Winery Owner Founders on Tied-House Laws

San Francisco restaurateur pays $80,000 fine for selling Kuleto wine in more than two of his restaurants

by Paul Franson
Kuleto restaurants
Pat Kuleto was first ordered to close Boulevard, Nick's Cove and Farallon (from left) for three months. He later reached a settlement that carried an $80,000 fine.
San Francisco, Calif. -- Pat Kuleto, a well-known vintner and one of San Francisco's most prominent restaurateurs, has been fined and restricted after running afoul of California's confusing tied-house laws.

"Tied-house" laws regulate how alcoholic beverages are marketed and how manufacturers, wholesalers and retailers interact. The term originated in England to refer to a bar "tied" by ownership or contract to a specific beer or liquor manufacturer.

Pat Kuleto
Pat Kuleto
Prior to Prohibition this practice was allowed in the United States, but critics complained that it encouraged overconsumption of alcohol, as tied houses offered "free lunch" if you bought a drink to promote business.

To prevent this common ownership, tied-house laws were passed establishing the three-tier system, in which alcoholic beverages are sold by producers or importers to wholesalers, and by wholesalers to retailers. The laws were also designed to prevent a few alcohol-beverage suppliers from tying up bars and dominating the market (as has been true for beer in the United Kingdom).

Under these tied-house laws, the tiers are distinct: Wineries generally cannot own retailers (including restaurants), and neither can distributors (wholesalers), although within California, wineries may directly sell to both wholesalers and retailers as well as to consumers. That's not true in most states.

The laws sometimes seem arbitrary and can be confusing and apparently contradictory at times. James M. Seff, who heads the winery law practice at Pillsbury Winthrop Shaw Pittman in San Francisco, says, "The laws have mostly outlived their usefulness and don't take into account the way modern business operates." that the tied house laws are confusing and make little sense in today's context.

One impact of the tied-house laws, however, is to support distributors, who are important politically and discourage direct sales to restaurants and retailers.

Many winery owners and partners also have invested in restaurants and other retailers, including Don and Rhonda Carano, who own Vintners Inn in Santa Rosa, Leslie Rudd with Press (and Dean & LeLuca and Oakville Grocery), Tim Mondavi, Michael Mondavi (including his Folio Enoteca in Napa's Oxbow Market), Chris Williams, Koerner Rombauer, Michael Moon, Garen and Shari Staglin, Bob Trinchero. Pat Kuleto says he knows of about 100 vintners who invest in restaurants, including some in his restaurants.

Kuleto started Kuleto Estate Winery in Napa Valley (he sold 70% to Foley Estates this year) and is a significant and managing partner in seven restaurants including new Epic Roadhouse and Waterbar in San Francisco, as well as Nick's Cove on Tomales Bay, Farallon, Boulevard and Jardiniere in San Francisco as well as Martini House in St. Helena.

The part of the law that tripped up Kulteo is that a winery can sell his wine in only two restaurants in which he has an interest in California, and the winery cannot supply more than 15% of the alcoholic beverages served there. And, unless the winery sells less than 125,000 gallons of its own brands annually in California, they must supply wine to their own restaurants through a licensed wholesaler.

If a winery has interest in more than two restaurants, it must not to sell its own wine in the additional establishments.

(By contrast, microbreweries have no limits on the amount of their own beverage they can sell, and they can even sell wine and spirits without an expensive license.)

By law, Kuleto wasn't supposed to sell his Kuleto Estate Winery wines in more than two of his eateries. This also applies to minority owners of wineries and, likewise, to vintners who are minority partners in restaurants. 

Like many other alcohol-beverage laws, tied-house laws had not been enforced consistently by the ABC. The understaffed bureau also typically doesn't pursue most infractions (other than serving minors, for example) unless there are complaints.

Kuleto was cited for selling his wines at more than two restaurants, and first he ws offered Draconian punishments: Closing Farallon, Boulevard and Nick's Cove (and Kuleto Estate Winery) for three months (or not serving alcoholic beverages, which could amount to almost the same thing), plus a $300,000 fine. Kuleto says this could have put the restaurants out of business.

After extensive and expensive negotiating, he was fined about $80,000 and says he paid the fine personally (legal fees were also extensive).

The three restaurants were put on probation for 30 months, and fans now can only buy Kuleto's wines at two of his restaurants, presently Waterbar and Epic Roadhouse.  He intends to switch from Waterbar to Martini House, so that people in St. Helena, where his winery is located, can again enjoy his wines.

Pat says that many of the vintners have filed to the ABC to legalize their investments. In addition, Seff points out that more than 40 exceptions to the laws have been passed, some to benefit specific companies.

Kuleto believes that the law could easily be made reasonable and serve its real intent if it were just to require that no more than 15 percent of the wine in any restaurant come from someone with interest in a winery and that the restaurant buys through a distributor. "This would protect the distributor and accomplish its spirit."

He says that he and other restaurants in this position all buy from distributors and don't try to bypass them. "We're not some giant chain trying to cut the distributors out," he says.

Seff agrees: "All Pat wants is to be able to sell his wines in his restaurants, and also let other winery owners invest in his restaurants and sell their wines there." He adds that the ABC is inflexible. "They say, 'We're here to enforce the laws. If you don't like them, go to the legislature to change them,' ignoring the political difficulty of making changes."

Other wineries, restaurants and special event organizers report that the ABC is being increasingly aggressive in enforcing the laws, and also that they're receiving increasing complaints from individuals trying to force enforcement of existing rules.
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