Laube v. Stroh

determine for good cause that the granting or continuance of such license would be contrary to public welfare or morals . . . The “good cause" requirement carries over into proceedings under section 24200, subdivision (a). (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at p. 1387, fn. 3.)

The Department’s charges were heard before an administrative law judge (ALJ) who made findings of fact and conclusions of law, then imposed the disciplinary action on behalf of the Department. In each case the Board affirmed by adopting the findings and conclusions verbatim. The Department’s decision, and by extension the Board’s, is now reviewable by this court on a petition for review. (§ 23090.)

Facts

The facts in each case are taken from the findings made by the ALJ. The factual findings are “conclusive and final and . . . not subject to review.” (§ 23090.3.)

The factual discussion involves the element of the licensee’s knowledge of illegal or improper activity on his or her premises; this knowledge may be either actual knowledge or constructive knowledge imputed to the licensee from the knowledge of his or her employees. (See Fromberg v. Dept. Alcoholic Bev. Control (1959) 169 Cal.App.2d 230 , 233-234 [ 337 P.2d 123 ]; Endo v. State Board of Equalization (1956) 143 Cal.App.2d 395 , 401-402 [ 300 P.2d 366 ].)

A. Laube

Petitioners William C. Laube, general partner, and Vemie L. Laube, Donald R. Gardner, Melvyn L. Manaster, and John D. Sweet, limited partners, do business as the Pleasanton Hotel. In April of 1983 they received an on-sale general eating place license from the Department. They have no prior record of disciplinary action.

The Pleasanton Hotel is “an upscale type hotel, bar and restaurant operation.” “The Chief of Police of Pleasanton described [petitioners’] operation as ‘clean’ and ‘orderly’ and praised the cooperation [petitioners’] staff demonstrated regarding police efforts to ‘keep the Pleasanton Hotel the exemplary establishment that it is in our community.’ ”

On the ground floor are the main dining room, a banquet room, and a cocktail lounge with a bar. The lounge and bar are separated from the dining

room by a hallway. The lounge contains about 20 tables, a stage and a small dance area. Half the tables accommodate four or five patrons, and half about three. On a busy night the lounge can hold 65 patrons; in addition to the seated crowd, customers often stand between the tables. On Fridays the entire lounge is served by only two waitresses, one handling fifteen tables and the other only five. A band starts playing at 9 p.m.

The drug transactions occurred on a Friday night either just before or after 9 p.m. Each transaction was initiated by a visit by Department undercover investigators and a confidential informant, who purchased drugs from David Ramirez, a patron of the lounge. The informant introduced the investigators to Ramirez, who in turn sold the investigators a small quantity of cocaine. All transactions occurred at a cocktail table, except one, which took place in a restroom. No transaction involved more than two bindles of a half-gram each. Each occurred after, or slightly before, the band began to play.

“The evidence established that, with the exception of February 19, all transactions occurred in the lounge of the premises while the parties were seated at a cocktail table. The exchanges occurred over a minimal period of time. In most instances, the bindles were passed at tabletop or slightly below. . . . [1Q [0]n occasion, an employee [of petitioners] was in the vicinity of a transaction between Ramirez and one of the investigators, [but] the evidence did not clearly and convincingly establish that [petitioners’] employees should have reasonably known what was transpiring. Taken into consideration are the following factors: The generally crowded nature of the premises when the transactions occurred, the music of the band, the brief time during which the exchanges occurred and the comparatively small sizes of the bindles involved.”

The evidence “failed to establish that either the licensee’s management or its employees knew” of the drug transactions. The evidence also showed that petitioners’ managers and employees “received no special training regarding drugs or preventative measures to control illegal transactions.” No evidence was presented that there was ever any other drug activity on the premises or that petitioners were aware of any; the sole evidence of narcotic activity was that involving the undercover officers and Ramirez.

The ALJ concluded that petitioners did not know or have reason to know that the transactions were occurring and thus did not knowingly permit them. However, the Department was proceeding in light of the McFaddin decision, which essentially states that a licensee can be found to “permit” conduct without knowing about it. McFaddin also states that a licensee who “does not reasonably know of the specific drug transactions” can be considered not

to have permitted them if the licensee “has taken all reasonable measures to prevent such transactions.” (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at p. 1390.) The ALJ thus focused on the preventive measures petitioners took to prevent drug trafficking on their premises. Because they were an upscale family-oriented business which did not cater to a clientele likely to engage in drug abuse, petitioners, not surprisingly, took few steps to prevent a problem of which they were unaware. The ALJ concluded: “Although the Chief of the Pleasanton police department offered a glowing assessment of [petitioners’] conduct since licensed, the evidence failed to establish what measures [petitioners] undertook to control trafficking by [their] patrons. ... [SI] [T]he evidence failed to establish that [petitioners] undertook all reasonable steps to prevent such activity from occurring."

Based on this reasoning, the ALJ reached the conclusion that petitioners “permitted” the drug trafficking and suspended their liquor license for 60 days. Fifty days of that suspension were stayed for two years on several conditions, including the development of measures to prevent drug trafficking on the premises.

The Board adopted the ALJ’s proposed decision verbatim and affirmed it, noting that there was “no evidence” that petitioners took “reasonable steps to prevent narcotic transactions.” The Board interpreted McFaddin to mean that a licensee unaware of drug transactions may only escape discipline if he or she had imposed a regime of preventative measures.

B. De Lena

Petitioner Richard De Lena operates a bar and restaurant known both as “The Don’s” and “Greenhouse Bar & Restaurant” in Sebastopol. Petitioner has held an on-sale general eating place license and a caterer’s permit since May 1988, with no prior record of discipline.

Petitioner’s establishment is on the ground floor of a two-story building which he owns. The second floor is occupied by a residential care facility which petitioner operates for developmentálly disabled persons. The ground floor is divided into a coffee shop, a dining room and a bar. The bar is separated by doors from the rest of the ground floor. Petitioner employs three bartenders and several waitresses and busboys; he has a total of twenty-one part-time and two full-time employees.

Five drug transactions were found to have occurred on petitioner’s premises, four involving an off-duty employee. On February 3, 1989, a Cotati

police detective purchased a $25, .17-gram bindle of cocaine from a patron of the bar. There is no indication that any employee of petitioner was aware of the illegal sale. On February 23, March 2, March 8, and March 9, 1989, the detective returned with a female Department undercover investigator and bought methamphetamine from Cindy Calkins, petitioner’s off-duty employee, who was sitting in the bar. The sales were for .50, .49, .28, and .11 grams. The sales either occurred in a restroom or covertly at a bar table, with money and drugs passed beneath the table or hidden in envelopes, candy containers or cigarette packs. Petitioner fired Calkins after her arrest for drug sales. Apparently, petitioner was unaware of this activity; there is no evidence that he knew of the sales. There is a finding that he was unaware of the Department’s undercover investigation.

Petitioner had installed a video surveillance system in the bar, dining room and coffee shop. The video monitor is located in petitioner’s upstairs office. Petitioner activates the monitor whenever he is in his office, from 2 to 5 p.m. and after 9:30 p.m. (He is personally in the bar between 5 p.m. and 5:30 p.m. and during most of the evening.) Only petitioner uses the video monitor.

The ALJ found that petitioner “feels strongly about the use of drugs in the premises. He has told his employees that they will be arrested if involved in drugs within the confines of the building or lot. He terminated the services of his cook in late 1988 for drug use.” Petitioner’s employees (along with most customers) are aware of the video surveillance.

The ALJ concluded that petitioner permitted the illegal sales on two distinct grounds: (1) that the knowledge of the four sales by the participating employee is vicariously imputed to petitioner, regardless of the employee’s having been off-duty; and (2) that assuming no knowledge, actual or vicarious, petitioner “permitted” all five of the sales within the meaning of McFaddin. The ALJ concluded that petitioner had failed to take all reasonable measures to prevent drug transactions. The ALJ proposed a revocation of petitioner’s license, stayed for two years on condition of an actual fifteen-day suspension.

The Board affirmed. The Board only briefly discussed the issue of the imputability of a bar employee’s knowledge when that employee is not on duty. The Board concluded that the ALJ correctly reasoned that the on-duty/ off-duty distinction is meaningless because an employee has a duty to refrain from illegal transactions on the premises at ¿1 times. The Board also reasoned that each time the employee returned to duty, her knowledge of her own illegal acts was automatically imputed to petitioner.

The Board’s ruling is devoted mostly to the McFaddin decision and its interpretation. It is impossible to tell how much weight the Board gave to the imputed knowledge issue as opposed to the McFaddin issue in affirming the discipline.

Discussion

A. Standard of Review

Judicial review in alcoholic beverage control matters is prescribed by statute. This court reviews the ALJ’s decision for the Department, as well as the Board’s affirmance. (§ 23090.3.) Under the circumstances present in these cases, our review is limited to ascertaining whether the Department acted in excess of its jurisdiction, did not proceed in a manner required by law, reached a decision unsupported by its findings, or relied on findings unsupported by substantial evidence. (§ 23090.2.)

B. Merits

The crux of this case is the McFaddin decision, its interpretation by the Department and the Board, and its historical antecedents. In Laube, petitioners contend that McFaddin cannot support the action against their licenses, because under correct law a licensee cannot be found to have “permitted” activity without knowledge of it. In addition, petitioners in both Laube and De Lena take issue with the Board’s interpretation of McFaddin. They argue that even if they were charged with some reasonable measures of preventive activity, each acted reasonably under the circumstances known to him—an absence of any reasonable expectation of drug sales on premises. In particular, petitioner De Lena argues he imposed all measures that seemed reasonable under the circumstances, only to discover after the fact that the Department, which has failed to provide guidance to licensees, did not consider those measures sufficient.

The Attorney General contends that knowledge of “permitted” behavior is not required, and that neither petitioner took sufficient preventive measures because drug transactions did in fact occur. We disagree with both contentions. Having examined in detail the historical antecedents of McFaddin, we respectfully conclude that the Board’s interpretation of McFaddin is incorrect, and leads to unwarranted liability without fault on the part of the liquor licensee, is over-expansive and, as seen below, will require honest licensees of the most innocent of liquor establishments to impose Orwellian schemes of customer surveillance inconsistent with contemporary societal values. For these reasons we annul the decisions below.

1. The McFaddin Decision

The petitioner in McFaddin operated “Confetti,” a large, popular San Diego disco. In an area of 7,500 square feet Confetti, served an average of 650 patrons per night, and as many as 1,500 on weekends. Confetti had 90 employees, 3 bars on 3 different levels, and catered to people between the ages of 21 and 36 years.

In a three-week period, undercover San Diego police officers bought small amounts of cocaine on six occasions and from four different patrons. Confetti’s operator and employees did not know or have reason to know of these transactions. Confetti had, however, imposed extensive measures in an attempt to control drug trafficking by employees and patrons. These stringent measures included using polygraph tests on employees to ensure compliance with prohibitions on drug use; using undercover personnel to monitor activities of employees; the posting of conspicuous signs in the restrooms warning of arrest and prosecution for drug sales; and checks of the restrooms every 10 minutes. (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at pp. 1390-1391, & p. 1390, fn. 8.)

The Department charged Confetti with permitting drug sales on its premises and suspended its license. The Board affirmed. The McFaddin court granted a petition for review and reversed. The court stated the issue as follows: “Does the operator of a nightclub ‘permit’ the sale of narcotics on its premises if the operator diligently attempts to control such sales and the operator and its employees do not know, or should not reasonably know, of the specific drug transactions?” (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at p. 1389.) Citing Mercurio v. Dept. Alcoholic etc. Control (1956) 144 Cal.App.2d 626 , 629-631 [ 301 P.2d 474 ], the court stated: “It is not necessary for a licensee to knowingly allow its premises to be used in a prohibited manner in order to be found to have permitted its use.” (McFaddin San Diego 1130, Inc. v. Stroh, supra, at pp. 1389-1390.) The court thus seems to have adopted the premise that a liquor licensee can “permit” illicit activity without being aware of it, and the Board seizes on this language.

The McFaddin court was influenced by a passage purporting to define “permit” which appears in a long line of cases in this area: “Further, ‘The word “ ‘permit’ implies no affirmative act. It involves no intent. It is mere passivity, abstaining from preventative action.” ’ ” (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at p. 1390, quoting Harris v. Alcoholic Bev. Con. Appeals Bd. (1963) 212 Cal.App.2d 106 , 123 [ 28 Cal.Rptr. 74 ], in turn quoting Dorris v. McKamy (1919) 40 Cal.App. 267 , 274 [ 180 P. 645 ], italics added by McFaddin court.)

This definition of “permit” is correct enough; however, a long line of California liquor license decisions have transformed this definition into something entirely different: the notion that the passive conduct of permitting something by failing to take measures to prevent it does not require knowledge of the thing permitted. The concept that one may permit something of which he or she is unaware does not withstand analysis. This is especially true since under section 24200, subdivision (a) and California Constitution, article XX, section 22, a license may only be suspended for good cause. McFaddin itself noted the problems with strict liability, or liability without knowledge on the part of the licensee, observing the “potential unfairness and possible unlawfulness of suspending or revoking a license if the licensee is blameless.” (McFaddin San Diego 1130, Inc. v. Stroh, supra, 208 Cal.App.3d at p. 1388, fn. 3.) Yet, by employing a definition of “permit” that requires no knowledge by the one granting the permission, McFaddin has been interpreted by the Board as imposing de facto strict liability on the licensee by charging him with “permitting” something whenever he has not taken action to prevent it, even when the licensee had no reason to know there was something that required prevention. We do not read McFaddin so narrowly. In a footnote, the McFaddin court specifically advised that it did “not reach the difficult question whether a licensee can have its license suspended or revoked without fault. . . .” (Ibid.)

2. Antecedents of McFaddin

The sentence in McFaddin on which the Board relies can best be described as the unfortunate product of line of cases whose language had become so routinely repeated and fossilized into unquestioned correctness that, like those terrified of the Great Oz, few bothered to look behind the curtain. Decades ago the liquor license cases began to quote the definition of “permit” described above and to employ the definition to preclude the requirement of licensee knowledge. An examination of those cases shows that the definition arose and was quoted and applied in a factual context involving knowledge, and that all of the liquor license decisions involved knowledge of the licensee. None involved disciplinary action against a licensee who did not know of the conduct “permitted.”

Ironically, the definition of “permit” was first expressed not in a California liquor license decision, but in a 1900 bankruptcy decision of the federal district court of Western Pennsylvania. In re Thomas (W.D.Pa. 1900) 103 F. 272 , involved the question whether a bankruptcy debtor “suffered” or “permitted” creditors to obtain a preference on the bankruptcy estate. Distinguishing the debtor’s passive conduct from that of taking affirmative action, the federal court concluded that the debtor permitted the preference by

failing to pay past due obligations. The unpaid debts led to levies of execution which created the improper preference. “It is true [the debtor] took no active, affirmative steps to create such preference, other than the failure to meet a matured judgment note or provide for its extension; but inasmuch as she took no steps to prevent the enforcement, by sale, of such preference, she must be held to have suffered or permitted these creditors to obtain preference. ‘To permit’ is defined as not to hinder. Webster defines ‘permit’ as more negative than ‘allow’; that it imports only acquiescence or an abstinence from prevention .... It would seem, therefore, that to permit or suffer implies no affirmative act,—involves no intent. It is mere passivity, indifference, abstaining from preventative action.” (Id.., at pp. 273-274.)

The facts of Thomas strongly suggest the obvious—that the debtor knew of her matured obligations. Other language in the opinion suggests the court was not equating passivity or a failure to act with a lack of awareness. (See In re Thomas, supra, 103 F. at p. 275.) Knowledge was assumed. Certainly the passage just quoted does not establish that the term “permit” may be defined to exclude knowledge on the part of the actor.

The Thomas language migrated westward in the 1919 decision of Dorris v. McKamy, supra, 40 Cal.App. 267 . Dorris was likewise not a liquor license case. It involved a civil action to remove a city marshal from office for failing to enforce the law. The marshal was accused of “permitting” a group of women to openly and notoriously engage in prostitution from certain buildings. The Dorris court evidently happened upon the definition of permit in Thomas and cited it in support of the comment that “permit” implies no affirmative act and is “mere passivity, abstaining from preventative action.” (Dorris, at p. 274.) The court concluded that the marshal “permitted” the conduct by his passive inaction, but found no basis for removal because his failure to act was based on the lack of a proper warrant for arrest. Like its Pennsylvania predecessor, Dorris does not speak in terms of failing to prevent an unknown event. The marshal’s knowledge of the open and notorious acts was assumed and was in fact alleged in the allegations of the complaint for removal.

Dorris (and by historical extension, Thomas) found its way into the developing law of liquor license revocation. The first such decision appears to be Swegle v. State Board of Equalization (1954) 125 Cal.App.2d 432 [ 270 P.2d 518 ], wherein a liquor licensee’s license was revoked because he “permitted” fights and the presence of both disruptive drunks and practicing prostitutes on his premises. The trial court, in denying a mandate petition against the Board of Equalization, had ruled that “permit” includes an “unknowing consent” to the occurrence of illicit acts. (Id., at p. 438.) The

court also ruled, in language approaching strict liability, that “a licensee can be held to have permitted acts . . . upon evidence and a showing that the acts themselves took place.” (Ibid.) The Court of Appeal upheld this interpretation of “permit,” citing the Dorris definition of “permit,” as merely passive abstention from preventative action.

The Swegle court did not explain how the Dorris definition precluded the element of knowledge. Moreover, in the very next sentence the court states that the licensee’s “agents were always present in the bar.” (Swegle v. State Board of Equalization, supra, 125 Cal.App.2d at p. 438.) The court proceeded to explain that the licensee’s employees were present and knew of the activity, and that their knowledge was imputed to the licensee. Thus the court employed the Dorris definition using language of strict liability, but on facts showing knowledge.

A similar result was reached in the case cited by McFaddin, Mercurio v. Dept. Alcoholic etc. Control, supra, 144 Cal.App.2d 626 , in which the license was revoked because the licensees “permitted” cocktail waitresses to accept alcoholic beverages purchased on the premises. The licensees argued that their knowledge was a necessary element of the charge of “permitting.” Citing Swegle, the court rejected the argument, stating emphatically that knowledge was not an element of permission. Again, however, the court stressed that one licensee was present when the acts occurred, and therefore knew about them; again, a ruling ostensibly establishing liability without knowledge was based on facts to the contrary.

In Givens v. Dept. Alcoholic Bev. Control (1959) 176 Cal.App.2d 529 [ 1 Cal.Rptr. 446 ], the licensee was clearly aware of the occurrences which led to his license being revoked. He was charged with “suffering” or “permitting” activities which made his bar a “disorderly house”: frequent fights, one of which led to a murder; frequent presence of pimps, prostitutes and drug dealers; and frequent loud and disorderly behavior by drunken patrons. The licensee’s defense was that he had tried to take steps to correct the problems and failed. The court held he had permitted the conduct by failing to take sufficient curative steps, e.g., soliciting the aid of the local police. The court cited Swegle for the proposition that “acquiescence is nonetheless permission” (id., at p. 534), but clearly that acquiescence was with the licensee’s knowledge. The court’s comment that “[i]f, as in this present case, the overwhelming evidence shows that the tavern is in fact a ‘disorderly house,’ there can be but one conclusion: that the licensee has permitted or suffered such a condition to exist” (ibid.) does not embrace strict liability unless lifted out of context.

In Benedetti v. Dept. Alcoholic Bev. Control (1960) 187 Cal.App.2d 213 [ 9 Cal.Rptr. 525 ], the license was revoked because the licensee permitted his

bar to be, in the parlance of the time, “ ‘a resort’ for sexual perverts.” (Id., at p. 217.) Although the court relied heavily on Mercurio and Givens and used their language of strict liability, the evidence before it showed that both the licensee and his employees witnessed and were aware of certain sexual activity occurring on the premises.

In Morell v. Dept. of Alcoholic Bev. Control (1962) 204 Cal.App.2d 504 [ 22 Cal.Rptr. 405 ], the license was also revoked for the licensee’s permitting overt homosexual activity on the premises. Citing Swegle, Givens, and Benedetti, the court concluded that “[n]o proof of knowledge by the licensee or his agents of the acts proscribed by the section is necessary, it being sufficient that the evidence show that such acts took place on the licensed premises.” (Id., at pp. 511-512.) This clear-cut statement of liability without fault is simply out of place: the evidence was replete with indications that the licensee’s employees repeatedly witnessed the targeted behavior of the patrons.

In Harris v. Alcoholic Bev. Con. Appeals Bd., supra, 212 Cal.App.2d 106 , the license was revoked for keeping a premises of disorderly drunks. The licensees argued they did not know of the dozens of arrests of drunken patrons. The court cited the Dorris definition, as well as the declarations in Givens and Morell that it is sufficient if the acts took place. (Id., at pp. 123-124.) Once again, the court spoke of strict liability in a case of constructive knowledge by the licensee: the frequent arrests for public drunkenness “were open and in full view and thus easily detectable by the bartender’s discerning eye.” (Id., at p. 120.)

In contrast to the foregoing line of cases suggesting strict liability, two decisions suggest that the licensee’s knowledge is essential. In Marcucci v. Board of Equalization (1956) 138 Cal.App.2d 605 [ 292 P.2d 264 ], the licensee was charged under section 24200 with permitting a minor to consume beer on her premises. The licensee’s bartender observed the obvious transgression. The court concluded: “A licentiate conducting the sale of beverages under an on-sale license is charged with an active duty to prevent minors from consuming intoxicating liquor on the licensed premises, and if the licentiate, through an employee, has knowledge that such consumption is taking place, there arises immediately an active duty to prevent its continuance. A failure to prevent it is within the meaning of the statute [section 24200] a permitting of that unlawful consumption.” (Id., at p. 610, italics added.)

In a related context, in Reilly v. Stroh (1984) 161 Cal.App.3d 47 [ 207 Cal.Rptr. 250 ], the court held tiiat once a licensee knew of a violation of

public morals on his or her premises, the licensee’s preventative measures had to be successful. Significantly, the Reilly court repudiated the language of strict liability and embraced Marcucci.

3. Evaluation of McFaddin and Its Interpretation

An ancient definition of “permit” as passive conduct has been gratuitously used by several California decisions to suggest that a liquor licensee can be held strictly accountable, without knowledge, notwithstanding the constitutional and statutory requirement of “good cause” for adverse action against a license. We respectfully differ with the Board’s perception of McFaddin and its antecedents, and hold that a licensee must have knowledge, either actual or constructive, before he or she can be found to have “permitted” unacceptable conduct on a licensed premises. It defies logic to charge someone with permitting conduct of which they are not aware. It also leads to impermissible strict liability of liquor licensees when they enjoy a constitutional standard of good cause before their license—and quite likely their livelihood—may be infringed by the state.

The problem of drug trafficking obviously warrants the utmost attention, and the general association between such trafficking and bars is well known. But the solution is not to impose strict liability on any licensee, even those running upscale establishments without a hint of suspicion of illicit conduct on their premises, simply because a drug transaction occurs. The McFaddin ruling has been interpreted by the Department and the Board in exactly this fashion. The McFaddin decision has inadvertently resulted in what the licensing authorities have dubbed the “McFaddin defense.” The unsuspecting licensee is strictly liable solely because a drug transaction occurred, unless it had engaged in preventive activity. Aside from the absurdity of having to impose a preventative regime against an evil not reasonably suspected, this defense requires the licensee to impose precisely the severe, intrusive measures employed by the disco in McFaddin. In both of the cases before us, the Board compared the measures taken by the establishment with those in McFaddin. The Board’s adhesion to the facts of McFaddin can lead, as it has in these cases, to absurd and unjust results.

The Board seems to assume that all bars are dens of drug trafficking. The Attorney General seemed to take that position at oral argument, and told this court that all bars must impose a regime of surveillance. However, not all purveyors of spirits preside over markets of illicit substances. Certain establishments with liquor licenses, because of their size, location or style of clientele, may simply not pose a reasonable suggestion of drug trafficking. Certain of San Francisco’s finest and world-famous hotels come immediately