WineLaw.ca

On Friday July 22nd, the Premiers of British Columbia, Ontario and Quebec announced a limited deal to improve access to Canadian wine in their respective provinces. The joint press release is here: Increasing the Flow of Wine Among Quebec, Ontario and British Columbia. The press release does not provide any detail as to what the initiative covers but it refers to easier on-line access to wines produced in these three provinces. It also refers to the fact that the initiative will be implemented through actions of the liquor boards in each province. As noted, there is currently very little information about the extent of this agreement.

However, it is possible that the agreement is based upon a relatively new e-commerce program unveiled by the LCBO (Ontario\’s liquor board) late last year, which indicates a process for \”special orders\” of Canadian wines. The details of that program can be found here: LCBO E-commerce, particularly in the links labelled \”e-commerce presentation to the trade\” and \”FAQs about e-commerce\” (both are PDF documents). If the LCBO program is the basis for this provincial deal, then the following characteristics would constitute the fundamentals of the program:

• Wineries would be able to list their products on an e-commerce website run by the liquor board in the other province (e.g. LCBO or SAQ, Quebec\’s liquor board).
• Consumers in the other province could purchase any of the listed wines so long as they ordered by the case. 
• The wines would not be stocked by the liquor boards. Rather, they would be ordered by the liquor board from the winery following a customer order.
• The winery would ship the wine to the liquor board in the other province, who would then either deliver the wine to a government liquor store for pickup by the customer (free) or arrange for delivery to the customer\’s home or office at extra cost. Delivery would only be possible within that liquor board\’s particular province.
• It seems likely that the wines listed on the site would be subject to provincial liquor board markups, which in the case of Ontario are 73.5% for out of province wine. This would mean that the wines would either have a higher end-consumer price in the other province than they would in their home province or that the winery would have to sell to the liquor board at a significant wholesale discount.

The Alberta government has announced that, effective August 5th, it is eliminating the discriminatory liquor markup policy that was introduced in the last provincial budget. As reported here earlier, Alberta had previously had a liquor markup policy that applied equally to products regardless of place of origin. The budget changed that by providing lower preferential markups to small breweries located in Alberta and provinces that had signed the New West Partnership. As a result, an Ontario brewery, Steam Whistle, sued the Alberta government and obtained an injunction to prevent the change on the basis of a preliminary argument that s.121 of the Constitution (the \”free trade provision\”) might prevent provinces from charging markups or fees that did not apply equally to all Canadian products. The Alberta government has now announced that they are reversing course and going back to a system that is non-discriminatory: Government to Create Consistency for Alberta Beer Markups. This move should effectively end the Steam Whistle case – which will also end the potential for a court ruling on the effect of s.121. At the same time, the Alberta government announced it will later introduce a \”grant program\” to encourage the growth of Alberta based small brewers.

The New Brunswick government has filed an appeal of the \”cross-border\” liquor case that was decided last month (the Comeau case) and which held that provincial liquor laws could not impede the \”free trade zone\” guaranteed by s.121 of the Constitution.  The appeal goes directly to the New Brunswick Court of Appeal (skipping an intermediate level of court) and contends that the judge made errors of law in interpreting s.121. One of the primary appeal arguments is that the judge did not follow older decisions of the Supreme Court of Canada that interpreted s.121 in a much more restrictive manner. The CBC news report on the appeal is here: New Brunswick appeals cross-border liquor case. The appeal is not surprising given the importance of the issues in this case.

In what could prove to be a groundbreaking decision of immense importance to the Canadian wine industry, a New Brunswick judge has found today that provincial laws that restrict the interprovincial transport of liquor are unconstitutional. The judge found that s.121 of the Constitution which guarantees a free trade zone within Canada does not allow provinces to create laws that prevent Canadians from transporting liquor from another province. It is not currently binding on other provinces because it is the decision of a NB trial court. However, if it is appealed to the Supreme Court of Canada, which seems all but certain, then it may eventually become binding across the country. Even now, it will likely be influential because there is now a precedent for other Canadian jurisdictions, if not a binding one. I note that all Canadian provinces have some form of laws, regulations or policies that inhibit the interprovincial trade in alcohol (Manitoba is the least restrictive). All of these restrictions are now vulnerable to a similar challenge.

This case may become Canada\’s Granholm (a case which opened up the U.S. market to direct to consumer wine shipping). This may be the start of a new era when Canadians from one part of the country will be able to legally purchase wine, or other alcohol, from another part of the country just as most people in the world are able to do. This is a very significant development for the Canadian wine industry because it may transform their markets from customers in a single province to all of the residents of the entire country.

Here is a link to the full decision: NB Liquor case.

From a wine lawyer\’s perspective, 2016 is shaping up to be what could be an exciting year in Canada. There are two significant court cases likely to be decided this year, from opposite sides of the country. Either one of these cases could significantly change the regulatory landscape for the wine industry in Canada.

In this sense, Canada could see a decision which may eventually have \”Granholm-like\” significance. Granholm v. Heald was the 2005 U.S. Supreme Court decision that opened the U.S. wine market to direct to consumer shipping by holding that a state could not discriminate against out of state wineries if it allowed in-state wineries to direct ship to consumers. In the recent Silicon Valley Bank \”State of the Industry 2016\” report, it was commented that the U.S. wine industry \”really dodged a bullet\” due to the Granholm decision because the decision \”knocked the legs out from protectionist state laws that favored in-state wine producers\”. The subsequent rapid expansion of the direct-to-consumer wine market greatly helped small wineries who found it difficult to obtain distribution because of a consolidation of distributors and the growth of grocery/big-box wine sales.

Wine media in Washington state is reporting on a Bill that would increase the number of secondary (off-site) tasting rooms for WA wineries to a new maximum of four: see Washington Wineries Ask Legislature for More Tasting Rooms. Secondary tasting rooms have proved to be extremely successful in Washington since a legislative change in 2000 which introduced the current allowance of two off-site tasting rooms per winery. The change allowed wineries to locate tasting rooms either in downtown wine area towns (e.g. Walla Walla) or closer to urban markets (e.g. Woodinville, which now has 130 tasting rooms just northeast of Seattle). These changes have meant that wineries could increase sales in their DTC channel which is, by far, the most profitable retail channel for the wine industry. Meanwhile, here in B.C., the provincial government has accepted a recommendation of the liquor policy review that secondary tasting rooms should be permitted. However, to date, there has been no announced timeline for implementation and wineries are unable to operate even a single off-site tasting location. 

The Toronto Star is reporting the details this morning of the Ontario government\’s plan to roll out wine sales in supermarkets: Ontario Uncorks Plan for Supermarkets. The plan calls for a phased roll-out of wine sales in supermarkets with an equal number of licenses to be issued at each stage for: a) \”Ontario-only\” wine, and for b) the sale of all international wines. In the first year, 35 licenses of each type would be issued (70 total). In 2019, 40 more licenses of each type would be issued (80 more for a cumulative total of 150). At the end of the phase-in period, all licenses would permit the sale of all types of wine. There is no limit to the number of licenses eventually issued. The licenses would permit the sale of wine on regular supermarket shelves (does not require segregated store within a store). The issues surrounding this plan and BC\’s supermarket plan will be discussed at the upcoming Wine Law Conference in Vancouver, to be held on February 20th. Please attend the conference for a full analysis of the issues.

The upcoming BC Wine & Liquor Law Conference will provide a comprehensive regulatory update on many issues facing the wine and liquor industries in British Columbia. The conference will take place on Monday, February 22, 2016 at the Metropolitan Hotel in downtown Vancouver (this is the beginning of the \”Vancouver International Wine Festival\” week). The agenda includes coverage of: the ongoing changes to BC\’s liquor laws (including those focused on BC\’s retail environment, wholesale pricing structure and distribution system), as well as interprovincial shipping, developments in the discussions around new British Columbia appellations, new water management laws, liquor host liability for wineries, and some views from south of the border on distribution in the U.S. and the use of social media for direct sales. There is a discounted tuition fee of $300 USD for those working in the wine or liquor industries. Full information and registration is here: Law Seminars BC Wine & Liquor Law Conference.

The Saskatchewan Government has announced some major changes to its retail system for liquor, contingent upon the Brad Wall government being re-elected in April 2016. Details on the changes can be found here: SLGA – Future of Liquor Retailing and in this PDF: Future of Liquor Retailing Backgrounder. If implemented, there will be some very significant changes to to the liquor retail system in Saskatchewan that can be contrasted with the changes being made here in British Columbia:

Expansion of Private Retail. Saskatchewan plans to convert 40 of its existing 75 government liquor stores to private retailers. In addition, it will issue licenses for 12 new private retail stores in communities that have been designated as underserved. The end result of this expansion will be that the government retailer will only operate 35 stores. Saskatchewan currently also has 4 private liquor retailers, 190 rural liquor stores, and 450 \”off-sales\” locations. Saskatchewan is not introducing liquor sales in grocery stores. By contrast, BC\’s changes have included an expansion of government liquor retailing through extended hours as well as the introduction of wine sales in a limited number of supermarkets. There has been no increase in the number of freestanding private liquor retailers in BC.

Level Playing Field. Saskatchewan is planning to introduce a new wholesale pricing system for liquor such that all retailers (both government and private) pay the same price for all products. British Columbia has also done this to some extent, with the one exception that BC\’s new supermarket wine vendors, as well as its existing VQA stores, currently pay significantly less at wholesale than everyone else. In addition, Saskatchewan will permit restaurants/bars/hotels to buy liquor from any retail source that they choose. By contrast, BC still requires that these customers purchase only from government channels. Saskatchewan will also create consistent business operation rules (e.g. hours of operation, pricing, discounts) for all retailers. 

Discounts on Wholesale Pricing. Saskatchewan will allow individual retailers or retail chains to negotiate lower wholesale pricing from suppliers through incentives (see below). Presumably, this could be based on volume or other factors. It will also allow suppliers to set \”system-wide\” discounts at the wholesale level. In contrast, British Columbia only allows \”system-wide\” discounts. 

Inducement and Trade Practice Rules. Saskatchewan will eliminate its prohibitions on inducements (financial incentives provided to retailers from suppliers such as co-op advertising that are common in other retail sectors). The only restriction in SK will be that incentive/inducement arrangements cannot exclude competitive products. In contrast, British Columbia has not reformed its inducement and trade practices rules (a 2010 industry consultation appeared to indicate that it would do so but that did not happen).

Changes to Liquor Board Markups. Saskatchewan has introduced a new system of liquor markup at the wholesale level which will generate the \”wholesale prices\”. Retailers will then set their own retail level prices themselves with varying retail level profit margins. This system is basically the same as BC\’s new system. However, the new markups for wine in SK are dependent upon alcohol level and are higher. For wine that has 14.5% alcohol or less, the markup will be 94% on the first $12.50 per litre of supplier cost and then 53% markup on the remaining value. Wine that has an alcohol level higher than 14.5% is treated the same as spirits with a markup of 125% on the first $25 per litre of supplier cost, 83% on the next $12.50 per litre of value and then 56% on the remainder. These markup levels are considerably higher than the levels imposed in British Columbia (89% on the first $11.75 per litre of value, 27% on the remainder for all wines). For wines that are over 14.5% alcohol (which would include many New World wines as well as pretty much all fortified wines such as sherry and port), the resulting consumer prices in SK will be extremely high (certainly higher than in BC and significantly higher than in AB). 

None of the above changes will actually be made unless the current SK provincial government is re-elected in April 2016.

Saskatchewan is now open for DTC shipments of wine (and spirits) from BC. However, the customer must obtain an authorization permit from the SLGA which is valid for one year. The maximum quantity of wine per shipment is 9 litres (one case) but multiple shipments during the year are permitted. Upon receipt of a shipment, the customer must pay a significant markup to SLGA which for wine is $5.25 per 750 ml bottle. See the SLGA info page here: Direct Shipment of Wine.