Archive for October, 2009
Amazon's Exit From Wine Business Shouldn't Hurt Wineries' Online Sales
October 23rd, 2009
The much-anticipated entrance of Amazon.com into the wine industry has come to an end before it ever got off the ground. The prospect of Amazon’s wine site sent a wave of excitement throughout the industry as small and medium sized domestic brands with limited distribution saw an opportunity to get exposure through Amazon’s enormous book of active customers. For foreign brands, the opportunity seemed even more attractive since imported brands don’t have the same rights to ship wine directly to consumers as U.S.-produced brands do. The Amazon program, in theory, would have provided access to a broad selection of wines from all regions of the world in a reliable, cost-effective approach to consumers in many states across the country.
Because of the large number of brands (6,000+ wineries in the United States alone) and labels that exist in the world, the wine industry seemed ripe for an aggregator like Amazon to come in and help consumers discover and purchase wines that they otherwise couldn’t find in their local wine shops and restaurants. Parallel success stories are easy to find in industries such as books, electronics and music. Sites like Amazon and the Apple iTunes Store are great platforms for exposing the “long tail” of industries that have large selections.
But, distributing wine is not the same as distributing books. Since the ratification of the 21st amendment in 1933, each state has the power to regulate the flow of alcohol within their borders. This system has led to a hodgepodge of antiquated laws that are very different from state-to-state. Much of the existing legislation that regulates the sale and distribution of alcohol was written at a time when lawmakers had no vision for today’s technology that allows for automated payments, electronic title and funds transfers, real-time compliance checks, and online age verification. Because of the conflict between available technology and written law, alcohol regulators are often put in a tough position when the time comes to establish administrative policy and to enforce their statutes. Recently, both the California and Virginia Alcoholic Beverage Control (ABC) departments issued industry advisories in attempts to clarify their statutes and policies. Both advisories make it very difficult for a third-party marketing company, like Amazon, to participate in the sale of alcoholic beverages without actually holding the appropriate licenses to sell and distribute alcohol.
Nevertheless, the challenges that third-party marketers (often referred to as “marketing agents”) face are quite different than the challenges that domestic producing wineries face when marketing, selling and distributing their own products. With the help of technology solutions, wineries can easily deal with the complex legislative rules that come hand in hand with selling and shipping their wines directly to consumers.
There is no doubt that third party marketers can add real value to wineries by exposing them to new customers and providing new sales channels. But, wineries are becoming better and better every year at marketing and selling their own products as well as finding new ways to effectively connect to their current and potential customer base. Additionally, when selling and shipping their own product directly to consumers, wineries gain a significantly larger margin on each sale compared to going through distribution systems.
As the 2009 holiday season (a time when most wineries make a significant share of their sales for the year) approaches, many will be nervous and disappointed to see Amazon exit the wine industry. At the same time, wineries should be excited about taking advantage of the brand building that they have done and finding innovative ways to connect to customers and sell their fabulous products. Furthermore, 2009 was a banner year for wine shipping legislation as three states (Kansas, Tennessee, and Maine) opened up their borders to direct shipment where shipping had previously been prohibited, bringing the total of available “offsite” (states that allow Internet, mail, phone, fax and club orders) states to 37. Although these are not among the top wine consuming states in the country, every consumer counts in this sluggish economy. Free the Grapes! hailed 2009 as the “best vintage since 2005” in terms of direct shipping legislation, and there is no reason to believe that this trend will not continue right into 2010.
Amazon’s Exit From Wine Business Shouldn’t Hurt Wineries’ Online Sales
October 23rd, 2009
The much-anticipated entrance of Amazon.com into the wine industry has come to an end before it ever got off the ground. The prospect of Amazon’s wine site sent a wave of excitement throughout the industry as small and medium sized domestic brands with limited distribution saw an opportunity to get exposure through Amazon’s enormous book of active customers. For foreign brands, the opportunity seemed even more attractive since imported brands don’t have the same rights to ship wine directly to consumers as U.S.-produced brands do. The Amazon program, in theory, would have provided access to a broad selection of wines from all regions of the world in a reliable, cost-effective approach to consumers in many states across the country.
Because of the large number of brands (6,000+ wineries in the United States alone) and labels that exist in the world, the wine industry seemed ripe for an aggregator like Amazon to come in and help consumers discover and purchase wines that they otherwise couldn’t find in their local wine shops and restaurants. Parallel success stories are easy to find in industries such as books, electronics and music. Sites like Amazon and the Apple iTunes Store are great platforms for exposing the “long tail” of industries that have large selections.
But, distributing wine is not the same as distributing books. Since the ratification of the 21st amendment in 1933, each state has the power to regulate the flow of alcohol within their borders. This system has led to a hodgepodge of antiquated laws that are very different from state-to-state. Much of the existing legislation that regulates the sale and distribution of alcohol was written at a time when lawmakers had no vision for today’s technology that allows for automated payments, electronic title and funds transfers, real-time compliance checks, and online age verification. Because of the conflict between available technology and written law, alcohol regulators are often put in a tough position when the time comes to establish administrative policy and to enforce their statutes. Recently, both the California and Virginia Alcoholic Beverage Control (ABC) departments issued industry advisories in attempts to clarify their statutes and policies. Both advisories make it very difficult for a third-party marketing company, like Amazon, to participate in the sale of alcoholic beverages without actually holding the appropriate licenses to sell and distribute alcohol.
Nevertheless, the challenges that third-party marketers (often referred to as “marketing agents”) face are quite different than the challenges that domestic producing wineries face when marketing, selling and distributing their own products. With the help of technology solutions, wineries can easily deal with the complex legislative rules that come hand in hand with selling and shipping their wines directly to consumers.
There is no doubt that third party marketers can add real value to wineries by exposing them to new customers and providing new sales channels. But, wineries are becoming better and better every year at marketing and selling their own products as well as finding new ways to effectively connect to their current and potential customer base. Additionally, when selling and shipping their own product directly to consumers, wineries gain a significantly larger margin on each sale compared to going through distribution systems.
As the 2009 holiday season (a time when most wineries make a significant share of their sales for the year) approaches, many will be nervous and disappointed to see Amazon exit the wine industry. At the same time, wineries should be excited about taking advantage of the brand building that they have done and finding innovative ways to connect to customers and sell their fabulous products. Furthermore, 2009 was a banner year for wine shipping legislation as three states (Kansas, Tennessee, and Maine) opened up their borders to direct shipment where shipping had previously been prohibited, bringing the total of available “offsite” (states that allow Internet, mail, phone, fax and club orders) states to 37. Although these are not among the top wine consuming states in the country, every consumer counts in this sluggish economy. Free the Grapes! hailed 2009 as the “best vintage since 2005” in terms of direct shipping legislation, and there is no reason to believe that this trend will not continue right into 2010.
Up in the Air
October 20th, 2009
On September 30, a federal district judge in a New Mexico suit brought by US Airways to free it from state regulation of beverage service ruled that the 21st Amendment prevents the federal government from preempting state regulation of alcoholic beverage service aboard federally regulated carriers. The decision leaves New Mexico regulators free to treat airliners in their airspace as if they were local taverns with respect to licensing, server training and over-service.
Although the case does not deal directly with wine distribution, it is a significant addition to the “weak Granholm” viewpoint, which lends support to trade barrier proponents in the second wave of wine access litigation now in the lower federal courts.
Supremacy
Judge Armijo’s opinion in US Airways, Inc. v. O’Donnell introduces some legal elements that may be unfamiliar to industry observers, but it represents a reading of 21st Amendment jurisprudence that is well worth examining. Examination will involve a little more detail about the Supremacy Clause of the federal constitution than has appeared to date in most public discussion of Granholm issues, but that will be unavoidable as post-2005 beverage law develops.
In the subject area of access by wine sellers to consumers and retailers in other states –that is, the development of a national market in direct distribution and direct retail sales and shipment– the recurring theme has been alleged incompatibility of state-imposed restraints with the Commerce Clause, which famously forbids permitting in-state wineries to sell and ship directly to consumers while denying that privilege to out-of-state wineries. That principle is said to arise under the “dormant” Commerce Clause, because it operates in an area, interstate commerce, where Congress holds exclusive power to legislate and has elected not to exercise it, thereby leaving the area federally unregulated and off-limits to state statutory restraints.
Supremacy Clause cases address the non-dormant side the Commerce Clause coin, where Congress has in fact exercised its power to legislate over a subject within its constitutional authority. A key question in Supremacy Clause litigation is whether existing federal legislation occupies the field being regulated, thereby invoking the Article VI declaration that laws passed by Congress “shall be the supreme Law of the Land … any Thing in the Constitution or Laws of any state to the Contrary notwithstanding,” to invalidate (i.e., “preempt”) the challenged state enactment. The answer is found by ascertaining the intent of Congress from the text of the statute.
Federal statutes may be found preemptive in more than one manner. The principal division is between (1) express preemption, i.e., a direct statement in the federal statute, denying states concurrent jurisdiction to legislate on the subject, and (2) implied preemption, i.e., a clear implication of that intent arising from the statutory text as a whole. Implied preemption further subdivides into “field preemption,” when the scope of the federal statutory scheme displays an intent fully to occupy the particular subject area, and “conflict preemption,” when regulated persons cannot comply with both the federal statute and the state law in question. The New Mexico case involves questions of express preemption and field preemption in the subject area of alcoholic beverage service on federally regulated air carriers.
In US Airways the federal legislation under consideration was the 1978 Airline Deregulation Act, which charges the Federal Aviation Administration with the duty to prescribe “regulations and minimum standards for other practices, methods, and procedure the Administrator finds necessary for safety in air commerce and national security.” Pursuant to that directive, the FAA adopted a regulation stating that no carrier under its jurisdiction “may serve any alcoholic beverage to any person aboard any of its aircraft who … [a]ppears to be intoxicated.”
The state had adopted a far more extensive set of regulations, including requirements for licensure and server training and penalties for over-service. Following a collision on a New Mexico highway involving multiple fatalities and a driver who was allegedly over-served on a US Airways flight to the state, the regulatory authorities ordered the airline to cease serving alcoholic beverages to passengers on flights arriving in or departing from locations within the state, without licensing as a retail outlet and compliance with regulations applicable to retail licensees.
Simple Question, Different Answers
The Airline Deregulation Act expressly provides that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of [a federally regulated] air carrier.” Thus, the square one question was whether the suit were a simple case of express preemption, taking beverage service to be a “service” of US Airways.
As the meaning of “service” in the Act controls the outcome of the case, it is not surprising that the parties advanced different definitions. The state’s position was that the sentence in which the term appears deals with transportation services, so the term must be restricted to things like frequency of flights. That is a conclusion reached by one of the five federal appellate courts in separate circuits that had interpreted the Act (none of them the 10th Circuit, where New Mexico is located).
An alternative reading begins with observing that the statutory phrase is equivalent to “a price, a route or a service,” because the introductory indefinite article is placed to modify each of the following nouns. The implication of “a service” is that there are various services and that the express preemption applies to all of them. The reading urged by US Airways, in which the sentence applies to food and beverage service, is supported by the other four appellate decisions.
All five Circuit Court opinions apply recognized principles of statutory construction and dissect the text with well-sharpened scalpels. There is, however, a cleaver at hand.
Cutting Through Complexity –or Not
What makes US Airways worthy of discussion here is its use of the 21st Amendment to resolve a Supremacy Clause issue.
Rather than come to a conclusion as to which of the other circuits had reasoned correctly, Judge Armijo declared that the choice is forced, because interpreting the Act to apply to alcoholic beverage service would render it unconstitutional as a limitation on states’ rights preserved by § 2 of the 21st Amendment. Section 2 is, of course, the constitutional provision declaring unlawful the importation of intoxicating liquor into a state contrary to the state’s laws. Granholm adds the proviso that the state law claimed to trump a federal interest be “valid,” opening the floor to debate over how one tests for validity.
At the heart of the validity issue is the question whether parts of the constitution other than the 21st Amendment operate on state liquor laws in the same way as on state laws regulating ordinary goods. If they do, then the § 2 states’ right to venture into interstate commerce far enough to control wine importation at their borders applies only to laws that first pass muster under, e.g., the dormant Commerce Clause prohibition of discrimination against interstate commerce (as Granholm says) and under the Supremacy Clause (which US Airways ultimately excludes in the case at hand).
In finding state regulation valid, US Airways presents a somewhat convoluted syllogism, in which Congress did not intend to regulate liquor service because it could not constitutionally do so, but the federal statute might preempt the subject of liquor service anyway, if (a) the court found the federal interest in regulating liquor service outweighed the state’s interest in regulating the same subject and (b) the state laws had a significant impact on Congress’s objectives.
Imbalance
Judge Armijo implied that her decision was based in part on inadequate presentation of the airline’s case.
On how Supremacy Clause interests weigh in the balance, she wrote that US Airways “makes no argument and presents no evidence” that the state laws violate specific parts of the federal constitution, thus taking application of Granholm beyond the dormant Commerce Clause off the table. On the element of impact, she noted that the airline had not shown the state regulation “would have an adverse effect on competition and airfare.” She characterized the plaintiff’s contentions on effect as “speculative” and as taking too little account of unspecified “judicial and administrative relief under New Mexico law.”
Summing Up
After thus disposing of express preemption, the court might have had little to say about implied preemption; if the 21st Amendment would invalidate express preemption in a given subject area, it should also preclude inferring preemption in that area from Congressional occupancy of the field. However, in ruling against implied preemption, the opinion goes on to articulate two points that may prove controversial.
First, the court appears to view field preemption as requiring Congressional intent specifically to occupy a field consisting of the very subject addressed by the regulation in question, rather than to occupy a field broad enough to encompass that subject. Ascertaining implied intent is inevitably a process of divination with considerable discretion in the trial court, but the standard in US Airways may be unduly restrictive.
More significant is the second point, with which the opinion closes. The court declares that even if the subject requires “an extensive and uniform system of federal regulation,” a state may nevertheless assert a 21st Amendment right to exercise “virtually complete control” over how to structure distribution of liquor, entitling it to apply its panoply of retail licensee regulation to the federal carrier. It would be difficult to fashion a clearer expression of pre-Granholm law. The question is whether, in contexts that are not exact duplicates of the facts of Granholm, it is also a statement of current law.
Those who have followed this subject will recognize the “virtually complete control” phrase as part of a dictum from Midcal, quoted by Scalia in North Dakota v. U.S., where it was also dictum, and quoted again in Granholm, where it was dictum yet again and, as a dissenter correctly saw, incompatible with the holding. Ironically, the US Airways court cites Granholm for the control point. (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm.) Some dicta prove more substantial than the decisions that transmit them; whether that will be true of this one is the central question of current 21st Amendment litigation.
by R. Corbin Houchins, CorbinCounsel.com
Maine Direct Shipping Permit Applications Available
October 12th, 2009
The direct shipping applications for Maine are now available on the Wine Institute website. The direct shipping permit allows wineries to ship up to 12 nine liter cases of wine to a recipient’s address each year. The Department of Public Safety, Liquor Licensing and Inspection Division has confirmed that there are no prohibited shipping areas at this time. The annual permit fee is $200 plus an additional $100 filing fee. Applicants will have to register with Maine Revenue Services to pay sales and use taxes before submitting their permit application. Maine Revenue Services will send applicants a Retailer’s Certificate to confirm that their sales tax account has been established. There is no fee to register with Revenue Services and the tax registration forms can be sent in via U.S. mail or electronically. The processing time for electronically filed applications is significantly shorter. Only sections 1 and 5 of the tax registration form must be completed.
Once wineries have received their Retailer’s Certificate they can submit their completed direct shipper application to the Liquor Licensing and Inspections Unit, along with a copy of their federal basic permit and application fee. The direct shipper application must also be notarized. Once wineries receive their direct shipping permit they will be responsible for paying excise tax to the Department of Public Safety and sales tax to Revenue Services. In addition, a direct shipping report must be filed twice a year. Reporting forms will be posted on the Wine Institute website once they become available. Should you have any questions please contact Annie Bones in Wine Institute’s State Relations Department at abones@wineinstitute.org.
Annie Bones, State Relations – Wine Institute
Montana: No Federal Onsite Shipments, Please
October 6th, 2009
The Montana Dept. of Revenue, Liquor Control Division recently confirmed that consumers in Montana are prohibited from receiving direct wine shipments under the Federal Onsite provision (sec. 11022 of Public Law 107-273). Montana law only allows consumers with a connoisseur’s license to receive direct wine shipments. However, the common carriers, FedEx and UPS, have NOT approved Montana for shipment of direct-to-consumer sales, because Montana law requires a consumer to obtain a license to receive such direct shipments.
