- Introduction
In the twenty-first century, there is an app for everything. Looking to buy more alcohol but do not feel safe driving to your local liquor store to replenish your alcohol supply? No need to worry because there is an app that will deliver alcohol straight to your doorstep. In 2012, three Boston College graduates created the first alcohol delivery app known as “Drizly.” Luke O’Neil, Thursty: A new app called Drizly delivers booze right to your doorstep, Metro.us (May 22, 2013). After completing the initial testing of the app in Massachusetts, the three co-founders expanded its reach to New York, Los Angeles and Chicago. Tom Huddleston, Jr., Ordering on-demand booze is about to get easier, Fortune (May 18, 2015). Today, Drizly is operating in the major cities of thirty states and even Alberta, Canada. Drizly.com (2021). However, Drizly is not alone in the delivery app market with competitors like Swill, Minibar, and Saucey offering similar services. But with Uber’s recent acquisition of Drizly for $1.1 billion, this app seems to be the top market participant. Tom Wark, Why Uber Will Not Be Challenging How Alcohol is Sold and Distributed, Fermentation Wine Blog (Feb. 15, 2021).
So, how does Drizly actually work? After a user downloads the app onto their smartphone device and makes an account, the user is able to search for their desired alcoholic beverage and place an order with one of Drizly’s retail partners. O’Neil, (2013). The retail partner then processes, fulfills, and delivers the order to the consumer within thirty to sixty minutes from the time the consumer finalized their order. Id. From this basic explanation, a few initial concerns are obvious. First, how do alcohol delivery apps fit within the three-tier system and other relevant alcohol regulations? Second, if the app does not fit within the three-tier system, how are Drizly and its competitors cheating the system? The answer to these questions is that they do not fit within the current framework and have carefully crafted their business model to avoid regulation. To be properly regulated, alcohol delivery apps require their own separate fourth tier.
- The Laws That Exist Today
There are four areas of the law that are implicated by alcohol delivery apps: the three-tier system, distribution, licensing, and legal drinking age. However, it is important to first understand who has the power to regulate this area and how they do so. The Twenty-First Amendment of the United States Constitution not only repealed the Eighteenth Amendment’s Prohibition, but it also confers onto the states the authority to regulate the transportation and importation of alcoholic beverages. U.S. Const. amend. XXI. In California, the State’s Constitution vests the Department of Alcohol Beverage Control (“ABC”) with the exclusive power to regulate the manufacture, sale, purchase, possession and transportation of alcohol. CA Const. Art. 20 § 22. The ABC’s regulations can be found in the California Business and Professions Code, Division Nine, commonly known as the “Alcohol Beverage Control Act” (the “Act”) and is a set of permissive statutes. Cal. Bus. & Prof. Code §§ 23000-25762. The Act will be the main reference for the laws at issue here.
First, the three-tier system is the area most implicated by alcohol delivery apps. Since the end of Prohibition most states use this regulatory scheme to separate and regulate the different actors in alcohol: manufacturers (tier one), wholesalers (tier two) and retailers (tier three). Gregory E. Durkin, What Does Granholm v. Heald Mean for the Future of the Twenty-First Amendment, the Three-Tier System, and Efficient Alcohol Distribution?, 63 Wash. & Lee L. Rev. 1095, 1097 (2006). The three-tier system generally prohibits any one tier from intermingling with another. Id. This basically means manufacturers cannot directly sell to consumers, instead they must sell their products to licensed wholesalers who then sell the products to licensed retailers. Id. Further, each tier has their own separate set of regulations that permit and prohibit specific conduct.
Second, alcohol distribution is heavily regulated. This area of law can be complicated to understand since some of the more complex regulations are found here such as strict distribution agreement requirements and franchise laws. Further, while all fifty states regulate the sell and distribution of alcohol, they all have different methods in doing so. Regardless of the different state approaches, the three-tier system and tied-house laws generally require distributors to act as the middle-man between producers and retailers. The role of distributors is to sell the manufacturers’ products to retailers, requiring distributors to have sales representatives who visit bars and take orders for multiple different brands (manufacturers) they represent. John Szymankiewicz, Beer Law (2017). The brands they represent make up a wholesaler’s portfolio and it is the wholesaler’s responsibility to sell the brands’ products by investing time and money into each individually. Id. Further, every brand in the portfolio must have entered into a distribution agreement with the wholesaler. Distribution agreements, also called franchise agreements, have multiple mandatory provisions which includes defining an exclusive sales territory and tough termination protections that overwhelmingly favor distributors over brewers. Cal. Bus. & Prof. Code §§ 25000.5, 25000.7.
While most states have a mandatory second tier, there are limited exceptions for self-distribution in some states, including California. Like the rest of the Act, self-distribution is heavily regulated. As such, the costs of self-distribution and other factors lead most manufacturers to use a wholesaler. Szymankiewicz, (2017). Nonetheless, there may be some hope for the self-distribution realm. There is current proposed legislation in California that would expand a beer manufacturer’s distribution rights by allowing them to obtain a beer direct shipper permit and ship directly to California consumers. Beer manufacturers: direct shipper permits, Senate Bill No. 517, 2021 Cal. Leg. 2021-2022 Sess.
Third, all players in the alcohol business must obtain a license to participate. Cal. Bus. & Prof. Code § 23300. The relevant code section provides that “No person shall exercise the privilege or perform any act which a licensee may exercise or perform under the authority of a license unless the person is authorized to do so by a license issued pursuant to this division.” Id. Therefore, any person or entity without a license is prohibited in engaging in any conduct that falls within the ABC’s scope and can face criminal charges for engaging in such conduct. Id. at §23301. Further, an authorized licensee is only permitted to exercise the rights and privileges specified for the license they hold. Id. at §23355.
Finally, all licensees that have the authority to sell alcohol are prohibited from selling to individuals under the legal drinking age of twenty-one. Cal. Bus. & Prof. Code § 25658. A violation of this law can result in criminal charges and fines up to $1,000. Id. Further, the licensee does not need to have actual knowledge that the individual is not twenty-one to be held liable. Id.
- How Alcohol Delivery Apps Are Cheating The System
With a basic understanding of the different laws being implicated by alcohol delivery apps, how are alcohol delivery apps cheating the system? The credit is due to their carefully crafted business model. Drizly’s website boasts that their “model is built to be compliant with the regulatory bodies in every state we operate in.” Drizly.com (2021). The most important part of their business model is the partnership relationship between Drizly and local retailers. Drizly’s robust network includes over 4,000 retail partners from coast-to-coast. Id. Furthermore, in 2018 Drizly entered into a partnership with none other than Anheuser-Busch. Drizly Partners with Anheuser-Busch to Stock Office Fridges, Brewbound (July 11, 2018). However, this partnership agreement is different than its regular retailer partnerships as Drizly’s sole job is to stock Anheuser-Busch offices with cold beer. Id. In a regular partnership, Drizly does not actually bring in any profits from the transaction between consumers and retailers. Ni Xu, Drizly: the disruptor of the 3-tier system?, Digital Initiative (Dec. 9, 2015). Instead, Drizly brings in money by charging a monthly license fee to its local retailers. Id. Furthermore, the person who delivers the alcohol to the consumer is not employed by Drizly, but rather the retail partner. Id. Basically, Drizly is simply an interface that retailers use to bring their shelves to the internet which allows consumers to purchase alcohol from wherever they desire.
In light of the three-tier system, where do alcohol delivery apps fit? By not engaging in the actual sale or distribution of alcohol, Drizly and its competitors are able to completely escape regulation. Drizly’s own website states “Drizly was uniquely designed to operate within the three-tier system.” Drizly.com (2021). But is this statement true? The app does not seem to operate within the system, but rather it operates around the system. By strategically not taking any money from the transaction, a delivery app cannot be seen as neither a retailer nor distributor. Instead, they become yet another middle-man, but this time it is between retailers and consumers. While it is natural to see Drizly as a distributor, they stretch the laws even further by avoiding distribution agreements. Again, Drizly’s own website says “we do not guarantee exclusivity to any one store in a given area,” which means they do not enter into distribution agreements with its retail partners. Id. Further, Drizly leaves it up to its retail partners to determine its delivery zone, hours, fees, minimum purchase amounts and more. Id. Drizly’s business model shows that they have carefully reviewed the different states’ alcohol regulations and found a way to operate around the three-tier system and distribution regulations.
Drizly again escapes regulation by not needing a license to operate. In California, the laws require anyone wanting to operate under the Act to obtain a license. Cal. Bus. & Prof. Code § 23300. The Act defines a wholesaler as “any person other than a manufacturer, winegrower or rectifier who is engaged in business as a jobber or wholesale merchant, dealing in alcoholic beverages…” Id. at § 23021. Further, it gives a weak definition of retailers by considering a retailer to be “any on- or off-sale licensee.” Id. at § 23023. With these working definitions, delivery apps do not seem to fall into either tier, even if the wholesaler definition is analyzed broadly. A delivery app certainly is not a manufacturer, winegrower or rectifier (“a person who colors, flavors or otherwise processes distilled spirits”). Id. at § 23016. But can they be considered jobbers or wholesaler merchants? These terms both define the same concept of distributors: people who buy products in bulk from manufacturers and then resell to retailers. Bob Adams, Wholesalers, Jobbers, Distributors & Importers, BusinessTown (2021). Since the apps do not purchase from alcohol or resell to retailers, they are not wholesalers. Further, delivery apps are not on- or off-sale licensees as they are not the actual business consumers are buying from. Therefore, since delivery apps do not fit within either definition and do not sell or deliver the alcohol, they are not required to obtain a license under the current laws.
Lastly, Drizly uses an identification catalog system called Mident to ensure the person receiving the alcohol is of legal drinking age. Dennis Keohane, How Amazon is getting beat by an upstart alcohol delivery app in its own backyard, Pando (Apr. 8, 2015). Drizly provides its retail partners with a Mident identification scanner which allows the delivery driver to scan the consumer’s ID and confirm the consumer’s age. Id. Thus, without a valid ID proving the consumer is of legal drinking age, they will not be given the alcohol. Furthermore, since Drizly is not involved with the alcohol purchase and the person delivering the alcohol is employed by the retailer, it is the retailer’s responsibility to ensure the person accepting the delivery is twenty-one or older. As such, the final concern is avoided, allowing Drizly and other delivery apps to completely evade state alcohol regulations as they currently exist.
- How Alcohol Delivery Apps Affect Craft Breweries
It is still not clear whether alcohol deliveries apps like Drizly have a negative or positive effect on craft breweries. With Drizly being the largest e-commerce alcohol platform in North America and its new owner being Uber, it seems Drizly will likely have a negative effect on small breweries. O’Neil, (2013). While Drizly does not directly determine what products are on a retailer’s shelves, wholesalers will be more likely to sell a certain brand to Drizly’s retail partners because of the positive profits. Further, Drizly tracks consumer drinking habits and regularly publishes reports on the data. Uber Acquires Beer Delivery App Drizly in $1.1 Billion Deal, Hop Culture (Feb. 2, 2021). Therefore, if big beer is selling better through Drizly than craft beer, wholesalers will sell more big beer products to maximize the profits for all three tiers. Also, Drizly and most other alcohol delivery apps currently only operate within major cities. This means that if a craft brewery’s distribution agreement does not reach a major city, they will be excluded from Drizly’s robust market. In order to combat this issue, larger wholesalers will need to start representing more small producers, but this solution is not likely.
- The Proposed Solution
The manufacture, sale, purchase, possession and transportation of alcohol is one of the most heavily regulated areas. While the three-tier system is not perfect, it does work in a way to protect craft breweries from being overran by big beer. If lawmakers continue to ignore this sleeping giant, it may eventually become so big that post hoc regulation will be difficult to achieve. Therefore, state legislatures need to act quickly to amend their current three-tier system to find a home for Drizly and its competitors, and that home is a new fourth tier. To actually promote temperance and keep alcohol out of the hands of minors, alcohol delivery apps need to be regulated through the ABC. As of now, a user can order as much alcohol as they like and have it delivered on-demand to their doorstep. As long as the recipient has a valid ID they are able to collect the alcohol order, but it is likely easy to use a fake ID or another person’s ID who is over twenty-one. Lastly, while it is positive that the consumer is not driving under the influence to get more alcohol, should we really promote an app that capitalizes off drunk consumers?
State lawmakers need to add alcohol delivery apps to their regulatory scheme because as of now, this money making machine has evaded regulation. Drizly and its competitors are utilizing a loophole in the ABC by not gaining any profits from the direct sale itself and not employing the delivery drivers. Currently, there are no laws that control alcohol delivery apps from profiting off alcohol and it is clear they do not fit in the normal regulation scheme. Therefore, legislators need to act now to create a fourth tier for Drizly and its competitors to be actually regulated under the Act.