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.

For more information on third party marketing, internet marketing, or wine law in general, please contact John Trinidad at [email protected].

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