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The CARE Act is a solution looking for a problem

Editor’s Note: The following is a guest post, written by Tom Wark of SWRA, in our series on the CARE Act of 2011.

So, what problem could possibly necessitate the radical solution of stripping every wine store in America of its Constitutional protection against discriminatory state-based laws? Make no doubt about it. H.R. 1161 does one simple, yet purely radical thing: It gives states the congressional and constitutional authority to discriminate against wine retailers for the sake of protecting in-state businesses against competition.

Again, what problem necessitates the kind of radical solution that has only been undertaken once in 220+ years?

According to the wholesalers that conceived and wrote the CARE Act, states need help to “defend a wide variety of laws that have been challenged, including physical presence requirements for retailers.”

“Physical presence requirements for retailers” is code for state laws that ban a state’s consumers from having wine shipped directly to them from out-of-state retailers of wine. These kinds of anti-consumer laws are discriminatory when the same state allows its own in-state retailer to ship to its residents and such laws exist around the country for a simple reason: To protect in-state wholesaler from competition from out-of-state retailers who are available to address consumer demand that wholesalers have not addressed, cannot address, don’t want to address and will not address.

Consider that in most states a wine store is required by law to purchase its inventory from wholesalers. This means that a local wine store may only sell those wines to consumers that they are offered by local wholesalers. If a wholesaler in a state doesn’t offer retailers a particular wine, then consumers will have no access to it—unless they are able to purchase it direct from another retailer in another state where the wine is available.

Wholesalers don’t like this option at all. When a consumer purchases a wine from a retailer in another state and has it shipped to them, local wholesalers make not a cent on that sale. The fact that the sale is made in the first place also exposes a significant and important problem of the state-based three tier system that wholesalers defend: Wholesalers in any given state only offer a tiny fraction of the wines that are actually available in the whole American marketplace.

Wholesalers like to say that the three-tier system offers consumers “tremendous excitement, choice and variety.” But that is only the case if consumers are able to access wines distributed in a variety of states. When they are forced to choose only from a selection of wines and beers wholesalers make available in their state, the choice represents a tiny fraction of what is actually available in the American marketplace. And wholesalers like it this way. The fewer wines and beers that wholesalers distribute, the more profitable their businesses are—as long as they don’t have to deal with competition from outside the state.

The CARE Act gives states free reign to actively and blatantly discriminate against out-of-state wine stores that seek to answer the growing consumer demand for product diversity that isn’t addressed by wholesalers. States pass these discriminatory laws for one single reason: to protect the politically connected wholesalers who are generous campaign contributors.

It is important to note that neither Congress nor the Supreme Court has ever endorsed the idea that a state may constitutionally discriminate against out-of-state wine stores the way the CARE Act would allow. Yet wholesalers suggest that lawsuits that challenge these protectionist laws are nothing more than “nuisance” lawsuits and that the CARE Act would protect states against lawsuits that seek to “deregulate alcohol sales.” In fact, wholesalers have made the audacious and completely false claim that “the current litigation status only will lead to states abandoning their powers to protect the public interest.”

The problem states have is not that they can’t effectively defend their alcohol laws from court challenges. Their problem is that they can’t effectively defend the protectionist, discriminatory and unconstitutional law the wholesalers foist upon them.

Wholesalers claim that states need the CARE Act’s congressional authority to discriminate against out-of-state retailers in order to “protect consumers and the public.” Yet in the same CARE Act, wholesalers have written language that assures wineries are protected against the very same kind of discrimination the bill authorizes against retailers.

What protections are offered to the consumer and public when a state’s in-state wineries, out-of-state wineries and in-state retailers are allowed to ship wine direct to the consumer, but out-of-state retailers are banned from doing the same thing? This is the case in a number of states and wholesalers will work to assure it is the case even more frequently if the CARE Act passes. The transaction that occurs when a consumer buys wine from an out-of-state winery is exactly the same as when a consumer buys wine from an out-of-state retailer.

There is no difference between these transactions. There is no public safety issue involved. There is no consumer protection issue involved. However, such discriminatory and anti-consumer laws do protect in-state wholesalers from competition, allowing them to continue guarantee consumer choice in wine is limited to the paltry selection they provide.

Keep in mind what consumers lose out on when wholesalers successfully convince states to ban wine lovers from buying wines from out-of-state wine stores. No French, Italian, German, Austrian, Spanish, New Zealand or any other non-domestic wines can be shipped into the state because these wines are only sold by retailers. Consumers have no access to wine-of-the-month clubs. Consumers have no access to auction house wines. And consumers have very limited access to the rare and collectible and small production wines that are most often available only from retailers. Yet, rest assured that the keeping these wines out of consumers’ hands and assuring wholesales are protected from competition protects the public interest and safety.

Finally, it must be acknowledged that the kind of state-based discriminatory laws that wholesalers seek to impose on wine retailers and consumers as a result of the CARE Act are exactly the type that the Constitution and its Commerce Clause were designed to prevent. When the Founders of the Constitution put the regulation of commerce between the states in the hands of the federal government and not the states, they did so because states made a habit of passing laws whose object was local economic protectionism. The practice caused animosity between the states and retarded economic progress. Wholesalers are at it again. Madison, Hamilton and Washington would shake their heads with dismay upon watching the wholesalers twist the laws to their own advantage and to the detriment of commerce and consumers.

No federal law prior to the 21st Amendment, not the 21st Amendment itself and no Supreme Court case since the passage of the 21st Amendment ever admitted that a state may blatantly discriminate against American wine retailers the way the CARE Act would allow. No rational reason has ever been offered as to why a state might need to ban wine shipments from out-of-state wine retailers, while shipment from in-state wineries and retailers and out-of-state wineries present no public policy concern. No lawsuit filed, won or lost by out-of-state wine retailers against states that discriminate has ever prevented states from effectively regulating the sale and distribution of wine, despite the claims made by the supporters of the CARE Act.

The CARE Act is fundamentally a solution looking for a problem. It appears the problem is wholesalers don’t feel they have enough protection against competition. This is hardly a reason to take the step of passing a radical bill that contradicts reason, dismisses sound Constitutional principles, impedes economic development, dissuades entrepreneurial activity, dismisses the legitimate desire among consumers for access to legal products, and punishes responsible American wine retailers in every state.

Tom Wark is executive director of the Specialty Wine Retailers Association, a national organization of brick and mortar and Internet retailers, wine clubs and auction houses that seek a alcohol regulatory environment that provides a level playing field for all stakeholders and and an emphasis on free trade.

3 Comments

  1. Excellent commentary, Tom. Your point regarding the identical nature of a producer and retailer retail transaction are right on, particularly in the context of the public policy concerns the supporters of CARE are quick to lean on. I also find it interesting that supporters so frequently rely upon dicta or dissenting opinions to support their claim that the intent of the 21st Amendment was specifically to allow states to write laws discriminating against out-of-state interests or the inviolate nature of the 3-tier system as presently operating in most states. The majority in Granholm struck an elegant balance between the Commerce Clause and 21st Amendment and, absent some substantive distinguishing factor, I can see no reason for treating retailers any differently than producers acting as retailers.

  2. Mathew:

    Thank you. Here's something to think about: What is the three tier system? Is there any singular common thread that defines ALL three tier systems? If not, what does that mean with regard to federal court decisions. If so, just how limited is the generic nature of the three tier system.

    Tom…

  3. Interesting questions Tom, particularly in how they pertain to federal court decisions. I won't touch that part without research, but it seems to me an organically occuring 3-tier system is fundamentally about efficient distribution of product to markets. An artificially created, government mandated 3-tier system is less about distribution and more about regulation. Accepting that some form of regulation of alcoholic beverages is desirable and that the government-granted monopoly currently practiced is not an efficient distribution system, the resulting question is "why is the current regulatory system, grounded in an outdated business model, fundamentally better than a modernized system providing similar regulatory protections but offering broader, less cost-inducing distribution?" I would argue it is not.

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