Regulatory Hurdles for DTC, Social Media, and Third Party Sales Channels
During last week’s Unified Wine & Grape Symposium, DP&F attorney John Trinidad moderated a panel discussion titled, “Regulatory Hurdles for DTC, Social Media, and Third Party Sales Channels.” Trinidad led off the session with a presentation describing how the Internet has “disrupted” the wine industry’s traditional sales and marketing models. You can access Trinidad’s PowerPoint presentation by clicking on the image below:
Trinidad noted that the promise of e-commerce has become significantly more important for small wineries given the increase in the number of suppliers and continued consolidation of the wholesale tier. As noted by a respondent to a Gomberg, Fredrikson & Associates study:
“It is tougher than ever int he 3-tier channel. We have a hard time getting distributor attention as tehy have way too many brands, not enough people and we are just too small to matter.”
While wineries now have a significantly increased opportunity to reach consumers directly without having to find national distribution or share their revenues with intermediary tiers, a number of hurdles still remain. These include production caps, on site requirements, and other impediments to direct-to-consumer shipping. Additional issues arise due to regulatory uncertainty regarding how state alcohol beverage agencies will treat “new players” in the wine sales model, including third party providers. In short, e-commerce and the increased ability to ship directly to consumers offers a number of opportunities for wineries, but also raises a number of unresolved regulatory questions.
Similarly, social media provides wineries with the opportunity to interact and build relationships with consumers, but may still wonder how federal and state regulations apply to “new media.” Government agencies concerned with transparency and consumer have, by in large, ported their advertising restriction and applied it broadly to social media. This includes tied house laws, which prevent wineries from providing things of value (including free advertising) to retailers. Trinidad noted that regulatory uncertainty is likely to continue as new Internet-based business models appear and blur the line between e-commerce and social media.
Finally, Trinidad provided attendees with an update on the Empire Wine / NYSLA dispute. As noted in prior blog posts, NYSLA has accused Empire Wine, a New York based retailer, of shipping wine to states where retail direct to consumer shipping is prohibited, even though those states have not pursued any disciplinary action against Empire. NYSLA believes this action is grounds for suspension, revocation, or cancellation of Empire’s New York State License. If NYSLA prevails, a California winery that illegally ships wine to a consumer in, say, Utah, may be putting their NY Direct Shipper’s license at risk.
NYSLA, Empire Wine and Due Process
On January 23, the New York State Liquor Authority is scheduled to hold a hearing to determine if retailer Empire Wine & Spirits (“Empire”) engaged in “improper conduct” that warrants the suspension, cancellation or revocation of the retailer’s New York liquor license. According to the SLA’s Notice of Pleading, Empire allegedly shipped wine to consumers in other states, including states that do not allow for retailer direct-to-consumer alcohol shipping, and this amounts to “improper conduct’ that warrants a disciplinary penalty. (For a summary of the issues involved, including some of Empire’s legal arguments to date, please see https://www.dpf-law.com/blogs/lex-vini/empire-wine-nysla-lawsuit/).
Under New York law, after the SLA has served a notice of pleading, and if the licensee pleads not guilty, the licensee is entitled to a hearing before an impartial decision maker – a basic tenet
ant of due process rights. Those same due process rights also prohibit the SLA from prejudging specific facts or laws that will be at issue in a hearing. For example, New York courts previously held that public statements by the Chairman or a commissioner of the SLA indicated prejudgment of facts at issue in a pending proceeding. Because the chairman / commissioner that made the statement had not disqualified themselves from the proceeding, licensee’s due process rights had been violated. If a “disinterested observer may conclude that [the administrative official] has in some measure adjudge the facts as well as the law of a particular case in advance of hearing it,” then that official is disqualified on the ground of prejudgment. Woodlawn Heights Taxpayers & Cmty. Ass’n v. N.Y. State Liquor Auth., 307 A.D.2d 826, 827 (N.Y. App. Div. 1st Dep’t 2003).
Recently, the SLA used its official Twitter and Facebook accounts to publish a link to an op-ed written by Craig Wolf, president of the Wine & Spirits Wholesalers of America, in which Mr. Wolf states that Empire “has for years shipped alcohol across state lines in violation of recipient states’ tax and licensing laws.” Mr. Wolf goes on to state that, “The SLA is doing what is right” by going after Empire, and argues that the SLA’s enforcement actions is supported by the 21st Amendment.
By promoting Mr. Wolf’s article, one could argue that the SLA has already decided the facts before Empire has had any chance to present evidence at the hearing. Moreover, the SLA has conclusively weighed in on a key legal questions at issue in this hearing: does the SLA’s disciplinary action attempt to regulate interstate sale and distribution of alcohol in violation of the Commerce Clause, or is the SLA’s action permissible under the 21st Amendment? (For a review of some of Empire’s other legal arguments, please see
The SLA’s adoption and public promotion of Mr. Wolf’s views and statements may provide the basis for an appeal by Empire (if needed).
John Trinidad is an attorney at DPF and also serves as pro-bono General Counsel to the American Wine Consumers Coalition, an advocacy organization seeking to protect consumer rights and lower barriers to wine access. His full bio is available here.