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Is Tied-House Still the Tie that Binds? Carrie L. Bonnington Pillsbury Winthrop Shaw Pittman LLP 2600 Capitol Mall, Suite 300 Sacramento, CA 95816 (916)

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Presentation on theme: "Is Tied-House Still the Tie that Binds? Carrie L. Bonnington Pillsbury Winthrop Shaw Pittman LLP 2600 Capitol Mall, Suite 300 Sacramento, CA 95816 (916)"— Presentation transcript:

1 Is Tied-House Still the Tie that Binds? Carrie L. Bonnington Pillsbury Winthrop Shaw Pittman LLP 2600 Capitol Mall, Suite 300 Sacramento, CA (916) Jerry R. Jolly Pillsbury Winthrop Shaw Pittman LLP 2600 Capitol Mall, Suite 300 Sacramento, CA (916)

2 1 Rationale for Tied House Law The term tied house law refers to the broad statutory scheme regulating both the marketing of alcoholic beverages and the cross-ownership of licensed operations. Policy rationale for this law: –to promote the states interest in an orderly market –to prohibit vertical integration and dominance by a single producer in the marketplace –to prohibit commercial bribery and predatory marketing practices –to discourage and/or prevent the intemperate use of alcoholic beverages

3 2 Are Tied House Laws Working SENATOR DEAN FLOREZ, CHAIR The Tied-House Puzzle: Why was the Three-Tier System Established and How Well has it Worked? TUESDAY, MAY 10, 2005 STATE CAPITOL, ROOM 3191 SACRAMENTO Gordian Knot of sometimes inconsistent laws and policies which may or may not reflect the needs and realities of the modern market place. In 2005, testimony before Senate Government Organizational Committee described tied house system:

4 3 Who Cares? Jerry Jolly, Director, Department of Alcoholic Beverage Control John Peirce, Chief Counsel, Department of Alcoholic Beverage Control Henry Dominguez, Vice President of Government Affairs, Anheuser-Busch Companies, Inc. Lance Hastings, Western Regional Director, State Government Affairs, Miller Brewing Company Steve Harrison, Vice President, Sierra Nevada Brewing Company Art DeCelle, Beer Institute Michael Falasco, Legislative Representative, Wine Institute Paul Kronenberg, President, Family Winemakers of California Pete Downs, Vice President of Government Affairs, Kendall-Jackson Winery Berman Obaldia, Vice President of Government Affairs, Distilled Sprits Council of the United States Geoff Howard, Legal Counsel, Bingham McCutchen LLP, California Beer & Beverage Distributors Craig Wolf, Vice President and General Counsel, Wine & Spirits Wholesalers of America Anna-Marie Stouder, Senior Legislative Director, California Restaurant Association Mariann Costello, Vice President, Scomas Restaurant, San Francisco Bruce Young, Legislative Representative, California Retailers Association

5 4 Are Tied House Laws Working? Does the general prohibition against cross- ownership [and the myriad exceptions] truly prevent exclusive outlets? Would a liberalization of the free goods prohibition bring back the abuses of tied houses prior to Prohibition? Would a liberalization of cross-ownerships bring back the abuses of tied houses prior to Prohibition?

6 5 Tied House Issues Historical Perspective Federal Law California Law Washington Law New York Law Illustrations Addressing Modern Issues

7 Historical Perspective Prohibition Vertical Integration Federal (1935) – Federal Alcohol Administration Act (27 U.S.C. § 201 et seq.) Control States License States Hybrid States

8 Federal Law Supplier may not induce a retailer to purchase its product to the exclusion in whole or in part of products from other suppliers in transactions implicating interstate commerce –Sale in interstate or foreign commerce –Unlawful inducement –Exclusion 27 U.S.C. §205(b)

9 Federal Means of Inducement Holding any interest in a retail license, premises or property Giving retail licensee thing of value Cooperative advertising Loans Quotas 27 U.S.C. §205(b)

10 Federal Exceptions Product displays Point of sale and consumer advertising Equipment and supplies Samples Combination packaging Consumer promotions 27 C.F.R. §§

11 Federal regulations specifically identify certain acts that are violations (red light acts), certain acts that are not violations (green light acts), and certain acts that put retailer independence at risk and therefore may be deemed an unlawful inducement (yellow light acts).

12 Red Light Acts Renting of display space by an industry member at a retail establishment (§6.35) The act by an industry member of furnishing, giving, renting, lending or selling any equipment, fixtures, signs, supplies, money, services or other things of value to a retailer (§6.41) Furnishing of free warehousing by delaying delivery of distilled spirits, wine or malt beverages beyond the time that payment for the product is received (§6.44) Paying or crediting a retailer for any advertising, display or distribution service (§6.51) Arrangement in which an industry member participates with a retailer in paying for an advertisement placed by the retailer (§6.52) Purchase, by an industry member, of advertising on signs, scoreboards, programs, scorecards and the like at ballparks, racetracks or stadiums from the retail concessionaire (§6.53) Rental by an industry member of display space at a retail establishment (§6.56) Requiring a retailer to take and dispose of any quota of distilled spirits, wine or malt beverages (§6.71)

13 Green Light Acts Giving or selling product displays so long as the total value of all product displays does not exceed $300 per brand at any one time in any one retail establishment, and the displays contain conspicuous and substantial advertising matter on the product (§6.83) Point-of-sale advertising materials such as posters, placards, designs, inside signs (electric, mechanical, or otherwise), window decorations, trays, coasters, mats, menu cards, meal checks, paper napkins, foam scrapers, back bar mats, thermometers, clocks, calendars and alcoholic beverage lists or menus (§6.84(1)) Consumer advertising specialties such as trading stamps, non-alcoholic mixers, pouring racks, ashtrays, bottle or can openers, corkscrews, shopping bags, matches, printed recipes, pamphlets, cards, leaflets, blotters, postcards, pencils, shirts, caps and visors (§6.84(2)) Giving a sample of distilled spirits, wine, or malt beverages to a retailer who has not purchased the brand from that industry member within the last 12 months (§6.91) Packaging and distributing distilled spirits, wine, or malt beverages in combination with other, non-alcoholic items for sale to consumers (§6.93) Providing coupons and other direct offerings subject to certain limitations (§6.96)

14 Yellow Light Acts The act by an industry member of resetting stock on a retailers premises (other than stock offered for sale by the industry member) Purchasing or renting display, shelf, storage, or warehouse space (i.e., slotting allowance) Ownership by an industry member of less than a 100 percent interest in a retailer, where such ownership is used to influence the purchases of the retailer Requiring a retailer to purchase one alcoholic beverage product in order to be allowed to purchase another alcoholic beverage product at the same time (§6.152) **An industry member should not engage in such acts without performing a careful analysis

15 Federal Exclusion (a)Exclusion, in whole or in part occurs: (1)When a practice by an industry member, whether direct, indirect, or through an affiliate, places (or has the potential to place) retailer independence at risk by means of a tie or link between the industry member and retailer or by any other means of industry member control over the retailer; and (2)Such practice results in the retailer purchasing less than it would have of a competitor's product. Congress intended the exclusion criterion to direct the regulator to determine something more than merely leading a retailer to purchase less of a product than it would have otherwise. Instead, Congress used exclusion to indicate placement of retailer independence at risk by means of a tie or link between the wholesaler and the retailer or by any other means of wholesaler control. Fedway Associates, Inc. v. United States Treasury Department Bureau of Alcohol, Tobacco and Firearms, 976 F.2d 1416 (D.C. Cir. 1992)

16 California Californias tied-house laws prohibit the direct or indirect ownership of any interest by a supplier in a retail license and the business or equipment used in the retail business. Regulates: –the ownership of interests the supplier may have in a retailer –the benefits a supplier may provide to a retailer Cal. Bus. & Prof. Code §§ , ; Cal. Code Regs. Title 4, §§1-150

17 CA Ownership California tied-house restrictions therefore do not prohibit just the traditional tied- house but any cross-ownership interest whatsoever between the supplier tiers and retail tier, no matter how small or attenuated, whether or not it might lead to actual control of a retailer.

18 CA Ownership Exceptions Supplier may lease space to a retailer at fair market value (with ABC approval) Supplier may own a diminutive amount of stock and serve on the board of a publicly traded retailer (enacted to permit the president of Joseph E. Seagram, then a major spirits supplier, to serve on the board of Safeway Stores) Supplier may own hotels of a certain size (enacted to permit Grand Metropolitan, a British alcoholic beverage supplier, to own the Intercontinental Hotel group, which in turn owned and operated the Mark Hopkins Hotel). The section was later amended to lower the number of required hotel rooms (to permit Bass Ale to own Holiday Inns); and to allow a supplier to own marine parks (enacted to permit Anheuser-Busch to own SeaWorld in San Diego; Anheuser-Busch sold SeaWorld in 2009); to own the premises of an on-sale or off-sale licensed cooking school (these sections permitted McKesson Corp., then an alcoholic beverage wholesaler, to own the California Culinary Academy in San Francisco); to own, serve on the board of, and promote a cooking school in Napa County (to permit a major vintner to participate in the Culinary Institute of America in St. Helena); to own cruise ships (added at the request of a major brewer that was considering the purchase of a cruise line but later opted against it); to own movie production theme parks (added at the request of Joseph E. Seagram when it purchased Universal Studios; Universal is now an asset of Vivendi, a French conglomerate formed by the merger of Seagram and CANALT); and to own an interactive entertainment facility Cal. Bus. & Prof. Code § et seq.

19 CA Benefits No supplier shall furnish, give, or lend any money or other thing of value, directly or indirectly, to, or guarantee the repayment of any loan or the fulfillment of any financial obligation of, any [retailer] Suppliers are prohibited from engaging in consignment sales of licensed beverages, giving secret rebates or making secret concessions as part of a sale, engaging in price discrimination, paying a retailer for advertising space, or, subject to exceptions at § , giving signs and displays to retailers Commercial briberygiving anything of value to a retailers employee in the hope of gaining customersis prohibited This prohibition not only acts against suppliers, but also makes it a misdemeanor for retail employees to accept such a bribe Cal. Bus. & Prof. Code § et seq.

20 CA Benefits Exceptions Suppliers can provide retailers with certain signs, displays, and promotional material, and a wholesaler can sell or rent any lawful product to a retailer at the market price Brewers can provide wholesalers and retailers with specified tapping equipment Suppliers can provide shelf stocking services (but are permitted to touch only their own goods) and free food, drink, and entertainment at meetings at the suppliers premises, at retailers conventions, and to retailers and certain retailer employees at business meetings, along with surface transportation to and from the meetings and tickets for entertainment events, including food, beverages, and transportation The law does not permit winegrowers to fly retailers to the winery or provide lodging for them at winery guest houses Certain suppliers can provide consumers with free entertainment, wine, and spirits (but not beer) at private parties under highly restricted conditions An important and well-used exception permits suppliers to provide courses of instruction for licensees and, as part of those courses, to supply the products they are discussing Suppliers can pay retailers for market research data and provide consumers, under certain conditions, with addresses of on-sale and off-sale retailers who sell their goods. Numerous exceptions permit suppliers to pay retailers for advertising space in specified venues, including stadiums and arenas, zoos and aquariums, racetracks and even water skiing arenas that meet certain specifications Cal. Bus. & Prof. Code § et seq.

21 CA Free Goods [n]o licensee shall, directly or indirectly, give any premium, gift, or free goods in connection with the sale or distribution of any alcoholic beverage, except as provided by rules that shall be adopted by the [ABC] department to implement this section or as authorized by this division. Cal. Bus. & Prof. Code § et seq.

22 CA Free Goods Exceptions Retailers may accept returns and make refunds or exchanges Winegrowers may make refunds to consumers no matter where the wine was purchased Samples may be given to licensees Gifts may be given to non-licensees Certain inside signs may be given to retailers Licensees may furnish certain services to specified communities and nonprofit organizations Licensees may sponsor certain contests on or off their premises Cal. Code Regs. Title 4, div. 1, §§ 52, 106

23 Washington Through the Steele Act, Washington, unlike many other states, elected to implement a mixed form of regulation in which the state retained control over the sale of distilled spirits (through state and contract stores) but implemented a three-tier distribution system for the sale of beer and wine Wash. Rev. Code, Title 66

24 WA Prohibitions Washingtons current primary tied-house statute contains two general prohibitions: manufacturers, importers, distributors, and their authorized agents are prohibited from (1) owning or having a financial interest in a retail license or owning property on which a retailer operates, and (2) providing money or moneys worth to a retailer Wash. Rev. Code § (1)(a)

25 WA Exceptions Many of the exceptions to the financial interest prohibition address the unique positioning of small wineries and breweries. For example, wineries and breweries may sell their wine and beer, as well as wine and beer produced by others, at retail on their premises. A winery may hold a restaurant license on its premises or on contiguous property. Similarly, a brewery may hold up to two licenses for a restaurant and/or tavern on its premises or at a separate location. As in California, Washington wineries and breweries even have self- distribution rights from their licensed premises, permitting them to sell directly to retailers and consumers. (Wash. Rev. Code §§ , , et seq.) The moneys worth restriction also has many exceptions. For example, a winery may provide certain services for a retailer, such as pouring at a restaurant or at bottle signings. A manufacturer or distributor may also provide a retailer with certain items, such as devices to mark beer or wine taps, can openers, bottle openers, and corkscrews; these items must be of nominal value or cost to the manufacturer or distributor. (Wash. Rev. Code § ; Wash. Admin. Code § )

26 New York It is unlawful for a manufacturer or wholesaler to: (a) Be interested directly or indirectly in any premises where any alcoholic beverage is sold at retail; or in any business devoted wholly or partially to the sale of any alcoholic beverage at retail by stock ownership, interlocking directors, mortgage or lien or any personal or real property, or by any other means Similarly, manufactures and wholesalers are prohibited from making a loan or gift to a retailer. They cannot: (b) Make, or cause to be made, any loan to any person engaged in the manufacture or sale of any alcoholic beverage at wholesale or retail (c) Make any gift or render any service of any kind whatsoever, directly or indirectly, to any person licensed under this chapter which in the judgment of the liquor authority may tend to influence such licensee to purchase the product of such manufacturer or wholesaler. The provisions of this paragraph shall not be construed to prevent a manufacturer or wholesaler from entertaining a licensee at lunch or dinner, or to prevent a manufacturer or wholesaler from participating in or supporting bona fide retailer association activities such as, but not limited to, associate memberships, dinners, conventions, trade shows, product tastings and product education where such participation is in reasonable amounts and does not reach proportions that indicate attempts to influence the purchase of products of contributing manufacturers and wholesalers by the members of such retailer associations N.Y. Alcoholic Beverage Control Law § 101(1)

27 NY Exceptions New York also has many exceptions to the general rule. In fact, most manufacturers located in New York also hold a wholesalers license. Thus, they may sell to traditional wholesalers (who then sell to retailers), but they may also sell directly to retailers N.Y. Alcoholic Beverage Control Law § 101

28 Illustrations

29 Sponsorships Manufacturer sponsoring third-party event Manufacturer sponsoring consumer sampling at retail premises Manufacturer sponsoring concert series at retail premises

30 Direct Shipping Retailers v. winegrowers shipping directly to consumers Unlicensed third party providers taking orders and acting as agent for winegrower or consumer

31 Cross Ownership Investment companies Out-of-state interests

32 Addressing Modern Tied House Issues Washington – Task Force, Initiative 1100, 1105 New York – Law Revision Commission California – Working Groups

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