Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees

By: John Edwards & John Hinman

This blog post concerns a very significant piece of legislation (Senate Bill 378) currently being considered by the California Legislature.  For over 60 years, licensees have had the right to challenge ABC license suspensions before they go into effect; SB 378 takes away that right. SB 378 removes existing and basic due process rights of all types of alcohol beverage licensees to challenge potentially arbitrary and capricious ABC action in a neutral forum – actions that are often undertaken at the behest of local authorities or neighbors with an axe to grind against the licensee involved.

The tension between local authorities, neighbors and licensed establishments has never been higher and can be seen in licensing and enforcement decisions involving wineries, distilleries, breweries, retail stores and nightclubs throughout the state.  If the basic rules of engagement in place since the 1955 adoption of the ABC Act are going to be significantly changed then at the very least the licensees of this state should be adequately informed of the reasons for basically doing away with the Appeals Board by stripping away the Board’s power to do pre-penalty review.

Historical Background: the ABC Act and the Appeals Board

The ABC Act was adopted in 1955 to create a clear interface between the power of the state to regulate alcohol and the rights of California alcohol licensees to operate their businesses free of discriminatory, arbitrary and unfair enforcement.  This followed a period where establishments (particularly gay bars in San Francisco in the infamous 1950’s era “Black Cat” cases) had been singled out by law enforcement for special undercover State Board of Equalization (then the alcohol licensing and enforcement authority) investigations aimed at wiping out the perceived “immorality” that had started to blossom in the San Francisco entertainment community, and in other places throughout the state.

The history of alcohol enforcement up until that time had been marked by the indiscriminate, and often arbitrary, use of the state police power to punish those whose activities were deemed “immoral,” a phrase that covered a lot of activities, including personal sexual preferences. The result after reform was Article XX, Section 22 of the California State Constitution. This article created an independent agency (the Department of Alcoholic Beverage Control or “ABC”), which itself was to be checked by an oversight board called the “Alcoholic Beverage Control Appeals Board,” which was made up of three members appointed by the Governor, who serve at the Governor’s pleasure. The purpose of the Appeals Board was to establish limited review as a matter of right of ABC decisions in cases assessing punishment where the decision was alleged to be unlawful, unfair, arbitrary or capricious. The following constitutional standard now applies to Appeals Board review:

Review by the board of a decision of the department shall be limited to the questions whether the department has proceeded without or in excess of its jurisdiction, whether the department has proceeded in the manner required by law, whether the decision is supported by the findings, and whether the findings are supported by substantial evidence in the light of the whole record. In appeals where the board finds that there is relevant evidence which, in the exercise of reasonable diligence, could not have been produced or which was improperly excluded at the hearing before the department it may enter an order remanding the matter to the department for reconsideration in the light of such evidence. In all other appeals the board shall enter an order either affirming or reversing the decision of the department.” Article XX, Section 22, California Constitution.

This articulation of the ABC Appeals Board review power is as basic a description of “due process” rights as one can imagine. Who can argue with requiring findings, or substantial evidence, or prohibiting punishment based on evidence improperly excluded? Without this level of available review the ABC could proceed in an arbitrary and capricious manner, could punish licensees based upon the whim of whoever was in power at the time or, even worse, based on false allegations from disgruntled local neighbors and authorities.  Testing allegations of misconduct before punishment is imposed in a fairly conducted judicial hearing is a fundamental right.

The system has worked well for the last 60+ years, but not without occasional tension between the ABC and the Appeals Board. Even though the ABC probably prevails in 95%+ of the appeals that are filed, the ABC still does not like being overruled by the Appeals Board. In recent years, the ABC has made clear on many occasions its displeasure with Appeals Board decisions requiring that the ABC observe basic legal rights (including its own regulations). In fact, as explained below, the ABC currently takes the position that the Appeals Board decisions cannot be relied upon by licensees seeking guidance as to what is and is not lawful in an increasingly complex world.  That itself is a serious issue.

What Does Senate Bill 378 Do?

This brings us to State Senator Anthony Portantino’s Senate Bill 378. This bill threatens the livelihoods and due process rights of alcoholic beverage licensees throughout California.  Senate Bill 378:

●      Empowers the ABC to issue “temporary” restraining orders suspending licenses;

●      Provides that the “temporary” restraining orders can last up to 22 days (or even longer) before a hearing is held by the Department (which itself has just issued the order) on whether to expand that order to a preliminary injunction, which, in turn, would last until a hearing on the merits, which is scheduled at the discretion of the ABC (which in our experience, usually takes three to four months to calendar);

●      Strips the Appeals Board of its constitutionally-created power to review “temporary” restraining orders of the ABC and, instead, relegates licensees to petitioning a Court of Appeal to issue a discretionary writ of review;

●      Allows “temporary” restraining orders to be issued at the behest of the Department or a city attorney; and

●      Allows the ABC to issue the “temporary” restraining order on the strength of an affidavit signed under oath by a police chief, county sheriff or mayor/city manager.

What Could Go Wrong?

The bill would make possible the following scenario:  A city official reacts to a local resident who complains about an establishment by filing an affidavit accusing the licensee of violating the ABC laws.  The Department issues a “temporary” restraining order suspending the license, and the first opportunity that the license may challenge that order does not occur for 22 days, during which its business is shut down.  The Department can then issue a preliminary injunction continuing the shut-down until a hearing on the merits, which will be scheduled at the Department’s discretion—could be a month, could be a year.  Even if the charges are ultimately proven to be false at the hearing on the merits, few licensed businesses are likely to survive the prolonged shut-down.  A licensee’s only avenue of redress is to seek review from a Court of Appeal, which may or may not grant the petition, and certainly not until the damage from the shut-down has already happened.

Good luck to the investors in that business.

Even aside from the substantial question of whether Senate Bill 378 violates the California Constitution, it would make dangerous and unnecessary changes to California law for the following reasons:

1.      The ABC already has the power to act quickly to forestall violations by filing accusations and scheduling prompt hearings.  There is no need to empower it unilaterally to issue suspension orders on the say-so of city officials operating in a political arena.  There are many cases on the books in which the Appeals Board or the courts have rejected the allegations of complaining local officials after they had been tested under oath in a contested hearing, or discovered a lack of evidence to prove a local resident or ex-employee’s allegation. 

2.      As noted above, the Appeals Board has a constitutionally-created role of appellate jurisdiction over actions of the Department.  The drafters of the California Constitution wisely decided that some direct oversight of the enormous discretion vested in the ABC was necessary.  That judgment has been vindicated by many years of practice.  The advantages of Appeals Board review are that appeals can be taken as a right, the process takes far less time than a typical appeal to the busy Courts of Appeal and the members of the Appeals Board are well-versed in industry practice and ABC law.

The Courts of Appeal are already busy and often reject appeals from the ABC Appeals Board as it is.  Senate Bill 378 would require licensees whose licenses have been suspended by a “temporary” order to seek review in a Court of Appeal, with the Court having the discretion to grant or deny such review.  The Courts of Appeal have general appellate jurisdiction over all civil and criminal appeals, and their dockets are crowded. 

How likely are the Courts to put aside appeals from murder convictions and multi-million dollar civil cases to give expedited treatment to the “temporary” suspension of an ABC license, even though the consequences to the licensee’s livelihood may be devastating?  To ask that question is to answer it.

What, Then, Is the Motivation Behind This Bill? 

SB 378 appears to be a continuation of the ABC’s ongoing effort to free itself from appellate oversight by the Appeals Board.  Last year, the ABC took the position that decisions of the Appeals Board are not “precedent” and that referring to prior decisions is illegal and unethical.  The Appeals Board rejected that fatuous argument in a lengthy opinion, noting that:

[T]he only potential beneficiary in a world where prior decisions of the Board must be ignored and the Department has issued no precedential decisions itself, is the Department….  ‘If no one can cite or rely upon decisions of the Board, the Department is free to disregard them and create its own “shadow world” of unrestrained discretion—precisely what the Legislature sought to eliminate’….[1]

Senate Bill 378 appears to be yet another attempt by the ABC to achieve unrestrained and effectively unreviewable discretion.  This attempt is as unmeritorious and dangerous as the prior one.

How significant is this? As the first section of the ABC Act provides:

Section 23001 . . . It is hereby declared that the subject matter of this division involves in the highest degree the economic, social, and moral well-being and the safety of the State and of all its people. All provisions of this division shall be liberally construed for the accomplishment of these purposes.

You can’t get much more important than that.

Licensees should not have their livelihoods put at risk on the unchallenged say-so of municipal officials usually operating based on local political beefs, without any means of redress for at least 22 days and, more likely, much longer, and without any guarantee of the timely appellate review that has been a hallmark of ABC practice for many years.  Senate Bill 378 would put the entire alcoholic beverage industry at the mercy of municipal officials, angry neighbors and the unrestrained discretion of the ABC.  Licensees and their trade associations should make every effort to ensure that it does not become law. 

What Can You Do about This? 

Call or write State Senator Anthony Portantino and share your view on the merits (or lack thereof) of SB 378 and then call your trade association leaders and let them know your views.  Here’s a likely incomplete list of some of the alcohol industry trade groups we have supported in the past to get you started.

[1] BMGV, LLC v. Dept. of Alcoholic Bev. Control (Appeals Board 11/17/16) AB-9568, p. 25.  The ABC, represented by the Attorney General, has petitioned for a writ of review of portions of the Appeals Board’s decision, excluding the portion addressing the issue of the Board’s prior decisions as precedent.