Is “Tied-House”
Still the Tie that Binds?
Carrie L. Bonnington
Pillsbury Winthrop Shaw Pittman LLP
2600 Capitol Mall, Suite 300
Sacramento, CA 95816
(916) 329-4700
carrie.bonnington@pillsburylaw.com
Jerry R. Jolly
Pillsbury Winthrop Shaw Pittman LLP
2600 Capitol Mall, Suite 300
Sacramento, CA 95816
(916) 329-4700
jerry.jolly@pillsburylaw.com
Rationale for “Tied House” Law
The term “tied house law” refers to the broad statutory scheme
regulating both the marketing of alcoholic beverages and the
cross-ownership of licensed operations.
Policy rationale for this law:
– to promote the state’s interest in an orderly market
– to prohibit vertical integration and dominance by a single
producer in the marketplace
– to prohibit commercial bribery and predatory marketing
practices
– to discourage and/or prevent the intemperate use of
alcoholic beverages
1
Are “Tied House” Laws Working
SENATOR DEAN FLOREZ, CHAIR
The “Tied-House” Puzzle:
Why was the Three-Tier System Established
and How Well has it Worked?
TUESDAY, MAY 10, 2005
STATE CAPITOL, ROOM 3191  SACRAMENTO
In 2005, testimony before Senate Government Organizational Committee
described “tied house” system:
“Gordian Knot of sometimes inconsistent laws and
policies which may or may not reflect the needs and
realities of the modern market place.”
2
Who Cares?
• Jerry Jolly, Director, Department of Alcoholic Beverage Control
• John Peirce, Chief Counsel, Department of Alcoholic Beverage Control
• Henry Dominguez, Vice President of Government Affairs, Anheuser-Busch Companies,
Inc.
• Lance Hastings, Western Regional Director, State Government Affairs, Miller Brewing
Company
• Steve Harrison, Vice President, Sierra Nevada Brewing Company
• Art DeCelle, Beer Institute
• Michael Falasco, Legislative Representative, Wine Institute
• Paul Kronenberg, President, Family Winemakers of California
• Pete Downs, Vice President of Government Affairs, Kendall-Jackson Winery
• Berman Obaldia, Vice President of Government Affairs, Distilled Sprits Council of the
United States
• Geoff Howard, Legal Counsel, Bingham McCutchen LLP, California Beer & Beverage
Distributors
• Craig Wolf, Vice President and General Counsel, Wine & Spirits Wholesalers of
America
• Anna-Marie Stouder, Senior Legislative Director, California Restaurant Association
• Mariann Costello, Vice President, Scoma’s Restaurant, San Francisco
• Bruce Young, Legislative Representative, California Retailers Association
3
Are “Tied House” Laws Working?
• Does the general prohibition against crossownership [and the myriad exceptions] truly
prevent exclusive outlets?
• Would a liberalization of the free goods
prohibition bring back the abuses of tied houses
prior to Prohibition?
• Would a liberalization of cross-ownerships bring
back the abuses of tied houses prior to
Prohibition?
4
Tied House Issues
• Historical Perspective
• Federal Law
• California Law
• Washington Law
• New York Law
• Illustrations
• Addressing Modern Issues
5
Historical Perspective
• Prohibition
• Vertical Integration
• Federal (1935) – Federal Alcohol
Administration Act (27 U.S.C. § 201 et seq.)
• Control States
• License States
• Hybrid States
Federal Law
Supplier may not induce a retailer to
purchase its product to the “exclusion in
whole or in part” of products from other
suppliers in transactions implicating
interstate commerce
–
Sale in interstate or foreign commerce
–
Unlawful inducement
–
Exclusion
27 U.S.C. §205(b)
Federal Means of Inducement
• Holding any interest in a retail license,
premises or property
• Giving retail licensee thing of value
• Cooperative advertising
• Loans
• Quotas
27 U.S.C. §205(b)
Federal Exceptions
• Product displays
• Point of sale and consumer advertising
• Equipment and supplies
• Samples
• Combination packaging
• Consumer promotions
27 C.F.R. §§6.1-6.153
Federal regulations specifically
identify certain acts that are
violations (“red light” acts),
certain acts that are not
violations (“green light” acts),
and certain acts that “put
retailer independence at risk”
and therefore may be
deemed an unlawful
inducement (“yellow
light” acts).
Red Light Acts
• Renting of display space by an industry member at a retail establishment
(§6.35)
• The act by an industry member of furnishing, giving, renting, lending or selling
any equipment, fixtures, signs, supplies, money, services or other things of value
to a retailer (§6.41)
• Furnishing of free warehousing by delaying delivery of distilled spirits, wine or
malt beverages beyond the time that payment for the product is received (§6.44)
• Paying or crediting a retailer for any advertising, display or distribution service
(§6.51)
• Arrangement in which an industry member participates with a retailer in paying
for an advertisement placed by the retailer (§6.52)
• Purchase, by an industry member, of advertising on signs, scoreboards,
programs, scorecards and the like at ballparks, racetracks or stadiums from the
retail concessionaire (§6.53)
• Rental by an industry member of display space at a retail establishment (§6.56)
• Requiring a retailer to take and dispose of any quota of distilled spirits, wine or
malt beverages (§6.71)
Green Light Acts
• Giving or selling product displays so long as the total value of all product
displays does not exceed $300 per brand at any one time in any one retail
establishment, and the displays contain conspicuous and substantial
advertising matter on the product (§6.83)
• Point-of-sale advertising materials such as posters, placards, designs,
inside signs (electric, mechanical, or otherwise), window decorations, trays,
coasters, mats, menu cards, meal checks, paper napkins, foam scrapers,
back bar mats, thermometers, clocks, calendars and alcoholic beverage lists
or menus (§6.84(1))
• Consumer advertising specialties such as trading stamps, non-alcoholic
mixers, pouring racks, ashtrays, bottle or can openers, corkscrews, shopping
bags, matches, printed recipes, pamphlets, cards, leaflets, blotters,
postcards, pencils, shirts, caps and visors (§6.84(2))
• Giving a sample of distilled spirits, wine, or malt beverages to a retailer who
has not purchased the brand from that industry member within the last 12
months (§6.91)
• Packaging and distributing distilled spirits, wine, or malt beverages in
combination with other, non-alcoholic items for sale to consumers (§6.93)
• Providing coupons and other direct offerings subject to certain limitations
(§6.96)
Yellow Light Acts
• The act by an industry member of resetting stock on a
retailer’s premises (other than stock offered for sale by the
industry member)
• Purchasing or renting display, shelf, storage, or
warehouse space (i.e., slotting allowance)
• Ownership by an industry member of less than a 100
percent interest in a retailer, where such ownership is used
to influence the purchases of the retailer
• Requiring a retailer to purchase one alcoholic beverage
product in order to be allowed to purchase another
alcoholic beverage product at the same time (§6.152)
**An industry member should not engage in such acts
without performing a careful analysis
Federal Exclusion
(a) Exclusion, in whole or in part occurs:
(1) When a practice by an industry member, whether direct, indirect, or
through an affiliate, places (or has the potential to place) retailer
independence at risk by means of a tie or link between the industry
member and retailer or by any other means of industry member control
over the retailer; and
(2) Such practice results in the retailer purchasing less than it would have
of a competitor's product.
“Congress intended the ‘exclusion’ criterion to direct the regulator to
determine something more” than merely leading a retailer to purchase
less of a product than it would have otherwise. Instead, “Congress
used ‘exclusion’ to indicate placement of retailer independence at risk
by means of a ‘tie’ or ‘link’ between the wholesaler and the retailer or
by any other means of wholesaler control.”
Fedway Associates, Inc. v. United States Treasury Department Bureau of Alcohol,
Tobacco and Firearms, 976 F.2d 1416 (D.C. Cir. 1992)
California
• California’s tied-house laws prohibit the direct or
indirect ownership of any interest by a supplier
in a retail license and the business or equipment
used in the retail business.
• Regulates:
– the ownership of interests the supplier may
have in a retailer
– the benefits a supplier may provide to a
retailer
Cal. Bus. & Prof. Code §§23771-72, 25500-25512; Cal. Code Regs. Title 4, §§1-150
CA Ownership
California tied-house restrictions therefore
do not prohibit just the traditional tiedhouse but any cross-ownership interest
whatsoever between the supplier tiers and
retail tier, no matter how small or
attenuated, whether or not it might lead to
actual control of a retailer.
CA Ownership Exceptions
• Supplier may lease space to a retailer at fair market value (with ABC approval)
• Supplier may own a diminutive amount of stock and serve on the board of a publicly
traded retailer (enacted to permit the president of Joseph E. Seagram, then a major
spirits supplier, to serve on the board of Safeway Stores)
• Supplier may own hotels of a certain size (enacted to permit Grand Metropolitan, a
British alcoholic beverage supplier, to own the Intercontinental Hotel group, which in
turn owned and operated the Mark Hopkins Hotel). The section was later amended to
lower the number of required hotel rooms (to permit Bass Ale to own Holiday Inns);
and to allow a supplier to own marine parks (enacted to permit Anheuser-Busch to
own SeaWorld in San Diego; Anheuser-Busch sold SeaWorld in 2009); to own the
premises of an on-sale or off-sale licensed cooking school (these sections permitted
McKesson Corp., then an alcoholic beverage wholesaler, to own the California
Culinary Academy in San Francisco); to own, serve on the board of, and promote a
cooking school in Napa County (to permit a major vintner to participate in the Culinary
Institute of America in St. Helena); to own cruise ships (added at the request of a
major brewer that was considering the purchase of a cruise line but later opted
against it); to own movie production theme parks (added at the request of Joseph E.
Seagram when it purchased Universal Studios; Universal is now an asset of Vivendi,
a French conglomerate formed by the merger of Seagram and CANALT); and to own
an interactive entertainment facility
Cal. Bus. & Prof. Code § 25503 et seq.
CA Benefits
• No supplier shall “furnish, give, or lend any money or other thing
of value, directly or indirectly, to, or guarantee the repayment of
any loan or the fulfillment of any financial obligation of, any
[retailer]”
• Suppliers are prohibited from engaging in consignment sales of
licensed beverages, giving secret rebates or making secret
concessions as part of a sale, engaging in price discrimination,
paying a retailer for advertising space, or, subject to exceptions
at §25611.1, giving signs and displays to retailers
• Commercial bribery—giving anything of value to a retailer’s
employee in the hope of gaining customers—is prohibited
• This prohibition not only acts against suppliers, but also makes it
a misdemeanor for retail employees to accept such a bribe
Cal. Bus. & Prof. Code § 25503 et seq.
CA Benefits Exceptions
•
Suppliers can provide retailers with certain signs, displays, and promotional material, and
a wholesaler can sell or rent any lawful product to a retailer at the market price
•
Brewers can provide wholesalers and retailers with specified tapping equipment
•
Suppliers can provide shelf stocking services (but are permitted to touch only their own
goods) and free food, drink, and entertainment at meetings at the supplier’s premises, at
retailers’ conventions, and to retailers and certain retailer employees at business meetings,
along with surface transportation to and from the meetings and tickets for entertainment
events, including food, beverages, and transportation
•
The law does not permit winegrowers to fly retailers to the winery or provide lodging for
them at winery guest houses
•
Certain suppliers can provide consumers with free entertainment, wine, and spirits (but not
beer) at private parties under highly restricted conditions
•
An important and well-used exception permits suppliers to provide courses of instruction
for licensees and, as part of those courses, to supply the products they are discussing
Suppliers can pay retailers for market research data and provide consumers, under certain
conditions, with addresses of on-sale and off-sale retailers who sell their goods. Numerous
exceptions permit suppliers to pay retailers for advertising space in specified venues,
including stadiums and arenas, zoos and aquariums, racetracks and even water skiing
arenas that meet certain specifications
Cal. Bus. & Prof. Code § 25503 et seq.
CA Free Goods
“[n]o licensee shall, directly or
indirectly, give any premium, gift,
or free goods in connection with
the sale or distribution of any
alcoholic beverage, except as
provided by rules that shall
be adopted by the [ABC]
department to implement
this section or as
authorized by this
division.”
Cal. Bus. & Prof. Code § 25600 et seq.
CA Free Goods Exceptions
• Retailers may accept returns and make refunds or
exchanges
• Winegrowers may make refunds to consumers no matter
where the wine was purchased
• Samples may be given to licensees
• Gifts may be given to non-licensees
• Certain inside signs may be given to retailers
• Licensees may furnish certain services to specified
communities and nonprofit organizations
• Licensees may sponsor certain contests on or off their
premises
Cal. Code Regs. Title 4, div. 1, §§ 52, 106
Washington
Through the Steele Act,
Washington, unlike many
other states, elected to
implement a “mixed” form
of regulation in which the
state retained control over
the sale of distilled spirits
(through state and contract
stores) but implemented a
three-tier distribution
system for the sale of beer
and wine
Wash. Rev. Code, Title 66
WA Prohibitions
Washington’s current
primary tied-house statute
contains two general
prohibitions: manufacturers,
importers, distributors, and
their authorized agents are
prohibited from (1) owning or
having a financial interest in
a retail license or owning
property on which a retailer
operates, and (2) providing
“money or money’s worth” to
a retailer
Wash. Rev. Code § 66.28.010(1)(a)
WA Exceptions
• Many of the exceptions to the financial interest prohibition address the
unique positioning of small wineries and breweries. For example,
wineries and breweries may sell their wine and beer, as well as wine
and beer produced by others, at retail on their premises. A winery
may hold a restaurant license on its premises or on contiguous
property. Similarly, a brewery may hold up to two licenses for a
restaurant and/or tavern on its premises or at a separate location. As
in California, Washington wineries and breweries even have selfdistribution rights from their licensed premises, permitting them to sell
directly to retailers and consumers. (Wash. Rev. Code §§ 66.24.170, 66.24.240, 66.28.010 et
seq.)
• The “money’s worth” restriction also has many exceptions. For
example, a winery may provide certain services for a retailer, such as
pouring at a restaurant or at bottle signings. A manufacturer or
distributor may also provide a retailer with certain items, such as
devices to mark beer or wine taps, can openers, bottle openers, and
corkscrews; these items must be of nominal value or cost to the
manufacturer or distributor. (Wash. Rev. Code § 66.28.010; Wash. Admin. Code § 314-16-020)
New York
•
It is unlawful for a manufacturer or wholesaler to:
(a) Be interested directly or indirectly in any premises where any alcoholic beverage
is sold at retail; or in any business devoted wholly or partially to the sale of any
alcoholic beverage at retail by stock ownership, interlocking directors, mortgage or
lien or any personal or real property, or by any other means
•
Similarly, manufactures and wholesalers are prohibited from making a loan or gift to a
retailer. They cannot:
(b) Make, or cause to be made, any loan to any person engaged in the manufacture
or sale of any alcoholic beverage at wholesale or retail
(c) Make any gift or render any service of any kind whatsoever, directly or indirectly,
to any person licensed under this chapter which in the judgment of the liquor authority
may tend to influence such licensee to purchase the product of such manufacturer or
wholesaler. The provisions of this paragraph shall not be construed to prevent a
manufacturer or wholesaler from entertaining a licensee at lunch or dinner, or to
prevent a manufacturer or wholesaler from participating in or supporting bona fide
retailer association activities such as, but not limited to, associate memberships,
dinners, conventions, trade shows, product tastings and product education where
such participation is in reasonable amounts and does not reach proportions that
indicate attempts to influence the purchase of products of contributing manufacturers
and wholesalers by the members of such retailer associations
N.Y. Alcoholic Beverage Control Law § 101(1)
NY Exceptions
New York also has many exceptions to the
general rule. In fact, most manufacturers
located in New York also hold a
wholesaler’s license. Thus, they may sell
to traditional wholesalers (who then sell to
retailers), but they may also sell directly to
retailers
N.Y. Alcoholic Beverage Control Law § 101
Illustrations
Sponsorships
• Manufacturer sponsoring third-party event
• Manufacturer sponsoring consumer
sampling at retail premises
• Manufacturer sponsoring concert series at
retail premises
Direct Shipping
• Retailers v. winegrowers shipping directly
to consumers
• Unlicensed third party providers taking
orders and acting as “agent” for
winegrower or consumer
Cross Ownership
• Investment companies
• Out-of-state interests
Addressing Modern Tied House Issues
• Washington – Task
Force, Initiative
1100, 1105
• New York – Law
Revision Commission
• California – Working
Groups