ARTICLE

Originally published in Vineyard & Winery Management - Mar/Apr, 2000

TIME magazine named everyone's favorite genius, Albert Einstein, as Person of the Century. Einstein turned science upside down nearly a hundred years ago with his General Theory of Relativity, claiming that virtually everything, including time, is relative. Although many of his conclusions — such as the hypothesis that objects get harder and harder to move, the faster we try to accelerate them — were extremely controversial, his theories have since been confirmed. And I think most of us have experienced the truth of at least some of them ourselves. Certainly, we can also testify that the faster we try to get anything done, the harder and more complicated everything gets!

Compliance is no exception to the General Theory of Relativity. Early in my career I learned, to my surprise, that very little if anything is black and white in government compliance. As Einstein would say, "It’s all relative." Because that’s so, answering compliance questions requires not just knowledge, but also judgment. Consulting with regulators is as much a process of diplomacy as inquiry, and making compliance decisions is often based more on risk management than on certainty. In a relative world, even science becomes something of an art.

So, what’s relative about compliance? And how do you guide your licensed business in a relative regulatory environment? Here, in honor of Albert Einstein, are my answers to these questions, in the form of the four Laws of Compliance Relativity.

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Compliance Relativity Law #1: The meaning of laws and regulations is relative to precedent and interpretation.

You would think that following the letter of the law would be a safe course. However, it is frequently very misleading to take a law on "face value." I have found countless examples of laws whose meaning is very different in practice than on paper. Here are some examples:

A California law explicitly allows a winery to operate a restaurant on or adjacent to its winery licensed premises without obtaining a separate retail license. However, the State ABC insists that the restaurant be operated at the winery, not next door, due to neighborhood impact concerns that ostensibly justify ABC’s deviation from the legislative language.

A Rhode Island regulation prohibits the issuance of a brewpub license to any company operating other brewpubs out of state, although the related laws say no such thing. (Thus far, the brewpub industry in that state is too young to have challenged this contradiction.) While it is quite unusual for a regulation to deviate so far from the underlying statutes, it is nearly impossible to understand how far any state carries its tied house restrictions without talking to the people who enforce them.

The prize for the most tangled web of interpretation coming from a single regulation must go to BATF’s regulation against "misleading" language on a label. This one restriction has spawned a wide variety of unwritten label approval policies, including all of BATF’s efforts to prohibit health claims on wine labels. Who would have guessed?

The only defense against the relativities of interpretation is to maintain open, mutually respectful relationships with experienced and knowledgeable regulators, and consult with them frequently.

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Compliance Relativity Law #2: The answers to compliance questions are relative to circumstances.

The answers to all compliance questions depend on the exact situation. For instance, take the question, "Can a California winery sell to consumers?" The answer is "Yes," if the sale takes place at the winery, but it is "No," if you are thinking of selling bottles at an off-site tasting event.

Compliance answers are so relative that regulators are invariably reluctant to answer general questions. Unless they clearly understand the specifics of your situation, they could easily give you incorrect information. Unfortunately, for the same reason, an answer that was correct when you asked for it could become incorrect if even an apparently minor detail of your plan changes.

The best defense against the relativities of circumstance-dependent laws is to be very specific when consulting a regulator or expert — and very careful to consult again when plans change.

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Compliance Relativity Law #3: The chances of "getting caught" are proportional to what’s at stake

There are many laws and regulations affecting the licensed beverage industry, and not all of them are enforced equally strictly. In general, laws relating to service of minors are high profile enforcement priorities, while violations of other requirements, such as the qualification of managers, may go unnoticed indefinitely. Investigators are so busy monitoring licensee activities that could negatively affect the community that they don’t have much attention for the "victimless crimes" of technical violations.

However, the importance of minor violations suddenly escalates without warning when a licensee needs either forgiveness or permission. You would need forgiveness when you are under investigation for another alleged violation. You would need permission when you are asking for a license, a renewal, a change in premises, or a variance of some kind.

In either case, the spotlight on your case gets much brighter, so things that would not otherwise have been scrutinized are now high profile. When you are accused of a violation, the discovery of other infractions, even minor ones, can be considered aggravating circumstances that indicate a general unwillingness to comply. You can end up with a stiffer penalty as a result.

When you are requesting an approval of some kind, the regulators will use your request as leverage to get you to correct any flaws in your operation and update anything out of date in your file. Unfortunately, although getting into compliance is generally not difficult, it can often be time-consuming — and when you are anxious for permission to exercise a new privilege or open a new location, you may not be able to afford the extra time.

When you are requesting an approval of some kind, the regulators will use your request as leverage to get you to correct any flaws in your operation and update anything out of date in your file. Unfortunately, although getting into compliance is generally not difficult, it can often be time-consuming — and when you are anxious for permission to exercise a new privilege or open a new location, you may not be able to afford the extra time.

This form of compliance relativity is particularly frustrating, because it can turn a executive’s world upside down. In the real world, there is generally room for a little slack; most people don’t ALWAYS drive below the speed limit, for example. It is the wise executive’s job to determine when the extra effort to perfectly comply is so costly or problematic as to justify the risk of cutting a regulatory corner or delaying full compliance until a later time. Unfortunately, a change in circumstance after such a decision has been reached can make a reasonable decision look devastating in retrospect. There are only two effective defenses against this kind of nasty surprise: (1) keep your compliance record squeaky clean, or (2) be proactive enough that when you see a need for forgiveness or permission coming, you put your house in order fast.

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Compliance Relativity Law #4: The oral answer is often different than the written answer.

The difficulty of getting a written answer to a compliance question reminds me of another law of modern physics: the Heisenberg Uncertainty Principle. This law tells physicists that they cannot accurately measure both the location and the velocity of a sub-atomic particle, because the very act of measurement changes one or both. The compliance version of this law says, "You cannot ask for a written copy of a liberal compliance answer without changing it."

A written answer to a compliance question can be a wonderful thing. The obvious reason to "get it in writing" is self-protective — you can use it to justify to colleagues or other regulators the course of action you took based on the written answer. Even if the answer is later reversed, the letter will protect you from criticism and even from legal consequences. The written answer is evidence of your good faith efforts to comply and the reasonableness of what you did.

Another good reason to get a written response is to discover any possible misunderstandings that were not evident during your conversation with the regulator. As I frequently remind my coworkers and clients, "The only thing harder than compliance is communication." Sometimes it is impossible to tell that the regulator and you were each thinking of something completely different when you spoke. If that was the case, you will almost always discover the problem when the written version arrives. Better to find out sooner than later, before you have acted upon the misunderstanding.

However, it can sometimes be very UNdesirable to get an answer in writing. That’s because many answers are relative — depending on how "official" the regulator needs to be. Regulators will often feel quite comfortable informally discussing enforcement priorities and pragmatic interpretations of requirements. But when you ask for that kind of response in writing, your desire for self-protection loses out to theirs!

For example, a regulator once told me quite frankly that compliance with a certain state law was hardly enforced in practice. But when I requested a letter interpreting the law, he turned me down, saying, "I don’t think you really want me to do that. If I write anything about this law, it will have to be very strict."

On another occasion, a regulator gave me some bad news: a law prohibiting a licensee in her jurisdiction from holding similar licenses in other states also applied to "sister" companies in the applicant’s ownership structure. This was the official position. However, when we discussed the "Catch 22" this represented for national retailers, she admitted, "just between us," that in practice they always ignored the affiliated company information when processing an application from a subsidiary of a chain retailer.

At times like those, you are far better off NOT getting an answer in writing. Your best bet is to make your own memo about the conversation, noting the date and the name of the person you spoke with. Such a memo is not as good a defense against a later challenge, but it’s better than your memory — and it’s far better than the different answer you’d get if you insisted on an answer in writing.

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Living with the Laws of Compliance Relativity

Fortunately, the laws of compliance relativity are a lot easier for non-scientists to understand than Einstein’s famous theory. Putting them to use doesn’t require any higher mathematics — just the willingness to continue learning, to exercise judgment, to treat regulators with respect and diplomacy, and to balance a diligent effort to comply with a few well chosen risks.