In January of 2010, the United States Court of Appeals for the First Circuit affirmed the judgment of the District Court in the case of Family Winemakers of California v. Jenkins. This ruling struck down the 30,000 gallon capacity cap, which excluded 98% of domestic wines from shipment to Massachusetts. Although this represented a big win for wineries, several problems remained, and it was up to the Massachusetts legislature to act.
Almost four years later, Bay State lawmakers will once again try to craft a replacement law and move it through the legislature. The first and most important step is a public hearing on Direct Wine Shipping in Massachusetts to be held in Boston on Tuesday, November 12 at 1pm Eastern Time in the Joint Committee on Consumer Protection and Professional Licensure.
Bill H.294, sponsored by Representative Ted Speliotis, is one of five bills related to direct shipping listed in the hearing schedule. It would allow wineries to ship up to 24 cases per year to individual consumers in Massachusetts, require annual volume reporting to the state and remittance of excise and sales taxes to the state.
One key issue that must be addressed to make any direct shipping law effective is that of a “fleet permit” for common carriers. A fleet permit allows common carriers like FedEx and UPS to obtain a single permit for alcohol deliveries that covers all their trucks in the state, in contrast to regulations that require a permit be obtained for each and ever delivery truck. Without a fleet permit as part of a direct shipping bill, it is unlikely that the major common carriers would deliver wine into Massachusetts no matter how good the rest of the bill might be.
Additionally, the current direct shipping law on the books has a “consumer aggregate” volume limit, which allows consumers to only receive a limited amount of wine within a calendar year from all sources. This kind of aggregate limit is mostly un-workable, as wineries have little idea what consumers have already received. The aggregate volume limit is not included in H.294.
Behind Pennsylvania (population 12,702,379), Massachusetts (6,547,629) is the second largest of nine states that are currently off limits for wine shipments. The other states include Alabama (4,779,736), Kentucky (4,339,367), Oklahoma (3,751,351), Mississippi (2,967,297), Utah (2,763,885), Delaware (897,934), and South Dakota (814,180).
Free the Grapes! Press Release
Huge win for wineries, but can I ship to Massachusetts now?
Why Can’t I Have a Boston Wine Party?
Massachusetts Remains Elusive for Direct Shippers
Today, we would like to remind you of two things: one is a law that will affect our friends in Sonoma County this year, and the other is a cordial invitation to an industry event in the area on May 30th!
Sonoma County has seen great growth over the past few years, especially in 2012. According to our latest direct shipping report, created in conjunction with Wines & Vines, we have seen sales through direct shipping out of the area rise over 10% in the past year alone. Several regional organizations have taken note of this growth, and helped pass legislation in August of 2010 to ensure that Sonoma-based wines are properly branded and marketed.
Sponsored by the Sonoma County Vintners and the Sonoma County Winegrape Commision, AB 1798 requires that any wine from an American Viticultural Area (AVA) located in Sonoma County must also include the words “Sonoma County” on its bottle labels. Though the legislation was passed three years ago, very little action has been required by vintners—until now. The state of California will begin enforcing this new requirement on January 1st, 2014. The possible punishment of neglecting this new rule is the revocation of one’s winery license.
This marks the fourth kind of law, called “conjunctive labeling,” enacted in the Golden State. Napa Valley, Lodi, and Paso Robles have had this type of requirement enacted in the past.
The rationale is twofold:
- According to the sponsor organizations’ market research, Sonoma County’s brand recognition is much greater than most of the individual AVA’s that make their home in Sonoma County
- A voluntary program to place “Sonoma County” on the region’s wine labels resulted in a 20% participation, and sponsors of the bill want to increase those numbers significantly.
There is a counter-argument to this new initiative, however. Wineries have been using more detailed AVA information to better market their region, such as “Russian River Valley” and “Dry Creek Valley.” Adding Sonoma County to the label is seen by some as diluting the brand. Regardless, the legislation has long since passed.
While this may have been on your radar when it was first enacted, we wanted to remind you that this would be a good time to make sure your upcoming COLA submissions to the TTB are properly ready to go.
More detail on label requirements can be found at :
As for that invitation…ShipCompliant is pleased to participate in the eWinery Solutions “State of the Industry” seminar at Sonoma State University on May 30th. We’ll be digging deeper into our recent direct shipping data, and talk about ways to use this data to your advantage! Click here to sign up!
As we like to do at the beginning of each year, we once again look into our crystal ball and offer you some informed prognostications as to what the world of wine direct shipping might have in store for the coming year. While we don’t see any negative trends impacting the compliance world in the next year, we do anticipate the continuation of certain trends of which we believe you should be aware.
Here are our picks for important compliance trends to keep a close eye on in 2013
1. Limited But Important Direct Shipping Changes
Wineries now enjoy the opportunity to ship into 40 states (including Washington D.C.). The remaining closed states are predominantly those that have given little hint of changing their policy. However, we once again have our sights trained on two states where we believe some opening in the direct shipping landscape might occur: Pennsylvania and Massachusetts.
Pennsylvania has considered direct shipping legislation for the past few years, but so far the direct shipping initiatives have become more or less attached to the heated battle over the privatization of the Pennsylvania Liquor Control Board (PLCB). The privatization battle will wage on concurrently with efforts to “modernize” the PLCB. Direct shipping is reportedly part of a six-point plan to modernize the state control system. A sticking point for direct shipping legislation will be how to deal with the 18% “Johnstown Flood Tax” that is applied to sales through the state system.
Massachusetts also saw a direct shipping bill in play in 2012 for the third straight year, but it went nowhere. This non-action occurred despite the fact that a 2010 Federal Appeals Court decision ruled the current wine shipping law in the state unconstitutional and despite Governor Deval Patrick’s stated support for direct shipping. We expect another tough battle in the Bay State over this issue in 2013.
2. Changes to COLA Processing at TTB
Over the past couple of years the TTB has given every indication that they are going to completely overhaul the process of obtaining Certificates of Label Approval (COLAs). It still remains a fact that one must get a federal pre-approval through the COLA process before bringing a new product to market. However, given the increase in new products and decreased budgetary resources at the TTB, this crucial federal agency is looking for ways to decrease the burden that administering the pre-approval of labels places on them.
Toward this end, TTB has taken steps to make it easier for suppliers to make adjustments to labels without applying for a new COLA. We expect the TTB to continue to move towards a more streamlined pre-approval process this year. This process will not happen overnight, but will force suppliers, wholesalers, and state agencies that depend on the COLA for different purposes to review and adjust their processes.
3. Privatization and Modernization
While it is probably too early to pass judgment on the recent move in Washington State voters to privatize the state liquor control system, it can be said with some assurance that other states currently involved in one way or another with alcohol sales will look closely at privatization. A move in Pennsylvania to privatize alcohol sales has been underway and debated for a couple years now with the governor behind the effort. Other control states are also looking to modernize their control systems to add more value for their constituents and to get out ahead of privatization pushes.
Larger retailers tend to support privatization, while wholesalers and small retailers are typically wary. All eyes are on the ongoing transition in Washington State.
4. Regulating Third Party Providers (TPPs)
Last year we predicted that more Third Party Providers (unlicensed marketers using their reach to advertise wine products) would get into the business. With both Amazon and Facebook now doing just this, we have pretty clear evidence that third parties are investing in the wine vertical. The key to opening up the TPP landscape was the Advisory by the California Alcohol Beverage Control issued in 2011 that laid out the special method by which TPPs and suppliers had to structure their relationships.
Other states are now looking closely not only at the California model but are also considering exactly how to regulate and enforce this new advertising channel in their own states. We expect to see other advisories and clarifications coming from states addressing how TPPs and suppliers can work together compliantly.
Finally, if states take a position similar to California’s view of the marketplace channel, we would not be surprised to see other niche players enter this vertical, helping suppliers to reach a larger wine buying audience.
5. Revisions to Direct Shipping Regulations
Since the Granholm Supreme Court decision in 2005, numerous states somewhat quickly addressed and changed their direct shipping laws and regulations. After seven years with new regulations, many states we believe will revisit their laws and make adjustments.
In some cases we see changes in the capacity caps that currently restrict the size of the winery that can ship direct. In other cases, we would not be surprised to see some states lift restrictions on how fulfillment houses ship into their states as well as changes to report and tax filing regulations. The hope is that these changes make both compliance reporting and state agencies more efficient while also giving the state agencies the tools they need to maintain a level playing field.
6. Changing the Product Registration Process
For decades, state product registrations have been done with paper. As more and more products enter the marketplace, state response times have slowed. This has been exasperated by budget cuts to various state regulatory agencies in the wake of the recession and state budget deficits. The response has been to work to bring state product registration into the 21st century by allowing them to be submitted online and responded to online.
ShipCompliant’s own PRO (Product Registration Online) system has been adopted by a number of states to help speed up and make more efficient the product registration process, driving improvements in efficiency both for suppliers and the state agencies. We expect the pace of implementing online product registration to increase in 2013 for the same reason it initially was instituted in a number of states: budget cuts, efficiency efforts and modernization pushes. This will also be accelerated by TTB’s push to redefine the concept of a COLA, which is currently a resource that states depend on as part of their state label approval processes.
Late Monday night, in the final action of a marathon legislative session that closed out the year, the New Jersey Assembly passed S3172, a bill that, among other things, opens up the state for direct-to-consumer shipments. If signed by Governor Chris Christie as expected, it will allow wineries producing up to 250,000 gallons of wine annually to apply for licenses to ship wine directly to New Jersey consumers.
The bill also allows for both in- and out-of-state winery self-distribution and tasting rooms, two issues that New Jersey was compelled to address due to a 2010 lawsuit (Freeman v. Corzine) that ruled the state was acting unconstitutionally by allowing in-state wineries to sell wine through distribution methods unavailable to out-of-state wineries.
Direct Shipping Details:
Once S3172 is signed by the Governor, New Jersey, a state that has prohibited direct wine shipments, will join 38 other states in allowing limited amounts of wine to be shipped to its residents. The bill gives licensed Farm and Plenary wineries the ability to ship, and allows out-of-state wineries producing less than 250,000 gallons per year to apply for an “Out-of-State Winery License”. The fee for the Out-of-State Winery License is one of the most expensive direct shipping licenses in the country at $938 per year (the same annual fee paid by in-state wineries). All licensed wineries may ship up to twelve nine-liter cases to a New Jersey consumer per year. Sales and excise taxes must be paid.
For an additional fee, New Jersey Farm, Plenary, and Out-of-State Winery licensees may self-distribute (sell wine directly to New Jersey retailers). After recent amendments to the bill, however, wineries are restricted from shipping to retailers via common carrier. It is yet unclear what this means for the self-distribution privilege, specifically for wineries that are not in close proximity to the state. The additional fee for self-distribution ranges from $100 to $1000 per year, depending on the production volume of the winery.
Tasting Room Details:
S3172 will allow out-of-state wineries to operate tasting rooms within New Jersey. Out-of-state wineries may operate up to 16 tasting rooms, while in-state wineries may operate up to 15 tasting rooms in addition to their licensed premise; Farm, Plenary, and Out-of-State Winery licensees must pay a $250 fee for each tasting room location. New Jersey wineries are currently able to operate tasting rooms and joint tasting rooms. The bill, however, removes the ability for wineries to operate joint tasting rooms, which is a disadvantage for out-of-state wineries.
The opening of New Jersey to direct wine shipments is a major accomplishment and will open up one of the last significant marketplaces that prohibit direct shipment of wine. Both New Jersey and out-of-state wineries are expected to benefit from the change in the law, as well as New Jersey wine consumers. If signed by the Governor, the law would go into effect on the first day of the fourth month following enactment (May 1, if enacted in January). When specific regulations concerning license applications and reporting are issued, ShipCompliant will notify its clients and the industry.
Last Monday the U.S. Supreme Court declined review of the 2010 Court of Appeals decision in Wine Country Gift Baskets.com v. Steen, a Texas case refusing to apply Granholm’s antidiscrimination principle to wine sales by out-of-state non-producing retailers. (Previous blog posts have referred to the case as the Texas Siesta Village suit, using its original lead plaintiff name; for convenience, I will call it Steen here.)
Denial of review leaves standing the 5th Circuit opinion, which reads Granholm to mean only that states giving their in-state manufacturers the right to circumvent the “three-tier system” cannot for protectionist purposes deny the same dispensation to out-of-state manufacturers. In that analysis, the state can allow its own retailers to deliver directly to Texas consumers while denying the same privilege to out-of-state retailers, because Granholm does not address application of the Commerce Clause to non-producing sellers.
Judge Leslie Southwick’s opinion in Steen does not shrink from the basic Granholm question: Does the state law facially and intentionally discriminate against out-of-state retailers relative to in-state retailers? Although he points out that Texas has not authorized circumvention of the three-tier system for local retailers and thus, he believes, cannot be discriminating when it prevents out-of-state retailers from circumventing the same system, Steen is about justifying location discrimination, not about whether it exists.
The justification Steen offers is that without excluding interstate retailing, the state could not maintain a mandatory three-tier system — thus elevating the form of regulatory structure to a constitutional principle outweighing Commerce Clause considerations. Does denial of Supreme Court review advance that position in the ongoing controversy over state barriers to interstate retailing and wholesaling?
When the Supreme Court Passes
It is a truism in the law that the Court’s denying review carries no implication that the decision in question was correct. Many considerations go into review decisions, and it is not difficult to justify excluding from a packed court calendar a case revisiting a difficult and divisive precedent that affects only a relatively small segment of the economy. As noted in previous blogs, I suspect it will require inconsistent rulings among the appellate circuits to drag the Court into confronting the internal contradictions of Granholm.
Nonetheless, even if denial of review is technically meaningless, it may add a bit of luster to the lower court opinion in the eyes of judges in other circuits and at least justifies a close look at where the Steen decision leaves us.
Ironically, it was the 5th Circuit that presaged Granholm in the 2003 Dickerson case, by invalidating facially discriminatory Texas direct shipment laws. In Dickerson the 21st Amendment did not save the state statutes because they had been adopted for a protectionist purpose, rather than a recognized 21st Amendment objective such as temperance. Reasoning based on purpose followed straightforwardly from the 1984 Supreme Court decision in Bacchus.
In 2005, Granholm supplanted Dickerson as the definitive statement of Commerce Clause versus 21st Amendment jurisprudence on discrimination against out-of-state wineries relative to in-state wineries. Both cases dealt exclusively with the producing wineries’ direct sales and shipments to consumers.
While Dickerson was merely silent on application of the nondiscrimination principle to other tiers of distribution, Granholm contains the famous quotations from Justice Scalia’s one-judge opinion in a 1990 Supreme Court case that did not involve direct shipment to consumers, North Dakota v. U.S., “We have previously recognized that the three-tier system itself is ‘unquestionably legitimate’ . . . . The Twenty-first Amendment . . . empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.”
A Little Latin
Because Granholm involved no challenge to a state three-tier system itself, but dealt only with discriminatory application of a three-tier requirement, the above quotations play no role in the strict logic of the ultimate decision. They are, in legal parlance, “obiter dicta,” which means things said in passing — usually shortened to “dicta,” and sometimes seen in its singular form, “dictum.”
Portions of an opinion that are mere dicta, even coming from the Supreme Court, are not binding on lower courts. Lower courts are obliged to accept the Supreme Court’s determinations of matters of law that are pivotal to its decisions and to follow the doctrinal principles necessarily implied by how a Supreme Court case came out. That source of mandatory guidance is known as the “holding” of the case. The Commerce Clause principle of nondiscrimination that actually drove the Granholm result is part of its holding. Dicta are not part of the holding, and lower courts are entitled to give them as much or as little weight as they see fit in applying the Supreme Court precedent in which they appear.
The Court itself has been lax in distinguishing dicta from holdings. For example, the 1980 landmark Midcal opinion admits states have “virtually complete control” over fashioning their liquor distribution systems, but that observation could not be a holding, because Midcal overturned the California price posting system. Nevertheless, Granholm quotes the passage without labeling it as dicta. Similarly, Granholm says the Court “held” in North Dakota that “States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment,” although eight of the nine justices deciding North Dakota disagreed with that unqualified statement.
Because North Dakota is the primary source of current judicial defense of the three-tier system, it merits careful examination. There the conflict was between North Dakota’s distribution system and federal regulations that called for supplying spirits to armed services post exchanges at a price achievable only by direct distribution from distillers. The Court’s opinion, endorsed by four of the nine justices, declared that the state’s three-tier law survived a Supremacy Clause challenge for conflict with federal regulations (not a dormant Commerce Clause challenge) only because the state provided a workable alternative to three-tier distribution — i.e., requiring an identifying sticker on bottles distributed directly. Four other justices found the alternative too burdensome and would have overturned the state law.
The swing justice was Scalia, who wrote a separate opinion expressing the view that the practicality of the sticker alternative didn’t matter, because the state’s right to enforce three-tier distribution was absolute under the 21st Amendment. With five justices voting to uphold the law, the case resulted in a victory for the state, but with no majority view of the rationale and only one justice advancing the absolutist position. That one-judge concurring opinion is the sole source of the above quoted statements that famously appear as dicta in Granholm.
Making it Big
Some dicta fade into obscurity. The three-tier system dicta of Granholm have gone on to achieve prominence. Circuit Judge Richard Wesley in a New York retailer case, Arnold’s Wines, quoted the trial judge Richard Howell with reference to Scalia’s North Dakota assertions, “But if dicta this be, it is of the most persuasive kind.” The same text appears crucially in Steen.
Judge Howell’s subjunctive “if” clause is mere rhetorical flourish, for the text he quoted from Granholm is obviously and unquestionably a dictum. To find it compellingly persuasive, one must draw, from the fact that one justice in North Dakota found the state’s 21st Amendment right to a three-tier system weightier than a cost-saving Department of Defense liquor procurement regulation, the conclusion that the state right is also weightier than national consumer and merchant interests protected by the Commerce Clause. In reaching that conclusion, the Steen court reasoned that a state could not exercise its Granholm-sanctioned right maintain a mandatory three-tier system if retailers from outside the state, who presumably had not purchased from a “licensed in-state wholesaler,” were free to compete from local retailers for resident consumer trade.
Even if the quoted statements were authoritative, it is questionable whether they would sustain the Steen position. Although the Granholm majority states that in North Dakota the Court “recognized the three-tier system as ‘unquestionably legitimate,’” in context the North Dakota opinion recognized a three-tier system as legitimate, not “the” system in the sense of all instances of it:
“In the interest of promoting temperance, ensuring orderly market conditions, and raising revenue, the State has established a comprehensive system for the distribution of liquor within its borders. That system is unquestionably legitimate. [Here the Court cites two of its opinions, Young’s Markets, whose reasoning was essentially abandoned in Bacchus and given burial in Granholm, and a case allowing states to regulate bootleggers traveling through en route to another state.] The requirements that an out-of-state supplier which transports liquor into the State affix a label to each bottle of liquor destined for delivery to a federal enclave and that it report the volume of liquor it has transported are necessary components of the regulatory regime.”
Nothing in North Dakota deals with discrimination between a North Dakota retailer or wholesaler and an out-of-state retailer or wholesaler. It is at bottom not even a Commerce Clause decision, as it turns on the right of a state to compromise an express federal objective under the Supremacy Clause. Even if its rhetoric can be transferred to dormant Commerce Clause jurisprudence, it unambiguously legitimizes the North Dakota system on grounds of its pursuit of traditional aims (temperance, orderly markets and tax revenues), not for the sake of the system structure itself.
Fifth Circuit law on interstate retailing now rests on the theory that because the legitimacy of the tiered distribution system in North Dakota (with its provision for circumvention by stickered goods) was unquestionable, any state law that is part of a tiered system, even one directly contravening the Commerce Clause, must be valid.
It is one thing to say tiered systems are legitimate distribution structures (“Texas may have a three-tier system”), quite another to say that they can be used to discriminate against interstate commerce in ways that fail standard Commerce Clause tests. On careful reading, the holding of Granholm (as Justice Thomas correctly observed in his dissent) amounts to taking the 21st Amendment out of cases of intentional protectionism favoring local sellers over interstate sellers; in such cases there is no special “saving” of liquor laws that would be invalid under general Commerce Clause nondiscrimination principles applicable to all goods. In contrast, what the Steen court refers to as “our read” of Granholm takes the North Dakota dicta as insulating anything that is an “inherent part” of the “traditional three-tier system” from Commerce Clause scrutiny.
Whether Granholm’s arguably radical application of the dormant Commerce Clause is limited to the top tier of wine distribution cannot be determined by parsing the text of that opinion. Rather, it is a policy choice between the Marshallian vision of a national market with only rare departures from free movement of goods across state lines and the Repeal era view of alcoholic beverages as disfavored articles of commerce over which states are given almost unlimited rights of regulation in consequence of their undoubted 21st Amendment right to control importation. Judges in cases yet to be presented will have to make that choice.
Meanwhile, Judge Howell’s bon mot about North Dakota dicta gains familiarity. The 2nd Circuit Arnold opinion in which it appears ultimately does not rely on it, but rather saves the state law on non-21st Amendment grounds, as pursuing a legitimate state purpose that cannot reasonably be achieved without discriminating against interstate commerce. The Steen decision goes farther by enshrining it as a primary basis for decision.
By R. Corbin Houchins, CorbinCounsel.com
On December 17th, the US Court of Appeals for the 3rd Circuit (Delaware, New Jersey and Pennsylvania) rendered its decision in Freeman v. Corzine (formerly known as Freeman v. Fischer and Freeman v. Governor of New Jersey). The case applies Granholm to several aspects of New Jersey law, which banned direct shipment by all wineries, but allowed direct-to-consumer sales only by in-state wineries. To no surprise, it concluded that the facial discrimination created by giving only its own wineries a sales route around the three-tier system violated the dormant Commerce Clause, absent proof of a legitimate state objective it cannot achieve without discriminating against the interstate seller (the necessity test, which no state has passed so far in Granholm litigation).
A less predictable part of the 3rd Circuit ruling involved personal importation, a subject courts have not heretofore directly examined under Granholm. The Freeman opinion takes a straightforward nondiscrimination approach: If a state allows its resident wineries to sell directly to consumers without volume limits, it cannot impose significant volume limits on wine a consumer purchases at an out-of-state winery and brings into the state, without meeting the necessity test. To comply with Freeman, it appears that states must either fashion demonstrable proofs of necessity that will withstand close judicial scrutiny (as New Jersey failed to do) or choose between (a) imposing on their wineries’ tasting room sales the same, usually extreme, limits that apply to personal importation and (b) allowing consumers personally to import out-of-state on-site purchases with no more limits than apply to local tasting rooms.
Because the federal direct shipment law permits wineries to ship on-site purchases directly to consumers who could lawfully have carried it home as luggage under personal importation laws, independently of state direct shipment laws, invalidating state volume limits could in theory expand direct distribution geographically and make it available to wineries that do not hold shipping licenses. It seems highly unlikely, however, that states would by inaction permit creation of a significant market in untaxed personal importation of on-site sales.
Plaintiffs in Freeman also challenged the ban on all direct shipment, on the grounds that on-site laws, though not facially discriminatory, discriminate in effect by prohibiting out-of-state wineries from using the only method at hand to compete with local wineries, a visit to which by the local consumer is not as burdensome as a trip outside the state. (Non-facial discrimination is usually examined under a less stringent standard, whether the purported benefit to the state outweighs the harm to commerce, known as the Pike test.) Like most courts that have encountered it, the 3rd Circuit rejected the differential burden argument in conclusory terms, finding that the law “even-handedly forces all wine sales out of one channel and into other available channels” –i.e., no proven discrimination in effect. However, unlike some other courts, it held out the possibility that in another case the pro-commerce litigants might successfully prove differential burden by demonstrating economic loss because of the disproportionate travel requirement inherent in on-site laws. It also implied that future plaintiffs who could prove even modest economic loss to out-of-state producers might profitably argue that benefits from the non-facial discrimination are too slight to pass the Pike balancing test.
By R. Corbin Houchins, 12/23/2010, CorbinCounsel.com