Archive for January 10th, 2008
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.
