California ABC Releases Industry Advisory on Marketing of Alcoholic Beverages by Unlicensed Third-Party Service Providers

ABC has released an Industry Advisory to provide guidance to licensees who may be considering whether to participate in programs offered by “Third Party Service Providers” – unlicensed persons or businesses operating Internet websites or other sales platforms for the purpose of promoting, marketing, or selling alcoholic beverages to consumers.

Third Party Service Providers are often called “marketing agents”, “compliance agents,” “agents of the consumer,” “agents of the winery,” “agents of the retailer,” “fulfillment operators,” “logistics providers,” “affiliate marketers” or similar names and their programs typically involve the operation of Internet websites through which consumers may purchase alcoholic beverages.

ABC’s position is that while many Third Party Service Providers engage in activities that do not require licenses issued by the Department (such as producing and maintaining a website operated by or for a licensee, or providing back-office compliance services), many are engaging in activities for which a license is required.

Ominously, the Advisory states that violation(s) of the ABC Act may subject the licensee to disciplinary action even if all of the prohibited activities are conducted by the Third Party Service Provider, the rationale for which is that the licensee’s participation facilitates the violation.

The Advisory cites a number of possible violations arising from Third Party Service Provider relationships, including:

Solicitation of Orders

Any Third Party Service Provider soliciting orders of alcoholic beverages for or on behalf of licensees is engaged in the “sale” of alcoholic beverages and must hold a license issued by ABC.

Marketing Programs

When suppliers and retailers are involved in the same sales platform (website or otherwise) that is financed, in whole or in part, by suppliers with a benefit to retailers, or retailers will necessarily receive benefits from advertising or purchase order submission via the platform, a “Free Goods” violation may result (Business and Professions Code section 25600, ABC Rule 106).

Programs operated by Third Party Service Providers that include enticements or inducements to order alcoholic beverages, such as free shipping or free items with orders, also could result in a Free Goods violation.

Service Fees

Although service fees charged by a Third Party Service Provider are not, in and of themselves, improper, when fees are based upon a percentage of the sale of alcoholic beverages ABC has concerns. ABC draws a distinction between sharing in the profits from the sale of alcoholic beverages and the nominal transaction fees charged by independent financial service providers (such as credit card companies and banks). While financial service providers may typically charge a transaction fee based upon a percentage of the sale, such a fee is generally unrelated to the sale or promotion of the product. Moreover, unlike many Third Party Service Providers, such financial service providers are otherwise uninvolved in the program and have no vested interest in the promotion or sale of alcoholic beverages.

Involvement in Fundamental Business Decisions

Decisions regarding management, pricing, controlling the distribution of funds, and profiting from the sale of alcoholic beverages are considered fundamental privileges of a licensee. Business and Professions Code section 23300 prohibits the exercising of license privileges without holding a license authorizing such privileges. As such, if any of these fundamental decisions are made by non-licensees, or if non-licensees share in the profits from the sale of alcoholic beverages, a violation could occur.

The full text of the Advisory may be found on the ABC website at:

http://www.abc.ca.gov/trade/Advisory-Third%20Party.pdf

Please contact Tom Carey of our Alcohol Beverage Law Practice Group for more information.