Tied House” (Federal and State Laws)

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4 © 2015 Wendel, Rosen, Black & Dean LLP Alcohol Regulation - Taxation • The Whiskey Excise Tax (1791)and Whiskey Rebellion • Alcohol, beer, distilled spirits were considered safer than drinking water • In 1830, average American over age 15 years drank the equivalent of 88 bottles of whiskey a year (3x as much as today)

5 © 2015 Wendel, Rosen, Black & Dean LLP Events Leading to Prohibition • Temperance Movement: 1830s-1850s - Maine in 1851 was first state to prohibit sale and consumption of alcohol - Several other states had some form of prohibition • Target: the saloon, particularly, the “tied house” • Civil War 1861-1865 • Beer excise tax to pay for war

6 © 2015 Wendel, Rosen, Black & Dean LLP What is a “Tied House” • Ownership of saloons and bars (retailers) by the alcohol beverage maker (usually breweries) • Trade Practices • England and US • Problems - Alcoholism - Disorderly conduct - Domestic strife - Loss of wages and workers

7 © 2015 Wendel, Rosen, Black & Dean LLP Temperance Movement: Late 19th and Early 20 Century • Grew in last half of the 19th century, part of “progressive” political ideas including women’s suffrage, and antitrust laws. • Women’s Christian Temperance Union (1874) and Anti-Saloon League (1893)

• Sixteenth Amendment Carrie Nation - authorized federal income tax - passed Congress 1909, ratified 1913

8 © 2015 Wendel, Rosen, Black & Dean LLP The Eighteenth Amendment • Eighteenth Amendment - Section 1. After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all the territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited. - Ratified in 1919, quickly - Banned “intoxicating liquors” - The “noble experiment” • Volstead Act - Defined “intoxicating liquors” as at or below 0.5% alcohol by volume

9 © 2015 Wendel, Rosen, Black & Dean LLP Prohibition 1920-1933 • Early signs were favorable, but led to: - Organized crime - Dangerous illegally-produced liquor and moonshine - Corruption - Disrespect for the law • The Great Depression - Federal government needed excise tax revenue • Cullen-Harrison Act (1933) allowed for 3.2% beer

10 © 2015 Wendel, Rosen, Black & Dean LLP Repeal – The 21st Amendment • Section 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. • The 21st Amendment did not establish tied house laws or three-tier system

11 © 2015 Wendel, Rosen, Black & Dean LLP Federal Alcohol Administration Act (1935) • Federal regulatory framework: (Brewers Notice, COLAs, etc.) • Federal Tied House Law (27 USC Section 205) • Trade Practices: - Pay to Play - Advertising - Difference from CA state law: federal law requires an inducement to a retailer that causes retailer to exclude products of another supplier • Ownership: Did not establish a three-tier system, did not separate the upper tiers from each other (producers and wholesalers)

12 © 2015 Wendel, Rosen, Black & Dean LLP Toward Liquor Control • Prohibitionists had lost, but still advocated for governmental regulation of liquor . . . but how? • Seminal book on state liquor regulation Toward Liquor Control (1933) - Funded by Rockefeller Foundation - Emphasized state and local regulation - Prohibit “tied houses” - Advocated “control” system for spirits, fortified wines and strong beers John D. Rockefeller, Jr. - Advocated a “license” system for table wine and 3.2% beer; 3.2 beer should be freely allowed

13 © 2015 Wendel, Rosen, Black & Dean LLP Toward Liquor Control – Rationales • Ownership: “The ‘tied house’ system had al the vice of absentee ownership. The manufacturer knew nothing and cared nothing about the community. All he wanted was increased sales. He saw none of the abuses, and as a non-resident he was beyond local social influence.” • Trade Regulation: “There are many devices used by brewers and distillers to achieve the same end, such as furnishing of bars, electric signs, refrigerating equipment, the extension of credit, the payment of rebates, the furnishing of warranty bonds when required to guarantee the fulfillment of license conditions and of bail bonds when the dealer is haled into court. A license law should endeavor to prohibit all such relations between the manufacturer and the retailer, difficult as this may be.”

-- as quoted by Marc Sorini, 2013 presentation about “Toward Liquor Control”

14 © 2015 Wendel, Rosen, Black & Dean LLP Map of License/Control States (control states are in blue) Iowa Maine Oregon Michigan New Hampshire Idaho Ohio Vermont Montana Pennsylvania Wyoming W. Virginia Utah Maryland North Carolina

Alabama Mississippi

15 © 2015 Wendel, Rosen, Black & Dean LLP Development of Three Tier System • States that were not full “control” states, created (mostly) mandatory middle tier of wholesalers to separate producers from retailers • 1940s-1950s: interstate highway system, technology advances, television, national retail chains

16 © 2015 Wendel, Rosen, Black & Dean LLP California Tied House Law • 1932 - Proposition 2 gave State of California exclusive right to license or regulate alcohol in state; Original alcohol regulatory “tied house” laws passed in 1935 - Forbade tied house • Alcohol Beverage Control Act moved into Business & Professions Code in 1953, still on the books - Original law 9 sections and 3 pages; by 2005, 40 sections and 32 pages; current law, about 1/3 prohibitions and 2/3 exceptions • 1955 - Department of Alcoholic Beverage Control (ABC ) - Proposition 3 passed in 1954, amending CA Constitution (Article XX, Section 20) - Corruption in Board of Equalization, Prop. 3 established the Department of Alcoholic Beverage Control

17 © 2015 Wendel, Rosen, Black & Dean LLP CA Business & Professions Code Section 25550 • “No manufacturer, winegrower, manufacturer’s agent, rectifier, California winegrower’s agent, distiller, bottler, importer, or wholesaler, or any officer, director, or agent of any such persons shall: - 1) hold the ownership, directly or indirectly, of any interest in any on-sale license.” - 2) furnish, give, or lend any money or other thing of value, directly or indirectly, to . . . Any person engaged in operating, owning or maintaining any on-sale premises where alcoholic beverages are sold . . • Same prohibition for off-sale license (B&P Code 25502) • Two Tiers in CA

18 © 2015 Wendel, Rosen, Black & Dean LLP California: Four policy reasons for Tied House Laws • Orderly Market. Promote the state's interest in an orderly market • Antitrust. Prohibit the vertical integration and dominance by a single producer in the market place • Fair Trade & Marketing Practices. Prohibit commercial bribery and to protect the public from predatory marketing practices; and • Temperance. Discourage and/or prevent the intemperate use of alcoholic beverages.

19 © 2015 Wendel, Rosen, Black & Dean LLP 1960s-1970s • 1965 - Fritz Maytag buys Anchor Brewing • 1960s-1970s – Consolidation of national and regional breweries • 1971 – First state beer “franchise” law (Mass.); CA a “partial” franchise state • 1971 – CA Beer Wholesalers Assn. v ABC • 1976 – New Albion Brewing • 1978 – Federal homebrewing law passed • 1979 – Sierra Nevada Brewing

20 © 2015 Wendel, Rosen, Black & Dean LLP Homebrewing • Left off Federal Register in 1933 • Federal law in 1978 (H.R. 1337), effective in 1979, no longer prohibited home brewing • Sponsored by Senator Alan Cranston (D-CA) • Limit of 200 gallons per household per year, or 100 gallons if only one Sen. Alan Cranston adult resides in such household • For personal or family use, not for sale, in a “household” (CA Bus. &Prof. Code § 23356.2)

21 © 2015 Wendel, Rosen, Black & Dean LLP Brewpub Law: AB 3610 • AB 3610 - Assemblyman Tom Bates - Passed1982, enacted 1983 • Allowed brewery to sell beer and wine on premises directly to consumers if brewery had a bona fide eating establishment.

22 © 2015 Wendel, Rosen, Black & Dean LLP AB 3610 Developments • Mendocino Brewing (1983) (2nd) • Buffalo Bill’s (1984) (3rd) • Triple Rock (1986) (5th) • Today over 500+ breweries and brewpubs in California

23 © 2015 Wendel, Rosen, Black & Dean LLP Type 23 License: Small Beer Manufacturer • 1953: Sell your beer to licensee (wholesaler or retailer) • 1978: Sell your beer for consumption on premises (taproom) • 1983: Sell beer and wine, including other’s beer and wine, for consumption on premises if you have an on- premises restaurant (AB 3610)(modern brewpub) • 1988: Can get off-premises retail beer and wine license (Type 20 license), so long as others’ beer and wine is purchased from a licensed distributor • 1992: Sell own beer for consumption off premises (growlers) • 2015: Sell beer and wine for customer’s private event held at brewery (others’ beer/wine must be purchased from wholesaler)

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26 © 2015 Wendel, Rosen, Black & Dean LLP California Tied House Law – “Exceptions “ • Breweries can self-distribute • Breweries can get wholesaler license (beer and wine) • Bus. & Prof. Code 25503.28 (1994) - small brewer (Type 23) or its owners, officer, director, employee or agent, can own or have an interest in up to 6 retail on-sale licensees - actually the law states that owner of no more than 6 on-sale (retail) licenses can own a Type 23 license, and must purchase alcohol from wholesaler or winegrower, Wolfgang Puck except as to beer brewed on premises - became operative in 1998

27 © 2015 Wendel, Rosen, Black & Dean LLP Type 75 License “On-Sale Brewpub-Restaurant” • Bus. & Prof. Code 23396.3 (1996) - created the Type 75 “brewpub- restaurant” license - a retail license that allows the licensee to brew up to 5,000 barrels of beer, minimum of 100 - AB 684 sponsored by a retail chain (CA Café Restaurants) supported by California Restaurant Association; opposed by CCBA - can sell spirits too - confusing - fee is much higher than Type 23, but can be cheaper than other retail license

28 © 2015 Wendel, Rosen, Black & Dean LLP Internet & Social Media • Bus. & Prof. Code Sections 25502.1 and 25502.2 • Passed in 1999, effective 2000; sponsored by Assemblyman Chesbro • Allowed manufacturers to list retailers that sold their products in response to a direct inquiry from a consumer by phone, mail, or electronic means or in person; this was no longer a “thing of value” • Amended in 2015 to remove the requirement for a “direct inquiry” from a consumer, so it now effectively allows a brewery to identify retailers in a social media post, subject to certain conditions

29 © 2015 Wendel, Rosen, Black & Dean LLP Tied House Laws Future • Ownership – not bad • Trade Regulation – confusing, but law evolving; adopt federal standard of inducement to exclude? • Competition - Distributors help small breweries reach other markets - Franchise laws can harm small breweries, but CA franchise law not as severe - Issue is consolidation of distributors and larger breweries ownership or control of distributors; need an independent and numerous system of distributors • Alcohol Consumption - Overall beer consumption is flat, but craft growing - Fewer alcohol related deaths and accidents

30 © 2015 Wendel, Rosen, Black & Dean LLP Tied House Law and Three-Tier Future • Brewers Association. “State laws should support an independent distribution tier that is unencumbered by undue influence, ownership or control by the largest brewers and ensures access to market for all brewers. For small brewers, the ability to be licensed as a distributor is often an essential element that serves to provide them access to market and increase consumer choice.”

Eugene M. Pak [email protected]

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