STATE OF IOWA BEFORE THE DEPARTMENT OF COMMERCE ALCOHOLIC BEVERAGES DIVISION DOCKET NO. D DIA NO. 09DOCBL062 STATEMENT OF THE CASE

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1 STATE OF IOWA BEFORE THE DEPARTMENT OF COMMERCE ALCOHOLIC BEVERAGES DIVISION IN RE: Okoboji Cocktails, Inc. d/b/a Cocktails 575 HWY 71 S Arnolds Park, Iowa Liquor License No. LC DOCKET NO. D DIA NO. 09DOCBL062 PROPOSED DECISION STATEMENT OF THE CASE The Iowa Department of Public Safety 1 (DPS) filed an administrative hearing complaint against Okoboji Cocktails, Inc. d/b/a Cocktails (licensee) with the Iowa Department of Commerce-Alcoholic Beverages Division (ABD). The hearing complaint alleges that the licensee s open and continuing failure to comply with all applicable provisions of the Smokefree Air Act constitutes a violation of Iowa Code section (2) and 185 IAC 4.2(1) and is sufficient grounds for the suspension and/or revocation of the liquor license. (Hearing Complaint) This case was held before Administrative Law Judge John M. Priester on May 14, 2009 at 2:00 p.m. at the office of the Iowa Department of Commerce, Alcoholic Beverages Division, 1918 S.E. Hulsizer, Ankeny, Iowa. Assistant Attorney General John Lundquist represented the DPS. The licensee was represented by attorney Peter Cannon. The record was open for 30 days for the parties to file briefs. The briefs were received on July 31 st 2009 and the record was closed. THE RECORD 1 The Iowa Department of Public Safety is the primary beer, wine, and liquor law enforcement authority for the state. Iowa Code section (1)(2007).

2 Page 2 The record includes the Hearing Complaint; the Notice of Hearing; the testimony of the witnesses; and the following exhibits: DPS EXHIBITS: Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 4: Exhibit 5: Exhibit 6: Exhibit 7: Exhibit 8: Exhibit 9: Exhibit 10: APPELLANT EXHIBITS: Exhibit A: Exhibit B: Exhibit C: Exhibit D: Exhibit E: Exhibit F: Iowa Smokefree Air Act Complaint & Compliance Summary, Iowa Department of Public Health; First Notice of Potential Violation (9/10/2008), IDPH; Second Notice of Potential Violation (2/5/2009), IDPH; Third Notice of Potential Violation (3/23/2009), IDPH; Iowa Smoke Free Air Act Complaint Report, (2/4/2009) Arnolds Park P.D. Chief Al Krueger; Iowa Smoke Free Air Act Complaint Report, (2/10/2009) ABD Tobacco Enforcement Officer Bill Missman; Iowa Smoke Free Air Act Complaint Report, (3/27/2009) ABD Tobacco Enforcement Officer Bill Missman; Licensing Information re: Liquor License No. LC Okoboji Cocktails, Inc. d/b/a Cocktails; Application for Retail Cigarette/Tobacco Permit Okoboji Cocktails; Retail Cigarette/Tobacco Permit Okoboji Cocktails; Declaration of Regular Patrons regarding never witnessing smoking on premises; Lease for licensees premises; Lease for Okastogi premises; Pictures of Licensees Premises; Pictures of Okastogi premises; Schematics of both licensee s premises and Okastogis. FINDINGS OF FACT

3 Page 3 1. Okoboji Cocktails, Inc., d/b/a Cocktails (licensee) is a bar that holds Class C Liquor License LC Diane Chaplin, Jolene Schmidtke and Troy Dahl each have a 1/3 ownership interest in Okoboji Cocktails, Inc. (DPS Exhibit 8) 2. The Iowa Smokefree Air Act (Iowa Code Chapter 142D) became effective on July 1, The Act prohibits smoking in most licensed liquor establishments that are open to the public. The Act also specifies areas and locations which smoking is not regulated, which includes retail tobacco stores. 3. Following its enactment, the licensee purchased another business, Okostogis, which was located a few miles away. Okostogis is a cigarette retail establishment. The licensee then rented a room that abuts the current establishment and remodeled the room to relocate Okostogis to be near the licensee s establishment. 4. The layout of the licensee s establishment and the business known as Okostogis was entered into evidence. To enter Okostogis a patron would have to walk through Cocktails as there is no independent entrance for Okostogis to the outside world. There are signs directing patrons in Cocktails to Okostogis. There is a door with a sign directing patrons to keep the door closed. 5. Okostogis has no employees. When patrons want to purchase cigarettes or cigars, they approach a Cocktails employee who effectuates the purchase. Patrons bring their food and drinks from Cocktails into Okostogis to consume while they smoke. 6. Cocktails and Okostogis are set up as two independent businesses, although there is some comingling. Both establishments shared a retail cigarette/tobacco permit. They share employees. They also share an entrance. 7. Brent Saron is employed by IDPH to manage the Smokefree Air Act Enforcement and Educational Process. Citizens can file complaints concerning violations of the Smokefree Air Act either on-line through the IDPH website or by calling a toll free number. After a complaint is Iowa Acts ch (H.F. 2212, approved April 15, 2008)

4 Page 4 received, IDPH staff contacts the complainant, either by or telephone, to verify the information provided. If the details of the complaint are verified, IDPH sends the subject of the complaint a Notice of Potential Violation by certified mail. The Notice of Potential Violation is educational in nature. After a first Notice of Potential Violation has been issued, IDPH sends a copy to its Tobacco Partnership Agency in the local area and asks them to conduct an educational site visit. After a complaint has been verified against a particular business, the IDPH creates a business account that shows the name and address of the business, the type of business, and the legal owner. All verified complaints concerning the Iowa Smokefree Air Act are then recorded in the business account. The business account for Okoboji Cocktails documents that IDPH received three verified complaints of smoking from July 20, 2008 through March 3, On September 10, 2008, the IDPH sent the licensee a First Notice of Potential Violation. The notice stated that on August 20, 2008 law enforcement officers observed smoking by patrons inside the premises. The notice summarized the requirements of the Smokefree Air Act, including the requirements that an employer, owner, operator, manager, or person having custody or control of any enclosed facility or outdoor area where smoking is prohibited is required to: not permit smoking in that area; and not have ashtrays; have no smoking signs posted. The September 10, 2008 Notice of Potential Violation specifically stated that it was not a citation or notification of a fine, that an informational packet about the provisions of the law was enclosed, and that a representative from the local community tobacco control program may contact the recipient for an educational site visit. The notice warned the licensee that if a second valid complaint was filed against the establishment within the next 12 months, a Second Notice of Violation may be issued and this notice would be forwarded to a local law enforcement agency for further action. Finally, the September 10, 2008 notice states:

5 Page 5 In addition, as stipulated in the Smokefree Air Act on page 13, line 5: violation of this chapter by a person who owns, operates, manages, or who otherwise has custody or control of a public place, place of employment, area declared a nonsmoking place or outdoor area regulated under this chapter may result in the suspension or revocation of any permit or license issued to the person for the premises on which the violation occurred. (emphasis in original) 9. On February 5, 2009, IDPH sent the licensee a Second Notice of Potential Violation of the Iowa Smokefree Air Act. The notice stated that a complainant (law enforcement officers) observed patrons smoking inside the licensed premises on February 4, The notice noted that smoking was observed in a back room designated as a tobacco shop and ashtrays were observed. The licensee was again notified of the possible consequences that could result from non-compliance with the Act. 10. After a second notice of potential violation is issued, IDPH notifies the Alcoholic Beverages Division (ABD). IDPH and ABD have a 28E 3 Agreement for ABD to coordinate the law enforcement site visits for the Smokefree Air Act. ABD contacts the local law enforcement agency to conduct a law enforcement site visit. IDPH pays the local law enforcement agency $100 for each site visit initiated by IDPH through the ABD, regardless of the outcome. 11. On March 23, 2009, IDPH issued a Third Notice of Potential Violation to the licensee. The third notice stated that a complainant observed patrons smoking inside the premises on March 3, 2009 in the back room area and using ashtrays. The third notice was forwarded to local law enforcement for further action. 12. The onsite inspections regarding compliance under the Act which resulted in the issuance of the Notices of Potential Violations were performed by law enforcement 3 Iowa Code chapter 28E enables state and local governments in Iowa to make efficient use of their powers, in part by allowing them to enter into agreements with one or more public or private agencies for joint or cooperative action. See Iowa Code section 28E.4(2007).

6 Page 6 officers with the Arnolds Park Police Department and ABD Tobacco Enforcement Officers. Non-compliance with the Act was detected at all of the on-site inspections for which Notices were issued. Smoking was observed in the back room and second hand smoke was smelled in Cocktails. 13. The licensee presented testimony that they are trying to be in compliance with the Iowa Smoke Free Air Act. They purchased Okostogis for $5000 and moved it to the building of Okoboji Cocktails. Okostogis and Okoboji Cocktails are set up as separate businesses with different landlords. The licensee did not challenge that smoking occurs in Okostogis and that ashtrays are located in Okostogis. The licensee s position is that Okostogis is a stand-alone business that is a tobacco outlet and therefore smoking is permissible there. I. Iowa Smokefree Air Act CONCLUSIONS OF LAW The Iowa Smokefree Air Act (Iowa Code chapter 142D) became effective July 1, The General Assembly specifically found that environmental tobacco smoke causes and exacerbates disease in nonsmoking adults and children and that these findings are sufficient to warrant measures that regulate smoking in public places, places of employment, and outdoor areas in order to protect the public health and the health of employees. 5 The stated purpose of the Act is to reduce the level of exposure by the general public and employees to environmental tobacco smoke in order to improve the public health of Iowans. 6 The Smokefree Air Act prohibits smoking in most 7 public places including the interior spaces of restaurants and bars. 8 The owner, operator, manager, or other person having custody or control of a public place or place of employment shall clearly and conspicuously post no smoking signs or the international no smoking symbol in and at every entrance to the public place or place of employment. All 4 See 2008 Iowa Acts ch (H.F. 2212, approved April 15, 2008) 5 Iowa Code section 142D.1(2). 6 Iowa Code section 142D.1(3). 7 The Act does exempt some public places from the smoking prohibition, including but not limited to retail tobacco stores. See Iowa Code section 142D.4. 8 Iowa Code sections 142D.3(1); 142D.2(16).

7 Page 7 signs shall contain the telephone number for reporting complaints and the internet site of IDPH. 9 The owner, operator, manager, or other person having custody or control of a public place or place of employment shall remove all ashtrays from these locations. 10 An owner, operator, manager, or other person having custody or control of a public place or place of employment shall inform persons violating the Smokefree Air Act of its provisions. 11 Okoboji Cocktails (the licensee) does not dispute that smoking occurred on the licensed premises during the time period July 1, 2008 through March 27, The IDPH served the licensee with three written Notices of Potential Violation, provided the licensee with all educational materials necessary to achieve compliance with the Iowa Smokefree Air Act and expressly informed the licensee that violations of the Act could result in sanction by ABD. Although there are no fact disputes regarding smoking occurring at Okoboji Cocktails from July 1, 2008 until March 27, 2009, the licensee asserts such activity was not regulated by the Smoke Free Air Act. To evaluate this claim by the licensee, it is necessary to review the statute and the Department s administrative rules. II. Legal Issue The licensee presents the following legal question in this case: Was Okoboji Cocktails exempted from compliance with the Smoke Free Air Act based upon an assertion that smoking occurred in an area not regulated by the Act, i.e. a retail tobacco store named Okostogis? The Smoke Free Air Act, at Iowa Code section 142D.4, clearly provides exceptions for certain types of areas and premises which are not regulated by the Act. One such premise is a retail tobacco store. A retail tobacco store is defined as a retail store utilized primarily for the sale of tobacco products and accessories and in which the 9 Iowa Code section 142D.6(3). 10 Iowa Code section 142D.6(4). 11 Iowa Code section 142D.8(3).

8 Page 8 sale of other products is incidental to the sale of tobacco products. 12 Rules promulgated by the Iowa Department of Public Health implementing the Act provide the same definition for the term retail tobacco store and also sets forth a formula for determining whether the sales of other products are incidental to the sale of tobacco products. Specifically, under the Department s rules, incidental to the sale of tobacco products means that gross revenue of a retail tobacco store derived from the sale of products other than tobacco products is not more that 20 percent of the retail tobacco store s total gross revenue. 13 Under the framework set forth above, a retail tobacco store must satisfy a two part test in order to be exempt from the Smoke Free Air Act. Specifically, a retail tobacco store is a store which is: 1) used primarily for the sale of tobacco products and accessories and 2) in which other sales and products are incidental to the sale of cigarettes. The licensee s assertion in this case that it satisfied these requirements is not supported by the evidence of record. The undersigned finds that Okostogis is not an independent business, even though they are two separately incorporated businesses. Patrons cannot enter Okostogis from the street. They have to walk through Cocktails to enter the tobacco shop. Okostogis can only be open when Cocktails is open. Okostogis does not have any employees-it relies on employees of Cocktails to transact the business of Okostogis. The evidence of record does not establish that the licensee has satisfied the gross revenue standard found in the Department s rules. The licensee s testimony concerning its business failed to include any data regarding gross revenue, regardless of source. It is impossible to apply the Department s 20% rule in the absence of gross revenue data concerning the sales of tobacco products and nontobacco products. The licensee s blanket statements that it met this part of the Department s rules can not be validated as no data was supplied by the licensee. 12 Iowa Code section 142D.2(18) IAC 153.2

9 Page 9 For the reasons cited above, the licensee has failed to establish that Okostogis was a retail tobacco store exempt from regulation under the Smoke Free Air Act. The smoking which occurred on the premises during the time period July 1, 2008 through March 27, 2009 was in violation of the Smoke Free Air Act. The licensee asked how it could be in compliance with the Smoke Free Air Act. If the licensee were to seal up the door between Okostogis and Cocktails and seal up the walls so that no smoke infiltration could enter Cocktails. Then if Okostogis were to open a door to the outside and hire employees to staff the cigarette retail store, the business would constitute a separate business. III. Sanction Having determined that the licensee violated the Smoke Free Air Act, the analysis now centers upon the appropriate sanction. The legislature has declared that the Iowa Alcoholic Beverage Control Act shall be deemed an exercise of the police power of the state, for the protection of the welfare, health, peace, morals, and safety of the people of this state, and all of its provisions shall be liberally construed for the accomplishment of that purpose. 14 It is unlawful to sell alcoholic beverages in Iowa except upon the terms, conditions, limitations, and restrictions enumerated in Iowa Code chapter The Iowa Alcoholic Beverages Division (ABD) is vested with broad authority to administer and enforce the state s laws regulating the sale of alcoholic beverages. 16 The administrator of the ABD has statutory authority to suspend or revoke a liquor control license or to impose a civil penalty not to exceed one thousand dollars for any violation of Iowa Code chapter 123. However, before imposing a revocation, suspension, or civil penalty, the licensee must be given written notice and an opportunity for an administrative hearing. 14 Iowa Code section 123.1(2007). 15 Iowa Code section 123.2(2007). 16 Iowa Code sections 123.4; ; ; Auen v. Alcoholic Beverages Division, 679 N.W.2d 586, 590(Iowa 2004); City of Sioux City v. GME, Ltd., 584 N.W.2d 322, 325(Iowa 1998).

10 Page 10 The Hearing Complaint that initiated this contested case proceeding alleged that the licensee s open and continuing failure to comply with all provisions of the Iowa Smokefree Air Act constitute violations of Iowa Code section (2) and 185 IAC 4.2(1). Iowa Code section (2) provides that no liquor license shall be issued for premises which do not conform to all applicable laws, ordinances, resolutions, and health and fire regulations. 185 IAC 4.2(1) provides that licensees and permittees shall at all times maintain their respective premises in compliance with the laws, orders, ordinances and rules of the state, county and city health and fire departments and the Iowa Department of Inspections and Appeals. ABD has been vested by the legislature with jurisdiction to hear and determine violations of Iowa Code section (2) and 185 IAC 4.2(1) and to impose sanctions for violations. ABD has clear authority to sanction the licensee for violations of state law and clear authority under Iowa Code section 142D.9(4) to suspend or revoke any permit or license issued to the person for the premises on which violations of the Smoke Free Air Act occurred. Liquor licensees may not choose to operate their licensed premises in violation of duly enacted statutes and rules. Violations occurring in the operation of the licensed premise are not forgiven merely because the licensee attempted navigation into a safe harbor. Rather, the licensee has an affirmative duty to maintain the premises in conformance with all laws and rules. The licensee acted to its detriment in proceeding on a course of noncompliance without first and affirmatively determining whether it could qualify as a retail tobacco store. Upon receipt of the First Notice of Potential Violation, the licensee proceeded with its assertion that it could operate as a retail tobacco outlet. Other remedies were available to the licensee to resolve questions regarding exemption from the Act, which could have been pursued while maintaining compliance with the Act. The DPS argues that the licensee s repeated violations of the Smoke Free Air Act require a penalty sufficient to deter similar violations by other liquor licensees. In addition, it is unfair to allow the licensee to realize an economic benefit through its violation of the law. DPS

11 Page 11 compares the violation in this case to knowingly permitting illegal activity on the premises, a violation that typically results in a day license suspension. The licensee argues that suspension is unduly harsh in this case. In considering the sanction to be imposed in this case, factors to be considered are the good record of compliance with ABD and the licensee s good faith, albeit incorrect, attempts at compliance with the Smoke Free Air Act. Based upon the evidence submitted in this case, the undersigned finds that a 14-day suspension is the appropriate punishment. DECISION AND ORDER IT IS THEREFORE ORDERED that Liquor License No. LC-34971, issued to Okoboji Cocktails, Inc., d/b/a Cocktails, is hereby SUSPENDED for a period of fourteen days for its failure to comply with all state laws and rules governing the licensed premises, in violation of Iowa Code section (2) and 185 IAC 4.2(1). The 14-day suspension shall begin on Monday, September 14, 2009 at 6:00 a.m. and shall continue until Monday, September 28, 2009 at 6:00 a.m. IT IS FURTHER ORDERED that no alcoholic liquor, wine, or beer may be sold, dispensed or consumed on the premises during the period of suspension. APPEAL RIGHTS Pursuant to the administrative rules of the division, any adversely affected party may appeal a proposed decision to the Administrator of the Alcoholic Beverages Division within thirty (30) days after issuance of the proposed decision. In addition, the Administrator may initiate review of a proposed decision on the Administrator's own motion at any time within thirty (30) days following the issuance of a proposed decision. 185 IAC 10.27(1) and (2). Requests for review shall be sent to the Administrator of the Alcoholic Beverages Division, 1918 S.E. Hulsizer, Ankeny, IA Unless otherwise ordered, each appealing party may file exceptions and briefs within thirty (30) days of the notice of appeal or order for review. Within thirty (30) days thereafter, any party may file a

12 Page 12 responsive brief. The Administrator may shorten or extend the briefing period as appropriate. The Administrator may resolve the appeal on the briefs or provide an opportunity for oral argument. 185 IAC 10.27(6). The administrator may affirm, reverse or modify the proposed decision. A party who is adversely affected by the proposed decision shall not be deemed to have exhausted administrative remedies unless the adversely affected party files a request for review of the proposed decision within the time provided and the Administrator has reviewed the proposed decision and has affirmed, reversed, or modified the proposed decision. Dated this 11 th day of August, 2009 John M. Priester Administrative Law Judge Department of Inspections and Appeals 3rd Floor, Wallace State Office Building Des Moines, IA CC: See Attached Mailing List

13 Witnesses: William Missman Iowa Alcoholic Beverages Division 1918 SE Hulsizer Rd. Ankeny, Iowa Chief Al Krueger Arnolds Park Police Department PO Box N Highway 71 Arnolds Park, Iowa Copies to: John Priester Administrative Law Judge Department of Inspections & Appeals Administrative Hearings Division Wallace State Office Bldg- 3 rd Fl., 502 E 9 th Des Moines, Iowa John Lundquist Assistant Attorney General Department of Justice Hoover State Office Building Des Moines, Iowa Lt. Darin Fratzke ISP, District #6 503 W. 44th Street Spencer, Iowa Chief Al Krueger Arnolds Park Police Department PO Box N Highway 71 Arnolds Park, Iowa City Clerk, Arnolds Park City Hall PO Box N Highway 71 Arnolds Park, Iowa John Henry Ellison, Chief Investigator Iowa Lottery 2323 Grand Avenue Des Moines, Iowa Beverly Zylstra Social Gaming Unit Lucas State Office Bldg Des Moines, Iowa Gayle Collins Commissioner Iowa Alcoholic Beverages Division 1918 SE Hulsizer Rd Ankeny, Iowa Peter S. Cannon Attorney at Law 1200 Valley West Dr. Ste. 400 West Des Moines, IA 50265