Archive for January, 2008
Six Veils Out of Seven: Retailer Shipments Under Granholm
January 30th, 2008
On January 14, 2008, a district court in Texas rendered a mostly pro-trade decision in Siesta Village Market, LLC v. Perry that clarified much, but danced around the hottest issue, leaving the final veil in place.
The case upholds the basic Specialty Wine Retailers contention that a state that allows its retailers to deliver to consumers must permit direct shipment by out-of-state retailers. It also has some important things to say about the meaning of Granholm’s less pellucid passages. In particular, it attempts to deal with the most significant internal tension of the Granholm majority opinion, viz., the difficulty of squaring the holding of the opinion, that states cannot require out-of-state wineries to become residents as a condition to reaching local markets, with a dictum-within-a-dictum quoted from a 1990 Supreme Court case, North Dakota v. United States, to the effect that the 21st Amendment empowers states “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm).
The Siesta Village decision and its implications merit further discussion, in particular on the following points:
1. Texas had a “citizenship” requirement of at least a year’s residence in the state for most licenses. It had already been declared unconstitutional when applied to newly arriving wholesalers with physical premises within the state. Siesta Village goes farther by analyzing the statute as a location requirement and holding it unconstitutional on Commerce Clause grounds, to the extent it prevented issuance of the requisite retailing licenses to out-of-state retailers.
2. The Siesta Village judge takes Granholm as a location parity case, and his opinion is explicit that physical presence requirements “plainly discriminate against interstate commerce.” However, like every analyst of Granholm, he had to deal with a key question posed by the quotation from North Dakota, noted above: If a state has the right to require all wine to “be purchased from a licensed in-state wholesaler,” how does one give effect to the Commerce Clause policy against location discrimination? One way of resolving the issue is to require the state to accept methods of consummating the purchase requirement that do not substantially burden interstate commerce relative to local, such as running the sale through the local middle tier without requiring the wine to take an economically disadvantageous logistical path when sold by an out-of-state retailer. Another is to declare that the quotation is dicta and therefore not binding in applying the Granholm holding to a different chain of distribution where its effect on commerce is more problematic –rather too bold a departure to expect in a district court opinion. In the event, the judge simply let the contradiction lie, holding that the retailers have to comply with Texas laws requiring a state retail license and purchase from a Texas-licensed wholesaler, a deferral that has been described as a ticket to the next round of litigation. Meanwhile, the Texas Alcoholic Beverage Control Commission has informally commented that it is not their problem.
3. Experts disagree on the extent to which Granholm was a “weak record case” that could have gone the other way had the states made a better showing of regulatory problems, for example in tax collection and averting deliveries to underage recipients. Siesta Village takes the opposite view, and granted summary judgment, which means the court decided Texas failed to show substantial likelihood that, if it were afforded a full hearing, it would present evidence on which a judgment in its favor could be based. To win in a direct discrimination case a state would have to show there is no reasonable alternative to discrimination for achieving legitimate regulatory objectives. The court reads Granholm to say that the availability of licensing and modern communications makes such an argument inherently implausible, and comes close to saying a state can never prevail on the proposition that interstate delivery is more likely to cause underage drinking than intrastate delivery.
4. Another point of controversy among lawyers is whether the Commerce Clause is indifferent to whether a court cures discrimination by leveling up or down. Siesta Village takes the side of those who argue that it makes no sense to level down in enforcing a constitutional provision intended to encourage interstate trade, at least in the absence of a clear legislative statement requiring termination of in-state privileges in case of invalidity of interstate prohibition. In constitutional law terms, the Siesta Village judge may have discovered a penumbra to the Commerce Clause that would prevent courts from taking such simplistic approaches as counting the number of lines of statutory text that would have to be rewritten and picking the smaller revision.
5. Although Siesta Village rejected the wholesalers’ strange argument that the discrimination arose not from Texas’s intent, but from the happenstance of the plaintiffs’ locations, it indulged in dicta indicating states can adopt on-site-only laws, in which case the “accident of geography,” and not state discrimination, would be responsible for excluding remote sellers. It appeared to accept the reasoning that because there is no “direct shipment market” in those states, the remote sellers are not excluded from anything by the prohibition, which is arguably a flawed argument under the Commerce Clause, whose policy extends to disproportionate burden as well as overt discrimination.
Appeals seem likely. Meanwhile, the parties in Knightsbridge Wine Shoppe, LTD v. Jolly, who agreed to extend Granholm, at least temporarily, to non-producing retailers selling to California consumers, will presumably take up their cudgels on application of the Siesta Village analysis, versus that of the New York case, Arnold’s Wines, Inc. v. Boyle on September 9, 2007. In Arnold’s Wines, the New York federal district court dismissed a retailer suit without an evidentiary hearing, on the grounds that the state had a 21st Amendment right to require all sales to go through an in-state wholesaler, a proposition suggested by the vexing dictum in the Granholm opinion.
The Arnold’s Wines decision seems to miss Granholm’s point that a state may have the right to require all wine to go through three tiers, but does not have the right to apply its rule with location discrimination unless it provides evidence that its discrimination against interstate sellers is required by a legitimate state objective that cannot be achieved through nondiscriminatory means. The Siesta Village judge expressly declined to follow Arnold’s Wines, which it plausibly characterized as putting the 21st Amendment above the Commerce Clause, precisely what Granholm forbids.
Dulling the Cutting Edge
January 30th, 2008
Yesterday’s decision of the Ninth Circuit Court of Appeals rejected almost everything about the trial court’s decision in Costco Wholesale Corp. v. Hoen that was innovative under federal antitrust law, turning the case into an expression of conservative deference to state law.
Appellate judges did not even throw Costco the scrap of a favorable word about the Granholm portion of the judgment, on which the state had already acquiesced by changing its statutory scheme to eliminate discrimination against out-of-state manufacturers. A small mitigating factor for trade in wine is that the Ninth Circuit did not attempt to expand the effect of the 21st Amendment , leaving in place both the district judge’s definition of the supposed Section 2 defense and her finding that it had not been proved.
The immediate effect of the decision, once a mandate is issued to the district court, will be threefold: (1) Washington will have to stop requiring suppliers to post prices and hold them unchanged for 30 days without actively supervising them for reasonableness, a practice the court agreed constitutes a per se violation of federal antitrust law. (2) The state may nevertheless enforce other restraints that have operated as part of the price posting scheme, i.e., the bans on quantity discounts and credit, the minimum 10% markup and the requirement that suppliers charge all retailers in the state the same price, irrespective of the point of delivery. (3) The state may also continue the two challenged restraints of trade operating only indirectly on price, the bans on central warehousing and on sales between retailers. It seems likely the mandate will take effect in due course, as there is no reason to expect the Court of Appeals to entertain a request for rehearing, and the odds are against the Supreme Court’s accepting the case for review, should a party attempt to appeal.
Practical compliance with the opinion will raise interesting administrative issues on which the Court of Appeals offered no guidance. The first unanswered question is, assuming the state wishes to retain the allowed price restraints, how it could operate a price posting system without the illegal “hold” requirement? Would some hold period significantly shorter than 30 days be legal? If not, how could one administer an instantly revisable posting? If there is can be no mandated time period for holding a price, can a uniform price rule apply to any transactions that are not exactly contemporaneous? Assuming posting is out for practical reasons, liquor price law enforcement would be mostly on the same footing as enforcement of trade laws generally, requiring investigation and often relying on competitor’s complaints, a scenario that invites cost-benefit analysis of interfering in a marketplace that is already regulated under general antitrust and fair competition laws.
All those uncertainties arise at a time when the Washington State Liquor Control Board is considering freer trade policies and some wholesalers are becoming less ardent in their support of post-and-hold price restraints. The state legislature is in a short session currently, with relatively little opportunity for profound and controversial changes in a major regulatory scheme, but the anomalies created by the Costco case suggest an attempt at a legislative fix, possibly including consideration of jettisoning the posting-related laws the Court of Appeals said the state could keep.
A setback for Costco
January 30th, 2008
A three-judge panel of the United States Court of Appeals for the Ninth Circuit ruled yesterday in the case of Costco Wholesale Corp. v. Hoen. The panel largely reversed the April, 2006 decision that declared much of Washington’s three-tier system to be unconstitutional.
Although the court did agree with Costco that the “post and hold” requirement that forces suppliers to post their prices and hold them unchanged for a period of time is unconstitutional, it disagreed with Costco on two main points. The first upheld the liquor board’s right to ban central warehousing, meaning that distributors must deliver product to each retail store instead of to a central warehouse owned by the retailer. This takes away a key advantage that Costco has in efficient distribution. The court also upheld the liquor board’s right to ban high-volume discounts to different retailers.
Both sides now have the option of appealing the court’s decision within two weeks. They could also appeal to the United States Supreme Court within three months. Costco has expressed disappointment in the decision, but it is not clear whether either side will appeal the ruling.
Retailers win one, lose one in Texas court
January 16th, 2008
Judge Sidney Fitzwater of the U.S. District Court for the Northern District of Texas handed down a very important decision on Monday. In the Siesta Village Market Opinion, Judge Fitzwater said the following
The court concludes that Texas’ ban on the sale and shipment of wine by out-of-state retailers to Texas residents is unconstitutional, but it also holds that the requirement that wine retailers——including out-of-state retailers——first purchase such wine from Texas-licensed wholesalers is constitutional.
We’ll have much more to say about this case in the future, but this opinion is important because, for the first time, Judge Fitzwater said effectively that the principals of Granholm v. Heald should apply not only to wine producers, but also to wine retailers. In other words, just as Texas must treat in-state and out-of-state wineries evenhandedly, it must also treat in-state and out-of-state retailers evenhandedly. The following sentence in the opinion highlights this claim.
Because the retailer-plaintiffs and in-state wine retailers are engaged in the same business——the sale of wine to retail consumers——and seek access to the same market——Texas consumers——they are potential competitors and are therefore similarly situated for purposes of dormant Commerce Clause analysis.
Unfortunately for retailers, the good news also came with a new twist. The decision upheld the constitutionality of the Texas requirement that both in-state and out-of-state retailers that wish to ship to Texas consumers first purchase the wine from a wholesaler licensed in the state of Texas. A California wine retailer, therefore, must first purchase wine from a licensed Texas wholesaler before shipping it to Texas consumers. Tom Wark, Executive Director of the Specialty Wine Retailers Association, had the following to say about the new twist.
Not only is it illegal under California law and other state’s law, but I believe it’s illegal under Texas law, Wark said. We won on everything but there’s that little unfortunate part the judge got wrong. I feel sorry for Lou Bright (who heads the Texas ABC). How is he going to implement this?
Prior to this decision, the parties had agreed to a preliminary injunction that allowed out-of-state retailers to ship wine into Texas without a permit. We’ll now wait for administrative guidance from the Texas ABC. In parallel, the decision will likely be appealed.
Oregon - The Next Round is Just Starting
January 10th, 2008
With a new law allowing out-of-state wineries to sell directly to Oregon retailers, effective January 1, Oregon looked like a bright star in the winery self-distribution field. Oregon had chosen to level up, allowing both domestic and out-of-state wineries to sell direct to retailers. It seemed as if free trade in wine had arrived.
But, in a preemptive strike just before the New Year, the Oregon wholesalers decided that the new law was the perfect vehicle to attack central warehousing by Oregon chain retailers.
In an e-mail circulated in late December, the wholesalers told chain retailers operating in Oregon that “the central warehousing of wine by a retailer” was no longer allowed and that a “retail license does not allow the retailer to transport wine or beer from one licensed location to another, even if the two locations are owned by the same entity.”
Retailers, who had for years used Oregon wholesalers to import wine and then have it delivered to the retailer’s central warehouse for the retailer to transport it to their retail locations, found themselves scrambling when wholesalers refused to deliver wine to their warehouses, even before the new law took effect. This was not wine purchased in a direct sale between the out-of-state winery and the retailer, but wines imported by, and purchased from, the Oregon wholesaler, as had been done for years.
The regular readers of the ShipCompliant blog may recall that the issue of central warehousing by Oregon retailers was discussed extensively in a prior blog post titled “An Exchange on Central Warehousing”. While Oregon had no statute prohibiting the practice, the OLCC had enunciated the position that central warehousing was not consistent with its regulations. However, the blog post carefully analyzed the Commission’s position and found it unsupported by law or logic.
For retailers in Oregon, the OLCC’s position was strange because many of the chain retailers had been receiving wine into their central warehouses and delivering to their own stores for YEARS. Some of them had letters from the Commission specifically approving the practice. The Commission took no steps to revoke these prior letters and let the practice continue.
So the wholesalers took it upon themselves to see if they could end retailers’ practice of central warehousing. While not articulated directly, the wholesalers are apparently relying on the provisions of the new wine self-distribution law to claim the practice is now outlawed. First, the new law does require that wine purchased direct from a winery must be received at a premise with a license endorsed to receive direct sales. [Section 2.(5) of HB 2677.]
But does that mean that the wine, during transit, must always stop at a licensed location? Could the wine be stored and transported from an unlicensed location, such as a central warehouse, before coming to the premises with the license with the proper endorsement?
Second, the new law in Section 2b contains provisions relating to who may ship wine under this new permit. Apparently the wholesalers believe that since retailers are not mentioned as one of the licensees who may transport direct sales wine in this section, retailers may no longer transport or ship wine at ANY TIME, even between their own stores, a practice that had been allowed for years. Again, it is not clear that the new law dealing specifically with direct sales by wineries to retailers was designed to limit retailers’ rights to transport or ship their own inventories of wine. Apparently the struggle to define who can ship wine, and under what circumstances is now open for debate.
The OLCC has just convened a rule advisory committee this week to help draft the final regulations to implement the both Wine Direct Shipper and Wine Self-Distribution permits, with formal rulemaking to follow this spring. We can expect round two to be exciting as the wholesalers decided to open it with a quick punch before the bell.
Welcome Alex Heckathorn
January 10th, 2008
We’re pleased to introduce our friend Alex Heckathorn as a guest blogger. Alex has been a principal in Compliance Services of America (CSA) for over 10 years. As an attorney for CSA, Alex advises and licenses wineries, brewpubs, importers, wholesalers, distillers and brand builders across the US.
What were they thinking?
January 10th, 2008
Naturally, there is another side to the story, which deserves analysis because of the policy issues it raises for liberalization of wine distribution laws, a goal nearly every commentator embraces.
First, Wine.com’s own justification: Wine Spectator Online for January 8th quotes CEO Richard Bergsund, who declared, “We’d like to see markets open up, and we’d like to see fair competition. There are two ways to try and make change in a law you don’t like: One is operating within the law, and one is ignoring the law. We’ve chosen the former. We just believe that we’re at an enormous disadvantage if we’re the only one paying the high cost of compliance.” A lengthier explanation, signed by Mr. Bergund and Wine.com founder Mike Osborn, can be found in the Wine Spectator forums here. In case anyone would like to follow the fracas in greater detail, Wine.com also responded on 01.06.08 at 3:56 PM and on 01.04.08 at 4:06 PM to the Vinography blog post, receiving two supportive posts (on 01.04.08 at 7:38 PM and on 01.08.08 at 5:04 PM) among numerous flames and a sensible suggestion of how they might have advanced their interests without all the blowback, posted by Winemonger.com on 01.09.08 at 11:50 AM.
The issues that stand out for me involve the legal and ethical obligations of persons harmed by laws of dubious validity. For the record, here is the “devil’s advocate” perspective on the blogs thus far:
1) If a state is allowing Wine.com to deliver wine to its residents from a local retail-licensed facility, then under Granholm a serious question arises regarding its legal power to do so while prohibiting the same deliveries from a similarly licensed location outside the state. Wine.com can decide for various reasons not to raise that question, accepting the contingency that its business model would have to change if the laws were leveled up or down.
2) Until such time as a court with jurisdiction in one of the approximately 37 states that prohibit retailer direct shipment issues a final judgment of invalidity that becomes effective (not, for example, stayed on appeal), locally licensed businesses there have a right to operate in a market that complies with the applicable law. Those of us who think the law is invalid have a right to challenge it. The outcome of the challenge could, equally consistently with Granholm, either continue the interstate ban and end Wine.com’s in-state shipments or permit both in-state and out-of-state retailers to ship.
3) The right to force a state to make that choice does not logically imply a right to violate current law to the detriment of a complying competitor. It is ludicrous and crass to compare making an illegal wine shipment in contravention of an arguably invalid law to nonviolently resisting overt racial discrimination in the civil disobedience phase of the civil rights movement. It was, by widely accepted ethical standards, wrong for authorities to enforce segregation, even before those laws were formally invalidated. No comparable moral opprobrium attaches to enforcing commercial laws that foolishly limit consumer choice and serve the interests of a narrow segment of the economy. Good reasons for repealing a law are not a free ticket to ignore it.
4) Not incidentally, anyone outraged by passage of bad special interest legislation should be a partisan of campaign finance reform. The specialty retailer folks were quite right in pointing out the gross expenditures of wholesaler trade associations as part of the problem. If you were in a business that depended upon legislation, rather than only the value of your services, for profitability, wouldn’t you want to be pals with the lawmakers?
5) That leaves the question of the alternatives available to a business in Wine.com’s position, assuming it decides to exercise its undoubted right to seek the aid of the state in responding to illegal competition. Some commentators question whether Wine.com has the legal right to stimulate orders resulting in illegal shipments. One would have to know more about the details of the sting operation than has been made public to ascertain whether it was executed without violating any laws. Even if it did involve violations, authorities would probably exercise their discretion to overlook them if they were done with no benefit to Wine.com other than their contribution to deterring illegal transactions. Commentator fulminations notwithstanding, it is entirely proper for a business to act on the profit motive in bringing competitor violations to light. Some of the “natural” alternative responses raise legal problems. A prudent lawyer would not, for example, let her client call up a competitor who was beating him on price by stepping outside the law with a message that it would be reported unless the competitor knocked it off. (The antitrust and accessory liability counseling issues are beyond the scope of this post.) One blogger suggested that before doing the stings Wine.com could have made a public statement that it intended to compile evidence of illegal shipments and turn it over to authorities, a method that would certainly be less hazardous than direct communication with competitors. If the program were to start after a certain announced date, to give competitors a chance to get into compliance, it might have reduced criticism. Criticism, at least from the sources of the linked blog posts, would presumably also have been reduced if Wine.com had merely borne the injury. Probably it would have been reduced further if Wine.com had supported the specialty retailers’ legislative programs. Those are, of course, public relations, rather than a legal, considerations. Wine.com has no obligation to avert criticism. Commentators have no way of knowing whether their protests have any negative effect on its business, and no discernible basis for offering public relations advice in the first place.
6) Regarding the separate issue of legislative strategy, Wine.com has introduced the issue of “credibility” of a lobbying organization that, according to Wine.com, does not claim to represent a membership dedicated to legal competition. It is far too early to tell what difficulties, if any, pro-trade groups will encounter in their battles with the wholesalers because of pervasive lawbreaking in their ranks. However, whatever one’s evaluation of the legislative front, lobbying cannot credibly be advanced as a substitute for state help in keeping competition legal under existing law. No one is against effective lobbying; the question is how to define one’s obligations while that process is under way.
Wine.com stings fellow retailers
January 7th, 2008
Wine.com is apparently not in the holiday spirit. They recently set up a number of sting operations by purchasing wine on their competitors’ sites and notifying state ABCs that illegal shipments were on the way. Vinography has the full scoop. Be sure to read the comments below the post as well to see a pretty heated discussion that includes the CEO of Wine.com. Not surprisingly, the Wine & Spirits Wholesalers of America applauded the move.
New Oregon rules are live - reminder to get the new permit
January 3rd, 2008
Just a quick reminder that the new permit system took effect in Oregon on January 1st. Even if you previously had a reciprocal shipping permit to ship into Oregon, you now need their new permit to continue direct shipping. For wineries in states that were not considered to be “reciprocal” with Oregon, you can now apply for the new permit. Each permitted winery can ship up to two nine-liter cases per Oregon individual per month. Please see our previous posts below for more information and steps for applying for the direct shipping and self-distribution permits.
Oregon Direct Shipper Permit Applications Available
Indiana and Oregon - starkly different paths to wine shipping laws
Oregon to end reciprocity - permitted retailers and wineries can ship on January 1st
