How Wine Sellers Risk Licenses by Using Third-Party Providers

2/2/2017 Articles
North Bay Business Journal

The innovative marketing and brand experiences offered by the online technology of third party providers (TPPs) can be an effective way for wineries and wine retailers to connect their product with their customers, expand markets and facilitate the sales of wine.  

Many TPPs are online marketing services that allow consumers to connect with a product by tapping an app on their phone. The customer simply clicks on the app, selects the product and enters the credit card information.

The TPP sends the information to the retailer who processes the payment and arranges for the delivery. Consumers get their products, retailers expand their markets, and the TPPs make money without having to produce, inventory or sell anything. What’s wrong with that?

The  concern of the regulators is that while wineries and retailers who sell alcohol are required to be licensed, TPPs are not.

When TPPs started proliferating, the California Department of Alcohol Beverage Control (ABC) issued an advisory in 2011 setting out clear guidelines for licensees. The guidelines concluded that the licensed seller (the winery or retailer) is ultimately responsible for the actions of the TPP and that it is therefore in the best interests of the licensee to make sure the service provider understands the rules before entering into a contract.

The consequences of not paying attention can be serious, including in some cases the filing of an accusation by the ABC against the licensee.

Coupons, rebates and delivery apps

There are now many ways in which new technologies are making sales and marketing very efficient. For example, the instant redeemable coupon (IRC) is the equivalent of cash given by the retailer to the consumer at the point of purchase, which is then processed through the retail account and ultimately paid by the supplier.

In effect, you could potentially walk into a store with just a handful of coupons and walk out with a bottle of wine. Of course the conditions on most coupons prohibit multiple coupon redemption on one particular product.

 In California, it is still lawful for suppliers to provide consumer IRCs through retailers for spirits, but as of January 1, 2017, it is unlawful for suppliers to provide them at the point of retail sale for beer and wine.

 “Where there’s a law that prohibits what has become normal supplier marketing activity, there’s often a work-around,” says John Hinman, alcohol regulation law specialist and founder of Hinman and Carmichael LLP.

In comes the manufacturer’s rebate, called a mail-in rebate (MIR), where the consumer may mail a coupon in to the manufacturer and receive a check for a particular amount by return mail. The MIR is still legal, but the IRC isn’t.

Now a technical service provider comes in and develops an app to instantly process the manufacturer’s mail-in rebate.

“This may or may not be legal,” says Hinman. “The developers making the apps may not necessarily understand the rules, nor care about them because they don’t have licenses at stake, but that fact that technology is being used to work around the system, and satisfy the spirit of the law because the money doesn’t go through the retailer, is an elegant solution to a vexing marketing problem.”

Watch how the money flows

TPPs are connectors. They can’t sell alcohol. They can’t make decisions about pricing.  What they can do is charge fees. They can, and do, often string together a set of fees that equate to full compensation for their services.

Many companies use Stripe, an internet commerce company, to transfer money. The app connects the payment by the consumer to the retailer’s Stripe account and the money goes right through to the seller. This is generally legal. It’s where the money stops that problems can arise.

Take Task Rabbit, for example, a website that provides people to carry out paid services for members. If you were to request the purchase and delivery of a bottle of wine to be picked up at a retailer, Task Rabbit would take your money, pay for the item at the retailer, and keep back some of the cash as their fee.

Here the money stops not at the retailer, which would be legal, but at Task Rabbit, the TPP. This “concierge system” is a common practice, and while the regulators may not be out there looking for violators, if someone complains, they may well pursue it.

How can the licensee protect itself?

Our firm and Hinman’s firm use a set of best practices with clients to make sure that when a winery or wine retailer contracts with a third party provider, the licensee has reviewed the contract for compliance and made sure the process is legal. Until TPPs are required to be licensed, it is prudent to have the TPP indemnify the licensee for any noncompliance on their part.

It is important for licensees to become educated and to educate their marketing people about the regulatory challenges they have to abide by to remain within the law. Resources include NCSLA, NABCA and the Wine Institute.

You can also encourage the Wine Institute to get a law passed that says that the Department of Alcoholic Beverage Control must issue declaratory rulings upon request. This would enable licensees to run their TPP programs past the regulators for advance approval, rather than moving forward with a program of questionable legality. Advance approval would provide licensees with a level of certainty before expending resources on TPP programs.

This article is intended for informational use only and is not to be construed as legal advice.  If you need legal advice, please consult with your counsel.

Katherine Philippakis is a partner with Farella Braun + Martel LLP and chairs the firm’s Wine Industry Practice Group. Farella is a law firm with offices in San Francisco and St. Helena that has a long history representing those involved in the California wine industry.  She works frequently with the firm of Hinman & Carmichael, of which John Hinman is a founding partner; Hinman & Carmichael is a boutique San Francisco firm that specializes in regulations related to the production, distribution and sale of alcoholic beverages. 

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