New Alcohol Delivery Oversight on the Horizon

We’ve been hearing rumblings about possible legislation moving forward in Sacramento that will give the California Department of Alcoholic Beverage Control (“ABC”) more oversight over companies that deliver alcohol products here in California. Last week, we got our first look at Senate Bill 254, which had been a mere placeholder since its introduction on February 7 by Senator Portantino.  The proposed bill would add Business and Professions Code Section 25513 to the Tied-House Restrictions of the California ABC Act (as well as similar sections in the Code pertaining to tobacco, not covered by this blog post), which would for the first time define a “delivery network company,” and would prohibit companies that deliver alcoholic beverages (and/or tobacco products) from delivering these regulated products until receiving ABC approval of their delivery systems and abiding by certain requirements intended to curb access by minors.  

Under the bill, a “delivery network company,” defined as an “an organization… that provides prearranged delivery as an act of enrichment, financial or otherwise, of goods or services using an online-enabled application or platform to connect consumers with goods or service [sic] and to have those goods or services delivered directly to the consumer by an individual compensated by the organization,” would be required to submit its “system” to the ABC for review and approval.  That system must also include the following elements: 

1. A means of verifying that the recipient of alcoholic beverages is 21 years of age or over; 
2. Person-to-person delivery; 
3. Delivery drivers that are 21 years of age or over; 
4. The ability for consumers to suspend delivery for any period of time to their designated primary delivery location, and 
5. No delivery to college or university grounds. 

As currently drafted, the bill covers unlicensed service providers (Third Party Providers or “TTPs”) as well as current ABC licensees with privileges to sell alcohol directly to consumers that also provide delivery services to its customers.  We think it unlikely that the author’s intention was to include all retail deliveries of alcohol (a subject already covered by existing ABC regulations), but unless delivery network company is more narrowly defined, all licensees with off-sale retail privileges that currently deliver alcoholic beverages to consumers should be watching this bill. 

While this is just the first draft of legislation that so far focuses on the ABC’s core constitutional priority of preventing sales to minors, a worthy and important goal, many questions regarding the regulation of delivery of alcohol still remain unanswered by this bill, including many we face in our daily practice: 

1. What types of verification will be required and what kinds of records will the delivery network company need to collect? Signature capture, as required by UPS, Fedex and other shipping providers?  ID scanning? 
2. What does person-to-person delivery mean? Is it a prohibition against deliveries without an adult present to receive the delivery or something else?  What needs to happen to the product or the transaction if no one is there to receive the order?  How must returns be handled? 
3. What does it mean for the consumer to be able to suspend delivery to its primary delivery location and how does that advance the ABC’s interests in preventing sales to minors and encouraging responsible delivery of alcoholic beverages? 
4. Will the ABC also want to see protocols for preventing sales to obviously intoxicated recipients? 
5. Specifically as to TTPs, will the ABC also be reviewing flow of funds, percentage fees, tied-house implications and other hot button issues not covered by this legislation, or will they be restricted to reviewing only the portions of the system that prevent sales to minors? 

Up until now, there have been no laws or regulations that specifically cover TPPs, which do not have an ABC license category.  The only substantive guidance for TPP businesses working with alcohol licensees has been ABC regulations concerning retail delivery and the industry advisories issued by the ABC in 2009 and 2011 (the “ABC Advisories”).  These ABC Advisories were originally issued to provide guidance for licensees seeking to leverage the consumer acquisition reach of the various internet and app sales and marketing platforms (Amazon, Groupon, LivingSocial, Lot18 and many others) that did not want to hold alcohol beverage licenses, but instead focused on advertising, customer acquisition, and online tools to facilitate sales and fulfillment of products or experiences including alcoholic beverages.  The ABC Advisories focused on the level of control and responsibility a licensee must maintain when utilizing a TPP as its agent, avoiding indirect unlawful gifts and retail inducements, flow of funds requirements, and avoiding engaging a TPP to conduct activities or taking margins that would otherwise require an independent alcohol license.  

While helpful guidance (for industry members, TPPs, alcohol lawyers and the many other states that have used the ABC Advisories as a model for their own TPP guidelines and laws), the ABC Advisories are not law, and the ABC has thus far declined to pre-approve TPP platforms, including the now ubiquitous delivery systems that are the subject of this bill and make up a large part of our firm’s TPP practice.  We’ve recently seen some uptick in ABC enforcement in this space that has provided some additional guidance on the ABC’s current stance on TPPs, but many TPPs have been operating in a legal gray area, dependent on legal memoranda from law firms focusing on alcohol beverage regulation like our own in order to ease investor concerns about legal compliance.  

We encourage any and all licensees and TPPs involved with alcohol delivery to get involved in the legislative process now to make their voices heard so that this bill can provide appropriate guidance to the ABC in the responsible and appropriate regulation of delivery network companies.  And if this bill becomes law, it’s a good time for businesses involved in this space to call your legal counsel to ensure you have the protocols in place to obtain the ABC’s approval.