Zimmer, Duncan & Cole

The Cost of Serving Drinks with Dinner

This week, our column heads to Brookings for a night on the town. Three establishments filed a lawsuit challenging the City's pricing system for new liquor licenses. The case is, 9 Bar & Nightclub, Cubby's Sports Bar & Grill, and Skinner's Pub v. City of Brookings (2011 S.D. 16).
Prior to 2008, cities and towns in South Dakota were only allowed to issue a limited number of on-sale liquor licenses. ("On-sale" liquor means the beverages are consumed on the premises. "Off-sale" means the beverages are sold closed, in the packaging, and must be consumed somewhere else.)
The maximum number of on-sale licenses was based on population. Each town under 1,000 could have three, and larger towns were allowed another license for each additional 1,500 residents.
These limitations have made on-sale liquor licenses scarce and valuable. A new bar can be added only when an old bar goes out of business (or when the town grows.)
In addition, this old system made it nearly impossible for an existing restaurant to add hard alcohol to its beverage lineup. The zero-sum game required a restaurant to buy an existing bar, shut it down, and then transfer the liquor license over to the eatery. This rarely made economic sense.
The Legislature attempted to fix this problem during the 2008 session. It passed a bill allowing cities to issue an unlimited number of on-sale licenses for full-service restaurants.
These new licenses are only available in restaurants where a waiter or waitress delivers food and drink offered from a printed food menu to patrons at tables or booths, but not those that only serve fried orders, sandwiches, hamburgers, or salads.
The price for these restaurant licenses was set at the higher of two numbers: either the price of the last sale of a regular liquor license between two private parties in the city, or one dollar for every resident.
Brookings, technically, has zero private license sales. Instead, Brookings has only one liquor license, which is owned by the City. The City then leases out the use of this license by entering into "operating agreements" with individual bar owners.
Since the owners can then sell or transfer the operating agreements, this system is virtually the same as issuing licenses. But the City of Brookings chose to read the statute literally. The City determined that since there were technically no "license sales", then it could set the license fee at the rate of one dollar per resident, which is $18,504. (Market rate, otherwise, is around $100,000 in Brookings.)
This didn't sit well with existing bar owners in Brookings, who had paid considerably more for their own liquor licenses, and didn't want cheap competition.
Shortly after this lawsuit was started, the Legislature passed an additional amendment to the liquor license rules, which clearly made the rules the same for Brookings. "Operating agreements" were now the same as "licenses".
Going forward, the City would have to issue licenses at market rate, rather than for the dollar-per-resident figure.
The big question in this case, though, was what to do about the system Brookings had already set up (prior to the 2009 amendment). Would the City be forced to collect more money from those restaurants that had already bought licenses at the cheaper rate?

* * *

When the Legislature passes a new law, it isn't usually retroactive. This rule protects people (and businesses) from losing rights they've started to rely on and expect. (This concept is central to the idea of being "grandfathered in".)
The exception to this rule is when a new law was passed in order to "clarify" a previous law. In that case, the new law isn't changing anything, it's just explaining existing law.
Here, the Court decided that the 2009 amendment was only a clarification and not a new change in the law. This means that nobody will get the benefit of the mistaken, lower rate, and the city will have to charge $100,000 for the privilege of serving drinks with dinner.
A link to the full opinion is available on my law firm's website, www.zdclaw.com.

If you have a question about the law or a recent court case, please send it to me. I'll do my best to answer it in plain English, and without "legalese". You can reach me at dan@zdclaw.com or "Less Legalese, Please," 5000 S. Broadband Lane, Suite 107, Sioux Falls, SD 57108.

Daniel K. Brendtro is a trial attorney from Sioux Falls. His firm, Zimmer, Duncan & Cole, LLP, has represented clients statewide since 1948 on all types of cases, including injuries, accidents, criminal defense, and business lawsuits.