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Know the Law: The Online Conundrum

Posted on  | June 3, 2013   Bookmark and Share
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SLA ruling clear: retailers must control internet sales of wine

by Keven Danow and Arielle Albert

On April 9, 2013 the New York State Liquor Authority (SLA) issued Declaratory Ruling 2013-01006A in response to a request from an unlicensed technology compliance service company (“Tech Company”) seeking guidance on the issue of Internet sales of wine through third party advertisers. Specifically, the Tech Company asked the Authority to approve its business model for a compliance system intended for use by unlicensed Internet advertisers working with New York licensed wholesalers, retailers, warehousers and fulfillment companies.

The Tech Company described a model that would allow a licensed retailer to utilize an unlicensed advertiser’s website to display products to consumers. According to the request the licensed seller had the authority to “accept or reject the order request” and upon acceptance, the licensed retailer would direct the fulfillment of the order. In consideration for its services the advertiser and the Tech Company would receive a fee from the licensed seller for each sale.

Although the request for declaratory ruling was made by the Tech Company, the SLA’s ruling concentrated upon the relationship between the unlicensed advertiser and licensed retailer. Before issuing its declaratory ruling, the Authority held a full board meeting at which the participating Tech Company, wholesaler, retailer, and Internet advertiser were invited to address concerns of the Authority and Industry members. Of primary concern is whether the proposed relationship between the non-licensed advertiser and the retail licensee would violate ABCL §111, which prohibits a licensee from making its license available to persons or entities who are not on the license. Such a violation is known as “availing.”

The Passive Problem

The Authority did not confine itself to the language in the request for a declaratory ruling. It conducted an independent investigation into the actual practice and procedures being used by the participants who were already operating in New York State. SLA investigators found that in practice the retail licensee was relegated to a completely passive role. In addition, the Authority noticed the advertiser had an agreement with the warehouse to hold and ship the wine. The retailer appeared not to have any knowledge of what warehouse it was using to fulfill these sales.

The SLA noted that even the retailer’s acceptance or rejection of a sale was perfunctory. At first, the licensed retailer would “accept” an “order request” made by a consumer by doing nothing. Its failure to reject the order within a stated amount of time was deemed an acceptance. This was later changed to require a keystroke by the retailer when the order was accepted. The retailer did not reject a single offer.

As the SLA noted problems, the advertising company made adjustments to the method of operation. However, the SLA found that these adjustments were cosmetic rather than meaningful. For instance a change from a standard bottle fee paid to the retailer to monthly advertising bills had almost no effect on the amount the retailer netted from each sale. The SLA concluded that the licensed retailer played “little, if any, role” in the sale of wine through the model platform and consequently the platform encouraged availing in violation of ABCL § 111.

Guidance Yet to Come

In its declaratory ruling the SLA acknowledged that the sale of wine over the Internet is a growing trend and expressed its intention to provide comprehensive guidance to the industry on related issues. While the industry awaits a more complete statement, the Authority warned that a licensee must maintain complete control over every sale made under its license. It must be responsible to determine what products will be sold and at what price and it must actively decide whether to accept or reject a sale. The licensee must not allow unlicensed third parties to be compensated based on a portion of the sale made.

In determining when an arrangement between a licensed entity and third party advertiser violates New York beverage alcohol laws, the SLA will not look only at the written agreements between parties but also will consider the actual day-to-day functions to ensure more than facial compliance.

Until as the Authority issues further guidelines, licensees would be wise to examine every proposed agreement with a third party advertiser to see if it compiles with the law both on paper and in practice. The Authority will view as evidence of availing any arrangement that shifts the risks and rewards related to the sale from the licensee to a non-licensed third person.


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