Author Archives: Suzanne Nicholson

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.


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!


2015 Grape Escape – Cancelled After Vendors Refuse to Participate in Event Sponsored by Retailer

We recently posted about how social media is advertising, and the care wine manufacturers need to take to ensure they do not run afoul of state tied-house laws.

The impact of those laws is being felt locally here in Sacramento, where organizers of the “Grape Escape” – an annual showcasing of local food and wines – have canceled this year’s event which was to be held in early June. Articles about the cancellation indicate that only four wineries signed up to participate this year, down from 47 a year ago. The primary reason appears to be fears over potential citations from the ABC. Last year, eight participants were investigated and put on probation (but not fined) for mentioning the event’s retail sponsor, Save Mart, in their social media postings, or directing consumers to the retailer to purchase tickets. Because manufacturers may not give anything of value to a retailer without violating tied-house restrictions, and because advertising constitutes a thing of value, social media mentions of a retailer by a manufacturer (i.e. “advertising”) runs afoul of the law.

Wine and food events such as the Grape Escape have a long and wonderful history. It’s a shame that retail sponsorship of such events can make vendors so nervous they choose not to participate, rather than develop specific guidelines or practices to ensure their promotion of the event does not run afoul of ABC advertising restrictions. Wineries should view the ABC as a resource for ensuring their own compliance with the law, rather than an adversary, and where questions arise, seek out guidance rather than pulling the plug completely.


Going Green: Labeling Organic Wine

Labeling of wine is subject to regulation by the TTB, and requires a certificate of label approval (COLA). Basic information that must be included on all labels include the brand name, class or type of wine, alcohol content, appellation, the bottler’s name and address, contents by volume, a sulfite declaration, and the government health warning. Previously, Uncorked ran a post about font and sizing requirements, accessible here.

If you want include “organic” claims on your label, you must satisfy USDA organic regulations for production and handling of your wine. Those requirements are beyond the scope of this post, but suffice it to say they are extensive. And, the type of “organic” claims you can make on your label are dependent upon a few key factors.

To label your wine “Organic” and to use the USDA Organic seal on your label, your wine-making operations must be overseen by a third-party accredited certifying agent (ACA) to ensure compliance with organic production and handling requirements. The yeast used in your wine, and all agricultural ingredients (i.e., grapes) must be certified organic, with the exception of those ingredients on the National List of Allowed and Prohibited Substances, information about which can be found here. Non-agricultural ingredients must be on the National List, and are limited to a certain percentage of the total product. Finally, only naturally occurring sulfites are allowed in wines with an “Organic” label. If you want to include a statement on the label that your wine contains only naturally occurring sulfites, you will need a lab analysis to back that up.

Wines with added sulfites (up to 100 ppm of sulfur dioxide) may not be labeled “Organic” or use the USDA Organic seal, but they may be labeled as “Made with Organic Grapes.” Only the grapes must be certified organic, the remaining agricultural ingredients need not be.

Labels for both “Organic” and “Made with Organic Grapes” must include the name of the certifier/ACA: “Certified organic by ***.”

If your wine doesn’t meet the criteria for “Organic” or “Made with Organic Grapes” labeling, you may still be able to list certain  ingredients as organic, but will have to submit proof of certification for each ingredient with your COLA application.

Setting your wine apart from the crowd with an organic label is great marketing. Just make sure you are current on USDA and TTB regulations before you send those labels to print!


Certified Farmers’ Market Permits: Wine Tastings Included

California winegrowers holding a Type 02 license have been able to sell their wine at farmers’ markets under a special permit (Certified Farmers’ Market Sales Permit) for some time. For a relatively nominal fee, now $50, a licensed winegrower may sell wine at a certified farmers’ market so long as the wine is (a) “produced entirely from grapes or other agricultural products grown by the winegrower” and (b) bottled by the winegrower. The permit is good for an entire year, but the winegrower may only sell wine one day a week at any given farmers’ market. A separate license is required for each certified farmers’ market at which the winegrower’s product is to be sold, but there is no limit on the number of licenses that may be held.

Annual sales for wine sold under all certified farmers’ market sales permits held by any one winegrower are limited to 5,000 gallons, and are to be reported to the ABC.

As of July 2014, the ABC also allows instructional tasting events to be held at certified farmers’ markets under this license, “subject to the authorization and managerial control” of the particular farmers’ market operator. Restrictions on instructional tasting events are as follows: (1) the event area must be separated from the rest of the market by some type of physical barrier (chain, rope, wall), with only one licensee conducting the event; (2) consumers may not leave the instructional tasting area with an open container; and (3) tastings are limited to 3 ounces per person per day.

Winegrowers undoubtedly welcome this expansion of their rights under this particular license, as it allows them to provide their potential consumers with the full farmers’ market experience of sampling the product prior to purchase.

Interestingly, as of January 1, 2015 licensed beer manufacturers are also allowed to sell their products at certified farmers’ markets, but the ABC restrictions differ from those applicable to licensed winegrowers. Most notably, tastings are not permitted, and the licensee can only sell at farmers’ markets located in the same county or an immediately adjacent county to that in which the beer manufacturer is located.


Going Green: Sustainability Certification in California

A few weeks ago, Aerin and I attended the Unified Wine & Grape Symposium in Sacramento. One of the seminars I attended dealt with sustainability, a topic that seems to be popping up with increasing frequency in the wine industry.

Sustainability is an interesting concept, primarily because it lacks any single definition or set of criteria. And, when it comes to certifying your wine as “sustainable” there are several programs to choose from. Wineries need to do their research to uncover the criteria for each certification program, and evaluate which program best fits their current practices and goals for sustainability.

One of California’s main sustainability programs is the California Sustainable Winegrowing Program. It advances and provides resources for practices that are “environmentally sound, socially equitable, and economically viable.” Its certification program – Certified California Sustainable Winegrowing (CCSW Certified) – provides third-party verification of a winery’s implementation and ongoing improvement of nearly 200 sustainability practices/criteria drawn from a publication called the “California Code of Sustainable Winegrowing Workbook,” which is available for free to California vintners and winegrowers here. According to its literature and website, CCSW emphasizes conservation of water and energy, soil health, protection of air and water quality, employee/community relations, and the preservation of local ecosystems and wildlife habitat.

Another third-party certified sustainable winegrowing program is Lodi Rules for Sustainable Winegrowing Certified Green. According to its website, the Lodi Rules take “a comprehensive approach to farming that goes beyond just pest management to promote practices that enhance biodiversity, water and air quality, soil health, and employee and community well-being.” A fact sheet can be found here, which summarizes the Lodi Rules’ standards for Certified Green. The program does not restrict its certification to wines from the Lodi Appellation; in 2012 about 1/5 of its certified acreage was outside the Lodi region.

Napa County vintners and winegrowers have their own local certification program: Napa Green. Napa Green describes itself as the wine industry’s “most comprehensive ‘best practices’ program for land use and wine production.” Two certifications are available: Napa Green Certified Land, and Napa Green Certified Winery. The Land Certification seeks to protect and preserve the Napa watershed, and involves creating a plan unique to each landowner’s property that emphasizes wildlife habitat, protection of riparian environments, and sustainable agricultural practices. The Winery Certification emphasizes the conservation of water and energy, prevention of pollution, and reduction of waste.

Yet another statewide program out is Sustainability in Practice, or SIP Certified. This program focuses on habitat and water conservation, energy efficiency, pest management, economic stability, and human resources.  According to its website, SIP Certified wines reflect the implementation of sustainability practices that are broader and more comprehensive than even USDA Organic standards. A link to SIP Certified frequently asked questions can be found here.

All of these programs are based on the fundamental premise that ultimately, sustainable practices are not only good for the environment, but good for business as well. After all, the wine industry is heavily dependent upon both natural and human resources, so it only makes sense that business practices emphasizing the protection and health of those resources will ultimately contribute to the industry’s continued vitality and growth.

Room for improvement may lie in the specificity of information available to the consumer about sustainability certification. Certainly consumers find value in knowing which wines are “certified” sustainable, but at present they have no easy way to differentiate between the various certifications they may find on the labels. Do they want that information? Or is it enough to simply know the product has been through some form of certification process? I suppose time and the market will tell. Meanwhile, wineries interested in letting their consumers know more specifics always have the option of describing their sustainability practices where the consumer can’t miss them: right on the label itself. Of course, don’t forget to check the regulations governing labeling before you do – particularly those prohibiting any statements that could be considered misleading. That’s a topic for another day.


Social Media is Advertising: Know the Basics

There’s no question that social media is critical to marketing one’s product. For wineries, however, maintaining a social media presence comes with some serious restrictions. That’s because social media is considered advertising, and is subject to both federal and state regulations governing the advertising of alcoholic beverages. This post is intended to give you the basics on regulations governing the use of social media by wineries. It is, however, not exhaustive. If you have questions about whether something you want to post is permitted, it’s best to look into it or seek advice before posting, rather than risk an inquiry by the TTB or ABC.

Federal regulations set forth both mandatory and prohibited content for any advertising. As for mandatory content, regardless of what social media platform you are using (i.e., Facebook, Twitter, YouTube, blogs, etc.), you must post the name and address of the permittee responsible for the advertisement. This information does not need to be repeated in each individual post, but should be readily accessible to anyone visiting the page. The best place to put this information is in the “About” or “Profile” section of the page. If you are posting about a specific product, your post is required to have “a conspicuous statement of the class, type, or distinctive designation to which the product belongs,” corresponding to that which appears on the product label.

Turning to prohibited content, your page cannot contain any of the many prohibited types of statements set forth in 27 CFR 4.64. That means no misleading statements, no “obscene” or “indecent” statements or designs, no statements that are disparaging of a competitor’s product (even if you’re comparing your product to a competitor’s product), no statements relating to alcohol content (with a few limited exceptions), no statements inconsistent with your labeling, and so on. Check the regulation: it’s pretty comprehensive and includes other restrictions on statements relating to the age of your product, its origin, and any health-related claims.

Of course advertising directed at minors is prohibited. Your online platforms should include an age-screening tool, where the user must either confirm they are of legal age, or enter their birth date to proceed to your content.

California law prohibits wine manufacturers from giving anything of value, “directly or indirectly, to… any person engaged in operating, owning, or maintaining any off-sale licensed premises.” In other words, you can’t give anything of value to a retailer. Posting where your products are sold is providing something of value to the retailers that sell your products. Fortunately, there is an exception to be found: in response to a direct consumer inquiry, you may post the names, addresses, and other contact information for two or more unaffiliated off-sale retailers selling your product as long as you satisfy certain conditions. Those conditions are that you cannot post the retail price of your product, your listing is the only mention of the off-sale retailer in your post, you have to refer to more than one retailer and they cannot be affiliated in any way, and you are exclusively responsible for making, producing, and paying for said listing in response to the consumer inquiry.

Remember that all advertising restrictions apply to the permittee. That means if someone else posts something on your page that does not comply with federal or state regulations, you as the permittee will not be held responsible for that third-party content. However, if that third-party content is re-posted or shared by you, you will be held responsible. While not strictly required, it’s probably a good idea to monitor user-generated content on your sites to make sure it doesn’t fall too far outside the scope of permissible content, or your own bounds of good taste.


Going Green: Wine on Tap

A couple of months ago, I attended a “Wine Law Forum” put on by the CEB in Yountville, just north of Napa. It was a great day and a half, with seminars on a wide range of timely topics, from buying a winery, to pouring wines in alternative locations, to water regulation issues, to the legalization of recreational marijuana, which could be coming to California in the near future. One seminar that I found particularly interesting concerned alternative types of wine packaging. Specific alternatives discussed? Refillable growlers (which I’ll address in a later post), and wine on tap.

Wine on tap? That’s right – wine on tap – straight out of a stainless steel keg. Talk about alternative! Granted, it’s not hard to be “alternative” in an industry where bottle and cork are steeped in tradition, and constitute what many consider to be an integral part of the wine experience. Nevertheless, by the end of the seminar, I was convinced that wine on tap is an inevitable and exciting development in wine packaging. As consumers become more and more insistent on sustainable practices, and producers more and more concerned about efficiency, cost, and increasing competition, wine on tap has something for everyone.

Stainless steel kegs are impermeable to oxidation and can keep wine fresh for up to three months after they are tapped (six months untapped). For any restaurant or bar or tasting room that serves wine by the glass, that means less wasted wine. No one wants to serve their customer a glass from a bottle that was opened two days ago, and with wine on tap, you don’t have to. And, because the kegs are reusable, it also means less landfill waste. According to Free Flow Wines, a company that provides kegging and logistics services for wineries (and whose founder led the seminar I attended), the use of stainless steel kegs has saved over 2.5 million bottles from the landfill since 2011. That’s a lot. Less bottles in the landfill means less bottles and corks that producers need to buy on the front end. I’m guessing that can translate into quite a savings.

Of course, given the complexity of the regulations governing the wine industry, wine on tap is not without its challenges. With every state having its own regulations on matters ranging from fill volumes to labeling, developing a navigable system for the distribution of wine on tap is a work in progress. But in progress it is.

All in all, as a (relatively) “younger” wine consumer, I thought wine on tap hit all the right notes for a demographic of wine drinkers that are not only keenly aware of and interested in sustainable practices, but are willing to insist on such practices with their pocketbooks.