Thursday, July 30, 2009

Comments on Rulemaking to Implement Section 506, Session Laws of 2009 (Pre-proposal Notice #09-13)

Family Wineries of Washington State (FWWS) is an organization presently representing over 85 small Washington Wineries. FWWS has since its inception supported the elimination of those aspects of Washington State’s liquor laws which serve solely to regulate economic aspects of wine trade and which do not provide a public safety benefit. We believe such restrictions and prohibitions serve only to benefit various special economic interests to the detriment of the consumer and the overall growth of the Washington wine industry. We were therefore pleased at the expressed intent of the legislature to liberalize certain areas of the law regarding “inter-tier” ownership and point of sale practices. We continue to advocate for the elimination of restrictions on such areas of trade. Unfortunately, from our perspective, the Legislature adopted a bill drafted by entrenched economic interests that could be read to reinforce many areas of trade restriction under the auspices of liberalizing them. We believe that in attempting to carve out a few new exceptions while maintaining a logically indefensible system, a predictably complex statute emerged. We further believe that the bill as drafted contains some fairly glaring omissions and logical errors, could lead to new and unintended restrictions on trade, and could increase economic uncertainty.

We were therefore very pleased at the apparent willingness of WSLCB policy leaders, as expressed at a recent legal seminar teleconference (hereafter referred to as “the recent teleconference”), to interpret the legislative intent of the new law broadly and boldly. Such authority in interpretation is granted to the Board by Title 66 and is indeed necessary to allow regulatory clarity and to facilitate the reform envisioned by the law. In short, we believe that Board action through rulemaking is vital to achieving the stated goals of the legislation and reducing the uncertainty created therein.

Specific Concerns and Recommendations on Rulemaking related to Section 506, Session Laws of 2009

RCW 66.28.180, Section 3, Regarding Inter-Tier Ownership Interests


This section, when taken together with the explicit prohibition contained in section 6 on advancing money under any “agreement,” “business practice, or arrangement” is sufficiently incomplete as to be meaningless. Glaringly, no specific exception is made for capitalization of an inter-tier "interest,” leaving inheritance as the only (admittedly important) conceivable venue for obtaining such an interest. Likewise, and equally glaring, is the obvious question of distributions of equity or earnings from such entities since, presumably, most investors will seek to obtain interests of this type with the goal of eventual profitability. A prudent investor would reasonably seek assurances on these points, given the specific prohibitions on advancing money contained in the law, which, barring suitable clarification, are controlling.

Suggested Rulemaking:

In order to facilitate the obvious intent of the Legislature to allow inter tier interests, the Board should establish rules recognizing the obvious ordinary transactions surrounding such business investments and should:

1) Provide specific language clarifying that such interests may be capitalized by advance of money or money’s worth including but not limited to cash, or equity interests in real estate, equipment or facilities, and

2) Provide specific exceptions from the blanket prohibition on advancing money for ordinary business distributions, including but not limited to, distributions of equity, corporate dividends, distributions of cash from operations, and payment of fair value for goods and services.

RCW 66.28.180, Section 5 Regarding Assertions of Undue Influence in Inter-Tier Interests


FWWS finds the form of section 5 unsettling. The section provides that “any person” may request that the board investigate whether an inter-tier financial interest “has resulted or is more likely than not to result in undue influence or has resulted or is more likely than not to result in an adverse impact on public health and safety.” Such a person may not even need to be theoretically harmed by the alleged influence. Additionally unsettling is the provision of possible remedies including the Board issuing the draconian order “that the transaction be rescinded or otherwise undone.”

FWWS has advocated consistently that the venue for adjudicating claims of undue influence should, as with any other such anti-trust allegations, be in a court of law. We believe that without clarifying regulations the law could be read to set the bar for mischief and harassment far too low and could result in a substantial waste of Board resources.

We are also concerned that without rules specifically identifying the range of ordinary business practices that may occur between inter-tier entities, the law as written will have a severe chilling effect on any prudent investor’s desire to enter into such business arrangements. One example of a potential area for allegation of undue influence would be a restaurant changing their house wine from another supplier’s brand to the brand of their winery affiliate. Such a scenario is not only logical, but might well be the compelling reason that a restaurant owner enters into such a relationship in the first place. In this example the restaurant owner and winery affiliate might also be construed to be violating the explicit prohibition contained in section 2(6)(h) regarding “an industry member having a commitment not to terminate its relationship with a retailer with respect to the sale of a particular product or products.” Again this is an obvious aspect of a long term business commitment and yet another example of the logical inconsistencies in the legislation that should be addressed by rulemaking. When this subject was raised in the recent teleconference, the moderator suggested that the Board identify “safe harbors” to address some of these concerns. We agree that the implementing regulations should identify transactions that will comply with the law. Without specific rulemaking, a prudent investor will not have sufficient certainty regarding day to day business relations with its affiliate to reasonably make such a financial commitment.

Finally, we are concerned that a third party might use a “routine” liquor code violation (e.g. a citation issued under a State ID check enforcement operation) to allege inter-tier public safety impacts. The rules should include provisions to limit frivolous claims.

Suggested Rulemaking:

Provide clarification that ordinary purchasing and sales decision making regarding the products of an industry member affiliated with retailer by financial interest are beyond the scope of undue influence allegations.

Provide specific clarification that the commitment of a retailer to purchase the products of an industry member or distributor with which they are affiliated by financial interest is not considered undue influence as defined in section 2(6)(h). Further clarify that the commitment of such a retailer to purchase the product of such an affiliated supplier does not constitute a violation of section 2(6)(d) with regard to purchasing a “specified amount” (i.e. more than none) of said supplier’s product.

Provide a list of transactions (“safe harbors”) that are presumed legitimate and a procedure whereby other proposed economic transactions can be approved in advance by the Board

Specifically provide that a rescission or divestiture order will only be undertaken after the Board has exhausted all other reasonable remedies and penalties to address the alleged issue of undue influence or public impact.

Provide that any party bringing an allegation under section 5 of public safety impacts due to inter-tier ownership shall provide detailed evidence of the specific way in which the alleged impact is caused directly by the ownership interest in question.

RCW 66.28.180, Section 7 Regarding Gifts of Branded Promotional Items


In liberalizing the restriction on producers and distributors providing branded promotional items to retailers, the drafters of this section provided in subsection (1)(a)(iii) that such items “May be provided by industry members only to retailers and their employees and may not be provided by or through retailers or their employees to retail customers.”

This begs the question, when taken together with the interlocking definitions in section 2 of “industry members” and “retailers,” as to whether such a prohibition extends to self distributed wineries acting in their capacity as “retailers.” If so this would constitute a new prohibition on a practice widely used by FWWS members in the past, and one which, on balance, is considered by many to be a more valuable marketing tool than the new allowance for nominal gifts to retailers. Indeed, when this question was raised by an FWWS member in the recent teleconference, Board staff indicated that the Board “had not considered the implications for self distributed wineries.” We very much appreciate this candor and further appreciate the stated desire by Board staff to allow any such promotions to consumers if purchased by the retailer and suitably not targeted to “appeal principally to youth.” However we are concerned that the vague wording of the law as written makes the LCB’s confusion on this point understandable. We further believe that absent suitable clarification through rulemaking such confusion is likely to be repeated in the future by the Board’s MIW representatives in their enforcement of the statute. We therefore believe that clarifying rules are needed.

Suggested Rulemaking:

Provide rulemaking to the effect that nothing in the law will be interpreted to prevent a retailer, or a self distributed winery or brewery acting in its capacity as retailer from purchasing and providing such branded promotional items to its customers subject to the restrictions of section 7(1)(a)(iv) on items appealing “principally to youth.”

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