Observations on the New York SLA Marketplace Ruling
The declaratory ruling issued by the New York State Liquor Authority (SLA) this week in response to a request by ShipCompliant for approval of their Marketplace Platform has seemingly spawned as many new questions as it has answered. I have read and re-read both the ShipCompliant petition and the SLA ruling, as well as watching the entire (all 3½ hours of it!) SLA Board Meeting where a discussion about the petition ensued. Having done so, I have a few observations about the current and future standing of marketplaces in New York and beyond.
As those of you interested in the future of internet wine marketing know, marketplaces are a growing opportunity for licensed wine suppliers to reach significant new audiences by tapping into the existing customer base of established lifestyle retailers and media companies. They are a recent development and still in their infancy as a marketing model. As such, the rules surrounding them are also evolving, as the model and the technology enabling it is often ahead of the regulatory curve.
California has been the leader in crafting guidelines for the operation of marketplaces by unlicensed third party marketers, issuing an influential advisory in late 2011 that has served as the regulatory framework for the development of marketplace programs. The SLA’s ruling will surely join it to play an important role in how those regulations develop. The initial industry reaction to the ruling appears to be one of no small amount of alarm, and I have read comments suggesting such marketplaces will be shut down. I believe such comments are an over-reaction in light of the limited scope of what the SLA has done:
Limited Application. First and foremost, the SLA’s ruling is in response to a single marketplace program, rather than all marketplace programs, although it certainly provides insight into the SLA’s thinking.
Producer Direct Excluded. Second, the SLA expressly excluded Producer Direct marketplace models, wherein a producer ships directly to a New York consumer under the authority of a New York direct shipper license. Instead, it focused exclusively on the 3-tier model, considerably more complex involving multiple license holders instead of just one.
Disconnect Between Practice and Design. Finally, the SLA’s determination was in large part fueled by the fact the Marketplace Platform was not operated as had been represented in the petition, and this disconnect between actual practice and design was an underlying consideration for much of the ruling’s language.
What do we know?
What is clear is under current New York law it is not permissible to operate a marketplace wherein the licensed seller is passive in the process, meaning they have little control over decision-making and assume little risk of loss. This control extends to the licensed seller being responsible for performing usual retail functions such as product selection, pricing, control of funds, and the amount of profit they will reap. Also, any unlicensed third party compensation cannot constitute a substantial portion of the proceeds of the sale. Finally, flat fee compensation models to the license holder are disfavored as an indicator of seller passivity resulting in illegal availing of the seller’s license privileges.
What don’t we know?
What is less clear is the extent to which the SLA intends to enforce the guidance offered by its own Office of Counsel regarding license holder use of third party marketing services. Counsel opinion allows advertisement on a third party marketer’s website, but not order taking on the site, and requires a flat fee compensation schedule to the marketer not contingent on the number of sales or the amount sold. While stating license holders can take comfort in relying upon the opinion, meaning they do not risk violations by staying within them, the SLA also expressly did not formally adopt them. I take this to mean that not following them will not necessarily constitute a violation.
The Big Picture
While the ruling leaves cloudy the details of how Producer Direct marketplaces will operate in New York in the future, I do not believe this model is in danger. It is a simpler model, with many of the key indicators of availing found in the 3-tier model either absent or more directly in the control of the licensed seller. Furthermore, the SLA made clear both in its ruling and at the Board Meeting that it is cognizant of, and even receptive to, the changing technology of the internet. That they excluded the Producer Direct model from the Ruling and intend to hold public meetings to explore issues surrounding marketplaces is further evidence of their intention to accommodate the future of marketplace models, but to do so in a manner that comports with New York’s alcoholic beverage laws. From that standpoint, this ruling is a positive statement and recognition that such effective marketing solutions have a future in the Empire State and elsewhere.