What is “tied-house” and why is it a thing?

Direct excepts from the Appeals Board’s opinions

Appeals Board quotes are in red. Footnotes and citations have been omitted and extra paragraph breaks added for readability.

At the heart of the tied-house issues in this case are:

• California Business and Professions Code section 25500, subdivision (a)(2) (hereinafter, section “tied-house” prohibition) which  says that winegrowers cannot ” Furnish, give, or lend any money or other thing of value, directly or indirectly, to, or guarantee the repayment of any loan or the fulfillment of any financial obligation of, any person engaged in operating, owning, or maintaining any on-sale premises where alcoholic beverages are sold for consumption on the premises.

and,

• Business and Professions Code section 25600, subdivision (a)(1) and ABC Department rule 106, subdivision (a) the prohibition against giving away free goods in connection with the sale or distribution of an alcoholic beverage, in violation of.

From Freixenet Sonoma Caves Appeals Board decision

Tied-house statutes are so named because they were enacted to prevent the return of saloons operated by liquor manufacturers, a practice that had been common in the early 1900’s.

The California Supreme Court has explained that the Legislature enacted the tied-house provisions after the repeal of the 18th Amendment to prevent two particular dangers that had been common before Prohibition

First, theLegislature aimed to prevent “the ability and potentiality of large firms to dominate local markets through vertical and horizontal integration.”

Second, the Legislature wanted to curb “the excessive sales of alcoholic beverages produced by the overly aggressive marketing techniques of larger alcoholic beverage concerns.” 

The Legislature established a triple-tiered distribution and licensing scheme for alcoholic beverages.  Manufacturers were to be separated from wholesalers, and wholesalers were to be separated from retailers.

“In short,business endeavors engaged in the production, handling, and final sale of alcoholic beverages were to be kept ‘distinct and apart.'”

The Legislature intended that firms operating at one level of distribution “were to remain free from involvement in, or influence over, any other level.”

The drafters of the tied-house provisions believed that if manufacturers and wholesalers were allowed to gain influence through economic means over retail establishments, they would then use that influence to obtain preferential treatment for their products and either the exclusion of or less favorable treatment for competing brands.

Legislators were concerned that such practices would lead to an increase in alcohol consumption as retailers adopted aggressive marketing techniques to encourage customers to purchase the alcoholic beverages they stocked.

In addition, the California Supreme Court has noted, interpreting Business and Professions  Code section 25502, a companion statute to section 25500 pertaining to off-sale retail  licenses: [S]ection 25502 prohibits any substantial integration between commercial interests holding wholesale beer and wine or distilled spirits licenses and interests holding general off-sale retail liquor licenses.

This legislative bar to a consolidated operation was not conditioned upon the means by which such a consolidation might be accomplished. Rather, it was to be operative regardless of whether the impetus for the integration came from the wholesaler’s or the retailer’s side; it was the end result, rather than the method of its attainment, that the Legislature exorcised.