BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Isadore Hall, III
Chair
2015 - 2016 Regular
Bill No: SB 1426 Hearing Date: 4/12/2016
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|Author: |Hall |
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|Version: |2/19/2016 Introduced |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Arthur Terzakis |
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SUBJECT: Alcoholic beverage control: tied-house restrictions:
compensation
DIGEST: This bill creates a new tied-house exception in the
Alcoholic Beverage Control (ABC) Act that authorizes, until
January 1, 2022, a person who has an ownership interest in a
retail license, to be compensated by an alcoholic beverage
supplier for promotional or marketing services subject to
specified conditions.
ANALYSIS:
Existing law:
1)Establishes the Department of ABC and grants it exclusive
authority to administer the provisions of the ABC Act in
accordance with laws enacted by the Legislature. This
involves licensing individuals and businesses associated with
the manufacture, importation and sale of alcoholic beverages
in this state and the collection of license fees.
2)Separates the alcoholic beverage industry into three component
parts of manufacturer, wholesaler, and retailer. The original
policy rationale for this body of law was to prohibit the
vertical integration of the alcohol industry and to protect
the public from predatory marketing practices. Generally,
other than exemptions granted by the Legislature, the holder
of one type of license is not permitted to do business as
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another type of licensee within the "three-tier" system. This
is known as the "tied-house" law.
3)Restricts certain alcoholic beverage licensees from paying,
crediting, or compensating a retailer for advertising in
connection with the advertising and sale of alcoholic
beverages and expressly authorizes exceptions to this
prohibition.
4)Authorizes the holder of a winegrower's license, a beer
manufacturer, a distilled spirits rectifier, a distilled
spirits manufacturer, and a distilled spirits manufacturer's
agent, to purchase advertising space and time from, or on
behalf of, an on-sale retail licensee, under certain
conditions, if the on-sale retail licensee is the owner,
manager, agent of the owner, assignee of the owner's
advertising rights, or major tenant of specified facilities.
5)Defines an "on-sale" license as authorizing the sale of all
types of alcoholic beverages: namely, beer, wine and distilled
spirits, for consumption on the premises (such as at a
restaurant or bar). An "off-sale" license authorizes the sale
of all types of alcoholic beverages for consumption off the
premises in original, sealed containers.
This bill:
1)Defines "authorized licensee" for purposes of this bill to
mean a manufacturer, winegrower, manufacturer's agent,
rectifier, California winegrower's agent, beer manufacturer,
holder of an out-of-state beer manufacturer's certificate,
distilled spirits manufacturer, distilled spirits rectifier,
distilled spirits manufacturer's agent, or craft distiller.
2)Provides that an authorized licensee may compensate a person
with ownership interest in a retail license for promotional or
marketing services of the authorized licensee's products,
subject to the following conditions:
a) Any compensation agreement with the person must be in
the form of a written contract and include the conditions
outlined in this bill.
b) The person shall not be directly or indirectly involved
in the retailer's purchasing decisions of the brands of
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alcoholic beverages owned by the authorized licensee
compensating the person.
c) The authorized licensee compensating the person shall
not utilize the person to conduct promotional and marketing
activities to promote or market alcoholic beverages on the
premises of the retailer in which the person has an
ownership interest.
d) All compensation the authorized licensee pays to the
person must be based solely on the person's promotional and
marketing activities and shall not be related directly or
indirectly to the sale of alcoholic beverages by the
retailer in which the person has an ownership interest.
e) Prohibits the name, image, and brand of the retailer in
which the person has an ownership interest from being
featured or referenced in any fashion in any advertising of
brands sold by the authorized licensee compensating the
person.
f) Prohibits the person from being involved in the
decisions by the authorized licensee regarding the
selection of retailers that will offer for sale the brands
the person is compensated to promote and market.
3)Stipulates that a licensee that is not an authorized licensee
shall not compensate a person under this bill and shall not
directly or indirectly underwrite, share in, or contribute to
the costs of compensation authorized by this bill.
4)Provides that any officer, director, or agent of an authorized
licensee that is compensated by that authorized licensee for
promotional or marketing services of the authorized licensee's
products shall not be subject to the conditions outlined in
item #2 above (a-f).
5)Provides that an authorized licensee who, through coercion or
other illegal means, induces, directly or indirectly, a holder
of a wholesaler's license to provide compensation to a person
pursuant to this bill shall be guilty of a misdemeanor
punishable by up to six months imprisonment, by a fine of
$10,000, or by both.
6)Provides that an authorized licensee or person who violates
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any provision of this bill shall be guilty of a misdemeanor
punishable by up to six months imprisonment, by a fine of
$10,000, or by both.
7)Contains a January 1, 2022 sunset provision.
8)Contains legislative findings and declarations that it is
necessary and proper to require a separation between
manufacturing interests, wholesale interests, and retail
interests in the production and distribution of alcoholic
beverages in order to prevent suppliers from dominating local
markets through vertical integration and to prevent excessive
sales of alcoholic beverages produced by overly aggressive
marketing techniques. Any exception established by the
Legislature to the general prohibition against tied interests
must be limited to the express terms of the exception so as to
not undermine the general prohibitions.
Background
The enactment of the 21st Amendment to the U.S. Constitution in
1933 repealed the 18th Amendment and ended the era of
Prohibition. Accordingly, states were granted the authority to
establish alcoholic beverage laws and administrative structures
to regulate the sale and distribution of alcoholic beverages.
California's tied-house laws restrict wineries, breweries and
distilled spirits manufacturers from compensating any retailer
for advertising the sale of their alcoholic beverages. Over
time, the Legislature has enacted numerous exceptions to the
state's tied-house laws. For instance:
B&P Code Section 25503.11 permits a manufacturer to
own stock in a publicly-traded retail licensee or serve on
the board of a publicly-traded retail off-sale licensee.
B&P Code Section Sections 25503.15(b) and 25503.30
allow winegrowers to own an interest in on-sale licenses,
with limitations.
B&P Code Section 25502.2 permits a person employed or
engaged by a manufacturer to appear at a promotional event
at the premises of an off-sale retail licensee for the
purposes of providing autographs to consumers.
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B&P Code Section 25503.8 permits an alcoholic beverage
manufacturer to purchase advertising space at large
stadiums and arenas that sell their products.
The author's office notes that under this bill, and for a period
of five years only, a supplier would be able to retain the
services of a spokesperson that also has an ownership interest
in an off-sale or on-sale retail license. Additionally, the
author's office states that this bill contains certain
protections to assure that the promotional activity does not
happen on the retail premise or influence the retail decisions.
Suggested Amendments. The author may wish to consider the
following:
1)Add a provision stipulating the on-sale retail licensee must
offer/serve other competing brands of the manufacturer that is
paying the person to be their spokesperson.
2)Clarify the bill only applies to a person with an interest in
an on-sale license and prohibit an off-sale license holder
from being a spokesperson.
3)Include a provision prohibiting such an arrangement (a paid
spokesperson) if they hold an ownership interest in more than
five on-sale retail licenses.
Pending Litigation. On January 7, 2016, the U. S. Court of
Appeals for the Ninth Circuit issued a decision that may open
the door to relaxing the laws restricting supplier-paid
advertising in retail establishments. In the case, Retail
Digital Network LLC v. Jacob Appelsmith, as the Director of ABC,
the Court overturned a 29-year-old precedent which held that
those portions of the ABC Act prohibiting alcoholic beverage
suppliers and wholesalers from paying for the privilege of
advertising at a retail establishment did not violate the First
Amendment. The Court applied recent U.S. Supreme Court
jurisprudence to require a heightened scrutiny standard on
state-imposed limitations of non-deceptive commercial speech
whereby alcohol beverage suppliers and wholesalers are
prohibited from, directly or indirectly, giving anything of
value to retailers for advertising their products. In doing so,
the Court remanded the case to the lower court that had upheld
the earlier precedence for it to reconsider using a heightened
scrutiny standard rather than the intermittent scrutiny standard
that it had used in its ruling.
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Prior/Related Legislation
AB 866 (Garcia, 2016) extends an existing "tied-house" exception
in the ABC Act pertaining to the general prohibition against
advertising arrangements between retail, wholesale and
manufacturer licensees to include an outdoor stadium with a
fixed seating capacity of at least 46,000 seats located in the
City of San Diego (Petco Park - home of the San Diego Padres).
(Pending in this committee)
AB 600 (Bonta, Chapter 139, Statutes of 2014) extended an
existing "tied-house" exception in the ABC Act pertaining to the
general prohibition against advertising arrangements between
retail, wholesale and manufacturer licensees to include an
outdoor stadium with a fixed seating capacity of at least 68,000
seats located in the City of Santa Clara (Levi's Stadium - new
home of the San Francisco 49ers).
AB 2184 (Hall, Chapter 480, Statutes of 2012) created a new
tied-house exception in the ABC Act that authorized wine, beer
and spirits producers to participate in promotional events held
at an off-sale retail licensed location for the purpose of
providing autographs on bottles or other items to consumers.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: Yes
SUPPORT:
Diageo (source)
Anheuser-Busch
Family Winemakers of California
Wine Institute
OPPOSITION:
California Beer and Beverage Distributors
California Teamsters Public Affairs Counsel
ARGUMENTS IN SUPPORT: Writing in support, Diageo states, "For
decades, spokespersons have been used to promote alcohol brands.
For example, Frank Sinatra did commercials for Budweiser in the
1960's; Dave Matthews partners with Constellation on Dreaming
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Tree Wine; Mila Kunis and Neil Patrick Harris currently promote
Jim Beam and Heineken, respectively; and Diageo's brands are
promoted by Jimmy Kimmel. When an individual becomes an
influencer, companies often engage that person to market their
products. This is common practice not only in alcohol but with
sporting goods, snack foods and pharmaceuticals. In recent
years, there has been an explosion of celebrities entering the
restaurant business. Unfortunately, an individual who happens
to have an interest in a restaurant or nightclub is prohibited
from using their established celebrity status to serve in a
promotional capacity for an alcoholic beverage manufacturer.
In short, the individual has become a licensee and California
law prohibits, except where the Legislature makes an exemption,
a manufacturer from employing or making payments to a licensee."
Also writing in support, Anheuser-Busch states, "With provisions
requiring a written contract between the manufacturer and the
retailer, as well as strict penalties for illegal activity, we
believe that SB 1426 provides appropriate precautions against
abuse and illicit behavior. This legislation will help
manufacturers that would like to engage a paid spokesperson to
market a product, as is common practice with other segments of
the food and beverage industry."
The Wine Institute states, "This bill contains many safeguards
that will enable wineries to benefit from promotional services
offered by various celebrity spokespersons to connect with
consumers and expand their business."
Family Winemakers of California states, "For years,
spokespersons have been utilized in the promotion of various
alcohol brands. However, due to California's tied-house
restrictions, a person with an interest in a restaurant or
similar venue is excluded from employing their celebrity status
to operate in a promotional manner for a manufacturer of
alcoholic beverages. This bill will inaugurate a new tied-house
exemption that will authorize a manufacturer to maintain and
utilize the work of a spokesperson that has ownership interest
in a retail license."
ARGUMENTS IN OPPOSITION: Writing in opposition, the California
Beer and Beverage Distributors (CBBD) state that, "SB 1426 would
legalize the practice, now banned in California and across the
nation, of alcohol beverage manufacturers being permitted to pay
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retailers for promotion and marketing of manufacturers'
products. Legalizing manufacturer payments to retailers is
contrary to the State's public policy interest in assuring a
level playing field and equal access to the marketplace for all
breweries, wineries and distillers operating in California - the
biggest alcohol market in the country and home to the most
breweries and wineries in the United States. It could also
affect pending litigation and prejudicially affect the State of
California's position in that case." [Retail Digital Network,
LLC v. Jacob Appelsmith, as the Director of the ABC (2016).]
CBBD notes that, "bills such as SB 1426, have the potential for
allowing dominant corporations in California to exert greater
influence over the retail sector through payments for promotions
and marketing to selected retailers. Originally touted as a
bill to permit payments to celebrity spokespeople the bill has
become a vehicle to allow any person who is at least 21 years
old and has any ownership interest in a retail licensee to be
compensated for undefined 'promotional and marketing activities'
on behalf of an alcohol beverage manufacturer's brands."
CBBD argues that the conditions set forth in SB 1426,
"ostensibly to preserve retailer independence from a
manufacturer's control, are illusory protections and that the
so-called firewalls do not prevent pay to play by
manufacturers." Also, CBBD states that SB 1426 "would be the
first instance in which a tied-house exception is created for
the benefit of an individual as opposed to current exceptions
allowing paid advertising to a retail licensee in public venues
such as a stadium, sports arena, theme park, racetracks, and
exposition parks. For the current exceptions, there were public
policy considerations involved, such as promoting a desirable
economic activity in the venue and providing a funding source
for public entities when they owned or operated the venue. With
respect to SB 1426, no similar policy considerations are
apparent to support this new broadly written exception."
Also writing in opposition, the California Teamsters state,
"this bill would allow those with significant market power to
dominate the industry and we are concerned that such domination
of the marketplace would jeopardize the jobs of our members who
work in all aspects of the alcoholic beverage industry."
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