The Sip Stops Here…but Not There, or There, or There: New Restrictions on Interstate Shipping of Wine

According to some retailers, UPS and FedEx are now limiting the interstate shipping of wine. This crackdown is not in response to any new legislation – the shipping companies are instead enforcing existing laws in many states.

But First, a Primer on Shipping Alcohol Across State Lines

The Twenty-first Amendment to the United States Constitution provides that the transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is prohibited.

With the repeal of Prohibition, states were granted significant power over the distribution and sale of alcohol that is not present in laws related to shipping other products. This has led to wildly disparate treatment of the ability to ship alcohol across state lines. For instance, some states allow residents to order wine from any retailer in the US while others don’t allow any shipments at all.

The Liquor Law Repeal and Enforcement Act (aka the Webb-Kenyon Act) prohibits shipments of alcoholic beverages between states in violation of any law of the receiving state.

The Federal Alcohol Administration Act (FAA Act) requires a basic permit for wholesalers, importers, and manufacturers of alcoholic beverages. (Retailers are not required to obtain basic permits under the FAA Act.) Basic permits are conditioned upon, among other things, compliance with the Twenty-first Amendment and Federal laws relating to its enforcement as well as all other Federal laws related to distilled spirits, wine, and malt beverages. 27 U.S.C.§204(d). Thus, the TTB could, in appropriate circumstances, take administrative action against a basic permit holder for violations of the Webb-Kenyon Act.

In 2000, the Bureau of Alcohol, Tobacco and Firearms (the predecessor agency to the TTB), issued ATF Ruling 2000-1 to outline its enforcement policy relating to violations of State law that result in shipments of alcohol to consumers in one state from sellers in another state.  The TTB continues to follow the policy set forth in that Ruling, meaning that (1) the TTB may suspend or revoke a basic permit for violations of the Webb-Kenyon Act; and (2) the TTB can take administrative action against a basic permit where the permittee ships alcohol into a state in violation of the laws of that state. Notably, the TTB “will intervene when it is determined that there is a continuing, material, adverse impact upon a State through the actions of a basic permittee located outside the boundaries of the affected State. However, while [the TTB] is vested with authority to regulate interstate commerce in alcoholic beverages pursuant to the FAA Act, the extent of this authority does not extend to situations where an out-of-State retailer is making the shipment into the State of the consumer.”

Contemporaneously with Ruling 2000-1, Congress enacted the 21st Amendment Enforcement Act, providing state attorneys general the power to seek an injunction against any person they have reasonable cause to believe is or has engaged in “any act that would constitute a violation of a State law regulating the importation or transportation of any intoxicating liquor.”

Sipping and Shipping

UPS and FedEx have taken on the role of enforcing some of the existing state laws and are now limiting the states they will ship wine to. However, this limitation may be short-lived as litigation continues to abound.

In 2005, in Granholm v. Heald, the U.S. Supreme Court declared unconstitutional in violation of the Commerce Clause State laws that prohibited direct shipment of wine to consumers within the State from out-of-state businesses but permitted direct shipment to those consumers from in-state businesses. Basically, if a state allows their own in-state wineries to ship out of state, they must allow out of state wineries to ship into their state.

While some states have reviewed and amended their alcohol beverage rules in light of Granholm, there continues to be litigation surrounding the topic. For instance, Michigan, one of the states that lost the Granholm decision, is being sued again on a nearly identical basis, the only difference being the present lawsuit relates to out of state retail stores instead of out of state wineries.

Direct to consumer interstate and international shipments of alcoholic beverages to California consumers are prohibited, with narrow exceptions. Individuals and retailers outside California can ship up to two cases of wine to adults in California without a Wine Direct Shipper Permit so long as the shipping state has reciprocal wine shipping laws. (See here.) There is no such exception for direct shipments of beer or distilled spirits, so they cannot be shipped direct to consumer in California.

Following the Granholm decision, California enacted section 23661.3 of the Alcohol Beverage Control Act, which establishes a Wine Direct Shipper Permit for non-California wineries shipping wine to California residents. (For an overview of shipping wine within and outside California, see our previous post.)

Regardless of the shipper, the container must meet labeling requirements pursuant to the Alcohol Beverage Control Act.

Time will tell how this all plays out, but in the meantime, with state rules in flux, if you engage in direct shipping of alcohol, be sure to keep an eye out for changing state rules and contact one of our alcohol beverage attorneys to assist you in remaining compliant.


Ninth Circuit revisits Actmedia: Heightened Scrutiny Applies to B&P Code Advertising Restrictions

Thirty years ago, the Ninth Circuit rejected a First Amendment challenge to a California statute which prohibits paid advertising of alcoholic beverages at retail outlets. In Actmedia Inc. v. Stroh (9th Cir. 1986) 830 F.2d 957, the court applied the four-pronged test of Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980) 447 U.S. 557 to assess the constitutionality of a law that burdened commercial speech. That test asks: (1) whether the speech concerns a lawful activity and is not misleading; (2) whether the government has a substantial interest in regulating the speech; (3) whether the regulation serves to directly advance the asserted governmental interest; and (4) whether the regulation “is not more extensive than necessary.”

The law at issue in Actmedia was Business & Professions Code, § 25503(h), which prohibits manufacturers and wholesalers, as well as their agents, from giving anything of value to a retailer in exchange for on-site advertising. Actmedia was a corporation which leased advertising space on shopping carts. It challenged the law as an impermissible restriction on commercial speech in violation of the First Amendment. Applying the Central Hudson factors, the Ninth Circuit concluded the law was constitutional. The advertising of alcoholic beverages concerned a lawful activity and was not misleading, but California had a “substantial” interest in regulating the activities of the three “tiers” of the alcoholic beverage industry within its borders, and in promoting temperance. Section 25503(h) furthered that interest by limiting the ability of wholesalers to acquire influence over retail outlets, and by reducing the quantity of alcoholic beverage advertising in retail outlets. The court found the law was “narrowly drawn” to achieve these purposes, and not more extensive than necessary.

Since then, the US Supreme Court issued its decision in Sorrell v. IMS Health, Inc. (2011) 131 S.Ct. 2653. There, the Court held that content- or speaker-based restrictions on commercial speech are subject to “heightened judicial scrutiny” rather than the intermediate scrutiny set forth in Central Hudson. Under heightened scrutiny, the first two prongs of the analysis remain the same, but the third prong requires the government to demonstrate “that the harms it recites are real and that its restriction will in fact alleviate them to a material degree.” And under the fourth prong, the government must demonstrate that the law is specifically designed to achieve the government’s substantial interest.

In light of Sorrell, the Ninth Circuit agreed to revisit the constitutionality of section 25503(f)-(h) in the case of Retail Digital Network, LLC v. Appelsmith (2016) 810 F.3d 638. Retail Digital Network is a corporation which leases advertising space on LCD displays in retail outlets. It challenged the constitutionality of section 25503(f)-(h) after alcoholic beverage manufacturers refused to contract with it for advertising space based on fears of violating the statute. The Court found that because the statute prohibits the retail advertising of alcoholic beverages by manufacturers and wholesalers, it is both content-based and speaker-based, and must therefore survive “heightened judicial scrutiny” under Sorrell. Actmedia, which applied the intermediate scrutiny of Central Hudson, is inconsistent with Sorrell and therefore no longer controlling.

The Ninth Circuit sent Retail Digital Network back to the district court to develop the factual record and apply the proper test. And while the Ninth Circuit acknowledged the validity of the State’s interest in the three-tier system, and in promoting temperance, it also indicated the district court “should consider whether the State has shown that there is a real danger that paid advertising of alcoholic beverages would lead to vertical or horizontal integration under circumstances existing in the alcoholic beverage market today” and in the circumstance of this particular case, where payments are made not by the manufacturer or wholesaler directly, but by a third party. The court also directed the district court to consider whether section 25530(f)-(h) “materially advances” the State’s interests in light of the numerous statutory exceptions to these provisions. Finally, the court emphasized that heightened scrutiny must be provided to the question of whether the statutory provisions are “narrowly tailored” to achieve the State’s goals or whether those interests might be achieved by means other than the burdening of commercial speech.

This is definitely a case to watch, with significant implications for the advertising of alcoholic beverages in California. And whatever the district court decides, another appeal is likely to follow.


Further Delay to the FDA Labeling Requirement

As part of the labeling requirement contained within the Affordable Care Act of 2010, the FDA was required to establish menu-labeling regulations. Enforcement was expected to begin December 1, 2015, but has been delayed twice. The first delay pushed the deadline for enforcement to December 1, 2016. In December, Congress directed the FDA to push the enforcement date until one year after publication of the final guidance. The FDA announcement on March 9, 2016 made this delay official. There has not yet been an indication as to when the final guidance will be published.

The rule will require restaurants and similar retail food establishments with 20 or more locations operating under the same name and serving substantially the same menu items to post calorie information for standard menu items and provide guests with additional nutrition information upon request.

Originally, alcohol was proposed to be exempted but is now included in the labeling requirement for restaurants. The majority of comments supported having alcohol beverages covered under the final rule due to impacts on public health.

A restaurant that meets the parameters of the regulations will have to list calorie and nutrition information for all beer, wine, and spirits listed on a menu. Mixed drinks that are not listed on a menu are exempted, as are liquor bottles on display behind a bar.

In some instances, the rule provides flexibility for beer and wine and allows for calorie ranges to be rather than individual calorie counts for each offering. It should be noted that the requirements of the final rule do not apply to temporary menu items, i.e., foods that appear on a menu or menu board for less than a total of 60 days per calendar year (e.g., a seasonal craft beer).

The TTB regulation of the alcohol industry will not be affected by the FDA’s labeling requirements. All of the labeling requirements will comply with TTB requirements. Additionally, alcohol producers will not be required to disclose the nutritional content of their products. The burden for disclosure under the FDA regulations will be restaurants, who will be allowed to use the accepted USDA measurements for nutritional content.


You may recall us discussing The Grape Escape event, which was cancelled this year after wineries refused to sign up, fearing that the ABC would be cracking down on retailer-sponsored events. At the previous year’s event, multiple wineries were cited for mentioning the retailer sponsor of the event. One winery, Renwood, decided to appeal the disciplinary action before an administrative law judge. The ALJ agreed with Renwood, issuing a decision that included a finding that there was “insufficient proof to conclude that any benefit inured to Save Mart Supermarkets through the posting of the Save Mart Grape Escape logo on Renwood’s Facebook page.” Consequently, the disciplinary action was dismissed.

Starting at the beginning of 2016, there will be at least a little bit more clarity regarding winery participation in events that have retailer sponsors. Wineries will now be permitted to donate and pour their product at events hosted by a bona fide non-profit organization, even if that event’s sponsor is a retailer. In addition, wineries may freely forward or share social media posts about the event, even if the retailer’s name appears on the post. However, other restrictions still apply– for example, if you share a post, you may not add any additional information specific to the retailer. This also does not include events where a retailer is the host of an event for the benefit of a non-profit. The entirety of the new legislation can be found here.

 

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Non-Compete Agreements in California

With the proliferation of wineries in California, it’s not uncommon for an owner to find one of its winemakers deciding to leave and set up shop on their own. Is there anything you can do up front to prevent them from taking the craft they’ve honed at your winery elsewhere? The short answer is, in most cases, no. But as with almost everything in the law, there are some exceptions you should know.

California public policy strongly favors free and open competition in the marketplace. Business and Professions Code section 16600 states clearly that contractual restraints on competition or trade are void, except as otherwise provided. California courts interpreting this statute emphasize that it protects the right of Californians to pursue any business, occupation, or lawful employment of their choosing. Contract provisions which attempt to place restrictions on a person’s ability to work for a competitor, or open a competing enterprise, are generally unenforceable.

That said, you should be aware of the “as otherwise provided” part of the Code. The primary exceptions to the prohibition on non-compete agreements apply to “owners” of a business and arise in the following contexts.

First, if you are selling all of your ownership interest, or all of most of the operating assets together with the goodwill of the business, you can agree with the buyer to refrain from “carrying on a similar business within a specified geographic area” so long as the buyer is going to be carrying on the same or a similar business in that area.

Second, if you are leaving a partnership or an LLC, you can agree not to carry on a similar business within the geographic area where the business is operating.

If you fall within one of the above exceptions, you should consult with an attorney to make sure any non-compete agreement complies with California law and is narrowly tailored both in geographic scope and duration.


One Small Step: Easing Restrictions on Advertising in Social Media

On October 1, Governor Brown signed into law AB 780, which updates Business and Professions Code provisions concerning restrictions on manufacturers’ ability to identify or list on-sale or off-sale retail locations where their products are sold. The new law goes into effect January 1, 2016.

In an earlier post, “Social Media is Advertising: Know the Basics”, I warned that under then-current law, posting where your product is sold generally ran afoul of restrictions on “giving something of value” to retailers, but was allowed in response to a direct consumer inquiry, and so long as you listed more than one unaffiliated retailer.

With the passage of AB 780, wine manufacturers will no longer need to wait for a direct consumer inquiry to post the names and contact information of retailers who sell their product, so long as the listing is made, produced, or paid for exclusively by the manufacturer, includes two or more unaffiliated retailers, and does not contain any mention of retail price.

AB 780 should not be taken as an indication of the demise or weakening of California’s tied-house restrictions. AB 780 explicitly sets forth the Legislature’s finding that tied-house restrictions are both “necessary and proper… to prevent suppliers from dominating local markets through vertical integration, and to prevent excessive sales of alcoholic beverages produced by overly aggressive marketing techniques.” Nevertheless, AB 780 is a small, but important step for manufacturers, who can now feel much more secure posting where their products can be found.


TTB Update: Return of Wine to Bonded Premises

The TTB is catching up on some regulatory house-keeping. Effective October 15, 2015, TTB regulations governing the return of taxpaid wine to bonded premises will be amended to conform to provisions of the Taxpayer Relief Act of 1997, and the Internal Revenue Service Restructuring and Reform Act of 1998.

The Internal Revenue Code provides that if wine is removed from bonded premises, and subsequently returned, any tax paid on the wine returned to bond shall be refunded or credited (without interest) to the proprietor of the bonded premises. If tax has not yet been paid, then any prior tax liability is relieved.

Whereas it used to be that wine returned to bond had to be “unmerchantable,” that is no longer the case under the Taxpayer Relief Act of 1997. The TTB is now amending its regulations to conform to that Act, by removing the word “unmerchantable” from provisions relating to the return of wine to bond.

It also used to be that wine returned to bond had to be produced in the United States. That is no longer the case, under the Internal Revenue Service Restructuring and Reform Act of 1998. Wine returned to bond must only have first been removed from a bonded wine cellar. TTB regulations pertaining to the return of wine to bond will no longer refer to “domestic” wine or wine “produced in the United States.”

Better late than never. We can all appreciate increased clarity and consistency when it comes to the regulation of alcoholic beverages!