ARTICLE

Published in Vineyard & Winery Management - Jan/Feb, 2003

Winery regulation isn't just about what happens inside the four walls of your winery. The wine industry's "Big Brother" regulatory agencies are always watching vintners in the marketplace, to make sure that the marketing department's latest inspiration hasn't lured the sales department to step over the bounds of legality. In recent years, regulatory scrutiny of this type has been on the rise.

Legality in this context is defined by tied house laws, which are found in every jurisdiction in America. We have spoken about tied house laws in this column before. Those laws are designed to strictly maintain the independence of the retail tier from any undue influence by suppliers or wholesalers. First enacted at the end of Prohibition, tied house legislation aimed to prevent the return of aggressive sales practices, common at supplier-owned retail outlets prior to Prohibition, which were thought to encourage intemperance. Tied house laws attempt to accomplish this goal by not only restricting ownership interests between the tiers, but also by generally prohibiting the giving of "things of value" to retailers by suppliers.

There is no hard and fast definition of "things of value," but as you will soon see, this simple phrase covers a multiple of "sins," from giving away obvious valuables such as free goods or supplies, to offering more subtle benefits such as consumer referrals. We can't possibly cover all variations here (because your marketers are still thinking up new ones!). Rather, we've chosen a few examples which illustrate principles that can guide you in planning your promotions and help you know when you'd better get an expert opinion before proceeding.

We're not naive enough to think that the compliance person is frequently going to win a tug of war against the marketing director. They're in two very different "weight classes"! However, even when creativity prevails over caution—as it often should in a dynamic marketplace—the compliance department should at least advise management, during the planning stages, of the realistic risks involved.

If it's not specifically allowed, it's probably prohibited

In most jurisdictions, the ban on giving things of value is so complete and absolute that, unless there is a specific statutory exception allowing your latest marketing ploy, what you want to do is likely to be prohibited. For example, California has a specific exception which allows a winery to serve food and wine to retailers when they are visiting the winery. Without that exception, wineries would be legally required to send retail proprietors and their employees home hungry.

The activities which are allowed are very specifically spelled out as exceptions to the blanket ban against giving things of value. Like holding a winning lottery ticket, if the specifics of your promotion match the specifics of the legal exception, you win. But proceed with caution: If you change one small aspect of your plan, it's like changing one number in the lottery. Your ticket could become worthless! For example, California wineries may provide retailers with wine lists and table tents costing the winery less $25 per unit; however, if the retailer has already paid for them, the winery may NOT reimburse the retailer for those expenses. Talk about picky!

Freebies are not allowed

Free goods or gifts are the most basic example of giving "things of value." Adding a little extra wine to an order, without charge, is an eternal desire of retailers and a perennial motivation of marketers. The California ABC's Rule 106 expresses the tied house laws' universal response to this universal urge: "No licensee shall, directly or indirectly, give any premium, gift, or free goods, or other things of value in connection with the ... sale and distribution of alcoholic beverages."

"Sale and distribution" is not limited to transactions with the retail tier. California wineries are not only prohibited from giving things of value to retailers; any promotion offering something "free" to a consumer is also forbidden. However, while it is illegal to run this promotion: "Get a free corkscrew with the purchase of a case of wine," it is legal to make the identical offer if you explain it as follows: "A corkscrew is included in the price when you purchase a case of wine." This semantic change is actually a true description of how the winery is financing the offer, and is therefore allowed.

Naming names

Although less tangible, anything a supplier does that draws attention to a specific retailer is considered a "thing of value." For example, a supplier-sponsored contest that required consumers to obtain entry forms at specific retail locations, and distributed the prizes at a retail premises, was found to be illegal because it attracted customers to participating retailers.

Likewise, although it seems so innocent, regulators can consider simply informing consumers where they can find your wine sold at retail to be a "thing of value." That was the case in California, until finally a law in 1999 was enacted that allowed wineries to provide the names of off-sale retailers to consumers, including listing off-sale retailers on the winery's web site. However, of all tied house exceptions, the statutory exception in Section 25502.1 is fairly narrow in what it allows. It specifies that all referrals must list multiple retailers, that name, address, phone and web site address must be the ONLY reference made to a retailer, and that the retail price of the wine cannot be listed. Also, the listings must be produced and paid for by the winery.

Note to California wineries: This exception covers disclosing your California retailers only. If an out of state consumer asks what retailer in his area carries your wine, you should refer him or her to your wholesaler in their area. The wholesaler can provide further information on local retailers, in accordance with what is allowed in that jurisdiction.

Tastings

Donating wine for tastings at retail premises is consider a prohibited "thing of value" in some states. In California, if an on-sale retailer wishes to conduct a tasting, he must purchase the wine and charge for the tastes. (Off-sale retailers may not provide tastes in California.) Oregon law, however, does allow wineries to provide wine at no charge and conduct tastings at both on- and off-sale retail premises. Again, Oregon's tied house exception prescribes specific restrictions on advertising retailer's tastings and on how frequently such tastings may occur.

Wineries in California are allowed to donate wine for fundraising events sponsored by non-profit organizations, even if the non-profit holds a temporary retail license. However, wineries should be careful not to donate wine for events where the sponsor has hired a licensed caterer to serve at the event. Your winery's donation to such an event would be considered to be a gift of free wine to the caterer in charge of the event. In California several years ago, a winery was fined $10,000 in this exact situation. (In California, $10,000 is the minimum fine for tied house violations by suppliers.)

Samples and gifts

Okay, so free goods are not allowed, but is there a legal way around that prohibition? If a semantic change can help a winery give a corkscrew to a consumer, can sampling or gift-giving help a winery give free goods to a retailer? The answer in both cases is no.

Sampling a retailer beyond the legal limits for samples is a prohibited "thing of value." In California, samples may be given only to licensees who have not previously purchased the product, and no more than one liter of bottled wine may be given as a sample. In addition, all samples must be labeled with the words "Sample. Not for Sale" in letters at least 1/4" in height. Compliance is subject to audit: California regulations require records to be kept to prove that excessive samples are not being given. The California ABC Business Practice Unit advises that excessive sampling and inadequate records of sampling are two of the most common violations found at wineries.

Gifts of wine are also strictly regulated. Gifts may be made only as long as they are not given "in connection with the sale of wine." Be careful how you interpret this proviso! Anything given to a customer or potential customer could fall into this broad category. The California ABC allows suppliers to give gifts to vendors and a few very best customers under this definition. But giving a free bottle of wine to all your retail accounts would most certainly be a violation.

Credit to retailers

Another "thing of value" is excessive credit. Because prior to Prohibition suppliers used the extension of large lines of credit to exercise control over retailers, virtually every state has adopted detailed regulations governing credit to retailers. These regulations normally require the supplier to put the retailer on COD terms if the retailer does not pay invoices within a specified time.

Third party promotions: does an unlicensed middleman make it legal?

Up to this point we have touched upon some basic promotion tools, for which specific exceptions to the general prohibition on giving things of value have been made. You have probably noticed that a lot of the new and original things your marketing department would like to do are not on the list. Exceptions have been created only for promotional techniques that are well-recognized industry practices. The latest competitive advantage brainstorm is definitely not covered! Therefore, the name of the marketing game is figuring out ways to fit new ideas into established exceptions.

Since that can't always be done, creative marketers have recently devised an ingenious way to make a bold end run around the entire regulatory scheme. The strategy centers on the use of independent, unlicensed promotional companies to promote products in a retailer's premises or in conjunction with a retailer.

While the third party promotion company may be an independent and legitimate business and may suggest a promotion that is otherwise entirely legal, wineries need to still consider whether the retailer involved may be indirectly receiving a prohibited "thing of value" from the winery. The mere fact that third party is handling the promotion and accepting your payment does not necessarily protect your winery from a tied house violation. Matthew Botting, the chief counsel of the California ABC, warns, "If your can't do it yourself, you can't find someone else to do it for you."

The Wally's Catalog.

A number of California wineries found this out the hard way, when they purchased ads to appear in a holiday catalog for Wally's, a large southern California retailer. The wineries were contacted by the catalog printer. Ads were purchased directly from the printer, not the retailer. The wineries claimed that this was a straightforward purchase of advertising in a catalog sent to 125,000 consumers. But the ABC said that it was a tied house violation, and fined each winery $10,000.

The wineries appealed the ABC's decision and won the first round, but the Court of Appeal upheld the ABC's contention that a winery's payment for advertising in the exclusive catalog of single retailer was furnishing a "thing of value" to the retailer, in violation of the tied house laws. The mere fact that the third party took the money did not insulate the winery from the violation, since the money was used to pay for costs of a retailer's catalog, reducing what the retailer had to pay.

Chevy's events.

Another recent enforcement action by the California ABC shows the risks of making payments to third party promotion companies who are working in conjunction with retailers. Chevy's Mexican Restaurants hired a third party sports promotion company to organize its Fresh Mex Runs and Bathtub Regattas. According to the ABC, Chevy's provided the promotion company a list of vendors and suppliers to be contacted for sponsorships. The promotion company then sold suppliers the rights to place their logos on entry forms and banners which appeared in Chevy's restaurants. Ultimately, these payments by the suppliers defrayed the costs of the event, which Chevy's would otherwise have borne. A thing of value? While there is no final decision in this matter at the time this was written, the ABC is pursuing disciplinary proceedings against the suppliers and Chevy's.

Unfortunately, while each supplier involved in an illegal third party promotion stands to be fined a minimum of $10,000, California law limits to only $3,000 the fine paid by retailers for tied house violations. Think about it: a retailer risks relatively little when proposing a mutual promotional scheme to its suppliers. The suppliers, on the other hand, face much higher fines. Is the potential benefit worth that kind of risk?

Other states besides California are currently taking a hard look at third party promotions. The Illinois Liquor Control Commission recently announced that it has an "active and ongoing investigation" into third party promotion companies, and it is now requiring licensed retailers and suppliers who participate in such arrangements to provide an affidavit that the third party promotion company is truly independent.

The tug of war continues

Marketers who feel too limited by run-of-the mill marketing approaches will naturally try to stretch the limits of allowed methods to accomplish their non-allowed purposes. Regulators have become so sensitive to the possibility of tied house abuses that they are beginning to scrutinize practices that have long been considered legal. For example, regulators are now questioning whether "scan backs" are being handled properly, or whether the resulting rebates or credits are being used to make improper payments to retailers. Also, now that retailers are collecting and selling information on their customers' demographics and buying habits, regulators are confronting the question of whether sales of this information to suppliers may be used to conceal illegal payoffs and violations of tied house laws.

In the competitive marketplace, suppliers and retailers will always seek the most creative ways to increase their sales. Cooperation between trading partners makes sense in every other industry, but in our highly regulated business, both participants risk disciplinary actions—if the cooperation is successful in benefiting the businesses! Before embarking on a new promotional program—especially one involving a third party promotion company—it's a good idea to get advice from a regulatory expert, so you can at least understand the risks involved.