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A California State Appellate Court case provides a great roadmap for how state courts could adjudicate tied-house issues in the future. In Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Board,(Real Party in Interest, Bogle Vineyards), a California appeals court held that mere speculation that a tied house violation occurred was not enough to satisfy statutory requirements for sanctions and that there must be concrete evidence that a violation occurred.

Takeaways

This case provides some great lessons that could generally apply to tied-house issues. 1. The state should be held to the burden that concrete evidence is required to sanction someone and that speculation and possibility of violation is not enough. 2. This case also hinged on the temporary nature of the promotion. However, one weakness for Bogle was there was not a definite date for the promotion ending. Anyone providing a promotional display which includes a potential item “of value” would be well advised to put a definitive date of closure. Without taking this step, you leave yourself at the mercy of a tribunal. 3. The display in this case was permitted by the rules, before providing an item, make sure that it is permitted by the state rules. 4. Ensure that the nature of the gift could not be construed as establishing influence over a retailer.

Facts

Bogle Vineyards (Bogle) provided a Bogle-branded pizza oven as a point-of-sale display to Raley’s stores in California. Raley’s received the display from Young’s Market, the wholesaler, who received it from Bogle.

The pizza oven is a display for a promotion where the customer would receive $4 off pizza with the purchase of Bogle wine. Bogle paid for the pizza as part of the promotional campaign.

The oven Bogle provided cost $280.32, Bogle provided a promotional packet which stated that “the ovens ‘don’t work’ without propane AND the regulators can be removed, if needed.” I” Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 340 (Cal. Ct. App. 2022).

The wholesaler’s representative did not fully assemble the pizza oven for use in the display, she did not attach the propane regulator parts, which made the display oven inoperative.

The oven was subsequently removed during investigation by the California ABC, there was no contract or agreement pertaining to the pizza oven’s disposal or how long the display would last.

Procedural history

The Department accused Bogle of furnishing a thing “of value”, the pizza oven, to Raley’s in violation of California law.

An ALJ agreed with the Department and found that the oven in the display constituted a thing “of value”. The ALJ relied on the price of the oven, $280, and the fact that Bogle took no steps to render the ovens valueless prior to Young’s Market receiving them, even though it provided Young’s Market (Wholesaler) instructions about the oven not operating without propane and that the regulators could be removed.

Additionally, the ALJ found that although the Wholesaler installed the pizza oven without the propane tank regulator tubing, it still assembled the oven’s infrastructure, including the pizza stone. The ALJ also held there were no consequences if the retailer decided to keep the display at the end of the promotional campaign.

Although the ALJ found “Bogle did not intend to “gift” the ovens to retailers in exchange for prominent displays in their stores, it concluded that the “net result” was an unlawful furnishing in violation of the statute.”

“The ALJ further found that “[e]ven absent the parts that were retained by Jackson, the oven had value because the pizza stone was included in the display setup and the infrastructure of the baking area was intact. All that would be needed to have a functioning oven would be for someone to purchase an aftermarket propane regulator tube. Or, the retailer could have just asked for the remaining parts and nothing in the campaign parameters established by [Bogle] would have prohibited this.”Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 341 (Cal. Ct. App. 2022)

Bogle appealed the decision to the Board, which ruled in favor of Bogle. The Board held that the ALJ’s finding that the pizza oven was a thing of value was not supported by substantial evidence. No evidence existed that the retailer reassembled the oven or removed the pizza stone to use it. The Board found the “Department’s result was based on speculation and conjecture and was not within the spirit or letter of the law. ” Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 342 (Cal. Ct. App. 2022)”

The Department appealed and argued that the oven was a “thing of value” because it had an intrinsic value other than advertising. The Department opined that the Board’s interpretation would allow a supplier to furnish any inoperative item, no matter how valuable or how expensive to the supplier. Bogle countered that the inoperative pizza over was a display permitted by California rules and did not constitute a thing “of value”, and the Department placing value on the oven was pure speculation.

The Court agreed with Bogle that “an inoperative pizza oven, used solely for purposes of a temporary promotional display, was not a “thing of value” under the statute” Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 342 (Cal. Ct. App. 2022)

The Court in its analysis determined that the Department’s “finding that Bogle furnished a “thing of value” to Raley’s is not supported by substantial evidence.” Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 344 (Cal. Ct. App. 2022)

The Court proceeded to its answer by analyzing the intent of tied-house laws, which are to prevent large wholesalers and suppliers from gaining undue influences over retailers through economic means, resulting in large industry players gaining favorable treatment over a smaller competitor’s brands.

Past precedent of cases where courts found tied-house violations were discussed, and in these cases suppliers paid for retailers advertising, which constituted providing a thing “of value” to the retailer. In these cases, courts decided that the money exchanged could easily lead to a supplier’s influence over the retailer.

In looking at past precedents, the Court distinguished those cases from the case at hand. The Court could not conclude that “allowing a distributor to temporarily place an inoperative pizza oven in Bogle’s display provided a “valuable and tangible benefit” Dep’t of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd., 82 Cal.App.5th 337, 346 (Cal. Ct. App. 2022)

Disagreeing with the Department’s position that the oven with missing parts had value because the pizza stone was included and the baking area’s infrastructure was intact, the Court held that the unassembled oven having value is not supported by substantial evidence in the record.

The pizza oven would maintain value if the retailer could benefit from it, however, evidence demonstrates that the retailer did not use any part of the pizza infrastructure while it was on display. Further, the oven was removed from the store after the display ended and the state lacked evidence that the retailer derived value from the item.

The Court next focused on the crux of this case, the Department’s position based on speculation versus substantial evidence. The Department’s position was the oven was a thing “of value” because a retailer could have purchased the missing parts or requested them making the over operational. Unimpressed with this argument the Court held, “ the Department’s supposition that Raley’s theoretically could have done so, rendering the oven potentially useable and therefore potentially of some value, is speculation and therefore not substantial evidence of a violation,” and speculation is not evidence.

In reviewing the evidence, the Court concluded that the evidence did not show that the oven was used or retained by the retailer for later use, or that its value had any significance other than as a promotional display.

Conclusion

California set down the marker that concrete evidence is required in determining a violation of tied-house laws. Whether other courts follow this position remains to be seen. In Tennessee Wine the Supreme Court set forth a concrete evidence standard, yet a couple of federal circuit courts refused to implement the concrete evidence standard and relied on mere speculation.

The issue to watch for as tied-house issues come up in other states is whether state courts or tribunals adopt the concrete evidence standard or if the mere speculation standard prevails?