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Big Bad News For ShipCompliant in New York State

ShipCompliant’s MarketPlace platform violates New York  law, according to last night’s ruling from State Liquor Authority (SLA).

The ruling, was issued in response to a special full board meeting on January 17, 2013 in which ShipCompliant requested a ruling to declare that its direct sales system was legal in New York.

In denying that request, the SLA said:

The facts developed during the Authority’s inquiry and at the Full Board meeting indicate that ShipCompliant’s Request does not provide an accurate or complete description of the actual relations among these business associates.

Contrary to the representations made in the Request regarding the control exercised by the licensed seller, the Authority found that, in fact, the business model among the participating entities placed the licensed sellers in a passive role.

Examples were legion:

  • The advertiser’s agreement with the wholesaler provided that the wholesaler would receive a flat fee per bottle sold;
  • The advertiser’s initial agreement with the retailer provided that the retailer would receive a flat fee per bottle sold;
  • The advertiser selected the wines to be sold through agreements with suppliers;
  • The advertiser set the prices at which to sell the wine. While the retailer could request a different price) so far as the Authority is aware the retailer never did so;
  • The retailer had no agreement with the warehouse to which the wine to be sold was delivered, and did not know where the warehouse was located;
  • The advertiser had an agreement with the warehouse, which included terms relating to shipping the wine from California;
  • All wine sold by the retailer through the MarketPlace Platform was sold from the warehouse. None was sold out of the retailer’s store;
  • Initially, the retailer could “accept” an “order request” by simply not rejecting it within a prescribed time. While the Authority understands that during the  pendency of this request the process was changed to require a computer keystroke by the retailer, the Authority was further advised that the retailer never rejected an “order request.”

During the Authority’s inquiry, the advertiser’s agreement with the retailer was  revised to eliminate the flat fee per bottle sold. The advertiser then submitted  monthly advertising bills to the retailer.

However, the significant variation in the amounts of the advertiser’s monthly bills, the lack of detail, and the retailer’s lack of concern with the bills (as expressed during our inquiry), indicates that the arrangement likely remained, in its practical effect, a flat fee to the retailer per bottle sold. Notably, the retailer never reviewed or approved any advertisements prepared by the advertiser.

While many of the Authority’s concerns relate to the relationship between the advertiser and the retailer, the agreement between ShipCompliant and the retailer also raises questions.

The very detailed and restrictive “Control Account Instructions” governing “all access to the Retailer Control Account [i.e. the escrow account], including, without limitation, the deposit and disbursement of all funds into and out” of this account, calls into question what, if any, control the participating retailer exercised over funds paid for the alcoholic beverages.

The Authority also noted that the agreement between ShipCompliant and the retailer provides that when the retailer accepts an order request such that it becomes an “Order,” “the retailer will be bound to the terms of that Order, including, as applicable, the Product, quantity, pricing, fulfillment Agent and Wholesaler specified in the Order.”

While such a provision might appear on its face to be reasonable, when combined with the passive role of the retailer and the pervasive role of the advertiser, it supports the view that, in their current operation in New York, the model of ShipCompliant and its business associates does not comply with the ABCL or applicable Authority Rules.

The full text of the ruling can be accessed here by premium Wine Executive News subscribers.