Legal Issues:



June 30, 2017


This legal update focuses on five key cases impacting the beverage alcohol industry.


1. Retail Digital Network LLC v. Ramona Prieto, as Acting Director of Cal. ABC


2. Cadena Comercial USA Corp. D/B/A OXXO v. Texas ABC


3. Lebamoff Enterprises, Inc. et al v. Rauner et al.


4. Retail Services & Systems, Inc., d/b/a Total Wine & More v. South Carolina D.O.R.


5. Connecticut Fine Wine & Spirits, LLC v. Harris.


1.     Retail Digital Network LLC v. Ramona Prieto, Acting Director of California ABC - FIRST AMENDMENT V. 21ST AMENDMENT


RDN is a middleman involved in the advertising industry. RDN installs liquid crystal

displays, or LCDs, in retail stores, including those that sell alcohol beverages. The content displayed on RDN’s screens include advertisements. RDN enters into contracts with suppliers and service providers who want to advertise their products on the displays installed at these retail locations. RDN earns revenue from advertisers, which include alcohol beverage manufacturers and suppliers.


The company also enters into contracts with participating retailers for the right to install

its LCDs on the retailer’s premises. RDN incurs expense by paying each participating retailer “rent” in the form of a percentage of the advertising fees generated by the display in exchange for placing a display in the store.


RDN attempted to enter into contracts with alcohol beverage manufacturers to advertise

their brands on RDN’s displays in California, but the alcohol manufacturers have refused due to concerns that the advertising would violate Section 25503(f)–(h) of California’s Business and Professions Code. California Business and Professions Code Section 25503(f)–(h) forbids manufacturers and wholesalers of alcohol beverages from giving anything of value to retailers for advertising their alcoholic products.


Thus, for example, a liquor store owner in California can hang a Captain Morgan Rum sign in its store window, but Diageo cannot pay the retailer to do so, directly or through an agent.


Twenty-nine years ago, in Actmedia, Inc. v. Stroh, the U.S. Court of Appeals for the Ninth Circuit found this law to be consistent with the First Amendment. Applying the classic four-pronged test for evaluating commercial speech rights under Central Hudson Gas & Elec. Corp. v. P.S.C. of New York, the appellate court determined that the ABC law furthers California’s purposes both of limiting the ability of large alcohol beverage manufacturers and wholesalers to achieve vertical and horizontal integration by acquiring influence over the state’s retail outlets, and of promoting temperance. The Actmedia court ruled that tied-house restrictions on industry members’ advertising were permissible so long as the regulation was reasonably tailored to “prevent manufacturers and wholesalers from circumventing these other tied-house restrictions by claiming that the illegal payments they made to retailers were for ‘advertising.’”


In Retail Digital Network LLC v. Applesmith, the Ninth Circuit revisited California’s tied-house evil restriction on advertising to address whether Actmedia remains controlling in light of

intervening Supreme Court decisions such as Sorrell v. IMS Health, Inc., which RDN contends

have strengthened its commercial speech rights under the First Amendment.


After the three-judge panel issued its opinion, a majority of non-recused active judges voted to rehear this case en banc. The case was then briefed and argued before a panel of eleven judges of the U.S. Court of Appeals for the Ninth Circuit, including Chief Judge Thomas.


On June 14, 2017, the Ninth Circuit rendered its ruling. In a 10-1 decision authored by Judge Richard Paez, the federal appellate court affirmed the district court’s summary judgment in favor of the California Department of Alcoholic Beverage Control and upholding California’s tied-house evil law prohibiting alcohol beverage manufacturers and wholesalers from providing anything of value, directly or indirectly, to retailers in exchange for advertising their alcohol beverages.


 As we observed in Actmedia, Section 25503(h) addresses the California legislature’s specific “concern that advertising payments could be used to conceal illegal payoffs to alcoholic beverage retailers,” thereby undermining the triple-tiered distribution scheme. That concern “appears to have been widely held at the time of Section 25503(h)’s enactment. We concur that Section 25503(h) is sufficiently tailored to advance that interest. Section 25503(h) serves the important and narrowly tailored function of preventing manufacturers and wholesalers from exerting undue and undetectable influence over retailers.


Without such a provision, retailers and wholesalers could side-step the triple-tiered distribution scheme by concealing illicit payments under the guise of “advertising”

payments. Although RDN argues that the numerous exceptions to Section 25503(f)–(h) undermine its purpose. RDN fails to recognize that the exceptions do not apply to the vast majority of retailers, and they therefore have a minimal effect on the overall scheme. This stands in stark contrast to cases in which conflicting regulations have rendered the regulatory scheme “irrational,” or where the regulatory scheme is “so pierced by exemptions and inconsistencies” that it lacks “coherence,”






2.     Cadena Comercial USA Corp. D/B/A OXXO v. Texas ABC - DEFINING A “DIRECT OR INDIRECT INTEREST”


Cadena is a Texas corporation and wholly-owned subsidiary of FEMSA, a Mexican entity that used to be a brewer, along with owning a lot of other businesses, including the OXXO retail convenience store chain.


In 2010, FEMSA sold its brewing business to Heineken N.V. and Heineken Holding, N.V. (collectively, the Heineken Group) in exchange for more than 72 million shares of stock in Heineken N.V. and more than 43 million shares in Heineken Holding N.V.—a 20% combined interest in the Heineken Group. FEMSA’s holdings represented a minority, non-controlling interest in the Heineken business, but they did make FEMSA the largest shareholder in the Heineken Group except for the Heineken parent companies that own the controlling shares.


When FEMSA obtained its interest in the Heineken Group, it entered into a Corporate Governance Agreement that entitles FEMSA to appoint one of Heineken Holding N.V.’s five directors and two of ten members of the Supervisory Board of Heineken N.V. Again, FEMSA’s board members were in the minority, and exercised no control over the boards. Moreover, the parties’ Corporate Governance Agreement specified that FEMSA was not given “any right or control or influence or consultation right or other form of cooperation” relating to the Heineken Group.


After it sold its brewery business to Heineken, FEMSA created Cadena to extend FEMSA’s Central American retail convenience store business into Texas. Cadena wanted to sell wine and beer in its stores, which in Texas would require it to have a wine and beer retailer’s off-premises consumption permit. When Cadena tried to obtain one of these permits from the Texas ABC, routine financial disclosures it made during the application process revealed FEMSA’s 100% ownership of Cadena as well as its significant, but minority and non-controlling, ownership interest in the Heineken Group, which owns the Heineken Brewers that, in turn, hold Texas non-resident brewer’s permits.


The TABC protested Cadena’s permit on grounds that granting it would result in a violation of the Texas tied house statutes, and rejected its application.


The Texas ABC Code provides for “strict adherence to a general policy of prohibiting the tied house and related practices.” TEX. ALCO. BEV. CODE § 102.01(b). The Code defines “tied house” as “any overlapping ownership or other prohibited relationship between those engaged in the alcoholic beverage industry at different levels, that is, between a manufacturer and a wholesaler or retailer, or between a wholesaler and a retailer, as the words “wholesaler,” “retailer,” and “manufacturer” are ordinarily used and understood.Id. § 102.01(a).


The Code contains numerous provisions designed to achieve this overarching goal by separating the industry into three independent tiers: manufacturing, distribution, and retail. It attempts to achieve this separation by prohibiting cross-tier relationships. Several of these provisions served as grounds for the TABC’s protest of Cadena’s application for a permit.


The TABC determined that Cadena’s connection to the Heineken Brewers through FEMSA’s 100% ownership of Cadena and large ownership interest in the Heineken Group meant that granting the retail permit would result in Cadena having overlapping interests in the manufacturing and retail levels of the industry in violation of four separate provisions of the tied house statutes. Thus, TABC protested and rejected Cadena’s application.


The matter then proceeded to an evidentiary hearing before the county judge. At the hearing, the parties stipulated to the corporate relationships between Cadena, FEMSA, and the Heineken companies. The TABC further stipulated that the five statutory provisions at issue were the only grounds for its protesting Cadena’s application.


Although the TABC disputed that actual cross-tier control of entities is required to implicate the tied house restrictions, it nevertheless asserted that FEMSA could control the Heineken Brewers because of its ability to appoint directors to the Heineken Group’s boards. The agency also argued the court should impute this connection to Cadena for regulation purposes.


Cadena argued that the only “interest” sufficient to violate the tied house prohibitions is one allowing simultaneous actual financial or administrative control of entities in different tiers. Under Cadena’s interpretation, its permit application should have been granted as a matter of law because FEMSA has no ability to manage or control either the Heineken Holding Companies or the Heineken Brewers.


Cadena further maintained that FEMSA’s remote connection with the Heineken brewers was too attenuated to implicate historical tied house concerns, and that the interest could not be imputed to Cadena without piercing the corporate veils of all the entities involved.


The county judge denied Cadena’s application based on the statutory grounds cited by the TABC, finding that: (1) Cadena “has a real interest in the business or premises of the holder of a manufacturer’s or distributor’s license”; (2) for licensing purposes, as a subsidiary of FEMSA, Cadena is a manufacturer; (3) for licensing purposes, as a subsidiary of FEMSA, Cadena has an interest in the business of a brewer; and

(4) issuing the requested permit “would violate Sections 102.01(c), (h), 102.07(a)(1), and 102.11(1) of the Code.”


Cadena appealed to the district court, which affirmed the administrative order.


The Texas Court of Appeals also rejected Cadena’s claims, focusing on section 102.07(a)(1) of the Texas ABC Code, which provides that “no person who owns or has an interest in the business of a brewer may own or have a direct or indirect interest in the business of a retailer.” The appellate court concluded “the term ‘interest,’ as used in section 102.07(a)(1), broadly encompasses any commercial or economic interest that provides a stake in the financial performance of an entity engaged in the manufacture, distribution, or sale of alcoholic beverages.”


Cadena appealed to the Texas Supreme Court, raising three key contentions:


(1) a plain reading of section 102.07(a) can only lead to the conclusion that the Legislature intended a control-based test when determining which interests come under the statute, and any other reading renders the statute unconstitutionally vague and


(2) corporate separateness and veil-piercing principles are implicated and proper application of these rules would prevent Cadena’s licensure from being a violation of the Code because FEMSA’s interest in both Cadena and the Heineken Brewers is attenuated; and

(3) the TABC’s selective application of the statute to Cadena’s permit application violates equal protection principles because of the pervasive cross-tier holdings by other entities across the State.


In a 7-2 decision rendered on April 28, 2017, the Texas Supreme Court ruled for the State, affirming the appellate court’s decision and determining FEMSA’s indirect ownership interest in the Heineken Group and its breweries, together with its indirect ownership interest in Cadena, triggered the prohibitions outlined in section 102.07 of the Texas ABC Code as to Cadena and its application for a permit.


In determining whether the court of appeals was correct, the Supreme Court ruled on three main issues:


(1) Relying on a variety of dictionary definitions, as well as the surrounding statutory environment, the Court found that the meaning of the phrase “an interest in the business of a brewer” “broadly encompasses any commercial or economic interest that provides a stake in the financial performance of an entity engaged in the manufacture of alcoholic beverages.”

(2) The Court concluded that the TABC properly disregarded the separate corporate statuses of the entities involved when deciding if issuing a permit to Cadena would result in a violation of section 102.07(a), because (i) the shareholders in a brewery were also interested in the brewing business, and (ii) the relationships prohibited by tied-house evil laws flow both ways, rather than only in one direction as Cadena argued; and

(3) The TABC’s protesting of Cadena’s application, and the subsequent sustaining of that protest by the lower courts, did not violate Cadena’s equal protection rights, even though Cadena introduced evidence reflecting significant and pervasive cross tier holdings by publicly traded companies throughout the State of Texas. Under Texas law, to establish an equal protection claim, a deprived party must show (i) it was treated differently from other similarly situated persons, and (ii) no reasonable basis exists for the disparate treatment. While Cadena pointed to evidence that cross-tier holdings are pervasive across the State, it did not show that any of the entities involved are similarly situated to itself.




3.     Lebamof Enterprises, Inc. et al v. Rauner et al. - ATTEMPTING TO REDEFINE GRANHOLM


Lebamoff Enterprises loved to sell wine to its Indiana customers. But it also liked to sell wine to its customers residing across the state line in Illinois.


When the Indiana regulators expressed their displeasure, the Indiana wine retailer and two of its Illinois customers sued Illinois government officials, alleging that Illinois’ prohibition against the interstate delivery of wine into Illinois other than by duly-licensed Illinois upper-tier industry members discriminated against out-of-state retailers in terms of what wines can be sold to Illinois consumers.


The lawsuit was filed in the U.S. District Court for the Northern District of Illinois against Illinois Gov. Bruce Rauner, state Attorney General Lisa Madigan, Illinois Liquor Control Commission Chairwoman Constance Beard and liquor board executive director U-Jong Choe, alleging they illegally prohibit wines ordered from other states to be delivered to Illinois consumers. According to the complaint, the plaintiffs suffered financial damages from being prohibited to purchase wine outside the state of Illinois.


The plaintiffs sought a declaration that Illinois laws 235 IL ST 5/5-1(d) and 235 IL ST 5/6-29.1 (b) are unconstitutional, an injunction against the defendants prohibiting them from enforcing those statutes, all legal fees and all other relief the court deems just.


On June 8, 2017, a U.S. District Judge granted the defendants’ motion to dismiss the plaintiffs’ claims in their entirety. After acknowledging that state laws which discriminate against out-of-state actors may violate the Commerce Clause, the Judge went on to rule:


However, the Twenty-first Amendment granted to the "States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system." Id. at 488-89 (explaining that "a State which chooses to ban the sale and consumption of alcohol altogether could bar its importation"). The Twenty-first Amendment was intended to provide States with authority to "maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use." Id. at 484. . .

In Granholm, the Supreme Court made clear that States can "assume direct control of liquor distribution through state-run outlets or funnel sales through the three-tier system." Granholm, 544 U.S. at 489 (stating that the Court had "previously recognized that the three-tier system itself is 'unquestionably legitimate'")(quoting North Dakota v. United States, 495 U.S. 423, 432 (1990)). While the Court in Granholm ultimately found the three-tier systems in question to be unconstitutional, the reason for such a finding was based on the preferential treatment accorded to in-state producers, which allowed them to circumvent the systems. Id. at 474-76.


The Illinois statutory scheme does not provide such exceptions for in-state retailers or differentiate between such retailers and out-of-state retailers. Under the statutory scheme in Illinois, all alcohol sold in Illinois by retailers directly to Illinois consumers must pass through the three-tier system.


“Illinois does not provide out-of-state sellers of alcohol with unfettered access

to Illinois markets to prey on Illinois consumers and reap profits without regard to

the health and welfare of the Illinois public without complying with Illinois'

regulations and laws that are applicable to all.


            To allow Out-of-State Plaintiffs to operate outside the three-tier system in Illinois,

while in-state-retailers diligently operate within the regulatory system and help to limit the potential social problems connected with improper use of alcohol, would actually provide Out-of-State Plaintiffs with an unfair advantage over the in-state retailers rather than remove any self-perceived disadvantage to Plaintiffs. Plaintiffs' Commerce Clause claims in this action thus seek to foster unfair advantages in commerce, which is ironically contrary to the Commerce Clause.”



4.     Retail Services & Systems, Inc., d/b/a Total Wine & More v. South Carolina D.O.R. - THE END OF MOM & POP PROTECTIONISM


In a 4-1 decision, the South Carolina Supreme Court reversed a 2014 lower court ruling that had upheld the state's longtime power and practice of limiting the number of retail alcohol beverage outlets to three per licensee.


Maryland-based Total Wine & More challenged the law after the S.C. Department of Revenue denied it a license to open a fourth store in the state based on an 80 year-old post-Prohibition statute. "The licensing limits do not promote the health, safety, or morals of

the state, but merely provide economic protection for existing retail liquor store owners," acting Justice Jean Toal wrote for the State Supreme Court in reversing the initial decision by a lower court judge. “Economic protectionism for a certain class of retailers is not a constitutionally sound basis for regulating liquor sales," the ruling states.


Attorneys for Total Wine pointed out "the state provisions do not limit the number of liquor stores that can be licensed in a certain area - only the number that can be owned by one person or entity.” The statute also violated equal protection under the law because it created "arbitrary distinctions," treating large retailers that may want to operate more than three liquor stores differently than smaller retailers who may choose to operate fewer, the justices ruled.


The circuit court, in its initial ruling, said the three-license restriction was justified because it preserved the right of small, independent liquor dealers to do business. Attorneys representing the revenue agency and ABC Stores of South Carolina, had repeatedly claimed in oral arguments that protecting small businesses was the only justification for the law. "Ultimately," the justices wrote, "the revenue agency's position amounts to 'it's just liquor,' which is not a legitimate basis for regulation. Under this rationale, market regulation – no matter how oppressive - cannot ever be said to be unconstitutional."


How did four of South Carolina's five Supreme Court justices see fit to strike down alcohol laws that had been duly adopted by the South Carolina Legislature and consistently enforced by the State's executive branch of government for 80 years?


According to the majority of justices, focusing solely on oral arguments in the case, the license limitation law always was intended solely to be a barrier to out-of-state competition – promoting local commerce by protecting small “Mom and Pop” South Carolina retailers while restricting competition from larger, chain-store outsiders. Unlike the 1930s, these justices reasoned, America today does not tolerate such economic factionalism. Hence, the State Supreme Court's invocation of federal judicial precedents citing the U.S. Constitution’s Commerce Clause to strike down a pair of 80 year-old South Carolina statutes.


What was not considered: After the 21st Amendment to the U.S. Constitution repealed Prohibition, many states adopted similar restrictions on the number of liquor licenses they would issue to a single licensee. States like South Carolina reasoned that allowing individual persons or entities to amass numerous liquor licenses can lead to powerful business conglomerates that engage in aggressive marketing practices and pursue market domination. Based on the history of the infamous Saloon Era and the lessons learned during Prohibition, many of these states reasonably concluded that business aggregation in the context of the alcohol industry can be contrary to the public health and safety.


States such as Massachusetts, Maryland, New Hampshire, New Jersey and Rhode Island all chose to exercise their police power enhanced by the authority to regulate alcohol within their borders granted under the 21st Amendment, to adopt restrictions limiting the number of licenses that a single person or entity could hold.


Why restrict the quantity of liquor licenses at all? Why not let free market forces determine how many alcohol beverage retailers are enough (or too much) for a community?

Today, there are many scientific studies and consumer behavior analyses which demonstrate that alcohol consumption increases with the number of available retail outlets. Both of the famous alcohol regulation analyses Towards Liquor Control (1933) and After Repeal (1936) warned that methods to curtail the number of sales outlets were vital to preventing overcrowding and the

evils that result from having too many licensed establishments. There also are numerous studies and more contemporary analyses that support a reasonable debate over whether, and to what degree, increased access produces negative secondary effects in any given community.

But the debate over which studies are more accurate is not a question to be answered by the courts.


The relevant jurisprudence, both at federal and state levels, is clear: unless the courts are presented with a case or controversy that directly impacts a "suspect classification," the rational actions of a legislature are supposed to withstand attack. Suspect classifications involve government regulations that negatively impact an injured party based on race, or religion, or the violation of some civil liberty such as access to due process or equal protection. Are chain store retailers part of a suspect class?






5.     Connecticut Fine Wine & Spirits, LLC v. Harris


Maryland-based Total Wine and its affiliated entities operate retail alcoholic beverage stores in 21 states, including four in Connecticut, and it is the country’s largest independent retailer of fine wine and spirits.


Total Wine sued Connecticut in federal court alleging that the state’s minimum pricing and post-and-hold alcohol laws promote horizontal and vertical price-fixing by alcohol beverage wholesalers and prevent retailers from offering the best prices.


Under Connecticut law, alcohol retailers are forbidden from selling inventory at prices below so-called “bottle prices” that state-licensed wholesalers are required to post with the state’s Department of Consumer Affairs. Total alleged one count of horizontal price-fixing and one count of vertical price-fixing under the Sherman Antitrust Act against Connecticut Department of Consumer Protection Commissioner Jonathan A. Harris and Division of Liquor Control Director John Suchy, and requested a court judgment declaring the challenged

provisions invalid.


In her decision dated June 6, 2017, U.S. District Judge Janet C. Hall ruled for the State and dismissed Total Wine’s challenges to the post-and-hold provisions and minimum retail price provisions because they “constitute hybrid restraints that receive rule of reason scrutiny and therefore cannot be preempted.” Total Wine’s claim that the price discrimination prohibition is preempted also was dismissed, because “that provision is a unilateral restraint outside the scope of the Sherman Act.”


Finally, it is worth noting that Judge Hall made clear what the role of the judiciary should be in such cases. In footnote of her opinion, the Court states: The court notes that Total Wine’s Complaint includes several allegations that suggest the Connecticut liquor regime is unfair to consumers. See, e.g., Compl. ¶ 17 (“Under this anticompetitive regime, a retailer like Total Wine & More cannot use its market and business efficiencies to reduce the prices offered to consumers.”). Whether or not the statutory and regulatory scheme implemented by the State of Connecticut is wise is not a question for this court. Rather, the court can only be asked to determine whether the challenged provisions are preempted by federal law. Arguments as to the harm inflicted on consumers by this scheme are more appropriately directed to Connecticut’s executive and legislative branches of government.


Total Wine and the Push for Modernization of the Liquor Control Laws

The largest chain retailer in the country, Total Wine & More, is focusing on the liquor laws that govern the regulation of beer, wine, and liquor. Total Wine reportedly has grown to approximately $3 billion in revenue across a network of 172 stores operating in 22 states by successfully challenging longstanding alcohol laws in numerous states. Like the wine industry’s campaign for direct-to-consumer sales and shipping, Total Wine has employed lawyers and lobbyists and PR mavens to effect change through legislation and, failing that, litigation.


·        Minnesota - Alcohol sales on Sundays in Minnesota. Allowed as of February, 2017 following a years-long campaign by Total Wine.

·        Connecticut - Later closing time for liquor stores in Connecticut. Total Wine played a key role in this change.

·        Maryland - Overturning a law requiring price-posting and a ban on volume discounts in Maryland. It took a decade of litigation by Total Wine to overturn the price posting law and the ban on volume discounts.

·        South Carolina - Lifting the cap on the number of retail licenses that can be held by a single person or entity in South Carolina. Total Wine filed a lawsuit in SC to remove the cap on the number of retail licenses that can be held by a single person or entity in SC.

·        Massachusetts - Total Wine has sued to invalidate a state regulation that prevents retailers from selling alcohol below cost. Total Wine is also challenging a Massachusetts regulation prohibiting alcohol retailers from issuing discount coupons and loyalty cards.








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