Federal Court Rules in Favor of Wine Retailer DTC Shipments
Wine retailers received a double dose of good news last week.
As we reported earlier, on Thursday, the U.S. Supreme Court agreed to hear an appeal by the Tennessee Wine and Spirits Retailer Association in a case challenging Tennessee’s state residency requirement for persons or entities that hold a state alcohol beverage retail license. Tennessee Wine & Spirits Retailers Ass’n v. Byrd, No. 18-96 (6th Cir., 883 F. 3d 608; cert. granted Sept. 27, 2018). In determining the constitutionality of the state’s residency requirement, the Court may also weigh in on a key question that could have a big impact on direct-to-consumer shipping by wine retailers: does the Supreme Court’s 2005 decision in Granholm v. Heald, which prohibited state from discriminate against out of state wine producers, also prohibit state laws that discriminate against out-of-state retailers.
On Friday, a federal district court in Michigan answered that very question in favor of retailers, and concluded that if the state permits in-state wine retailers to ship direct to consumers, it must also grant the same privilege to out-of-state retailers. Lebamoff Enterprises v. Snyder, Case No. 17-10191, (E.D. Mich. Sept. 28, 2018). The Michigan law in question allowed in-state wine retailers that held a “specially designated merchant license” to ship to Michigan consumers, but prohibited out-of-state retailers from so doing. The court held that the law was not protected by the the 21st Amendment and unconstitutional in light of the Supreme Court’s holding in Granholm. In granting plaintiff retailer’s motion for summary judgment, the court concluded:
“Michigan is … operating an unjustifiable protectionist regime in its consumer wine market, a privilege unsanctioned by the Twenty-first Amendment and forbidden by the dormant Commerce Clause.”
As a remedy, the court opted not to nullify the offending law, but instead extended its shipping privileges to out-of-state retailers. Unless the state legislature repeals the law, then out-of-state wine retailers will be allowed to either apply for the state’s specially designated merchant license or a comparable out-of-state license.
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.
Groupon to Launch Wine Brand?
During a review of wine labels on ShipCompliant’s LabelVision database, we came across several new COLAs issued to Top it Off Bottling, LLC and Appellation Trading Company, LLC (Type 02 licensed winegrower based in Napa) listing the fictitious business name “Groupon Wines” and bearing a GROUPON WINES word mark on the front label. The wines include:
- Chatty Cat Cabernet Sauvignon;
- Jazzy Cat Pinot Noir;
- Snazzy Cat Chardonnay; and
- Top Cat Merlot.
A search of the USPTO’s trademark database shows that Groupon, Inc. has applied for trademark registration for the GROUPON WINES, CHATTY CAT, JAZZY CAT, SNAZZY CAT, and TOP CAT marks in Class 33 (alcoholic beverages other than beer).
It is unclear from these documents what Groupon’s plan is for these wine brands (i.e., whether Groupon will be acting as a third party marketer or has entered into a licensing arrangement with the licensed winegrowers), but it is interesting to see an Internet discount marketplace get involved in the supply-side of the wine market.
New York State Liquor Authority Sets 4/23 Meeting re Internet Wine Sales
The New York State Liquor Authority has scheduled a special board meeting for April 23, 2014 to consider two requests for declaratory rulings related to internet wine sales. Both Lot 18 and Connoisseur Encounters Co., Inc (doing business as “The Wine Cellar at Rye Ridge”) have asked the NYSLA for guidance regarding their proposed business operations. The Lot 18 petition is here and the Wine Cellar petition is here. According to its petition, Lot 18 plans to partner with “brand-strong Marketing Agents [such as magazines and other media entities] that have their own consumer lists, readership or website viewers, on-site customers and a recognizable brand” to deliver “personalized wine selections” to consumers.
Last year, the NYSLA rejected a request for a declaratory ruling regarding a platform that allowed for third party marketers, such as Lot 18, to operate in New York without an alcohol beverage license. The liquor authority subsequently held a hearing regarding internet-based sales of alcohol beverages, but to date has not issued any further guidance regarding third party marketing.
Earlier this year, we reported that Lot 18 had secured a New York state brick and mortar retail license.
DP&F does not represent Lot 18 in this matter.
Lot 18 Secures Brick & Mortar Retail License from NYSLA
Over the past year, the New York State Liquor Authority has wrestled with how to treat third party wine marketers like Lot 18. As we discussed in an earlier blog post, the NYSLA questioned whether third party marketers were essentially operating as unlicensed alcohol beverage retail business.
Although the NYSLA has promised to issue additional guidance for third party marketers, Lot 18 decided not to wait, and instead applied for a retail liquor store license which would allow them to legally ship wine to New York state customers. On January 14, 2014, Lot 18 representatives appeared before the NYSLA to answer questions related to their May 2013 application for a liquor store license for a storefront located at 2 Clark Place in Mahopac, New York. Lot 18 provided an overview of their online and brick and mortar operations, how orders and funds would be processed, how they would work with other marketers. After some deliberation, the board approved Lot 18’s request, and a declaratory ruling should issue in the next few weeks.
Lot 18’s decision to secure an alcohol beverage retail license is an interesting move by one of the most widely recognized online wine businesses. Most third party marketers have been operating based on an assumption that their business model does not require a state alcohol beverage license. Lot 18 went through a nine month process to apply for and secure a retail license, which will allow them to reach consumers in New York, which is second only to California in direct-to-consumer wine shipments (according to the ShipCompliant / Wines & Vines 2013 Direct to Consumer Wine Shipping Report).
DP&F does not represent Lot 18 in this matter.
Disruptive Technologies: The Internet and Wine
Dickenson, Peatman & Fogarty attorney John Trinidad recently gave a presentation at the University of California-Berkeley School of Law on the impact of the Internet on the regulations that govern the wine industry. You can download a copy of Mr. Trinidad’s presentation here.
During his presentation, Mr. Trinidad provided an overview of how the spread of e-commerce influenced the Supreme Court’s landmark decision in Granholm v. Heald; discussed third party marketing, California’s guidelines thereto, and New York’s recent hearings on Internet marketing; and also summarized the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau’s social media guidelines. He also discussed the blending of social media and mobile commerce.
For more information on third party marketing, internet marketing, or wine law in general, please contact John Trinidad at [email protected].
The Internet’s Impact on Wine Law
DPF attorney John Trinidad gave a presentation at the University of California-Berkeley School of Law in October 2013 on the impact of the Internet on the regulations that govern the wine industry. During his presentation, Mr. Trinidad provided an overview of how the spread of e-commerce in the wine industry, and how it influenced the Supreme Court’s landmark decision in Granholm v. Heald. discussed third party marketing, California’s guidelines thereto, and New York’s recent hearings on Internet marketing. Other topics discussed include:
- The evolution of third party marketing;
- California’s guideliens for third party marketers and recent developments in New York;
- How companies like Amazon are changing the wine industry and creating new opportunities for suppliers;
- Evolving mobile commerce opportunities for members of the wine industry; and
- TTB’s social media guidelines;
For more information on third party marketing, internet marketing, or wine law in general, please contact John Trinidad at [email protected].
New York SLA Announces 8/19 Meeting re Online Alcohol Beverage Sales
UPDATE – 7/11/2013
The NYSLA has moved the board meeting to “solicit industry input regarding the regulation of Internet Sales” to Monday, August 19 at 10 a.m.
Third Party Providers: Current state of play in California and New York
New TTB Guidelines on Social Media and Alcohol Beverage Advertising
Social Networks (incl. Facebook)
Applies to “fan pages for alcohol beverage products or companies and any content regarding alcohol beverage products posted to the pages by the industry member.”
Mandatory statements must be included on any “member fan page,” and should not be “hidden or buried.” TTB “strongly recommends” these statements be included in a conspicuous location, such as the profile section of the fan page (such as the “About” section on a Facebook fan page).
Video Sharing Sites
Applies to “[v]ideos about alcohol beverages that are posted to video sharing sites by industry members.”
Mandatory statements should be included in “profile” section of individual videos or on the “channel” information if the industry member maintains a channel.
Applies to any blog maintained by an industry member that “discusses issues related to the company, its products, or the industry in general….” Also applies to “anything posted by the industry member on the blog”
Mandatory statements must be included.
Microblogs (incl. Tumblr, Twitter)
Applies to any written statement “calculated to induce sales in interstate or foreign commerce.”
Mandatory statements must be included and TTB recommends including these statements on the profile page.
Applies to apps for mobile or other handheld devices “related to alcohol beverages.” Such apps are considered “consumer specialty advertisement,” similar to ash trays, matches, cork screws, etc. Thus, only mandatory statement is the company name or brand name of the product.
The NYSLA Ruling – What it Really Means to Licensees and Third Party Marketers
We have received several questions from clients regarding the New York State Liquor Authority’s ruling on April 9, 2013 regarding the “legality of internet advertising platforms.” The ruling, which addresses the relationship between a New York state wholesaler, a New York state retailer, a third party internet marketer and ShipCompliant, is narrow and specifically applies only to sales under ShipCompliant’s MarketPlace Platform conducted through New York’s three tier system. The NYSLA does however also provide some guidance as to the type of third party marketing arrangements that would be permitted, pending issuance of a more thorough advisory on the matter in the future.
It is important to note that the ruling does not address or impact shipping by out of state wineries that hold direct to consumer shipper licenses for New York or the legality of ShipCompliant’s Producer Direct program used by some wineries to assist with their direct to consumer shipments.
Summary of NYSLA Decision
Following an inquiry into the relationships and responsibility of the involved parties, the NYSLA found that the retailer and wholesaler in this case (the “licensed sellers”) exercised little to no control over the sales being made by the third party marketer/advertiser and played a “passive” role. The unlicensed third party marketer, on the other hand, exercised a “high degree of control over the business operations of the participating licensed seller”, including selecting which wines would be sold, setting the prices at which the wine would be sold, managing the storage and shipment of the wines sold and controlling the advertising for the wines sold, all with little to no oversight from the licensed sellers. According to the NYSLA, the third party marketer also received a “predominant proportion of the proceeds from the sale of alcoholic beverages,” while the licensed sellers simply received a flat fee. Based on these facts, the NYSLA held that the unlicensed third party marketer/advertiser was making sales without a license and that, therefore, the “relationship between the advertiser and the licensed seller in the MarketPlace Platform system” violates New York state regulations which “prohibit a licensee from making its license available to a person who has not been approved by the NYSLA” to hold that license.
Because of the narrow nature of this decision, the NYSLA stated that it intended to issue an advisory that will provide comprehensive guidance to the industry on the involvement of unlicensed parties in Internet sales of alcohol beverages to consumers. However, until such time, the NYSLA offered the following guidance to industry members:
* Licensees may rely on an opinion by the NYSLA Office of Counsel that provides that “a third party may allow a licensee to advertise its products on the third party’s website, provided that consumers are directed to the licensee’s website to place an order” and that the third party’s compensation is limited to a flat fee that is not contingent on the number of sales or the amount sold.
* Arrangements where licensed sellers take a passive role and/or incur no business risk are prohibited.
* Arrangements where an advertiser, third party marketer or other unlicensed party performs or is permitted to perform retail functions, such as deciding what products will be sold, what prices should be charged, how funds are controlled and distributed or the amount of the licensee’s profits are prohibited.
* Arrangements where the compensation to a third party constitutes a substantial portion of the sales or sales made are prohibited.
Notably, the NYSLA made clear that in evaluating the legality of these types of arrangements, it would not only look at the written agreements between the parties, but would also “evaluat4e the actual, practical, day-to-day functioning of the arrangements”, as it did in this case.
Comparison to California ABC Third Party Provider Advisory
On November 1, 2011, the California Department of Alcoholic Beverage Control issued an advisory on Third Party Providers, in which it stated that unlicensed third party marketers can facilitate the sale of wine over the Internet, provided that the benefited alcoholic beverage licensee at all times retains control over all sales transactions, including all decisions regarding pricing, selection, shipping and fulfillment. Under the California Advisory, a third party marketer would therefore be permitted to place advertising for an alcoholic beverage at the direction of a licensee, make buying recommendations to a consumer, direct consumers to specific licensees, receive orders and pass them on to the licensee for acceptance and fulfillment, process payments (although the licensee ultimately must control the funds and the flow of funds) and assist with shipping arrangements. But again, the licensee must at all times retain control over pricing, selection and fulfillment. The third party marketers may be compensated for their services, so long as the compensation is reasonable and does not result in any “actual or de facto control” over the licensee by the third party marketer.
The CA Advisory and the NYSLA ruling are consistent to the extent that both require that control for alcoholic beverage sales be held by a licensed seller. However, there are notable differences between the approaches taken by these two agencies and it is unclear whether the NYSLA’s ultimate stance on these issues will be in line with the CA ABC. For instance, the NYSLA suggested that, pending the NYSLA’s definitive statement on these issues, licensees should rely on an opinion by the NYSLA Office of Counsel that provides that “a third party may allow a licensee to advertise its products on the third party’s website, provided that consumers are directed to the licensee’s website to place an order” and that the third party’s compensation is limited to a flat fee that is not contingent on the number of sales or the amount sold. These requirements are not included in the CA ABC Advisory and in fact sales made on third party marketers’ sites (rather than on the licensee’s site) and reasonable fee arrangements (other than solely flat fees) would be permissible under California’s regulations so long as they comply with the remaining portions of the CA ABC Advisory and California alcoholic beverage rules and regulations.
A final decision on the permissibility of sales of alcoholic beverages using third party marketers will be forthcoming from the NYSLA and NYSLA intends to hold public hearings on the matter, allowing interested parties the opportunity to present their positions. In the meantime, license holders, third party marketers and other entities participating in third party marketing-type sales in New York should operate in accordance with the guidelines set forth by the NYSLA in the ruling.
In the end, licensees, third party marketers and other parties involved with these transactions should keep in mind that the sales of alcoholic beverages using third party marketers remains a grey area and should keep close eye on how these issues develop throughout the country.
For more information or assistance with third party marketing issues, please contact Bahaneh Hobel at [email protected]
New York State Liquor Authority to Examine Third Party Marketing
According to ShipCompliant and Wines & Vines presentation, New York is among the top three states for direct to consumer wine sales.
For more information on third party providers and third party marketing, please contact John Trinidad at [email protected].