BILL ANALYSIS Ó
SB 1426
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Date of Hearing: June 30, 2016
ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION
Adam Gray, Chair
SB
1426 (Hall) - As Amended May 31, 2016
SENATE VOTE: 32-4
SUBJECT: Alcoholic beverage control: tied-house restrictions:
compensation
SUMMARY: Establishes a new tied-house exception in the
Alcoholic Beverage Control Act (Act) that authorizes, until
January 1, 2022, a person who does not hold an ownership
interest in more than five California on-sale retail licenses,
to be compensated by an alcoholic beverage supplier for
promotional or marketing services subject to specified
conditions. Specifically, 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, holder of a distilled spirits
rectifier's general license, distilled spirits manufacturer's
agent, brandy manufacturer, brandy importer, holder of an
out-of-state distilled spirits shipper's certificate, holder
of a distilled spirits importer's general license, distilled
spirits importer, or craft distiller.
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2)Provides that an authorized licensee may compensate a person
who does not hold an ownership interest in more than five
California on-sale retail licenses 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 authorized licensee may have written contracts
regarding compensation authorized by this bill with no more
than five persons at any given time.
c) The person shall not be exclusively responsible for the
on-sale retail licensee's purchasing decisions of the
brands of alcoholic beverages owned by the authorized
licensee compensating the person.
d) The authorized licensee compensating the person shall
not utilize the person to engage in any endorsement or
promotional or marketing activity for alcoholic beverages
on the premises of the on-sale retail licensee in which the
person has an ownership interest.
e) 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
on-sale retail licensee in which the person has an
ownership interest.
f) The person shall not personally serve any alcoholic
beverages while on the premises of an on-sale retail
licensee. (This prohibition does not apply to an event
held at an unlicensed venue under a caterer's permit.)
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g) The on-sale retail licensee in which the person holds an
ownership interest in must offer for sale, and serve,
alcoholic beverages that compete with the brands of the
authorized licensee compensating the person for promotional
or marketing services.
h) Prohibits the name, image, and brand of the on-sale
retail licensee in which the person has an ownership
interest from being featured or referenced in any
advertising of the brands sold by the authorized licensee
compensating the person except the name and address of the
on-sale retail licensee in which the person has an
ownership interest may be advertised when promoting
specific events at which the compensated person does not
provide services.
i) Prohibits the person from being involved in the
decisions by the authorized licensee regarding the
selection of on-sale retail licensees that will offer for
sale the brands the person is compensated to promote and
market.
3)States 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-i).
5)States that an on-sale retail licensee in which the
compensated person holds an ownership interest that solicits,
or receives any compensation from an authorized licensee for
any unlawful activity relating to promotion or marketing
services shall be guilty of a misdemeanor punishable by up to
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six months imprisonment, by a fine of $10,000, or by both.
6)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.
7)Provides that an authorized licensee or person who violates
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. Also, establishes a similar misdemeanor
and fine for an on-sale retail licensee who, through coercion
or other illegal means, induces or conditions, directly or
indirectly, the purchase or sale of alcoholic beverages upon
an authorized licensee's selection or decision about the
promotional or marketing services of a person compensated by
the authorized licensee.
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.
9)Contains a January 1, 2022 sunset provision.
EXISTING LAW:
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1) Establishes 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) Existing law, known as the "Tied-house" law, 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 another type of
licensee within the "Three-tier" system.
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) Prohibits specified licensees from furnishing, giving, or
lending money or other things of value, directly or indirectly,
to a person engaged in operating, owning, or maintaining an
off-sale licensed premises.
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5) Prohibits the ABC from imposing a dollar limit of less than
$5 for consumer advertising specialties furnished by a distilled
spirits supplier to a retailer or the general public. Allows
beer manufacturers to give adult consumers promotional
advertising items valued up to $5. Existing law provides that
consumer-advertising specialties furnished by a wine supplier to
a retailer or to the general public shall not exceed $1 per unit
original cost to the supplier who purchased it.
6) 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.
7) Permits, until January 1, 2016, the appearance of a person
employed or engaged by an "authorized licensee," as defined, at
a promotional event held at the premises of an off-sale retail
licensee for the purpose of providing autographs under specified
conditions.
8) 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.
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FISCAL EFFECT: Unknown
COMMENTS:
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:
? Business and Professions (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 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
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providing autographs to consumers.
? B&P Code Section 25503.8 permits an alcoholic beverage
manufacturer to purchase
advertising space at large stadiums and arenas that sell their
products.
? B&P Code Sections 25503.15(b) and 25503.30 allow
winegrowers to own an interest in
on-sale licenses, with limitations.
Purpose of the bill : 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 has an
ownership interest in no more than five on-sale retail licenses.
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.
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
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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.
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
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 also
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."
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The Distilled Spirits Council supports this common sense bill
"because it has appropriate safeguards, while allowing
manufacturers to benefit from the promotional services of
spokespersons, like celebrities, that can influence consumers'
buying decisions."
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."
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."
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 retailers
for promotion and marketing of manufacturers' products.
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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 an ownership interest in more than five California
on-sale retail licenses 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." In addition, 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,
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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."
Related legislation : AB 866 (Garcia) of 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 the Senate Appropriations
Committee)
AB 1767 (Bigelow, 2016). Expands the specified conditions under
which designated alcoholic beverage licensees may purchase
advertising space or time in connection with events held on the
premises of an exposition, park, stadium or arena owned by the
on-sale licensee to include circumstances in which the premises
are "leased" by the on-sale licensee. (Pending in Senate
Governmental Organization Committee)
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Prior legislation : SB 557 (Hall), Chapter 420, Statutes of 2015.
Extended an existing tied-house exception pertaining to the
general prohibition against advertising arrangements between
retail, wholesale and manufacturer licensees to include a
fairgrounds with a horse racetrack and equestrian and sports
facilities located in the County of San Diego.
SB 462 (Wolk), Chapter 315, Statutes of 2015. Among other
things, extended an existing tied-house exception pertaining to
the general prohibition against advertising arrangements between
retail, wholesale and manufacturer licensees to include a
specified entertainment complex, known as the Green Music
Center, located on the campus of Sonoma State University.
AB 600 (Bonta, Chapter 139, Statutes of 2014). Extended an
existing tied-house exception 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 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.
AB 605 (Portantino), Chapter 230, Statutes of 2010. Created a
new type of license (instructional tasting license) that allows
the tasting of beer, wine, and distilled spirits at off-sale
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licensed premises.
AB 2293 (De Leon), Chapter 638, Statutes of 2008. Added a new
provision to the Act that permits a manufacturer of distilled
spirits, winegrower, rectifier, or distiller, or its authorized
agent to provide their product, as well as entertainment and
food to consumers over 21 years of age during invitation-only
events (free of charge), as specified. The events must occur on
premises for which a caterer's permit authorization has been
issued.
AB 1245 (Torrico), Chapter 629, Statutes of 2008. Modified an
existing provision of the Act to allow beer manufacturers to
give adult consumers promotional advertising items valued up to
$3.
REGISTERED SUPPORT / OPPOSITION:
Support
Diageo
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Distilled Spirits Council
Family Winemakers of California
Wine Institute
Opposition
Alcohol Justice
California Beer and Beverage Distributors
California Craft Brewers Association
California Teamsters Public Affairs Council
Analysis Prepared by:Eric Johnson / G.O. / (916)
319-2531
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