On October 2, 2018 the NJ Division of Alcoholic Beverage Control  (“ABC”) decided to suspend enforcement of the September 21, 2018 “ Special Ruling” regarding limited brewery licenses . The suspension of the regulations will provide the ABC with the opportunity to  discuss the impact of the new regulations with craft breweries, restaurants, and other licensees. In addition the ABC will work with lawmakers to determine if new legislation is needed to update the 2012 law which authorized limited brewery licenses that gave rise to the issuance of the  Special Ruling.

Walmart’s U.S. patent application involving blockchain technology is one of many blockchain-based patent applications that have been filed by large companies smitten with blockchain technology.  Published May 17, 2018, but filed November 16, 2017, the application is based on a provisional patent filing in November 2016.  In its application, Walmart seeks to patent a blockchain-based marketplace where buyers and resellers of products can leverage blockchain technology’s immutability and security to record characteristics of retail goods and the transactions involving those goods.  The application has not yet been examined, and must undergo prosecution which is highly likely to change the scope of any patent ultimately granted, if at all. Until allowed, it is difficult to predict the impact any patent granted from this application may have on competitors and industries seeking to similarly leverage blockchain-based marketplaces.

The blockchain technology originally used to code the Bitcoin blockchain is not patentable because it is not actually “new.”  However, customized variations of the original Bitcoin code and other decentralized systems that employ similar technologies may be patentable.  General ledger methods and hardware to record and track characteristics and transactions relating to good and services are ancient.  Even computer-aided ledger methods and hardware (e.g., centralized databases) are decades old.   Blockchains, although more recently developed, have generally been known and practiced since the inception of the Bitcoin blockchain’s open, albeit pseudonymous, ledger in 2009.  Accordingly, the maturity of blockchain technology generally renders the basic Bitcoin blockchain unable to pass the novelty and nonobviousness requirements for patentability.  Nonetheless, blockchain technology is being increasingly customized to specific uses, some of which may qualify for patent protection.

Blockchains are digital databases that use cryptography to secure records, or “blocks,” of information.  Each block is timestamped and includes a record of the blocks that preceded it.  The database is decentralized over a network of computers and the information in each block, including the historical information, may only be tampered with if an actor gains control of 51% of the computers in the network.  This ensures the integrity of information on blockchains by making hacking economically inefficient and extremely difficult.  Blockchains can not only store basic information, such as a record of transactions of digital money like Bitcoin, but can also use the information to function as a computer and perform tasks.  These automated processes are commonly known as “smart contracts.”  Smart contracts and the security and immutability of blockchains facilitate large-scale automation and remove the need for trusted third parties to verify transfers and ownership of goods and information.

Blockchain technology is promising.  Corporations like Walmart are racing to file patents covering specific blockchain structures and applications to secure competitive advantages going forward.  Additionally, corporations may file blockchain patents as marketing ploys to create buzz for their business, especially because blockchain infrastructures are difficult to scale for commercial operability.  Amid the hype and hysteria, it is important to understand what a blockchain patent covers and how to protect your company’s proprietary rights.

On September 21, 2018 David Rible, the Director of the New Jersey Division of Alcoholic Beverage Control, issued a Special Ruling applicable to NJ Craft Beer Brewery Licensees. The growth of the craft beer industry in NJ (88 limited brewery licenses have been issued and 23 applications are pending) and the manner in which they have expanded their business activities has caused the state to clarify and limit the number and types of activities that can be conducted on the brewery premises.

In 2012, an amendment to New Jersey’s alcoholic beverage control laws was enacted to promote the craft beer industry with the intention that it would help to generate the sale of craft beers at licensed bar/restaurants and retail stores. Under the 2012 law microbreweries were only permitted to serve beer on site in connection with a “tour” however no guidance was provided as to what type of tour was required or the type of events that could occur at the brewery. Although no food was permitted under the law to be served by the brewery, some breweries filled the void by supplying take out menus of nearby restaurants and allowing on site food deliveries.

As stated in the Special Ruling, the 2012 amendment was not intended to permit a brewery with the same privileges as a sports bar, restaurant, catering hall or liquor store. Nonetheless, many breweries have in many respects been acting as if they possess these full licensed privileges, without limitation, hosting trivia nights, live performances, sporting events, special events and private parties.

The Special Ruling now clarifies what activities are permitted and prohibited on the licensed brewery premises, clarifies the provision of the required tour, further clarifies the prohibition of food service, and limits the number and types of activities.  For example, no more than 25 on premises  public/ special  events  a year, 12 off premises events such as festivals, fairs or athletic events, and 52 private parties including trade and civic associations.  Additionally, a simplified E- Notification permit system is being instituted. The new rules are to take effect immediately and are actually a precursor to new regulations to be implemented by the State affecting the craft brewery industry.

Unfortunately, with upcoming Octoberfest events and already booked holiday parties these new regulations may have a stinging effect on many microbreweries’ bottom line.

New Jersey’s liquor license laws have generally remained unchanged for decades and have been a sore spot for municipalities seeking to fuel economic growth and small businesses hoping to open in town centers across the State.  Assemblymen John Burzichelli and Raj Mukherji have heard those concerns and others, and recently sponsored a bill in the New Jersey Assembly, A3494, which proposes reforms to the NJ liquor license system.

Under the current liquor license laws, the State of New Jersey limits the number of maximum liquor licenses within a municipality based on population.  Critics of the existing framework argue that the municipalities are beholden to census numbers that are updated every 10 years and with many of the issued licenses pocketed and not in use, many business owners that are ready and willing to serve cannot because of population density issues and pocketed licenses.  Proponents of reform also note that liquor licenses tend to be very expensive, even topping $1,000,000 in some particularly hot markets, which may give established restaurant groups with deeper pockets an advantage over start-ups.

The bill, in its proposed form, would allow municipalities to issue two new types of liquor licenses to smaller businesses.  One proposed license would permit service at tables, but not at a bar, and another proposed license would allow for only beer and wine service.  The new licenses would have a significantly lower price than the existing liquor licenses.  However, existing liquor license owners oppose the bill because new purchasers would be able to obtain a liquor license at a much lower cost which, in turn, may devalue existing liquor licenses obtained at a high price tag.  To address this concern, the bill contemplates a tax credit to those existing businesses that have paid market value for their licenses, with a portion of the initial fee and renewal fees for new licenses paid to the State to help offset the cost of tax credits that would be issued to existing license holders.

The bill was released from the Assembly Oversight, Reform and Federal Relations Committee on May 17, 2018 and subsequently referred to the Assembly Appropriations Committee.  As Assemblyman John Burzichelli has said, the bill is a work in progress.  For now, supporters of the bill will need to wait and see if the traction persists and in the meantime, continue to BYOB.

 

On June 14, 2018, the SEC’s Division of Corporation Finance Director, William Hinman, gave a speech titled “Digital Asset Transactions: When Howey Met Gary (Plastic).”  This speech provides additional insight into the SEC’s view as to whether cryptocurrencies and initial coin offerings (“ICOs”) are securities.  Here is a summary:

In his speech, Hinman explains that ICOs typically involve passive investors who purchase tokens in hopes that a promoter builds a successful network.  He posits that the networks involved are rarely functional, and that the token purchase “looks a lot more like a bet on the success of the enterprise and not a purchase of something used to exchange for goods or services on the network.”  These circumstances, combined with token marketing efforts that “are rarely narrowly targeted to token users,” are indicators that an ICO is a securities transaction.

ICO issuers have recently tried to avoid their tokens being classified as securities by labeling them “utility tokens” and arguing that the tokens are for consumptive use.  Hinman directly addresses this practice, stating that labeling something a “utility token” does not prevent it from being a security. While he conceded that tokens by themselves and tokens purchased for consumption only are likely not securities, he emphasized that the “economic substance of the transaction” determines whether a token sale is a securities transaction.  Specifically, the speech focused on the “investment strategy” used, and states that “virtually any assets” can be securities “provided the investor is reasonably expecting profits from the promoter’s efforts.”

To support the above concept that securities can be broadly defined to include an “investment strategy,”  Hinman explains that, as outlined in Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., the Howey test “is not static and does not strictly inhere to the instrument.”  The non-static interpretation of Howey is critical because it indicates that tokens which start as securities can lose that designation over time as a token’s network becomes “sufficiently decentralized.”  Hinman clarified that a security-token loses its status as a security when it becomes decentralized enough that purchasers “no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts,”  noting that, as a system becomes increasingly decentralized, “material information asymmetries recede” and the “ability to identity an issuer or promoter to make the requisite disclosure [required in securities offerings] becomes difficult, and less meaningful.”  This interpretation rewards systems that prioritize decentralization with a shield from securities laws, but creates ambiguity regarding the requirements for a network to become “sufficiently decentralized.”

In light of the above, Hinman finds that Bitcoin and Ethereum’s native token, Ether, are not securities because they are decentralized enough that the efforts of others are not a “key determining factor” in whether an investment in Bitcoin or Ether is successful.  The speech adds that applying the disclosure regime of the federal securities laws to Bitcoin and Ethereum transactions would “add little value”, and that, “[o]ver time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.”