1. Direct Shipping Evolution Unlicensed Third Party “Cyber Retailers” A Regulatory Perspective Matthew D. Botting General Counsel California Alcoholic Beverage Control

2. Disclaimer The California Alcoholic Beverage Control has not approved or disapproved of any specific on-line ordering models. The purpose of this presentation is to identify regulatory issues that the CA ABC has identified in reviewing a number of proposals for such programs. This is from California’s perspective and is not intended to be all-inclusive.

3. A Rose By Any Other Name... “marketing agent” “compliance agent” “agent of the consumer” “agent of the winery” “agent of the retailer” “fulfillment operator” “logistics provider” “affiliate marketer”

4. Common Characteristics Solicits orders for alcoholic beverages. Receives consumer orders for alcoholic beverages. Passes orders on to licensed wineries and/or retailers. Collects payment from retail customers and remits full or partial payment to licensee. Receives compensation for taking orders of alcoholic beverages from the licensee based on the value of sales. Stores the alcoholic beverages for the licensee. Delivers wine to customers. As distinguished from merely providing back-office services (e.g. web-site maintenance and bookkeeping).

5. “Agent of the Consumer” 1966 Attorney General Opinion—“Liquor by Wire” (Cal. AGO 66/89, July 7, 1966) Basic premise: – Consumer in State A goes to off-sale retailer in State A and places order for alcoholic beverage to be delivered to consumer in State B. – Retailer in State A takes order and payment, plus handling fee, and transmits order and payment to retailer in State B. – Retailer in State B delivers alcoholic beverage to consumer in State B. Conclusion: Organization facilitating transaction acting as an agent of the consumer and thus no license required.

6. Recent Concerns AG Opinion takes narrow view of “sale”—focusing on one part of the “transaction” (i.e., at what point title is transferred) is overly simplistic. Definition of “sale” is any transaction resulting in transfer of title of alcoholic beverage for consideration, and includes delivery pursuant to an order and solicitation of orders. (Bus. & Prof. Code Section 23025.) Must look at entire transaction, not simply the beginning and end while ignoring what happens in the middle. In practice, the third-party marketing company may act as the “agent” for several other parties at various points in the transaction, including the consumer and licensees.

7. Licensing Scheme is Comprehensive Cal. Constitution (Article XX, Section 22): – “The State of California...shall have the exclusive right and power to license and regulate the...sale...of alcoholic beverages within the State....” – “The Legislature may...provide for the issuance of all types of licenses necessary...for the...sale of any and all kinds of alcoholic beverages.” Business and Professions Code section 23001: – “This division is an exercise of the police powers of the State...to eliminate the evils of unlicensed and unlawful... selling, and disposing of alcoholic beverages....All provisions of this division shall be liberally construed for the accomplishment of these purposes.”

8. When is a License Required? Bus. & Prof. Code section 23300: “No person shall exercise the privilege or perform any act which a licensee may exercise or perform under the authority of a license unless the person is authorized to do so by a license issued pursuant to this division.” Bus. & Prof. Code section 23355: “Except as otherwise provided in this division and subject to the provisions of Section 22 of Article XX of the Constitution, the licenses provided for in Article 2 of this chapter authorize the person to whom issued to exercise the rights and privileges specified in this article and no others at the premises for which issued during the year for which issued.”

9. Regulatory Issues Exercising license privileges: Only licensees may exercise license privileges, including decisions regarding the purchase and pricing of alcoholic beverages. Tied-house: No supplier may, directly or indirectly, furnish or give anything of value to any off-sale retail licensee. Free goods: No licensee may, directly or indirectly, give any premium, gift or free goods in connection with the sale or distribution of any alcoholic beverage, except as may be specifically authorized. Consignment sales: Sales of alcoholic beverages to consumers may only be from an inventory of product actually purchased and possessed by the licensee undertaking the sale.

10. Exercising License Privileges Only licensees may exercise license privileges. Includes: – Selling alcoholic beverages. – Purchasing decisions. – Pricing decision. – Profiting from sale of alcoholic beverages. Major issue tends to be fees for services provided—if based upon sale of alcoholic beverages (such as percentage basis) then problematic.

11. Who is doing the “selling”? Bus. & Prof. Code section 23025—“Sale” means any of the following: – Any transaction whereby title to alcoholic beverages is transferred from one person to another for consideration; or – The solicitation or receiving of orders for alcoholic beverages; or – The delivery of alcoholic beverages pursuant to an order.

12. Tied-House Section 25502: No supplier may, directly or indirectly, furnish, give, or lend any money or other thing of value to an off-sale retail licensee. Be very cautious of programs that involve both suppliers and retailers. If retailer receives any benefit from supplier payment or involvement, then could be problematic.

13. Free Goods Section 25600 and Rule 106: No licensee may, directly or indirectly, give any premium, gift, or free goods in connection with the sale or distribution of any alcoholic beverage, unless expressly permitted. Typical violations: “free shipping”; “free gift”; “buy one, get one free”; etc. Whether third-party called “marketing agent” of winery or “agent of consumer”, licensee will be subject to discipline.

14. Consignment Sales Comes up when sale made by retailer. At time of sale, retailer must actually own the wine being sold. Red flags include: – Wine not ordered and/or winery not paid until after retailer makes the sale. – Winery ships wine sold by the retailer. – Any agreement under which retailer can return unsold wine to winery. (Sections 23355, 23393, 23394, 25502, and 25503(a).)

15. Available on the Department’s website: http://www.abc.ca.gov/trade/tradeenforcement.html

16. What About Wine Clubs? Issue: Well-known brand establishes “club” for the ordering of wine(s) selected by the club operator— that does not hold a license. All of the regulatory concerns apply: – Is the club operator just making recommendations and providing information, or is it soliciting orders? – Is the club operator merely passing orders to an appropriate licensee? – Are there club membership fees? – What is the relationship between the operator and the licensee(s) (e.g., financial, how are wines selected, etc.)? – Who is responsible for violations incurred by the operator? – Who is identified to the consumer as the seller?

17. Key Points to Ponder Is unlicensed activity really a “sale”? What is the true nature of the various relationships? How does the money flow? – Who controls the purse-strings? – What are the fees based upon? – Is it a flat fee for service or is there sharing in the profits? Who controls the transaction? Who makes decisions on the sale? What is the nature of the relationship with the consumer? Are the orders merely passed on to the licensee or does the transaction occur on the host website? What representations are being made?

18. Final Considerations Lots of moving parts: – Some may be OK. – Others may be problematic. Look at total picture—but be careful of not seeing the trees for the forest. Look at all of the agreements. Transparency is good but does not resolve all regulatory concerns. Nothing wrong with providing services.

19. Thank You