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Legal battle may lead to end of LCBO

Privacy Commissioner ruling reveals weakness in government-run liquor store’s mandate and could pave way for demise of monopoly 

By John Szabo MS | @JohnSzabo

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CORRECTION - March 16, 2013

According to Vin de Garde’s Warren Porter, there is no law prohibiting the splitting of cases among wine club members. He holds a sharing agreement with each of the Vin de Garde members that makes it legal to do so. According to the LCBO this is not permitted, but there’s no legal basis to this restriction.

John Szabo is CityBites’ wine editor and writer/principal critic and partner in WineAlign.com. He consults on the wine lists for several restaurants, and has also selected wines for the Vin de Garde wine club mentioned in this article.

In an abusive display of regulatory authority, the Liquor Control Board of Ontario has decided unilaterally to suspend all wine club purchases. The decision follows an order handed down by the Privacy Commissioner of Ontario last week, which negated the LCBO’s policies on the collection of personal information.

Vin de Garde is one of some 30-odd Ontario wine clubs serviced by the Private Ordering department of the LCBO, and has been operating since October of 2004. Up until 2012, the club had been required by the LCBO to keep an up-to-date list of members, but orders were filed on behalf of members under the Vin de Garde name (without individual names, addresses or order quantities disclosed). 

HERE COMES BIG BROTHER
Then things suddenly changed in early 2012. The LCBO began demanding personal details of all members for all orders (we’ll speculate as to why later in this article). After unsuccessfully trying to negotiate a viable arrangement with the LCBO from March until July 2012, Vin de Garde CEO Warren Porter filed a complaint with the Privacy Commissioner on behalf of club members. He argued that the LCBO is unnecessarily and unlawfully collecting the private and personal information of club members, including their name, address and telephone number, as well as the product name and quantity of the liquor they are purchasing. 

According to Porter’s lawyer Arnold Schwisberg, the LCBO’s practice of collecting club members’ information violates the Freedom of Information and Protection of Privacy Act. In particular, section 38(2) of the Act prohibits the collection of personal information except where the collection is 1) expressly authorized by statute; 2) used for the purposes of law enforcement; or 3) necessary to the proper administration of a lawfully authorized activity.

Beyond potentially being used to monitor the consumption habits of club members, this move appears to revive the specter of Big Brother that shadowed provincial liquor sales for several decades from when the LCBO was first established in 1927. On a more practical level, the amount of documentation demanded by the LCBO from both the wine club and the wine import agents representing the products was not only onerous, but it rendered business unviable. It would require hundreds of order forms per wine to be filled out, in addition to being simply unnecessary and possibly unlawful, according to Porter.

LCBO ORDERED TO DESIST
Just a couple weeks ago, on March 2, after several months of research and investigation that included multiple exchanges between the office of the Information and Privacy Commissioner of Ontario and the LCBO, the IPCO issued a full review of the LCBO’s personal information collection practices. The Privacy Commissioner upheld Porter’s complaint and ordered the LCBO to not only cease collecting the personal information of club members, but also to destroy all personal information that has been collected in the past. The only exception is for individuals who opt to pick up their wine at the LCBO, a reasonable circumstance for which personal details are required. No one would expect to show up and pick up their wine without ID, and it’s expected that orders and customers would been to be matched. 

Initially this seemed like no small victory for Porter and the Vin de Garde Club members. Yet the following week, on March 5, orders placed by Vin de Garde on behalf of members were rejected by the LCBO. The LCBO's clerk wrote on one purchase order "Wine requests for Clubs need to be invoiced in the name of the client(s)." This clearly contravened the Commissioner’s order. 

That same day, Porter’s lawyer sought an explanation and rectification of the rejection. The LCBO responded by stating that it had "temporarily ceased accepting orders from wine clubs" and that it is "considering its options." According to a press release issued by the LCBO: “We received the Commissioner's decision on Friday and are taking the necessary time to carefully review it and consider our next steps. During this time, we are temporarily suspending new wine club orders.”

Porter and his lawyer consider this position to not only be a breach of their contract with the LCBO, but also an abuse of regulatory authority and clear disrespect for both the consumer and the Privacy Commissioner. 

The timing of the matter is somewhat curious considering that Vin de Garde has been operating for almost eight years without being required to release the personal information of club members. According to the investigation launched by the Privacy Commissioner, the LCBO acknowledges “that in the past, for reasons including administrative oversight, it has processed orders from the complainant’s club without requiring the personal information of individual members to be provided.” Why it has suddenly become necessary to collect this information is not clear, even if it is clear that such a policy has been in place since the introduction of wine club licenses.

But at issue here is not why the LCBO processed orders without full disclosure of member’s personal data between 2004 and the 2012, but on a much broader level, whether or not the LCBO is entitled to collect such information in the first place.

LCBO’S DOUBLE STANDARD
Porter argues that club members are not given the same level of privacy as other LCBO customers. After all, any citizen can walk in off the street and purchase alcohol at any LCBO outlet without providing personal data of any kind. Pay with cash and you are completely anonymous.

The LCBO contends that the collection of personal information is necessary to “process the transaction; facilitate the recall of products if a defect is discovered; enable audits of the operation of the program; and deter fraud generally, and to deter the use of these types of sales by intermediaries for the illegal resale and illegal stockpiling of liquor.”

The Privacy Commissioner, however, was not convinced. In the review, the PC concludes that the collection of club members’ personal information is not strictly “necessary” for processing transactions—one of the conditions the LCBO must show in order to comply with the Act. After all, the LCBO’s private order department had managed well enough since 2004. Nor did the commissioner believe that it’s necessary in the case of product recall, considering the multiple options available to communicate a recall, such as would be required for the recall of any LCBO listing. 

FLAWED LOGIC
In a seeming reversal of logic, Heather MacGregor, Media Relations Co-Coordinator for the LCBO, justified collecting personal information for a product recall by pointing out that: “There is a significant difference in the volume of a product sold through our stores and that typically sold through clubs. Product recalls for store sales are managed through broad public notice, either through in-store notices and via the media depending on the severity of the recall. It is much more difficult to reach club customers in circumstances where as little as ten or fewer customers may receive a product (a not uncommon situation with club orders).”

It’s more difficult to reach as few as ten wine club customers, as opposed to hundreds, or potentially thousands in the case of a general LCBO product recall? One quick phone call to the club administrator and all members could be alerted immediately, or at least surely as easily as reaching thousands through public announcements. And if the club happens to no longer be operating when the recall is issued, well then, there’s still public announcements. (Maybe the LCBO has heard of Twitter?)

Regarding the illegal reselling and stockpiling of liquor, the LCBO states that knowing to whom the product is destined allows them to verify whether it reached the intended customer. Having personal information on hand would allow them ensure that fictitious customers weren’t created to facilitate the ordering and illegal stockpiling of liquor for later bootlegging.

The LCBO, in a move of limited foresight, chose to cite the instances of 12 companies who were caught violating the Liquor Licence Act and illegally stockpiling between 2002 and 2005. Perhaps the LCBO lawyers didn’t think through to the inevitable conclusion that citing these cases would occasion, namely that collecting personal information doesn’t prevent fraud. In all 12 of the cited cases, the agencies had fully complied with the requirement to provide their customers’ personal information to the LCBO’s Private Ordering department. As the Commissioner sates in her report: “In light of this, I am left with the conclusion that if the collection of the personal information about customers was aimed at deterring fraud, it appears not to have been successful in these cases.”

And furthermore, as acknowledged by the LCBO, cases of illegal stockpiling and resale can be investigated by the Alcohol and Gaming Commission of Ontario, or by provincial police. There are multiple other, more effective ways to investigate such illegal activities.

The Privacy Commissioner was also nonplussed by the LCBO’s inability to quantify the extent of suspected fraud perpetrated by wine clubs. She states that “the LCBO has not provided my office with much more than anecdotal or hypothetical evidence to support its position that the illegal resale of liquor by wine clubs in this province is so problematic that it necessitates the collection of the personal information of club members,” and that therefore the LCBO has not established “that the collection of personal information of club members using the private ordering sales channel is more than merely helpful at deterring fraud.”

Private order sales through wine clubs are relatively insignificant, as Heather MacGregor was quick to point out in an email exchange: “As you may be aware, club sales represent a tiny volume of the total quantity of wines sold through the LCBO’s various private ordering programs.” If so, then why such a public thumbing of the nose to the Privacy Commissioner’s ruling, and perceived abuse of its regulatory authority to the detriment of private business in Ontario?

THE CASE AT HAND
At issue appears to be the seemingly much more benign possibility of privately ordered cases of wines getting divvied up by club members. This appears to be the motivation behind the LCBO’s bluster. According to the current law, all private order wines, including wine club orders, are required to be made by the case. It is illegal for clubs to pool the orders of their members, thereby permitting multiple customers to share one case. The LCBO has expressed concern that clubs might place orders for cases of liquor and then “break up” the cases to enable its members to purchase individual bottles from that case.

It’s challenging to visualize what harm may befall the province of Ontario if a group of wine lovers were to share in the purchase a case of cabernet, all duties, taxes and provincial mark-ups paid, and profits returned to Ontario coffers at higher margins than regular LCBO sales (far lower overhead), and then divide up the bottles between themselves. The horror!

But the implications are far bigger than they seem. The Commissioner’s ruling would appear to open the door for not only wine clubs to keep the identities of their end customers private, but also for any wine, beer or spirits importing agency to private-order wine for distribution in Ontario with no names attached. If a club ordering wines through an agency is not required to supply customer names, then why would the agency itself be required to do so? 

Any agency could thus order wine though the LCBO’s Private Ordering department without necessarily pre-selling the wine, and thus use this avenue to supplement their limited consignment warehouse space, or allow agents without consignment space to compete with those that do. Having a product available for sale within a day or two, as opposed to a couple of months or more under the current Private Order system where everything is pre-sold with a customer name attached, is an incalculable advantage.

And once you’re there, what’s to prevent the splitting of cases of wines to multiple customers? Once the agent has picked up and paid for the case, there’s no need for the LCBO to know where, or to how many people it’s going—so much has been shown by the Privacy Commissioner. The AGCO and police can track the back-alley bootlegging.

THE END OF MONOPOLY?
This order could thus create a quasi-private retail environment in Ontario, minus the storefront. The volume of Private Orders could increase to beyond the logistics capacity of the LCBO, at which point there’d be a an even stronger argument that the LCBO is limiting potential provincial revenue from alcohol sales and not properly serving the citizens of Ontario. And at that point, there might be real popular support, and thus political will, to finally see the LCBO privatized. So you can see why they’re making such a big deal about it.

The LCBO has since filed a Judicial Review (appeal) of the Privacy Commissioner's decision using outside counsel. This is estimated to cost taxpayers more than $750,000. And in the most recent twist, they have agreed to process Vin de Garde’s club orders, but are now requiring that each individual member come personally to a handful of designated LCBO stores to pick up their order, as opposed to having it delivered to their home or office as has been done in the past. This of course requires the club member to give up their personal information under the Commissioner’s exemption, not to mention requiring considerably more administration by the LCBO to manage the shipping and pick up of hundreds of cases of wine through their system at taxpayers expense. The LCBO is thus complying technically with the order, though arguably violating its spirit and intent.

Vin de Garde and their con-counsel Arnold Schwisberg and Ian Blue have subsequently filed a Notice of Motion requiring the Privacy Commissioner to consider whether the LCBO’s has shown “sufficiently doubtful and unlawful conduct such that the Divisional Court may inquire whether it should punish or take steps to punish the LCBO as if it were guilty of contempt of court.” In other words, they want the courts to force the LCBO to get back to the business of processing the club's orders as before, and drop the requirement of personal pick-up.

So the case continues. Watch this space for updates to the story.