Background:

In 2008 the Legislature established a Joint Select Committee on Beer and Wine Regulation (Select Committee) to review the laws relating to the manufacturer, distribution, and sale of beer and wine. (2ESSCR 8407). The Select Committee met during the 2008 interim and produced a final report with recommendations.

Tied House Law.

The tied house law prohibits certain relationships between the manufacture and distributor tiers of the liquor industry and the retailer tier. Nearly all states and the federal government have some form of tied house law. The laws were intended to prevent inappropriate or coercive business practices among the tiers of the liquor industry.

Financial interest. The financial interest part of the tied house law prohibits a manufacturer, importer, distributor, or authorized representative, or person financially interested, directly or indirectly, in such a business, from having any direct or indirect financial interest in a licensed retailer. In addition, a manufacturer, importer, distributor, or authorized representative may not own any of the property on which a licensed retailer conducts business, and may not hold a retail license or sell at retail.

A number of exceptions have been enacted. Wineries and breweries may sell at retail on their premises. A brewery may hold up to two licenses for a restaurant and/or tavern on its premises or at separate locations. A nonprofit association or a wine industry association with an officer, director, owner, or employee of a winery on its board of directors may hold a special occasion license. Other exceptions have been enacted.

"Moneys' worth." The "moneys' worth" part of the tied house law prohibits a manufacturer, importer, distributor, or authorized representative from advancing to a licensed retailer, and a retailer from receiving, moneys or moneys' worth. Exceptions include the following:

Manufacturers, distributors, and importers may provide display and stocking services, price case goods, and perform other normal business services for retailers.
Wineries may provide certain personal services at spirits, beer, and wine restaurants; wine and/or beer restaurants; and specialty wine shops.
Wineries and breweries and retailers may provide information about and link to each other on their websites.
Domestic wineries and retailers may produce, jointly or with regional, state, or local wine industry associations, brochures and materials promoting tourism which contain information about retailers and wineries and their products.
Manufacturers, distributors, and importers may enter arrangements with sports/entertainment facility licensees or affiliated businesses for brand advertising and promotion of events.
Manufacturers, distributors, and importers may provide point of sale materials and brand signs to retailers.
Manufacturers, distributors, and importers may provide advertising and pouring of beer or wine at tasting or judging events.

Pricing.

"Post and hold." It is unlawful for a beer or wine manufacturer, importer, or distributor to modify prices without notifying and obtaining Liquor Control Board approval. A statute states that beer and wine suppliers and distributors must post the prices at which beer and wine are sold to distributors and retailers. Until recently, a rule required suppliers and distributors to adhere to posted prices for at least 30 days. These provisions were known as the "post and hold" requirement. In 2008 the "post and hold" requirements were struck down by the Ninth Circuit Court of Appeals in the Costco v. Hoen litigation.

Minimum mark-up. State law requires beer and wine manufacturers and distributors to mark-up the price of their product to a distributor or retailer, as the case may be, by at least 10 percent above the acquisition/production cost.

Summary of Bill:

Tied House Law.

The tied house law is repealed and new provisions adopted. In general, financial interests between industry members and retailers are permitted. Also, industry members generally continue to be prohibited from advancing, and retailers continue to be prohibited from accepting, moneys' worth. The exceptions to the moneys' worth prohibition are retained with some changes, and an additional exception for branded promotional items is added. The provisions apply to industry members and retailers.

Intent. Legislative recognition is made that the three-tier system is a valuable system for the distribution of beer and wine. The Legislature further recognizes that the historical total prohibition on ownership in different tiers as well as the historical restriction on financial incentives and business relationships between tiers is unduly restrictive. The Legislature finds that the modifications adopted are appropriate, as long as the modifications do not impermissibly interfere with the goals of: (1) orderly marketing of alcohol; (2) encouraging moderation; (3) protecting the public interest and advancing public safety by preventing consumption by minors and other abusive consumption; and (4) promoting the efficient collection of taxes.

Definitions. Definitions are added, including the following:

An "industry member" is a manufacturer, producer, supplier, importer, wholesaler, distributor, authorized representative, certificate of approval holder (out-of-state manufacturer), warehouse, and any affiliates, subsidiaries, officers, directors, partners, agents, employees, and representatives of any industry member.

"Undue influence over the purchasing, marketing, or sales decisions of one retailer or industry member over another industry member or retailer" means any agreement or other business practices or arrangements which result directly or indirectly in circumstances including:

a retailer on an involuntary basis purchasing less than it would have of another industry member's product;
purchases made by a retailer or industry member as a prerequisite for purchase of other items;
a retailer purchasing a specific or minimum quantity or type of a product from an industry member;
an industry member requiring a retailer to take and dispose of a certain product type or quota of the industry member's products;
a retailer having a continuing obligation to purchase or otherwise promote or display an industry member's product;
an industry member having a continuing obligation to sell a product to a retailer;
a retailer or an industry member having a commitment not to terminate its relationship with the other party with respect to sale and purchase of a particular product;
an industry member or retailer being involved in each other's day-to-day operations in a manner that violates the provisions; and
discriminatory pricing practices prohibited by law or other practices that are discriminatory if the product is not offered to all retailers in the local market on the same terms.

Financial interest. It is lawful for an industry member to have a direct or indirect financial interest in a retailer unless the interest has or will result in undue influence over the retailer's purchasing decisions and/or over the industry member's marketing or sales decisions ("undue influence") or has or will result in an adverse impact on public health and safety.

A complaint process is established. Any person may file a complaint with the Liquor Control Board (Board) asserting undue influence or an adverse impact on public health or safety. The Board may investigate and issue an administrative violation notice.

Any financial interest allowed as of the effective date of the act is presumed lawful.

Moneys' worth. Industry members may not advance to a retailer, and a retailer may not receive from an industry member, moneys' worth under any business practice or arrangement.

The personal services exception is broadened to allow wineries to provide personal services for special occasion licensees and private club licensees. The exception for jointly produced brochures and materials is no longer limited to domestic wineries. The exceptions apply to all industry members.

A new exception allows branded promotional items of nominal value. Items include trays, lighters, blotters, postcards, pencils, coasters, menu cards, meal checks, napkins, clocks, mugs, glasses, hats, visors, and other items of similar nominal value, whether a single item or in the aggregate. The items must be used exclusively by the retailer or the retailer's employees in a manner consistent with the liquor license, must bear imprinted matter of the industry member only, may not be provided to retail consumers, and may not be targeted to or appeal to youth.

A complaint process is established similar to the complaint process for financial interests. Any person may file a complaint with the Board asserting undue influence, an adverse impact on public health or safety, or that the provision of the items is otherwise inconsistent with the requirements for promotional items. The Board may investigate and issue an administrative violation notice.

Recordkeeping. Industry members and retailers must keep records for three years of things of value furnished or received and financial ownership interests.

Pricing.

Intent. Intent language in the pricing provisions is deleted.

Posting. The prohibition against modifying prices at the manufacturer or distributor level without notification to and approval of the Board is deleted. The requirement for beer and wine distributors to file a price posting with the Board is deleted.

Minimum mark-up. The requirement that suppliers mark up prices to distributors or retailers and that distributors mark-up prices to retailers by 10 percent of acquisition/production cost is removed. The prohibition against sales below cost is retained.

Rules Authority: The bill does not address the rule-making powers of an agency.