The federal government and nearly every state have laws on the books that regulate trade practices in the alcoholic beverage industry. One of the most complex categories of these regulations are those known as “tied-house” laws. These laws are intended to prevent the domination of retailers by their suppliers, i.e. the ability of a large company to dominate local markets through vertical (common ownership of supplier, distributor, and retail businesses) and horizontal integration (monopolistic control of “competing” brands). At the federal level, the FAA Act prohibits a supplier from inducing a retailer to purchase its products to the exclusion, in whole or in part, of products from other suppliers (27 U.S.C. 205(b)). Since this provision only applies to transactions in interstate commerce, the states are left to police similar problems in intrastate commerce. California has taken one of the most aggressive approaches to tied-house regulation.
Division Nine of The Business & Professions Code, along with Title 4, Sections 1-150 of the California Code of Regulations, govern intrastate alcoholic beverage operations. B&P Code sections 23771-23772 and 25500-25512 specifically address tied-house restrictions. The restrictions begin by prohibiting a supplier from owning any interest, directly or indirectly, in a retailer (on-sale or off-sale). It also prohibits ownership of a winegrower (or brewery or distiller) by a retail licensee. This seems to be a much broader prohibition than the federal law and most counterpart laws in other states; there is no requirement, on the language of the statute, that the supplier has actual control of the retailer. However, the range of exceptions provided in the subsequent sections of the B&P Code have become equally broad.
The statutory exceptions were created based on individual fact situations, and as such, they are narrowly tailored. Rather than being categorical and policy-based, nearly every exception is individualized. Therefore the next time a need arises to allow activity otherwise prohibited by California’s broad tied-house restriction, a new exception must be created. For instance, section 25503.11 permits a supplier to own a diminutive amount of stock in a publicly-traded corporate retail licensee or serve on the board of a publicly-traded corporate retail off-sale licensee, subject to the ABC’s approval (this exception was purportedly created to benefit Joseph E. Seagram by allowing him to serve on the board of Safeway Stores). The converse is also permitted (retail licensee owning a diminutive amount of stock in publicly-traded supplier) by section 25503.12. Another section allows a supplier to own a single retail license within a county with a population of less than 15,000 (section 25500(b)).
More specific to winemakers, section 25503.15(a) allows a winegrower to own on-sale licenses if none of its products are sold at the licensed premises. Obviously, this may defeat the purpose for many winemakers looking to participate in restaurant ownership, so section 25503.15(b) allows small winegrowers (less than 125,000 gallons of wine produced) to own an interest in up to two licenses, subject to a long list of conditions. The legislature later extended this privilege to winegrowers of any size, permitting ownership in any number of on-sale licenses, provided their own wines are sold by no more than two of the licensees and the number of wines produced by the winegrower does not exceed fifteen percent of the wines offered for sale by the retailer (section 25503.30).
The numbering of the examples above may have given away the fact that there are many other exceptions provided by the Code, but each comes with very specific requirements. If you are a winegrower interested in participating in the ownership of a restaurant (or a restaurant looking to own part of a winemaking operation), but thought the tied-house restrictions prohibited you from doing so, an attorney may be able to assist you in understanding whether any of the exceptions applies to you or how to structure your ownership so that they do.