at the local level, not by legislative fiat in Sacramento, which is currently the case. The plan could authorize extended hours applications on one or two streets (like the Embarcadero in certain blocks, or the nightlife corridor in the new SOMA plan on 11th street) or be confined to existing areas of high density nightlife where the need for adjustable planning exists today. The community plan could require some clubs to close at 2 am, some at 3 am and some at 4 am. This would be for the purpose of spreading out the closing time traffic. This would reduce the current burden on law enforcement to handle large crowds being forced out on the street, all at 2 am. The community could also place other conditions on the exercise of an extended hours permit, such as provisional status that could be revoked in the event that the venue did not act responsibly.

The other part of the bill requires that any venue (which could include late night restaurants that cater to "the other 9 to 5") desiring to apply for extended hours to apply to the ABC for the extended hours permit.  The existing ABC protocol that requires notice to neighbors and permits protests (by anyone) to applications for extended hours at any particular venue would apply to these permit.  If the ABC upholds the protest based on interference with quiet enjoyment (or for other reasons) the application may be denied or further conditioned (which is what happens with new venues now).

In short, the City decides if and where extended hours would be allowed and the ABC decides who may hold extended hours permits and under what conditions extended hours permit applications would be allowed.

SB 635 is state wide community empowerment; it’s not just about San Francisco. For example, the Gaslamp district of San Diego, portions of LA and entertainment areas in other major cities and resort communities in CA would be eligible to adopt community plans that address their local situation. There are many high density restaurant and club areas in the state where this option would be a useful tool. The "nanny state" theory of controlling local zoning and land use by state regulation because local communities can't be trusted has no place in California when it comes to entertainment, food and nightlife.

SB 635 allows local communities to take control of these important community decisions and will elevate San Francisco in particular, and California in general, to a level equal to or surpassing the great entertainment areas of the nation and the world. Optional 4 am hours (which require a special permit from the NY State Liquor Authority) has certainly never hurt New York. San Francisco and California deserve no less.