2018 Changes to the California Alcoholic Beverage Control Act

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Each year brings changes to the California Alcoholic Beverage Control Act, and 2018 is no exception.  Most of the changes for 2018 are quite esoteric, relating only to the provision of licenses in particular counties or venues, or allowing some additional rights to non-profit corporations who use temporary licenses for events.

However, a chief new feature of the ABC Act that will have state-wide impact is the Responsible Beverage Service (RBS) Training Program Act of 2017 (California Business and Professions Code § 25680 et seq.).  The RBS Act provides that the California ABC will develop a best-practices training program by 2020 that all on-premises servers of alcohol (and their managers) throughout the state will need to complete in order to be certified to serve alcohol.  Servers employed prior to July 1, 2021 must complete the program by August 31, 2021, and all servers hired after July 1, 2021 must complete the program within 60 days of being hired.  ABC advisories indicate that food servers, bartenders, cashiers, doormen, and bouncers all may be considered “servers” for purposes of the RBS Act.

The RBS law appears to encompass a wide manner of licensees that operate on premises – bars, restaurants, brewpubs, tasting rooms, clubs.  For non-profit special events/temporary licenses, the licensee is required to designate one certified server who must remain on site for the entire event.  Covered licensees are required to maintain records of their various certifications, and violators are subject to unspecified “disciplinary action.”

The 2018 ABC Act also permits for the first time beer manufacturers to provide free or discounted ground transportation rides for consumers (i.e. from the brewery taproom to local hotels, etc.) for purposes of public safety.  (California Business and Professions Code § 25600.)  This harmonizes the treatment of beer manufacturers with winegrowers and distillers.  The manufacturer cannot, however, make the transportation contingent on the purchase of an alcoholic beverage, and beer wholesalers cannot have any interest in the transportation arrangement.

In instances where small beer manufacturers (License Type 23) and winegrowers have adjacent production facilities, the 2018 revisions also permit a common-licensed area in which consumers can drink both wine and beer.  (California Business and Professions Code § 25607.)  This is a new exception to the general prohibition of anyone possessing alcoholic beverages on a manufacturer’s premises other than the types that manufacturer is licensed to produce.

Staying up to date on laws and regulations affecting the industry is vital to successfully protecting and growing alcoholic beverage businesses.  For assistance navigating beer-industry specific legal issues, contact Conkle, Kremer & Engel.

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Big Beer, Craft Beer, and Trademark Infringement: Harm to Premium Brands

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As the craft beer market continues to expand in popularity and threaten the market share of older “macrobrewery” giants like Molson Coors and Anheuser Busch, courts have seen increased legal disputes in the beer industry as brands fight for both their independence and the attention of consumers.  Most recently, Molson Coors has been sued in federal court in San Diego by Stone Brewing Co., one of the oldest and largest independent craft brewers in the United States.  In its complaint, Stone Brewing claims that Coors is infringing the “STONE” trademark by rebranding Coors’ sub-premium, low cost “Keystone” brand as “KeySTONE,” with a particular emphasis on the single word “STONE” in packaging and marketing materials.  Because of this, Stone Brewing alleges, Coors is sowing consumer confusion between the two brands.

Keystone Rebranding Comparison from Stone Complaint

Unless there is a swift settlement, one can assume that Stone Brewing will make good on the threat in its complaint that it will move for a preliminary injunction in order to stop the sale of Coors’ “KeySTONE” branded products during the pendency of the lawsuit.  A motion for a preliminary injunction is often a critical juncture in such trademark infringement lawsuits, and Stone Brewing will need to show that it will be “irreparably harmed” if the injunction is not granted.  This showing has in recent years become more difficult, as courts no longer presume irreparable harm when the plaintiff shows that consumers are likely to be confused by trademark infringement, but rather require an additional showing of likely irreparable harm.  “Irreparable harm” (also known as “irreparable injury”) generally means injuries that cannot be readily compensated by money damages, and since money damages are usually available for trademark infringement this standard presents special hurdles for infringement plaintiffs that can be difficult to overcome early in a case.

To show irreparable harm, one argument Stone Brewing will likely make is that its “premium brand” is being tarnished by confusion with Coors’ “value brand.”  This argument is presaged throughout Stone Brewing’s complaint (referring to Keystone’s beers as “watered down” and “fizzy yellow offerings,” as opposed to Stone Brewing’s “bold” and “artisanal” products).  The argument, which has been judicially adopted in relatively few cases, is essentially that the premium or niche brand is irreparably harmed by the association with the value, mass-market brand, which usually is of lesser quality.

Conkle, Kremer & Engel, which has experience in both trademark litigation and issues specific to beer production, distribution, and marketing, has succeeded in making this premium-vs.-value argument in federal courts in California.  For example, in Moroccanoil, Inc. v. Zotos International, Inc. (230 F. Supp. 3d 1161 (USDC C.D. Cal. 2017)), a 2017 trademark infringement case with similarities to the dispute between Coors and Stone Brewing, CK&E represented the manufacturer of Moroccanoil Treatment, a luxury oil-infused hair care product sold in distinctive packaging.  The defendant Zotos, part of a large personal care products conglomerate, had created a low-cost “value” hair oil product called “Majestic Oil” that, in addition to its similar name, used packaging that was a close likeness of Moroccanoil’s trade dress.

CK&E, in its successful motion for preliminary injunction, argued that sales of low-cost “value” Majestic Oil products would erode Moroccanoil’s carefully-built premium image.  The presentation included evidence establishing that once a product is no longer perceived by consumers as “premium,” it is difficult or even impossible for the seller to regain that perception.  The court agreed with CK&E and Moroccanoil, finding a likelihood of irreparable harm and granting a preliminary injunction against further sale of the Majestic Oil products.

Preliminary injunctions can be dramatic turning points in infringement cases.  In Moroccanoil’s case, the court’s preliminary injunction prevented Zotos from any further sales, advertisement or distribution of its infringing products, and required Zotos to recall all of its infringing products already in the market.  As could be predicted, the case settled swiftly thereafter and Zotos made permanent substantial changes to its product name and packaging to avoid infringing Moroccanoil’s intellectual property rights.

Click here to learn more about CK&E’s Moroccanoil v. Zotos matter or contact CK&E attorneys who work on beer industry matters, such as the brand protection that can make or break participants in the crowded craft beer market, including John Conkle, Evan Pitchford and Zachary Page.

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The “Fourth Tier” of Beer: Internet Sales and Direct-to-Consumer Delivery

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In previous posts, we discussed the background of the three-tier system of alcohol sales in the United States – manufacturer (or importer), distributor, and retailer.  For the beer consumer, historically this has meant purchasing beer immediately, in person, at a restaurant, bar or liquor store.  Each state has its own licensing requirements and operational rules for such brick-and-mortar sites selling beer.  But with the ubiquity and borderless nature of the internet, what some call the “fourth tier” of craft beer sales is rapidly taking root.  Following models previously used in the wine industry, several beer delivery websites and cell phone apps are now available, with the proprietors often providing “services” to otherwise licensed beer sellers (i.e. not taking legal possession of or selling the products themselves, but instead acting as service-providers to the licensed sellers).  For regional brands without an expansive distribution footprint, and for the craft beer lovers who seek out those regional beers, this is a promising development.

States have begun to reshape their policies and laws to accommodate this relatively new direct-to-consumer beer delivery conduit.  As can be expected in this early developmental stage, there is a wide range of permitted activity among the different states.  The most permissive regulations in a small number of states allow suppliers, both in-state and out-of-state, to make unlimited shipments for consumers’ personal use.  Other states require suppliers to obtain a simple permit in order to ship beer direct to consumers.  Certain states only permit direct-to-consumer shipments from in-state breweries, along with outbound shipments to out-of-state consumers.  Some states allow outbound shipments to other states but no in-state shipments whatsoever.  Several states prohibit direct-to-consumer shipments of beer altogether.  Perhaps needless to say, potential international sales present an entirely different set of complications.

In California, beer (not wine, which is treated differently) can be sold directly to consumers via the internet with certain restrictions.  These restrictions are not directed at the internet as a sales medium per se – instead, the restrictions stem more from the historical requirements placed on importation and off-premises alcohol retailers.  (See, e.g., California Business and Professions Code §§ 23661 and 23671.)  With respect to retail sales, the seller must already be licensed to sell beer in California by “traditional” means.  First, the seller must have a licensed brick-and-mortar location in California.  Second, the seller must keep their inventory at that particular location (i.e. no shipments directly from the seller’s suppliers).  Third, the seller has to sell (or at least be able to sell) products at that location itself and not solely online – in other words, the seller must have a real in-person sales facility, not just a warehouse to service internet sales.  (See 4 California Code of Regulations § 27.)  With respect to sales directly from California-based beer manufacturers, the California ABC has determined that “as a matter of policy,” beer manufacturers are permitted to make online sales of beer to consumers.  (See Form ABC-409.)  It remains to be seen, however, if California will continue to allow beer delivery websites and apps to operate under the auspices of “services” or if additional requirements will be imposed on such providers.  (It’s also worth noting that the U.S. Postal Service will not transport alcohol – that must be done through a private carrier.)

It is easy to see that anyone wishing to distribute beer by online sales, especially across state lines, can quickly put themselves at risk of regulatory or legal issues.  If you are a brewery, retailer, or beer delivery service that wishes to engage in internet or other direct-to-consumer sales, it is advisable to contact qualified counsel for assistance before beginning or expanding such service.

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Relationships Between Producers, Wholesalers, and Retailers: Beer Distribution and Franchise Laws in California (Part 2)

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In a recent blog post, we discussed beer self-distribution rules in California.  While the self-distribution laws in California are generally quite accommodating, and self-distribution works for a start-up craft brewery with limited funds, on a practical level it can only serve a relatively small geographical area.  As a brand increases in local popularity and the beer producer wants to expand its footprint and accelerate its competition with brands and beers outside its home region, usually the producer will choose to enter into a distribution agreement with an established third-party wholesaler.  When a beer producer chooses to contract with a distributor, then it is important to be aware of the applicable beer franchise laws (which also vary from state to state).  Beer franchise laws control the relationship between the brewer and the wholesaler and will generally trump contract terms that do not comport with such laws.

Beer franchise laws stem from a decades-old period when relatively few national-level breweries (like Budweiser and Miller) were able to exert significant power over the beer distribution industry, which at the time was chiefly comprised of numerous small mom-and-pop outlets.  As an example, the macrobreweries would impose stringent requirements for their distributors that necessitated significant investment (such as construction and maintenance of a sophisticated refrigerated warehouse), but there was nothing to protect the distributor when the macrobreweries decided to switch to a competitor, leaving the distributors with little recourse to recoup their investment.  To protect the distributors from this predicament, strong state franchise laws were enacted that made it difficult for the breweries to terminate contracts with distributors.

At their most draconian, beer franchise laws can marry a brewer to a distributor even if the brewer only sends a small initial amount of beer to the distributor for resale without any written agreement whatsoever.  In some cases distributors can even have the power to transfer the distribution rights to successors-in-interest without the brewer’s consent.  In many states, a brewer can only cancel a distribution contract for “good cause,” which may not include failure to reach sales quotas.  Further, many states require a brewer, in order to break a distribution contract, to pay the wholesaler Fair Market Value (“FMV”) for the lost business.  Of course, these rules have shifted a significant share of power to the distributors.

As the franchise laws weren’t enacted with the microbrewing phenomenon in mind, they can make distribution difficult for craft brewers that don’t have the clout of a national macrobrew and who don’t impose stringent requirements on their distributors.  In certain situations, a small brand may feel that a distributor is paying attention to other more established brands and that it is not getting the benefit of its bargain with the distributor.  However, many beer franchise laws have been softened over the past several years, allowing for more competition in the wholesale market and giving fledgling breweries more choice and control over the terms of their third-party distribution.  For example, some states exempt breweries that produce less than certain annual volumes from the franchise laws.  Of course, exemptions like this mean that brewers need to be conscious of their plans to grow and potentially exceed those volume limitations, and consider how it will affect their distribution agreements.

California’s beer franchise laws are some of the most accommodating in the country, because California allows the distribution agreement itself to control most of the important terms and dealings between the brewer and the wholesaler.  In California, a brewer must enter into exclusive written territorial agreements with distributors that are filed with the ABC (Cal. Bus. & Prof. Code § 25000.5).  California’s franchise laws do not restrict brewers to only “good cause” terminations (though the distributors themselves may very well fight for some type of good-cause requirement in contract negotiations).  Further, a brewer can terminate a distribution agreement if the wholesaler fails to meet a “commercially reasonable” sales goal or quota (Cal. Bus. & Prof. Code § 25000.7), and many beer distribution agreements call for the distributor itself to come up with an annual business plan that establishes sales goals based on certain data.  Except in certain situations, a brewer does not need to pay FMV to terminate the relationship (though again, a distributor may insist on a termination payment as a contract term).  While a brewer is not automatically bound by contract to a purchaser or transferee of its distributor, the brewer cannot unreasonably withhold consent or deny approval of such a transfer without incurring certain charges (Cal. Bus. & Prof. Code § 25000.9).

In California, the parties must be attuned to several important issues in creating the agreement, such as territory, term, change in ownership and transfer rights, termination rights, terms of sale, commercially reasonable sales goals, post-termination provisions, intellectual property licensing and advertising issues, dispute resolution, and other rights and duties of the parties.  Such contract terms are just as important for a brewer as finding a distribution team that is the right “fit” for a growing brand.

Overall, it is no surprise that the states with the most friendly self-distribution and franchise laws are the states with the most active and diverse beer business communities.  For example, California now has around 900 active breweries, far more than any other state, adding over 500 breweries in the last two years alone.

Conkle, Kremer & Engel has experience representing both breweries and distributors.  If you are launching a brewery in California, looking to expand your brand’s sales through self-distribution or with a third-party distributor, or have found yourself in a distribution-related dispute, contact Conkle, Kremer & Engel for assistance with those and other beer industry-related issues.

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Producer, Wholesaler and Retailer Relationships: Beer Distribution and Franchise Laws in California (Part 1)

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For breweries and beer suppliers of any size, distribution is a significant issue, from the initial determination of whether to self-distribute or obtain third-party distribution to the decision to terminate a wholesaler.  As the beer industry is one of the most highly regulated in the United States and the laws on distribution procedures vary from state to state, there are many details and pitfalls that all parties engaged in beer distribution should be aware of when contemplating and doing business.  Two such sets of laws relate to self-distribution and what are called beer franchise laws (somewhat similar to but generally distinct from laws for franchises like McDonald’s restaurants or 7-Eleven convenience stores).  This blog entry will address the basics of brewery self-distribution in California, while a following entry will address California beer franchise laws.  (Future entries will discuss such issues in other jurisdictions and inter-jurisdictional issues.)

First, any discussion of beer distribution in the United States must begin with the repeal of prohibition and the states’ implementation of the “three-tier” system, which was discussed in a previous post.  The three-tier system generally requires beer producers to sell to wholesalers who in turn sell to retailers (comprised of both on-sale establishments like pubs and off-sale establishments like bottle shops).  The chief purpose of this layered approach is to limit beer producers’ control over and promotion of the retail sale of their products.  While this structure has its roots in the temperance movement, the three-tier system has had the effect in recent decades of allowing smaller craft breweries to flourish due to its inherent checks on monopolization.  However, as the number of beer brands proliferates, wholesalers and retailers cannot realistically be expected to carry all such brands, and self-distribution for many brands is the only effective way to bring product to market.

Fortunately, within the three-tier system, the states are permitted their own sets of rules.  While many states require the manufacturer, the wholesale, and the retailer to be completely independent of one another with no common ownership (and therefore permit no self-distribution), other states blur the three-tier system by allowing for retailers to buy beer directly from manufacturers, and some states allow for a beer manufacturer to own its own legally-distinct distribution company.  About half of states currently set an upper threshold on self-distribution (i.e. up to a certain annual barrel production level), with a smaller number allowing self-distribution regardless of capacity.

California is currently one of the more generous self-distribution states, allowing licensed California retailers to purchase alcoholic beverages for resale from licensed California beer wholesalers or manufacturers regardless of the production level.  (See, e.g., Cal. Bus. & Prof. Code §§ 23357, 23402, 23388.)  The California rules also permit the brewer (with the appropriate licenses and permits) to sell packaged beer from the brewery premises (including growler fills), to operate taprooms and brewpubs (with certain production requirements), and/or to sell at farmers markets (again, with several restrictions).  While these rules have their nuances, they allow breweries in California to establish their brand(s) and get their business off the ground without having to rely on third-party involvement.

Conkle, Kremer & Engel attorneys have experience representing both breweries and distributors.  If you are launching a brewery in California, looking to expand your brand’s sales through self-distribution or with a third-party distributor, or in a distribution-related dispute, contact Conkle, Kremer & Engel for assistance with those and other beer industry-related issues.

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