Category Archives: Hot Topics

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.

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.

Beware the Use of “Volunteers” at your Winery

Over the past few months, as I’ve been mulling over topics for this wine law blog, several people have expressed their surprise at the news that a Bay Area winery was recently cited and fined for labor violations involving over 20 unpaid volunteers. The Department of Industrial Relations investigated when one of the workers was injured and, unsurprisingly, was not covered by workers’ compensation insurance. The fines assessed were so prohibitive – roughly $115,000 – that the winery was forced to shut its doors. It has come as a shock to many in the wine industry that the use of volunteers not only violates California labor laws, but can have such devastating consequences.

The Bay Area case is a wake-up call. For those in the industry who have used volunteers in the past, you should re-think that practice.

If you are a for-profit business (there are exceptions for non-profits, religious, and charitable organizations), you may not use unpaid volunteers without running afoul of California labor laws. California law defines the term “employ” very broadly to include “to suffer or permit to work.” Your volunteers may not be suffering, but they are performing work for you, and so are technically considered employees entitled to minimum wage, meal and rest breaks, and overtime pay. You as their employer are required to make payroll deductions, and to provide workers compensation coverage. The penalties for non-compliance can be severe, and include back wages, liquidated damages, and various other penalties.

You might be able to use unpaid interns in your for-profit business, but there are several criteria that must be met if your interns are to avoid classification as employees. For example, the internship must be primarily for the intern’s benefit, your intern must not displace other employees and must work under close supervision of regular employees or staff, you may not derive any “immediate advantage” from the intern’s activities, the internship must be similar to training that would be provided in an educational environment, there can be no guarantee or expectation of a job for the intern at the conclusion of the internship, and it must be understood that the intern is not to be paid for his/her time. In short, your intern’s experience must be primarily an educational one to avoid application of state and federal labor laws. Interns who are used simply to supplement or augment your existing workforce will be considered employees entitled to minimum wage and overtime.

Wineries that are considering the use of volunteers or unpaid interns should reconsider, or at a minimum seek the advice of counsel before doing so. Those that find themselves facing enforcement proceedings for labor law violations should do the same, as employers are entitled to all the normal due process protections, including the right to notice, an opportunity to be heard, and to be represented by counsel.