Untangling the complex world of wine direct shipping and compliance
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    Wrong, but Not Surprising: A Loss in Extending Granholm to Shipments by Retailers

    October 5th, 2007
    By R. Corbin Houchins, Beverage Industry Counsel

    The recent decision in Arnold’s Wines, Inc. v. Boyle, Docket No. 06 Civ. 3357 (Southern District of NY, Sept. 9, 2007), which upholds New York’s requirement that retailers be located within the state to sell and ship to New York residents, illustrates the difficulty of separating dictum from holding in the Granholm case. (See the September 18th blog post for an explanation of the difference.)

    My reading of the Arnold’s Wines opinion is that Judge Howell failed to put a famous statement from the 1990 North Dakota case, quoted in Granholm, in the context of the Granholm holding. The key quotation is that North Dakota had a 21st Amendment right “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” States and local licensee trade associations cite the statement as a fundamental principle of constitutional law, while out-of-state plaintiffs dismiss it as mere dictum and therefore incapable of serving as the decisional principle in discrimination cases. In Arnold’s Wines it appears each side was half right.

    To determine whether the North Dakota reference in Granholm is controlling precedent, one must examine the latter opinion to see if it was necessary to the result. When one does that, it seems clear that New York has the right to require all wine to go through a three-tier system, but no right to require that any element of that system be located within the state of New York unless the discrimination against out-of-state sellers can be justified under the Commerce Clause.

    Nothing in the Arnold’s Wines memorandum opinion suggests evidence of justification other than New York’s desire to have a three-tier system and the general objectives of states’ adopting such systems after Repeal. Three-tier systems are like any other exercise of regulatory power by the state; they are valid only if they either do not discriminate against interstate commerce relative to local or discriminate no more than necessary to serve a legitimate state purpose that cannot be achieved by available nondiscriminatory means. The burden is on the state to justify discrimination. However, the court decided that the defendants win as a matter of law, with no factual hearing. It looks to me as if the court wrongly deprived the plaintiff of its right to require the state to prove its case.

    2 Responses to “Wrong, but Not Surprising: A Loss in Extending Granholm to Shipments by Retailers”

    1. Eric Schisler says:

      The federal courts have the pivitol question of the winery self-distribution controversy wrong. Instead of; do out-of-state wineries have all the same opportunities as in-state wineries, the question should be (let’s take for example two wine producing states- California and Virginia); does Virginia law treat California wineries with all the courtesy that Virginia wineries receive when they seek to sell wine in the California market. Free interstate commerce is as simple as that!

      The greatest irony of this controversy is that by most accounts, the wholesaler tier of the three tier system is the smallest in number, is the most powerful in terms of lobbying ability, and provides the least valuable service of the three tiers. In large measure, wholesalers are just a high priced delivery service, while producers and retailers do most of the heavy lifting. The vast majority of wineries expend more effort selling their products than they do making their products. Even those who employ distributors exclusively.

      The days of cheap gasoline are long gone. Businesses of all kind, including wineries, have carbon footprints and fuel surcharges to worry about. Wineries committed to sustainability, should consider self-distribution to local license holders that are closer than a distributor in order to conserve precious resources and as a benefit, will also sell at higher margins. Incentivize employees to deliver a stop or two on their route home. It will strengthen your relationships with retail partners and create a nice bonus system for workers.

      A case of 12 bottles of wine weighs in at 32 pounds or more, the proximity advantage could translate to as much as 1-2 dollars per bottle by the time a wine reaches a consumer’s dinner table. Let’s not forget that wine is, in the end, a consumer good, just like toilet paper, Cheerios and pork chops. As long as producers respect the public’s desire to sell alcoholic beverages only to citizens of legal drinking age, wineries, like any other business, should have the freedom to run their operation as they see fit. America’s founding fathers’ would definitely concur.

      Eric Schisler

    2. It would be nice if wineries could exist by selling only locally and through the web, and there are a small handful that do, but only a handful. Only selling locally creates a situation where a large number of wineries are all trying to sell to a small number of retailers and restaurants. All wineries do try to sell in their hometown because of the reasons you suggested: you don’t have to ship your wine, and employees can drop it off on the way home, saving gas. But, for example, there are nearly 100 wineries in and around Healdsburg – not including the really small start up wineries – and maybe 20 restaurants or retailers. And we are unusual in that we have a lot of restaurants for a town of 11,000. Our local communities just can’t support all of the wine that is made locally. We have to distribute.

      Distribution is what allows wineries to go from making wine in the garage to making wine that pays the bills. And, making better and better wines. The fact remains that wine making, or wine production, is a numbers game. To use resources efficiently and lower costs per bottle, wineries need to be making on the order of 10,000 cases and up per year. That is a lot of wine to sell out of your tasting room, to your local retailers and even direct through the web. The way you sell your extra is through distribution, selling 100 cases at a time instead of 1.

      As a wine maker and winery owner, I dream of a world where I sell all of my wine through my wine club, tasting room and website – 100% direct. But, it’s not my reality and isn’t going to be one soon. So I, like the rest of the wineries in the country, need wholesalers and distribution, and I need more states to allow me to ship to their residents.

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