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House Rules, On-Premises Consumption and the Consequences to Retail Licensees

February 15, 2022

Reprinted with permission from the February 10, 2022 edition of The Legal Intelligencer © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Should I stay or should I go? While this popular question may remind most people of the famous 1981 hit by The Clash, for those holding retail liquor licenses this question has harbored newfound uncertainty due to the restrictions upon on-premises consumption brought about by the COVID-19 pandemic.

The restrictions placed upon both on-premises dining and consumption of alcoholic beverages by the COVID-19 pandemic have caused many retail licensees to adopt “house rules” whereby the on-premises consumption of alcoholic beverages is dissuaded by various practices. One such practice became the basis for a Pennsylvania Liquor Control Board (the board) decision whereby the board reinstated a citation issued by the Bureau of Liquor Control Enforcement (the bureau) against a retail licensee who maintained a practice of requiring the purchase of food in order to purchase alcohol for on-premises consumption, while not applying the same requirement for off-premises consumption of the same beverage. See Pennsylvania State Police, Bureau of Liquor Enforcement v. Rinku, Pennsylvania Liquor Control Board (2021) (Rinku). However, before discussing the specifics of the case, it is important to provide context on the term “retail licensee.” Retail licensee is commonly used to refer to either an Eating Place Retail Dispenser License (E Licensee) or a Restaurant Liquor License (R Licensee). While both of these licensees serve the primary purpose of providing food to the public, they differ in that an R Licensee may serve liquor, wine and beer products, while an E Licensee may only sell beer or its variants. However, both E and R Licensees are prohibited from selling any single, open container of alcoholic beverage for consumption outside the establishment. An R Licensee may be an elegant up-scale restaurant or a simple corner bar. An E Licensee is typically a corner store or gas station.

In the Rinku case, on three separate occasions a bureau officer entered the licensed premises of an E Licensee and selected a 24 ounce can of beer. During the checkout process, the bureau officer asked the employee where he could sit to drink the beer on the licensed premises. The employee stated that their house rule stipulated that a food purchase was required in order to remain on the premises and consume the beer. The bureau subsequently used a citation stating that the retail licensee “failed and refused to allow the consumption of malt or brewed beverages purchased at [their] licensed establishment to be consumed on the premises.”

This citation was at first dismissed by order of an administrative law judge (ALJ) based on their interpretation of the Liquor Code’s definition of a “restaurant,” noting that nothing in the Liquor Code “prohibits a licensee from requiring a food purchase in order to consume alcohol on the licensed premises.” The ALJ also interpreted an advisory notice released by the board in September 2019 as not explicitly prohibiting a practice of “requiring a food purchase to consume beer on the premises” nor requiring “food purchases for to-go sales just because the licensee requires food purchases for on-premises consumption.” See Advisory Notice No. 24, On-Premises Consumption of Beer and Wine, Pennsylvania Liquor Control Board (Sept. 11, 2019). The bureau chose to appeal the ALJ ruling, stating that while a house rule requiring the purchase of food in order to purchase alcohol is consistent with the definition of restaurant in the Liquor Code, “not applying that same practice of requiring the purchase of food in order to purchase alcohol for off-premises consumption allows discouragement of on-premises consumption through the use of disparate policies.” It was these “disparate policies” that were the focus of the ruling of the board in Rinku, and the ruling of the board should be a word of caution to any retail licensees utilizing similar practices.

At the heart of the bureau’s contention that a retail licensee utilizing “disparate policies” for on-premises and off-premises consumption being a violation of the Liquor Code is the holding in Malt Beverages Distributors Association v. Pennsylvania Liquor Control Board, 974 A.2d 1144 (Pa. 2009) (MBDA), which held that a retail license holder that wishes to sell alcohol to-go must make the alcohol available for on-premises consumption under terms that are “no stricter than the ones imposed on off-premises sales.” If a retail licensee were to put in place additional restrictions on the purchase of beverages for on-premises consumption, this would circumvent the three-tier system of alcohol distribution that is utilized in Pennsylvania. In this system of alcohol distribution, which is rather restrictive when compared to those of other states, the producer of alcoholic beverages sells to the beverage distributor, who then sells to the retail licensee, who in turn sells to consumers.

The court in MBDA stated that retail licensees inhabit a distinct “market niche,” in which they may not limit their business to takeout only, as that niche is occupied by distributors who are subject to separate restrictions from a retail licensee; i.e., distributors may only sell beer for takeout by the case and may not permit on-premises consumption, while retail licensee takeout transactions have a maximum fluid ounce restriction and must allow customers to consume beer on the premises. In summation, the board determined that the MDBA holding means that retail licensees who wish to sell beer for takeout must also make that beer available for on-premises consumption “under terms that are no stricter than the ones imposed on off-premises sales,” which includes making those alcoholic beverages available for on-premises consumption at all times when it is offering those alcoholic beverages for off-premises consumption.

With the above background in mind, we return to the Rinku case. While the retail licensee in that matter was not explicitly prohibiting the on-premises consumption of beer, its house rules made the purchase of beer for on-premises consumption more expensive than for off-premises consumption by requiring a food purchase. The board decided that the adoption of such a house rule is inconsistent with the ruling in MBDA and is thus an impermissible practice. The ruling of the ALJ was reversed, and the case was remanded for the imposition of an appropriate penalty.

So, where does that leave retail licensees today? Moving forward, retail licensees (particularly E Licensees) should be wary of any house rules they choose to implement that would put any undue hinderance on a customer’s purchase of a beverage for on-premises consumption when compared to a purchase of the same beverage for off-premises consumption. While COVID-19 restrictions imposed at the federal, state, and local level appear to be subsiding (barring any fresh variant outbreaks), some retail licensees may still wish to dissuade customers from purchasing beer for on-premises consumption through the imposition of house rules such as an R Licensee serving differing volumes of beverages for off-premises consumption and on-premises consumption, or a retail licensee serving differing brands of beer and wine for on-premises consumption than they do for off-premises consumption. For the former, the amount of beer or wine served for on-premises consumption can be minimal, so long as it is at least one standard size drink per customer per day (as a reminder: 12 fluid ounces is the standard size drink for any malt or brewed beverage; while a standard size drink for wine is 5 fluid ounces). For the latter scenario, R Licensees do not have to offer the same brands of beer and wine for on-premises consumption as they do for off-premises consumption; while E Licensees must offer the same brands for takeout as they do for on-premises consumption.

Jack Byrnes is an associate with McNees, Wallace & Nurick in the firm’s Harrisburg office where he practices in the corporate & tax, mergers and acquisitions, gaming & sports wagering, and food & beverage law practice groups.