New Jersey restaurant and club owners who do not possess a coveted New Jersey liquor license can now advertise that they allow customers to bring their own beer or wine or as it is more commonly known, “Bring Your Own Booze” (BYOB).

BYOB is a concept as inherent in New Jersey culture as Bon Jovi.  Tommy’s and Gina’s date night involves a cozy pizzeria where the veal special is outstanding, but the pizzeria does not serve liquor.   Yearning for a little wine with dinner, they swing by the liquor store a few blocks away and pick up a bottle of red wine on the way to their romantic meal.  While this scene is common place in the restaurants of New Jersey, a sign or other advertisement publicizing “BYOB” is not to be found.  New Jersey’s archaic liquor license laws have always banned restaurant owners from publicizing the ability for customers to BYOB, but on November 20, 2018, a New Jersey Federal Judge struck down the prohibition ruling that the ban was unconstitutional because it places a content-based restriction on commercial speech.

In order for a restriction on speech to be viewed as constitutional, it must pass strict scrutiny, the most stringent standard of judicial review used by the Federal Courts. Here, the court found that the content-based restriction on speech failed the strict scrutiny test because it was not supported by a compelling government interest nor was it the least restrictive means of achieving the government’s stated purpose.

Commercial speech such as BYOB advertisement is no exception to the high standard of review and such content based restrictions are presumptively unconstitutional.  The ruling is just in time for the start of 2019.  It doesn’t make a difference if Tommy and Gina make it or not, but they can now be better informed of their BYOB options.

When we last blogged in January about what borrowers can do to prepare for a potential cessation of the London interbank offered rate (“LIBOR”), there was a lot of uncertainty surrounding whether LIBOR would actually be replaced, what that replacement would be, and whether the market would have sufficient time to react.  Due to this uncertainty, we advised taking a “wait-and-see” approach with respect to borrowers reaching out to affirmatively modify their existing loan documents that reference a LIBOR rate to include LIBOR fallback language, except in the cases where borrowers were already in the process of negotiating an amendment for other reasons.  Although there has been some significant movement in both the development of LIBOR fallback language and the determination of the replacement rate since our last blog post, there has not yet been enough movement for us to change our advice at this time.

ARRC FALLBACK LANGUAGE

One major development since our last blog post is the publication by the Alternative Reference Rates Committee (the “ARRC”) of its Consultation Regarding More Robust LIBOR Fallback Contract Language for New Originations of LIBOR Syndicated Business Loans (the “Consultation”) on September 24, 2018.  As noted in our last blog post, the ARRC was established in 2014 by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York for the purpose of recommending a LIBOR alternative, identifying best practices for contract sturdiness in the interest rate market, and creating a plan to implement the new reference rate.  In the Consultation, the ARRC offered two general proposals for sample LIBOR fallback language and asked market participants for their commentary up until November 8, 2018.  The LIBOR fallback language was developed by a working group of the ARRC co-chaired by the Loan Syndications and Trading Association (“LSTA”), a highly influential trade group in the syndicated loan market, which gives it a lot of credibility in the marketplace.

Although the fallback language is not yet finalized, even in its current unfinished state, it provides some valuable guidance for borrowers who are currently involved in negotiations over either a new credit agreement or an amendment to their existing credit agreement.  At a high level, the Consultation takes two basic approaches to LIBOR fallback language, the amendment approach and the hardwired approach, each of which is discussed below.  Please note that the Consultation also discusses the different consent requirements under the amendment approach and hardwired approach, which are not addressed in this article.

THE AMENDMENT APPROACH

The amendment approach provides a streamlined mechanic for negotiating a replacement to LIBOR and a replacement LIBOR spread upon the occurrence of a “trigger event.”  A trigger event is essentially an action that gives rise to the conversion from LIBOR to a new reference rate.  Under the amendment approach, a trigger event is basically either (i) a public statement that LIBOR will fail to be published, or the actual failure of LIBOR to be published (a “Benchmark Discontinuance Event”), or (ii) a determination by the administrative agent or required lenders that new or amended loans are incorporating a new rate to replace LIBOR.  If either of these trigger events occur, the Borrower and the administrative agent may amend the agreement to replace LIBOR with an alternate benchmark rate (including a replacement benchmark spread), in each case giving due consideration to then-existing market convention and endorsements or recommendations by relevant governmental bodies such as the Federal Reserve Board, the Federal Reserve Bank of New York or a committee convened by either or both of them (each a “Relevant Governmental Body”).

As you can see from the above, the amendment approach is flexible in many respects, which is positive in some ways and negative in others.  On the positive side, it allows for LIBOR language to be amended if other lenders are incorporating a rate other than LIBOR, which could be well before the time, if any, that LIBOR becomes unavailable.  This gives borrowers and lenders the flexibility to get well ahead of the LIBOR issue if they desire.  Additionally, the amendment approach does not automatically replace LIBOR with a fixed replacement rate such as the Secured Overnight Financing Rate (“SOFR”), the alternative replacement rate selected by the ARRC.  Instead, it gives borrowers and lenders the ability to choose both the replacement rate and the applicable spread.  On the negative side, the ARRC pointed out in the Consultation that it may not be practicable to use the amendment approach if thousands of loans must be amended simultaneously due to a potential LIBOR cessation.  Moreover, this added flexibility comes at the price of allowing the lender or borrower to “game” an amendment depending on whether the credit market is then lender-friendly or borrower-friendly.  In a lender-friendly market, the lenders could block a proposed rate and force the borrowers into a higher interest rate (such as the alternate base rate).  In a borrower-friendly market, the borrowers could block any proposed spread to the replacement rate.  Although the hardwired approach addresses these concerns, it has its pros and cons as well, which are discussed below.

THE HARDWIRED APPROACH

As suggested by its name, under the hardwired approach the LIBOR replacement language is hardwired into the agreement, which is obviously much less flexible than the amendment approach.  Similar to the amendment approach, the replacement language also becomes effective upon the occurrence of a trigger event, which is either (i) a Benchmark Discontinuance Event, or (ii) an agreed upon number of outstanding publicly filed syndicated loans being priced over term SOFR plus a replacement benchmark spread.  If either of these trigger events occur, LIBOR is automatically replaced in accordance with a waterfall approach where the first available option is chosen from the following: first (1) Term SOFR, or, if not available for the appropriate tenor, interpolated SOFR, then (2) Compounded SOFR, then (3) Overnight SOFR, then (4) a rate chosen giving due consideration to then-existing market convention and endorsements or recommendations by any Relevant Governmental Body.  In addition, the existing LIBOR spread is automatically replaced by a spread adjustment, or method of calculating a spread adjustment, that has been selected, endorsed or recommended by the Relevant Governmental Body or, if not available, the spread adjustment or method of calculating the spread adjustment is selected by the International Swaps and Derivatives Association, Inc.

Like the amendment approach, the hardwired approach has its pros and cons.  On the pro side, it provides borrowers and lenders with the certainty that if and when LIBOR is discontinued, it is highly likely that some version of SOFR will be inserted as a replacement rate with a market replacement spread.  On the con side, as of now SOFR is only being quoted as an overnight rate, so it is currently unclear what the actual replacement to LIBOR (and the replacement spread) will look like if LIBOR is discontinued.  That being said, the ARRC has said that part of its transition plan for implementing SOFR will include the development of multiple forward rates, so it is likely that the waterfall will be fully populated well before LIBOR’s potential cessation.

In summary, although the ARRC has made great strides in drafting LIBOR fallback language, at the current time we do not think it is far enough along to advise borrowers to proactively request amendments to their existing credit agreements with LIBOR-based loans.  However, if a borrower is currently involved in an amendment or a new credit, we still recommend that they consider including either the amendment approach or the hardwired approach in its current form.  Although neither approach is perfect, both are preferable to the option of automatically defaulting to the alternate base rate.   

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.