Build It and They Will Come: Craft Products Get New Privileges in CA and TX

Big news for craft producers in California and Texas, two of the biggest consumer markets in the United States: Texas craft brewers and distillers now have expanded retail sale and on-sale consumption privileges and California craft distillers have expanded tasting privileges as a result of newly enacted legislation.  But why does this matter?  Why is it important to give craft producers more control over the experience consumers enjoy on their premises? While now such an essential part of California culture, it is almost hard to remember that the big business of California wine country tourism is a relatively new phenomenon.  It was less than forty years ago in 1976 that the Judging of Paris famously put California wine on the global map and helped shape what is now the fourth largest wine-producing region in the world.  The demand for California wine in the 1970’s fueled rapid growth and the number of wineries in the state ballooned from 227 in 1966 to more than 3,400 in 2010, according to the Wine Institute.  Strength in numbers and burgeoning state revenue created a powerful lobbying force, and California wineries pushed for legislation to give wineries broad privileges to allow consumers to experience California wine country by tasting and buying wine directly from the beautiful winery properties for both on-premises and off-premises consumption (and later, the privileges of shipping directly to consumers, but that’s another bedtime story).  Other states soon followed suit, and wine countries popped up across the country, to give the new American wine consumer access to small producers who didn’t have mass distribution in America’s retail establishments.

But under an alcohol regulatory system in which everything is prohibited unless expressly permitted, these tasting and retail privileges did not always extend to local brewers and distillers, whose sectors were dominated by the mass-produced national and international brands, most of whom did very well through the traditional three-tier system and had little interest in bringing consumers to experience their production facilities.

As craft breweries grew in popularity in the 1980’s, California granted the same privileges to local breweries, brewpubs and microbreweries to conduct on-premise tastings and sell to consumers for off-premises consumption.  See Cal. Bus. & Prof. Code § 23357.  We’ve since seen a massive explosion of craft beer that just keeps growing at exponential rates across the country.  The Brewers Association estimates the number of craft brewers to have grown from 8 in 1980 to 537 in 1994 to over 2300 in 2012, with more than 1500 in development around the country.

As a sign of this ever-expanding growth, earlier this year Texas expanded the privileges of brewpubs and microbreweries to permit consumers to tour and taste at the licensed premises and to permit expanded routes to market for small brewers:

• Brewpubs can manufacture up to 10,000 barrels annually instead of 5,000 and can sell to distributors and up to 1,000 barrels to retailers, in addition to consumers who visit their premises (SB 515).
• Brewers and manufacturers who sell less than 125,000 barrels can self-distribute up to 40,000 barrels directly to retailers (SB 516 and SB 517).
• Brewers and manufacturers who produce less than 225,000 barrels annually can sell up to 5,000 barrels of malt beverages produced on the premises for on-sale consumption to consumers (SB 518).

See TABC Press Release, “New craft beer laws signed by Governor Perry, go into immediate effect,” available at https://www.tabc.state.tx.us/home/press_releases/2013/20130615.asp

Craft spirits are growing too, especially with Millennials, who can be seen across the country in bars ordering exclusive specialty cocktails prepared by mixologists, key influencers for growing small batch brands.

As a result of this growth in craft spirits, this year Texas also opened up its laws to include local distillers and rectifiers, who are now able to sell or give away samples of their products to consumers for on-sale consumption up to 3,000 gallons annually, and sell up to two 750ml bottles of their products every thirty days to a consumer who visits the premises, up to 3,500 gallons annually. (SB 905).

This year in California, Governor Brown signed AB 933, which will permit distilled spirits manufacturers to charge each consumer for up to six ¼ ounce tastes of the distillery’s own products on its licensed premises.  The bill will become law in January, meaning distillers will be able to begin charging for tastings, without the necessity of using a work-around protocol like charging for glassware but not the tasting.

It is worth noting that AB 933 does NOT permit distillers to charge for or provide mixed drinks as part of the tastings, specifically stating that these tastings “shall not be given in the form of a cocktail or a mixed drink.”  This is an unfortunate restriction because it deprives consumers of the ability to taste the distilled spirits in the form they are most likely to consume it—in a cocktail.  Moreover, in our current cocktail culture, many distilled spirits manufacturers have very specific drink recipes and mixer recommendations intended for their products that they will not be able to share with consumers on site as part of these tastings.

Additionally, while neither current California law nor AB 933 will permit California distilled spirits manufacturers to sell bottles of their products directly to consumers from tasting rooms—all products will be required to be sold from a retail-licensed premises through the three-tier system—we hope this privilege will not be far behind, despite strong opposition from the distribution tier.

Will craft beer and spirits follow the example set by the American wine industry?  If you build it, will they come?  We hope that the expanded experiential marketing and retail sale privileges that helped the American wine industry tell its story to consumers will now extend to the craft beer and spirits industries, giving consumers the opportunity to fall in love with more small, local and creative brands than ever before.

For more information about craft beverages, please check out the Craft Beverage Expo in May 2014 in San Jose, California.  Hinman & Carmichael’s Rebecca Stamey-White serves on the Advisory Board.

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

On May 20th we wrote a blog on the dangerous nature of AB 1128, which would have elevated the penalty for furnishing alcohol to a minor from a misdemeanor to a felony.  This was one of the most pernicious anti-alcoholic beverage industry (and anti-parent) bills in the history of California. It snuck through the legislature because most folks simply didn’t want to be seen as encouraging in any way youth alcohol use; regardless of the circumstances or the context. We are pleased to report that Governor Brown vetoed the bill and sent the following message:

BILL NUMBER:  AB 1128

VETOED       DATE: 10/12/2013

To the Members of the California State Assembly:

I am returning Assembly Bill 1128 without my signature.

This bill would allow a felony to be charged if a person knowingly provides alcohol to an underage drinker, whose alcohol consumption thereafter causes injury or death.

The behavior targeted by this bill is already a misdemeanor and I am not convinced it should be made into a felony.

Sincerely,

Edmund G. Brown Jr.

We attribute this veto to the good sense shown by the Governor and, just as likely, to the strong messages delivered to the Governor by all of the industry trade associations that this bill was not necessary or advisable.   This is a good reason to continue to support your industry retailer and supplier trade associations.

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.