A LAYPERSON LOOKS AT ARSENIC IN WINE

A Note from John Hinman: Starting on March 19th (last week) three class-action lawsuits (one in California, one in Florida and one in Louisiana) have been filed against wineries and retailers alleging unsafe levels of arsenic in wine. These plaintiff class-action lawyer generated lawsuits have caused a great deal of concern (and many questions) by wine consumers, the wineries producing the products and the retailers selling the products. We represent many wineries and retailers that are affected and have taken the initiative to locate and engage product liability counsel for our clients, as well as to educate ourselves and our colleagues in what issues are really involved.The first step is looking at the underlying basis of the lawsuits – the presence of arsenic in the food supply, and in wine. The blog post below explains the scientific issues in a rational way and in the context of the food supply.

 

Lawsuits have been filed over the alleged presence of small amounts of arsenic in wine, preceded by orchestrated hype in the media.   In this blog, I offer my perspective about the factual allegations in the lawsuits.  I am a lawyer, not a toxicologist, so these thoughts are the perspective of a layperson.  We will address the legal aspects in forthcoming posts.

Is This Really News?

Did I know before the lawsuits that some wines had minute amounts of arsenic?  No, because I had not thought about it.  If I had looked, I could have found numerous articles on the web and in print that disclosed that fact.  It was, in fact, well-publicized earlier but brought to the forefront by the pre-lawsuit hype.

The Dose/Response Relationship—A Basic Concept of Toxicology

Toxicology is the branch of science that studies the harmful effects of chemicals.  One of the basic concepts of toxicology is the relationship between the “dose,” meaning the amount of a chemical introduced into an organism, and the “response,” meaning the reaction (if any) of the organism to the chemical.   The shorthand catch-phrase for that concept is: “The poison is in the dose.”  There are two important corollaries to that phrase:

  • Any compound can cause death or serious health effects if introduced in sufficient quantities.  People have died from drinking too much water at one time.
  • Just because a chemical causes harm at some quantity does not mean that it causes harm at every quantity.  Every year, some people die from drinking too much alcohol at one time, but many, many more people drink alcohol in moderate quantities, do not suffer any ill effects, and derive benefits from the consumption.

The dose/response relationship is important when evaluating arsenic.  Because a relatively small dose of arsenic can cause lethal effects, it has been a favorite of poisoners.  It is said, for example, that arsenic helped Catherine de Medici to alter the course of European history.   As we will see, however, the dose that Catherine was adding to her victims’ libations was many million-folds larger than the quantities allegedly found in wines today.

Closely related to the dose/response relationship is the concept of “sufficient challenge,” first articulated by Dr. Henry Smyth.   He noted that exposing animals to very small amounts of chemicals known to be lethal at higher doses actually produced animals that were healthier and longer-lived than animals who were not exposed.  Dr. Smyth’s hypothesis was that the body’s defense mechanisms were stimulated and strengthened by the exposure to small amounts of the chemicals.

What Is Arsenic And From Where Does It Come?

Arsenic is a metallic element found in the earth’s crust. Because it is an element, arsenic cannot be destroyed. It becomes available in the environment from both natural and human activity.  Some leaches out from the soil in the form of dust, and volcanic eruptions typically emit large quantities of arsenic.  Humans have introduced arsenic into the environment through mining, the former use of pesticides containing arsenic compounds, industrial processes, including metal smelting; burning coal and wood, and using it as a wood preservative.

Arsenic is primarily found in combinations with other elements that form either organic arsenic or inorganic arsenic.  Of the two classifications, inorganic arsenic has the higher potential to cause toxicological effects in humans.   

Arsenic, and particularly inorganic arsenic, is classified as a carcinogen by the EPA, the State of California and the International Agency for Research on Cancer.  None specifies a “safe” limit for arsenic exposure.  However, as discussed below, it is well known that arsenic is found at low levels in the food chain, but there are few regulatory standards.  Given that arsenic cannot be eliminated, the current levels of exposure from food, water and air has been deemed a risk that need not be further regulated.

Where Is Arsenic Found In The Food Chain?

Arsenic is found in the soil, the air and in water.  It is absorbed by plants, fish, and animals, and it thereby enters the human food chain.   Arsenic is found at very low levels in drinking water, as well as many foods and beverages, including fruits, vegetables (Brussel Sprouts and other cruciferous vegetables in particular), fish, poultry, rice, and, yes, some wine.   Since the widespread restrictions on the use of pesticides with arsenic, none of this arsenic is intentionally introduced.

Arsenic is present in the food chain at levels that are so small that people have only recently been able to measure them.  For example, the current U.S. EPA standard for drinking water is 10 parts per billion (“ppb”).   That measurement is difficult to conceive for most of us.  Here are some analogies used to illustrate what 1 ppb means: 

  • One second in almost 32 years;
  • One drop of ink in the largest gasoline tanker truck; and
  • One pinch of salt on 10 tons of potato chips.

If those don’t resonate, there are more on the internet.  The idea is that one ppb is a really, really small amount.

A Case Study—Rice

In 2012, Consumer Reports published the results of its study on the arsenic content of rice and rice products.  The tests found that most rice had 100-200 ppb of arsenic, but a large number of samples exceeded 200 ppb—up to 917 ppb in one case.  Arsenic in brown rice exceeded the arsenic in white rice samples from the same source.  There were no U.S. standards for arsenic in rice at the time.  Consumers Union advocated a standard of 120 ppb, but none has been enacted yet.  A UN organization has since set a standard of 200 ppb.  Certainly no one has banned or suggested banning rice from the human diet.

Well, that’s easy---just give up rice and switch to potatoes, right?  Not so fast!  Potatoes also contain some arsenic, and they contain solanine, a known toxin.  The average potato contains about 8 mg. of solanine.  The dose toxic to humans is 20-25 mg.   While rare, poisoning from potato consumption has been reported.  Therefore, switching from rice to potatoes does not eliminate risk; it merely changes the risk profile.  We can evaluate from our own experience and the knowledge of the vast amounts of both rice and potatoes that are consumed, that the risks of either are relatively minor.

Arsenic And Wine

Lawsuits have been filed against wine producers, based upon the findings of a laboratory (looking for testing work) that tested some wines for arsenic levels.  The laboratory has yet to report its exact findings,  Instead, the class action lawyers allege in hyperbolic, nonscientific language that the arsenic levels in some wines exceeded the drinking water standard “in some cases up to 500% or more.”   Translation: the highest levels they found were about 50 ppb (50 seconds in 32 years).  Moreover, when CBS Morning News reported the story, it did its own tests on four wines, and it got results that were “considerably lower” than those alleged by the complaint, including one that was under 10 ppb.

Testing for the presence of a chemical at concentrations of parts per billion requires rigorous and sophisticated analysis.  It is supposed to be done by technicians who are independent and have no personal interests at stake.  The fact that CBS News’ test results were well below those of the testing laboratory used by the plaintiffs raises many unanswered questions that will eventually be addressed.

Label Disclosures

Label disclosures by food and beverage producers are regulated by federal law.  Food producers are required to disclose the ingredients in their products, not the constituent compounds in those ingredients.  The ingredients in Rice Krispies, for example are: “Rice, sugar, contains 2% or less of salt, malt flavor.  BHT added to package for freshness.”  Neither Kellogg’s nor any other producer lists “sodium” and “chlorine” for salt, let alone the all of the chemicals present in ppb in what we know as “rice.”   For wine, the assumption is that consumers know it’s fermented grape juice.  Producers disclose the origin of the grapes, the alcohol content, and use of sulfites, not the constituent compounds in the grape juice.

But what of the factual allegations in the complaint?  What if some wines have arsenic over the drinking water standard? 

  • First, there are no federal or state standards for arsenic in wine.  The drinking water standard does not apply.   The vast majority of people drink much more water (2 liters) than wine on a daily basis, so the exposure standard would be different.  The few who habitually reverse the roles of water and wine are likely to suffer adverse health effects for reasons unrelated to arsenic.
  • Second, the federal government (the TTB) routinely tests samples of wine in the U.S. market for the presence of many constituents, including arsenic.  So, the fact that some wines contain low levels of arsenic has been well known—and publicized, long before the current litigation. The U.S. government has seen no need to regulate.  See Point 1 above.
  • Third, Canada does have a limit for arsenic in wine—100 ppb.  The EU’s Organization of Vine and Wine has a limit of 200 ppb for arsenic in wine.  The results reported by the plaintiff’s laboratory, even if accurate, are well below those standards.

So, what am I going to do about arsenic in wine?  First, I am well aware that worrying has its own adverse health effects that are more immediate and perceptible than any that might result from minute amounts of arsenic.  So, once I make up my mind, I am going to stick with my decision.

Second, while science can find chemicals in ppb quantities, it cannot yet tell you how much, if any, is risk-free.  Nor can it tell you how much, if any, is needed to benefit from Dr. Smyth’s “sufficient challenge.”  The truth is that life is not risk-free. What I do know, however, is that people have been drinking wine, and eating rice and potatoes for centuries, which puts the “risk” in perspective for me.  Am I really going to give up products that provide pleasure and fulfillment in order to avoid some undefinable but seemingly minimal risk?   My answer is “No! I am going to continue to eat rice and to enjoy wine!”

Having delved into arsenic, I have, however, made two firm resolutions to reduce risk.  First, I will not visit erupting volcanoes.  Second, I will very politely decline any invitation to have cocktails with Catherine de Medici.

Salut! 

The Biggest Retailer in the World vs. the TABC

Wal-Mart sells spirits in 25 states, and it would very much like to sell spirits in Texas.  However, Wal-Mart can’t sell spirits in any of its 543 Texas stores because of several bizarre legal restrictions on package store ownership in Texas.  So last month Wal-Mart filed a suit in federal district court in Texas against the Texas Alcoholic Beverage Commission challenging those statutes on constitutional equal protection, commerce clause and general “these crazy statutes don’t make any sense at all” grounds.

Wal-Mart does not qualify to sell spirits in Texas because (a) Wal-Mart is a publicly traded company, and (b) Wal-Mart does not operate hotels (publicly traded hotels may have package stores inside their hotels).  Texas’ ban on publicly traded corporations holding package store licenses goes back to 1995.  Before 1995, Texas prohibited any out of state company from owning a package store license in Texas, but this was struck down by the Fifth Circuit, as the court found the state couldn’t offer a justification substantial enough to authorize such discrimination against non-Texans. 

Immediately after the Fifth Circuit put the kibosh on barring non-Texans from holding package store permits, the Texas legislature passed the bill that prohibits public corporations from doing so, though it made an exception for publicly traded hotel corporations.   The Texas Package Store Association was the principal supporter of the bill, not surprisingly.  The fact that Walmart would be the largest private employer in Texas apparently held no sway in the legislature that year.

Walmart stores and Sam’s Clubs now hold 543 beer and wine off-premise permits in Texas, which are called “Q” permits, but if Wal-Mart got even one package store permit (ignoring the fact that they can’t, as a public corporation), they would have to give up all 543 of those permits.  So Wal-Mart is challenging that restriction as well.

Then there's the five package store limit.  Even if Wal-Mart were able to qualify for a package store license (ignoring for the moment that it would have to give up its 543 beer and wine store permits to do so), it would be limited to five package stores in the entire state.  There are similar restrictions in other states - MA comes to mind - but Texas has a Texas-sized loophole in its law. If you are a Texan and own five package stores, and your Texan parents own five, and your Texan sister and brother both own five, the law allows you to consolidate all twenty of those stores into one entity.  Not only that, but you can sell your business and transfer all of those licenses to another entity who doesn't have to be related to you. That's how Spec's and Twin Liquors own so many package store in Texas; 160 and 76, respectively.

Wal-Mart isn’t challenging the three-tier system in Texas in any way. Its claims revolve solely around the discriminatory laws that Texas imposes on package store licensure, and it does a good job of arguing that those laws should not stand up under the Equal Protection Clause and the Commerce Clause of the U.S. Constitution. It's true that Wal-Mart can be seen as a Goliath in a lot of ways, but everyone should be cheering for them this time. 

Rebecca Stamey-White presents Emerging Issues in Wine Law

On Wednesday, February 18th, Hinman & Carmichael LLP partner Rebecca Stamey-White gave a continuing legal education presentation to the Business Law Section and Intellectual Property Committee of the Palo Alto Area Bar Association (PAABA) on Emerging Issues in Wine Law.  During her presentation, Rebecca gave an overview of the complicated legal history of alcohol beverage regulation in the United States; a primer on tied house law, the three-tier system and investment/investor qualification considerations; and discussed other issues that may affect business and intellectual property counsel working with wineries and other licensee clients. Rebecca covered some of the emerging trends in the industry, including recent legal shifts in the regulation of private and control labels, the growth of unlicensed third party providers (such as online marketers, special event companies and local delivery platforms), the legal complications facing wineries advertising on social media and the growth of the legal cannabis industry and how it may affect California wineries if cannabis is legalized in the state.  The presentation was well-received with a lively discussion from the participants and of course was complemented with winetasting, which always pairs best with wine legal education!

Top Beverage Alcohol Law Firm Adds and Elevates Partners

Top Alcohol Beverage Law Firm Hinman & Carmichael Announces the Addition of New Partners and the Elevation of a Founding Partner

San Francisco, California (PRWEB) January 06, 2015

San Francisco-based Hinman & Carmichael LLP, one of the nation’s leading law firms specializing in 21st Amendment Law and alcohol regulation, is proud to announce the new face of the firm for 2015. Three of the firm’s associates have been elevated to partner: Suzanne DeGalan, Sara Mann, and Rebecca Stamey-White. Additionally, John Edwards has joined the firm as Senior Counsel and Founder Lynne Carmichael has been elevated to Partner Emeritus.

Suzanne DeGalan, Sara Mann and Rebecca Stamey-White, each of whom have been with the firm for the past five years, became partners as of January 1. Each bring to the partnership a significant depth of knowledge and experience in alcoholic beverage regulation; Mann focusing on nationwide private and control label distribution and retail compliance, alcohol delivery and Third Party Provider issues; Suzanne on distributor relationships and agreements as well as production and licensing agreements and social media compliance; and Rebecca on consumer event, advertising, social media compliance and a heavy diet of administrative accusation defense.

On January 1st, John Edwards joined Hinman & Carmichael LLP as Senior Counsel after a 40-year career as a partner at Jones Day. Edwards is one of the country’s foremost litigators and will be, with John Hinman, responsible for the firm’s robust beverage law specific litigation, arbitration and mediation practice.

Finally, founder Lynne Carmichael will transition to well-earned Partner Emeritus status, allowing her to spend more time pursuing her passion for theatre and world travel while remaining a key component of the Hinman & Carmichael LLP licensing and corporate team headed up by partner Beth Aboulafia.

About Hinman & Carmichael LLP 
San Francisco based Hinman & Carmichael LLP specializes in legal advice relating to the production, distribution and sale of alcoholic beverages in California and across the country. In particular, the firm focuses on licensing and qualification issues, business and marketing practices, distribution counseling, special counsel services for transactions involving licensees and representing clients in front of federal and state agencies that regulate alcoholic beverages. 

 

Illinois Qui Tam Lawsuits—Private Enforcement Of a State Claim: A Bonanza For A Plaintiff’s Lawyer And A Rip-Off Of Retailers

Today’s Booze Rules post was authored by the newest member of the Hinman & Carmichael LLP team – John W. Edwards II. John is joining the firm on January 1st as Senior Counsel after a 40-year career as a partner at Jones Day. John is one of the country’s foremost litigators and will be managing the firm’s litigation, arbitration and mediation practice.

An Illinois lawyer has filed over 300 Qui Tam cases against out-of-state sellers of products in Illinois state court.  The most recent group of cases targets wineries that ship directly to consumers under permits issued by the State of Illinois (“DTC”) and wine retailers selling alcoholic beverages to Illinois residents outside of Illinois, which the buyer then ships into Illinois.  The cases against the wineries attempt to take advantage of the lawyer’s expansive reading of a confusing Illinois tax provision, and the cases against the out-of-state wine retailers challenge the legality of their business model.

This blog post outlines the defenses, explains the current thinking on appropriate prophylactic changes to websites to reduce the danger of being involved and points affected industry members to defense counsel coordinating these cases in Illinois.

Qui Tam – What is it?

A Qui Tam action is a private citizen whistleblower lawsuit in the name of the state to enforce a state law that ordinarily would be enforced by the state Attorney-General.  Typically, the Attorney-General must consent to the action.  The plaintiff is not motivated by public spirit.  Rather, the plaintiff is entitled to a percentage (at least 25% in Illinois) of what is recovered for the State, plus “reasonable attorneys” fees.”  Thus, the stakes in a Qui Tam action are substantially higher than they would be if the defendant merchant were to resolve its tax liability (if any) administratively with the state. The ability to bring a Qui Tam case exists in many states so if this plaintiff prevails this might be the beginning of other lawyers bringing similar actions in other states.

The Illinois cases have been filed by Stephen P. Diamond, PLC, 332 Michigan Avenue, Chicago, Illinois 60604.  Diamond files as the plaintiff himself, eliminating the need to share any recovery or settlements with a “client.”  Pretty nice work for a lawyer only interested in generating revenue.

Explaining the Illinois Use Tax Claims

            Most of Diamond’s cases, including those against wineries selling DTC, have been framed as an effort to collect unpaid Illinois Use Tax.  Illinois imposes two taxes on Illinois consumers who purchase goods outside of Illinois and then import them: (1) a sales tax on the selling price of the merchandise, and (2) a Use Tax of 6.25% on certain shipping and handling charges.  Although the tax is imposed on consumers, Illinois requires out-of-state entities selling into Illinois to collect the Sales and Use Taxes and to pay them to the State.  In this case wineries are permitted to ship into Illinois via a DTC permit and thus are subject to Illinois jurisdiction. Out of state wine retailers do not have the same privilege and are ineligible for a permit – more about the jurisdictional implications of this below.

            Surprised to hear that Illinois requires collection of a tax on shipping & handling charges?  So, apparently, were hundreds of other merchants who have been sued by Mr. Diamond.  Why the confusion?

            Illinois regulations state the Use Tax is not imposed on shipping charges if they are “separate from the price of goods” or reflect the retailer’s actual charges from a common carrier.  Use Tax is, however, imposed on shipping charges that exceed actual cost or that are “included in the selling price” of the goods.  While that seems straightforward enough, in 2009, the Illinois Supreme Court ruled that, even if an internet merchant separately states shipping & handling charges on its website, those charges are “included in the selling price” and thus subject to Use Tax, if the buyer has to pay those charges to obtain the goods.

            The regulations have not been amended to reflect the Supreme Court’s ruling.   Thus, merchants and their advisors who check the Illinois tax regulations are not alerted to the possibility that they may be liable to collect Use Tax on shipping & handling, even though those charges are separately stated on their websites.  Moreover, it appears that Illinois itself does not agree with the expansive view of Use Tax liability advanced in Diamond’s lawsuits because Diamond has filed claims against merchants that have been audited by the Department of Revenue and found to be compliant with Illinois law.

What Diamond is doing is diabolically clever

Diamond has been ordering a small amount of merchandise—typically, a single bottle of wine—on one or two occasions, and then printing out the web page showing that the merchant collected Illinois taxes on the merchandise, but not shipping & handling.  Diamond then files a Qui Tam action to collect the unpaid Use Tax on all of the merchant’s sales to Illinois consumers over the preceding six years under the Illinois statute of limitations.  He also claims that the merchant (at least those who filed tax returns) violated the Illinois False Claims Act by filing “false” (i.e., erroneous) tax returns.  That Act allows recovery of three times the amount of tax owed and a civil penalty of $5,000-10,000 per violation.  Diamond also seeks “reasonable attorneys’ fees” for representing himself.  The various multipliers and add-ons, of course, transform even a fairly modest amount of uncollected Use Tax into a significant potential liability, designed to motivate settlements on terms favorable to Diamond.

The claims against out-of-state wine retailers

            Diamond has recently filed a series of cases against wine retailers in states other than Illinois that sell alcoholic beverages to Illinois residents under terms that make clear that title to the goods passes to the consumer in the state where the retailer is located, not in Illinois.  The consumer, not the retailer, is responsible for shipping the goods to the destination of his or her choice, whether Illinois or elsewhere.   The Uniform Commercial Code (“UCC), adopted in Illinois and almost every other state, specifically permits a buyer and seller to agree on where and when title to the goods passes.  The sellers’ website Terms & Conditions typically provide that title passes to the buyer in the wine retailer’s home state at the time the transaction closes and that subsequent shipment is at the buyer’s discretion and risk.  Under those circumstances, the buyer, not the wine retailer, should be obligated to pay Illinois Sales Tax, if the buyer chooses to ship the goods to Illinois, and the Use Tax should not apply, since the buyer separately chooses how and where to ship the goods.

            In the recent cases, Diamond claims that the out-of-state wine retailers failed to obtain the required permits to sell alcohol DTC in Illinois and, separately, that they violated the False Claims Act by failing to collect Sales and Use Tax on the out-of-state transactions.  The first claim directly challenges the retailers’ business model, premised on the UCC provisions allowing the buyer and seller to agree on where and when title to the goods passes and, of course, ignores the fact that out of state wine retailers are ineligible for DTC permits in Illinois.  So far as we are aware, this is the first (and perhaps the most important) direct challenge to that business model. Of note is the fact that many small wineries also use this business model in lieu of creating a network of DTC permits around the country.

Potential Defenses –Where can we go with these cases?

            Every case will present somewhat unique facts, depending on the defendant’s website language, practices, and Illinois tax history.  Common defense themes also run throughout these cases, including the following.

            The “no-knowledge” defense: To recover under the Illinois False Claims Act, Diamond must prove that the defendant “knowingly” failed to collect Use Tax on its shipping & handling charges and then filed false tax returns.  Illinois law defines “knowingly” to mean actual knowledge, deliberate ignorance of the facts, or reckless disregard of the facts.  However one chooses to interpret that statutory psychobabble, it at least means that an innocent or even negligent mistake does not suffice to support liability under the False Claims Act with its enhanced penalties.  The fact that Diamond has found over 300 internet retailers who were unaware of what Diamond claims to be their obligation to collect Use Tax on shipping & handling and who relied on the plain language of the Illinois tax regulations (unchanged since the Supreme Court’s ruling) alone supports the conclusion that, if all of those retailers erred, they did so innocently and are not liable under the False Claims Act.

            The “unclean hands” defense:  The “unclean hands” or “in pari delicto” (“in equal fault”)  defenses involve the fact that Diamond, who knows of his expansive reading of the Illinois Use Tax and is himself liable for that tax, if due (the retailer being obligated only to collect it), and is purchasing something from the defendant, sees that Use Tax is not collected on shipping & handling, and then sues the defendant for failing to collect the tax that Diamond himself owes.  Most reasonable people would conclude that Diamond should not be entitled to collect an enormous bounty for the retailer’s innocent failure to collect the tax that Diamond knowingly failed to pay.

            The False Claims Act requires the plaintiff to prove that he or she had knowledge of the facts underlying the claim that did not come from public sources.  While defendants have had limited success in using that provision as a basis to dismiss Diamond’s claims, it does provide a basis for resisting discovery demands.

            The UCC defense: For the cases involving out-of-state wine retailers (and wineries) selling alcohol to Illinois residents in the retailer’s home state, the UCC provisions discussed earlier provide the central defense.  No Illinois Sales Tax is due on the sale, because it occurred in a different state, and no Use Tax is due, because the buyer had complete discretion as to whether to ship and to where.  For those merchants that are not licensed in Illinois, have no presence there,  have never made a sale there, and have themselves never shipped any products to Illinois, there is a real question as to whether the Illinois courts have jurisdiction over them.

The litigation to Date

            Most of the cases that Diamond has filed to date have settled on terms favorable to him.  The cases that have been contested have had mixed results.  In a 2012 decision involving J. Crew, Inc., the Illinois trial court refused to dismiss Diamond’s claims at the pleading stage, holding that he had alleged enough to allow discovery and, likely, trial as to the issue of whether the defendant acted “knowingly.”  The court also rejected the defendant’s argument that Diamond had acquired knowledge of the facts from public sources.

            More recently, the same court ruled in two cases that the defendant had not knowingly filed false claims.  In both cases, the defendant had been audited by the Illinois Department of Revenue, which had concluded that no Use Tax was owed.  The court did not, however, hold that the audit was a complete bar to Diamond’s claim.  Moreover, both rulings were made after the cases had been tried to the court, not on pretrial motions.

The next steps in being defended

            Diamond is now in the process of serving his next round of cases.  We are coordinating our defense efforts through Mark Rotatori of the Chicago Office of Jones Day, who has extensive experience with these cases.  If you are served with a summons and complaint, please notify us immediately, so that we can timely protect your rights, contact Mark directly if you desire to be defended or consult with your counsel with respect to your options.

            If you have not yet been served, it would be prudent to monitor your website for orders from Stephen Diamond or anyone at the 332 South Michigan Avenue address in Chicago.   We are recommending to our clients that, if they receive an order from that address, they politely decline to fill it.  We believe that Diamond needs to consummate a sale in order to sue in Chicago.  If you already filled an order from that address, monitor your mail and please review the preceding paragraph.

How to avoid involvement

Going forward, there are two possible ways to protect against future liability.  Both involve reprogramming your website:

·         Your best chance (there are no guarantees) of avoiding exposure under Diamond’s expansive reading of the Illinois Supreme Court’s ruling is by clearly separating shipping & handling charges from the sale transaction.  Giving your buyers the option of having you ship the goods, picking them up at your location, or independently arranging for shipping themselves should sufficiently separate the sale and shipment transactions to avoid any question of Use Tax liability.  Many wine merchants who are not licensed for DTC sales in Illinois already utilize these provisions.  We will be working with our clients on terms that appropriately protect them going forward. We recommend that you work with your own counsel on this, and that you do it quickly.

·         You can begin to collect Illinois Use Tax on shipping & handling, which will cut off liability going forward.  However, as noted above, it is unclear that the Illinois Department of Revenue agrees with Diamond that collection of the Use Tax is required, and that does solve past liability exposure.  Depending on your circumstances, it may be possible to reach a settlement with the Department of Revenue on your liability, if any, for past Use Tax collection on terms more favorable than could be obtained from Diamond. This alternative is being explored by counsel in Illinois.

            The Illinois Qui Tam actions are an unfortunate but serious threat to the DTC industry, and particularly to merchants that are not licensed to ship directly to Illinois but make sales to Illinois residents in other states.

 

  1. Booze Rules 2026: California Alcoholic Beverage Law Update – The Good, the Bad and the Ugly
  2. Old Rules, New Marketplace: Alcohol’s Digital Revolution
  3. Mandatory EFT is Coming Before You know It! Are You Ready?
  4. It’s 2025 and New Laws for the Alcoholic Beverage Industry are Here, or Coming Soon
  5. The California Cash and Credit Laws: Moving to Mandatory Electronic Fund Transfers Between Wholesalers and Retailers on January 1, 2026 – Cash is no longer Legal Tender
  6. Passage of Title Based Sales – Is it Right for You?
  7. BARS AND NIGHTCLUBS BEWARE! THE DRUG TESTING REGIME STARTS ON JULY 1ST AND YOU MUST BE READY!
  8. Strategic Exit Planning: Positioning Your Alcohol Beverage Business for Successful Acquisition or Investment
  9. New California Alcohol Laws for 2024 – a Mixed Bag of Privileges, Punishments, Clarifications, and Politics
  10. TTB Speaks up on Social Media
  11. Alcohol Trade Practices Update
  12. President Biden just made a big cannabis announcement... what does it mean?
  13. The Uniform Law Commission – Encouraging Consistent State by State Definitions, Protocols and Procedures
  14. San Francisco to the Governor - Review the RBS Program and Delay Implementation. Problems must be Corrected.
  15. TTB and Consignment Sales – Is There a Disconnect Between Policy Development and Business Reality?
  16. RBS ADDENDUM – THE LATEST FROM THE ABC AS THE AGENCY PROVIDES MORE INFORMATION ON THE CALIFORNIA ABC’S MANDATORY RESPONSIBLE BEVERAGE SERVER PROGRAM
  17. THE STATE OF TO-GO BOOZE IN CALIFORNIA
  18. BOOZE RULES SPECIAL EDITION – THE RESPONSIBLE BEVERAGE SERVICE PROGRAM FACTS AND REQUIREMENTS
  19. Competition in the Beverage Alcohol Industry Continues Under the Microscope – Part 3
  20. Competition in the Beverage Alcohol Industry Under the Microscope – Part 2
  21. Competition in the Beverage Alcohol Industry Now Under the Microscope
  22. Alcohol Marketplaces 2.0 Part 5: Looking Ahead
  23. It’s Time for a Regulatory Check-Up: Privacy Policies for email marketing and websites
  24. Alcohol Marketplaces 2.0 Part 4: Who’s responsible for ensuring legal drinking age?
  25. Alcohol Marketplaces 2.0 Part 3: Follow the Money
  26. BOOZE RULES 2021 – NEW CONTAINER SIZES APPROVED FOR ALCOHOLIC BEVERAGES: KEEPING TRACK OF THE TTB’S ATTEMPTS TO REGULATE CONTANER SIZES
  27. Alcohol Marketplaces 2.0 Part 2: Collect sales tax from marketplaces or comply with alcohol guidance?
  28. Alcohol Marketplaces 2.0 Part 1: Solicitation of sales by unlicensed third-party providers
  29. Federal Cannabis Legalization Fortune-Telling
  30. BOOZE RULES – THE DIRECT SHIPPING WARS
  31. California ABC provides additional Covid guidance on virtual events and charitable promotions
  32. Hot Topics for Alcohol Delivery 2020
  33. California Reopening Roadmap is Now a Blueprint for a Safer Economy
  34. The Hospitality Reopening Roadmap to Success
  35. Salads Not A Meal in California, Says ABC
  36. Delivery Personnel Beware – The ABC is Coming for You and for the Licensees Hiring You to Deliver Alcoholic Beverages - This Time Its Justified
  37. Licensees Beware – the Harsh New ABC Enforcement Rules Are Effective Right Now
  38. Part 2: LEGAL FAQS ON REOPENING CA RESTAURANTS, BREWPUBS, BARS AND TASTING ROOMS
  39. John Hinman’s May 22, 2020 interview with Wine Industry Advisor on the ABC COVID-19 Regulatory Relief initiatives and the ABC “emergency rule” proposals
  40. Booze Rules May 21 - The Latest on the ABC Emergency Rules
  41. Part 1: Legal FAQs on Reopening CA Restaurants, Brewpubs, Bars and Tasting Rooms
  42. The ABC’s Fourth Round of Regulatory Relief - Expanded License Footprints Through Temporary COVID-19 Catering Authorizations, and Expanded Privileges for Club Licensees
  43. BOOZE RULES – May 17, 2020 Special Edition
  44. ABC ENFORCEMENT - ALIVE, ACTIVE AND OUT IN THE COMMUNITY
  45. Frequently Asked Questions about ABC’s Guidance on Virtual Wine Tastings
  46. ABC Keeps California Hospitality Industry Essential
  47. ABC REGULATORY RELIEF – ROUND TWO – WHAT IT MEANS
  48. Essential Businesses Corona Virus Signage Requirement Every Essential Business in San Francisco Must Post Sign by Friday, April 3rd
  49. Promotions Compliance: Balancing Risk and Reward
  50. The March 25, 2020 ABC Guidance: Enforcement Continues; Charitable Giving Remains Subject to ABC Rules; and More – What Does it all Mean?
  51. Restaurant and Bar Best Practices – Surviving Covid 19, Stay at Home and Shelter in Place Under the New ABC Waivers
  52. Economically Surviving the Covid Crisis and the Shelter in Place Orders: A Primer on Regulatory interpretations and Options
  53. Booze Rules – Hinman & Carmichael LLP and the Corona Virus
  54. Booze Rules: 2020 and the Decade to Come – Great Expectations (with apologies to Charles Dickens)
  55. The RBS Chronicles: If Your Business serves Alcoholic Beverages YOU NEED TO READ THIS AND TAKE ACTION!
  56. RESPONSIBLE BEVERAGE SERVICE ACT HEARING – OCTOBER 11TH IN SACRAMENTO – BE THERE!
  57. WHEN THE INVESTIGATOR COMES CALLING – BEST PRACTICES.
  58. RESPONSIBLE BEVERAGE SERVICE ACT PROPOSED ABC RULES 160 TO 173 – WHY THE RUSH?
  59. The TTB Crusade Against Small Producers and the “Consignment Sale” Business Model
  60. TTB Protocols, Procedures, and Investigations
  61. Wine in a 250 ML can – the Mystery of the TTB packaging Regulations and Solving the Problem by Amending the Regulations
  62. The Passing of John Manfreda of the TTB: a Tragedy for his family and a Tragedy for the Industry he so Faithfully Served for so Long.
  63. Pride in a Job Well-done, or Blood Money? The Cost of Learning the Truth from the TTB about the Benefits to Investigators from Making Cases Against Industry Members
  64. How ADA Website Compliance Works – The Steps You Can Take to Protect Yourself, Your Website and Your Social Media from Liability
  65. Supplier and Distributor Promotional “Banks,” Third Party Promotion Companies and Inconsistent TTB Enforcement, Oh My!
  66. “A Wrong Without a Remedy – Not in My America” – The TTB Death Penalty for Not Reporting Deaths
  67. Is a 1935 Alcohol Beverage Federal Trade Practice Law Stifling Innovation?
  68. Decoding the BCC’s Guidance on Commercial Cannabis Activity.
  69. Prop 65 - Escaping a "Notice of Violation"
  70. TTB Consignment Sales Investigations - What is Behind the Curtain of the TTB Press Releases?
  71. Heads Up! The ABC Is Stepping Up Enforcement Against Licensees Located Near Universities
  72. Coming Soon: New Mandatory Training Requirements for over One Million “Alcohol Servers” In California – September 1, 2021 will be here quickly
  73. 2019 Legislative Changes for California Alcohol Producers – a Blessing or a Curse?
  74. A Picture (On Instagram) Is Worth A Thousand Words
  75. Playing by the Rules: California Cannabis Final Regulations Takeaways
  76. Hinman & Carmichael LLP Names Erin Kelleher Partner and Welcomes Gillian Garrett and Tsion “Sunshine” Lencho to the Firm
  77. Congress Makes History and Changes the CBD Game for Good
  78. Pernicious Practices (stuff we see that will get folks in trouble!) Today’s Rant – Bill & Hold
  79. CBD: An Exciting New Fall Schedule… or Not?
  80. MISSISSIPPI RISING - A VICTORY FOR LEGAL RETAILER TO CONSUMER SALES, AND PASSAGE OF TITLE UNDER THE UNIFORM COMMERCIAL CODE
  81. California ABC's Cannabis Advisory - Not Just for Stoners
  82. NEW CALIFORNIA WARNINGS FOR ALCOHOLIC BEVERAGES AND CANNABIS PRODUCTS TAKE EFFECT AUGUST 30, 2018, NOW INCLUDING ADDENDUM REGARDING 2014 CONSENT AGREEMENT PARTIES AND PARTICIPANTS
  83. National Conference of State Liquor Administrators – The Alcohol Industry gathers in Hawaii to figure out how to enforce the US “Highly Archaic Regulatory Scheme.”
  84. Founder John Hinman Honored with the Raphael House Community Impact Award
  85. ROUTE TO MARKET AND MARKETING RESTRICTIONS - NAVIGATING REGULATORY SYSTEM CONSTRAINTS
  86. Alcohol and Cannabis Ventures: Top 5 Legal Considerations
  87. ATF and TTB: Is Another Divorce on the Horizon? What’s Going on with the Agency?
  88. STRIKE 3 - YOU REALLY ARE OUT! THE ABC'S STRICT APPLICATION OF PENALTIES FOR SALES TO MINORS
  89. TTB Temporarily Fixes Problem with Fulfillment Warehouse Tax Credits - an “Alternate Procedure” for Paying Taxes & Reporting
  90. CUSTOMERS WHO HAVE HAD ONE TOO MANY - THE FREE TRANSPORTATION DILEMMA
  91. The Renaissance of Federal Unfair Trade Practices - Current Issues and Strategies
  92. ‘Twas the week before New Year’s and the ABC is out in Force – Alerts for the Last Week of 2017, including the Limits on Free Rides
  93. Big Bottles, Caviar and a CA Wine Strong Silent Auction for the Holidays!
  94. The FDA and the Wine and Spirits Industry – Surprise inspections anyone?
  95. NORTHERN CALIFORNIA WILDFIRES: UPDATED REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  96. NORTHERN CALIFORNIA WILDFIRES: REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  97. Soon to come to your Local Supermarket– Instant Redeemable Coupons of the digital age!
  98. The License Piggyback Dilemma – If it Sounds Too Good to be True, it Probably is
  99. A timely message from our Florida colleagues on the tied house laws, the three-tier system and the need for reform
  100. ABC Declaratory Rulings – A Modest Proposal Whose Time has Come