Texas Best Road to Take for E-Commerce

The Texas Alcoholic Beverage Control (TABC) drafted a Marketing Practices Advisory (Advisory), on E-Commerce Advertising and Sales Platforms, which deals with how to regulate e-commerce in the liquor space. It recently held a stakeholders meeting, where it took feedback from the industry. As there were many state regulators on the call, one should not underestimate the importance of the Texas ABC’s undertaking. What ends up as a finished product in Texas may end up being a model and subsequently the norm in other states.

As a former state regulator, I can honestly say that writing regulations is difficult. Drafting regulations in a new area carries certain pitfalls, because if not drafted exactly, a regulation can impede marketplace innovation. The drafting job gets even more difficult when there is a burgeoning and dynamic area such as e-commerce.

The TABC Advisory focused on situations where it believes an E-commerce relationship could create a tied-house and even lead to situations where an illegal inducement could occur. The Advisory showed great concern for situations where a third-party could operate on behalf of an industry member. Its proposed rules and prohibitions centered around these three areas.

Although the TABC is well intentioned, and it was gracious in taking criticism and feedback from stakeholders, I think the Advisory in its present form is insufficient and may create numerous unintended consequences, which could lead to many regulatory wrenches thrown into the mix.

If TABC wants to crack down on the unscrupulous behavior in the ecommerce marketplace, it is equipped with the legal doctrines of tied-house, illegal inducements, and slotting fees. TABC can utilize these principles and apply them on a case-by-case basis. The alternative is developing an overarching legal standard and applying legal principles that could lead to unintended consequences and impede marketplace innovation. Texas is a leader in free markets and less regulation, the TABC should follow the general state practices and police according to solid and flexible legal principles, instead of over regulating.

Issues of foreseeability

The biggest problem with the Advisory is that it intends to regulate the unforeseeable.

In the last line of the section on prohibited agreements, the Advisory states, “Lastly, TABC does not see an avenue for platforms that touch all three tiers to operate lawfully under the Code.”

In other words, without being able to recognize every conceivable fact pattern where the tiers can work together, the TABC looks set to lay down a general principle without referring to exceptions.

However, the technology world has numerous examples where a website becomes a medium or connector for the three tiers to operate legally. For example, a liquor supplier may advertise on a website that connects wholesalers to retailers. If a retailer desires a specific product, it can find which wholesaler lists the specific product, on the same website a supplier may place advertising.

Under this situation, the third-party platform offers a service. It connects and allows industry members to communicate in the most efficient way. The supplier placing advertising on the platform does nothing more than raises brand awareness in a venue where industry members visit. There is no exchange of funds with a third-party that acts to pass the funds from the supplier to a retailer.

With no tied-house and illegal inducement concerns, one must ask why the TABC would effectively make statements banning the aforementioned situation. Previous to the development of e-commerce, the efficient connection of the three-tiers was not available, with the advent of technology much has changed. But questioning the legality of this situation does not help the marketplace, in fact, it works to stunt marketplace innovation and moves the marketplace back to inefficient business practices.

Comparing a website to a retailer’s physical presence

The second problem is the Advisory’s equating of a website with a retail location. In the Advisory it states, “The online platform/marketplace is considered an extension of the retailer’s physical premises.”

This principle of treating an online marketplace as an extension of a retailer’s physical presence does not equate to the real world. In some states (we should consider other states as the TABC advisory may serve as a model for other states) limits and restrictions are based on individual retail locations. So, if there are 100 retail locations in a state, do we apply the laws based on one location or one hundred? If for example, someone is allowed to provide a retailer a $200 in advertising signs per store, it would seem that with 100 retailers, the aggregate amount would be $20,000.

Equating an online marketplace with a brick-and-mortar does not reflect the differences between the two mediums. The brick-and-mortar retailer is limited in reach, whereas the online storefront allows the retailer a greater audience and opportunity. Simply put, maintaining the same rules for vastly different mediums is not very realistic.

Somewhat related to this issue is the use of unlicensed third-parties. Under the Advisory an unlicensed third-party can’t utilize funds from an industry member to advertise on a retailer’s site. Although this seems like an adequate principle, sometimes the e-commerce world works differently. For example, a supplier could provide advertising dollars to a marketing company that places pop-up ads on websites, the supplier may not maintain 100% supervision over how the 3rd party operates. If the supplier’s third-party utilizes a pop-up ad on a retailer platform is the supplier providing an illegal inducement? Especially, if it is not clear how the third-party marketing company operates it business?

An astute participant in the meeting brought up the issue of whether a supplier’s ad running through a tv at a retail location would create an illegal inducement?

There are a series of tough questions, but they show that the world of ecommerce, unlike a brick-and-mortar world, is gray and the answers are not always clear.

Third, the regulation states that “Because a retailer’s website is viewed as an extension of the physical premises, the online display of available products (i.e. the hierarchy of products viewed by a consumer) on a retailer-branded website/platform/marketplace is viewed as the shelf space within a physical premise.”

The Advisory equates any payment that goes towards advertising as a slotting fee. A slotting fee is when a supplier or wholesaler pays the retailer for favorable product placement or shelf space within a venue.

Again, the comparison fails to recognize the differences between the brick-and-mortar and online retail channels. In a brick-and-mortar there are only so many shelves and spaces. In an online environment, ads can run continuously for different brands, hence, you don’t possess the same influence to dominate an online retailer’s business. So equating advertising buys with slotting fees just does not equate.

Finally, there is the issue of spending on advertising, numerous states have rules that allow a supplier or wholesaler to spend a certain limit on indoor advertising, some of this advertising is on signs and some of it can be on other items such as coasters, napkins, and even glasses. If a state allows a retailer to utilize advertising dollars on items that the customer uses, which is a thing of value generally but is excepted by the law, shouldn’t there be exceptions and not full out bans on providing something to a retailer’s online store. History shows if we are going to write a general rule prohibiting a practice, then we might consider exceptions to the rule.

In concluding, TABC has general legal principles it can apply to bad actors, reinventing an efficient way to regulate by choking the Advisory full of restrictions that could have unintended consequences does not serve anyone well.