H.R. 5034 Update: Revision Reignites Debate, Important Hearing Set for Wednesday

When H.R. 5034 (also known as the Comprehensive Alcohol Regulatory Effectiveness, or “CARE” Act) was introduced on April 15, 2010, the opposition responded quickly and forcefully. Supplier organizations were united in their opposition to the bill, referring to it as the “wholesalers monopoly protection bill”. Even the California State Legislature issued a resolution, SJR 34, that urged Congress not to pass H.R. 5034.

Proponents of the bill, including the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) claimed the proposed legislation was necessary to protect state-based regulatory systems from “attack” (i.e., legal scrutiny under the U.S. constitution), claiming that “25 states have faced challenges in federal courts to their authority to regulate alcohol and their ability to maintain a licensed system of alcohol controls” since 2005.

Following months of intense debate, heated rhetoric, and an incredible amount of public relations and lobbying activity on both sides, the House Judiciary Committee did not schedule the bill for a hearing until after the August congressional recess. During the recess, Representative Bill Delahunt, lead sponsor of H.R. 5034, sent a letter to House Judiciary Committee Chairman John Conyers Jr., introducing new text in an what he terms effort to “perfect the language”, following “concerns about unintended [sic] consequences of the language as written”.

To help clarify the changes from the original version of H.R. 5034, we put together a redline document that highlights the revisions. The main change is the removal of section 3c, which established the presumption of validity and shifted the burden of proof in legal actions involving the regulation of alcoholic beverages. Like the original bill, the new version would immunize state laws that effect non-facial discrimination, such as capacity caps and in-person purchase requirements, if the discrimination were not proved to be “intentional”.

To better understand the revisions and the corresponding responses, we spoke with individuals from each of the tiers (the “three-tier system” includes suppliers, wholesalers and retailers) that are on the front lines of the debate.

Wholesaler organizations laud the new version as meaningful change. “While the proposed changes to the legislation address a narrower set of deregulatory concerns than the original legislation, it is certainly a step in the right direction,” says Karin Moore, Vice President and Co-General Counsel at WSWA. “The new version clarifies that the Granholm holding prohibiting facial or intentional discrimination against out-of-state producers remains the law of the land by incorporating the exact language used by Justice Kennedy in that landmark decision. The new language clearly and unequivocally confines itself to dormant Commerce Clause challenges, and addresses many of the concerns raised by opponents of the bill.”

Cary Greene, Chief Operating Officer & General Counsel at WineAmerica, sees broader implications. “There are many cases other than Granholm that elucidate how states can regulate interstate commerce in alcohol.  As revised, 5034 would undermine or reverse dozens of court decisions.  By scrambling settled case law, 5034 will cause years of re-litigation to try and figure out exactly what the new limits are.  The fact is courts have not done anything to jeopardize core Twenty-first Amendment powers.  State laws run into Constitutional trouble when they try to do something underhanded like fix prices or give an unfair market advantage to certain licensees or products.  5034 allows states to blatantly discriminate against out-of-state products without any concern for Twenty-first Amendment core purposes.  From a policy standpoint, I’m not sure why that would ever be a good thing.”

“The problems with HR 5034 remain significant, despite the changes to the language,” says Tom Wark, Executive Director of Specialty Wine Retailers Association. “Discrimination against out of state products would still be allowed on a number of levels and consumers are bound to be hurt by this legislation. Significantly for retailers, HR 5034 would strip wine retailers and merchants everywhere in America of their protection under the Constitution’s Commerce Clause from discriminatory state laws. It has happened only one other time in American history that an entire industry lost its Constitutional guarantee of free and open markets based on the constitutional principle of non-discrimination. Wine merchants would be catastrophically disadvantaged by H.R. 5034.”

imageA hearing in the House Judiciary Committee will take place at 11:00 ET this Wednesday, September 29th. This is an important hurdle in the process of moving legislation through Congress. Expert witnesses will testify in front of the full committee on Wednesday, and many parties will also provide written testimony to debate both sides of the bill. Barring technical difficulties, the hearing should be available via live webcast. Click here to watch the webcast (RealPlayer required).

So, what are the chances that H.R. 5034 will pass? Well, it’s important to note that the bill has 146 (not an insignificant number) co-sponsors from both parties in the House. On the other hand, supplier organizations continue to be unified in their opposition (Click here to view the joint opposition letter issued by the Brewers Association, WineAmerica, Distilled Spirits Council of the United States, Wine Institute, Beer Institute, and National Association of Beverage Importers on the revised 5034). We hope to learn a lot more in the hearing on Wednesday.

If H.R. 5034 moves through both chambers of Congress (no companion bill having yet been introduced in the Senate) and is signed by President Obama, not much would change overnight. Despite numerous reports that it would mean the end of direct shipping, it would not change current state laws that allow direct shipping. It would likely be an uphill battle to completely repeal existing direct shipping laws in most states. However, H.R. 5034 would open the door in states like Florida, New Mexico, and Massachusetts, where the direct shipping laws are in flux because of court cases and Granholm issues, for new state laws that introduce non-facial discrimination such as caps on production capacity (proposed for the last several years in Florida and recently nullified as unconstitutional in Massachusetts) or in-person purchase requirements. It would also provide discriminatory options for the remaining holdout states, such as Maryland, if their resident consumers’ support for direct shipment should become effective. With potentially greater long-term significance, it would tilt the field decidedly against extension of Granholm’s nondiscrimination principle to interstate retailing by non-producing shippers and to interstate wholesaling.

Massachusetts Remains Elusive for Direct Shippers

On 1/14/10 the First Circuit Court of Appeals in Boston ruled in favor the plaintiff in the Massachusetts FWC v. Jenkins litigation. The ruling affirmed the lower court’s order that struck down the capacity caps and wholesaler exclusions which are included in the Massachusetts direct-to-consumer shipping statute and prevented over half of the wineries in the United States from being eligible to ship to MA consumers.  On 4/12/10 the state announced that they will not be seeking an appeal to the Supreme Court, thus leaving this decision as the final law in the 1st Circuit.  Despite the favorable ruling, obstacles continue to make shipping to consumers in MA problematic.

One very serious problem with the existing law not addressed during the FWC v. Jenkins litigation is an aggregate volume limit of 240 liters (26.67 cases) per household per year.  The 240 liter volume limit refers to the total amount of wine each household can receive from all licensed direct shipper each year.  It is not possible for a winery to track the amount of a wine each household receives via direct-to-consumer shipments, yet the licensed shipper is liable for any shipments that cause a household to exceed the 240 liter volume limit. The Massachusetts Alcoholic Beverages Control Commission (ABCC) has not provided any guidance on how to comply with this rule.

The licensing requirements for common carriers (FedEx and UPS) pose a second problem for direct shipping to MA. MA has extremely onerous licensing requirements that are difficult for common carriers to comply with.  At this time, NO common carriers have approved MA for INTERSTATE* direct-to-consumer shipping.  Only FedEx Ground services MA on a limited basis, and has a license for INTRASTATE** direct-to-consumer wine shipments. The common carriers provide updates on their wine shipping status on the respective websites www.fedex.com/us/wine and www.ups.com/wine.

Legislation was drafted and introduced during the 2010 legislative session that to address the problems with common carrier licensing requirements and direct-to-consumer shipping.  However the legislature was primarily focused on election year issues and adjourned without passing the bills.  It is anticipated that similar legislation will be introduced in 2011.

*INTRASTATE -Commerce having an origin, destination and entire transportation within one state

**INTERSTATE-Commerce that involves transportation of goods from one state to another

–Annie Bones, State Relations – Wine Institute

Comprehensive Alcohol Regulatory Effectiveness (CARE) Act of 2010 Introduced

As expected, the Congressional subcommittee hearing on Legal Issues Concerning State Alcohol Regulation has been followed by a House bill. H.R. 5034 was introduced yesterday by Representative Bill Delahunt (D-Mass.) with support from the National Beer Wholesalers Association (NBWA). The bill is also called the "CARE" (Comprehensive Alcohol Regulatory Effectiveness) Act of 2010, and Wine & Spirits Daily posted a copy of it on their site.

It is the purpose of this Act to—

(1) recognize that alcohol is different from other consumer products and that it should be regulated effectively by the States according to the laws

thereof; and

(2) reaffirm and protect the primary authority of States to regulate alcoholic beverages.

The bill would amend both the Webb-Kenyon Act and the Wilson Act to “support State based alcohol regulation, to clarify evidentiary
rules for alcohol matters, to ensure the collection of all alcohol taxes, and for other purposes.”

The Wine & Spirits Wholesalers of America (WSWA) applauded the legislation, saying

It is important that states retain their constitutional power to regulate the distribution of beverage alcohol and are able to fend off litigation, which serves to destabilize or destroy that authority. Although we may oppose direct shipping and self-distribution as a matter of policy, our goal is not to overturn existing state laws. We simply believe the proper forum for resolving legitimate differences over these issues is in the state legislatures – not the courts.

We will have more coverage of this bill as the story develops.

Read more:

H.R. 5034

Wine & Spirits Daily (subscription required)

WSWA Press Release

Massachusetts will not appeal Family Winemakers decision

Massachusetts Attorney General Martha Coakley will not appeal a January Federal Appeals Court decision upholding an earlier District Court decision which overturned the 2005 direct shipping law.  In January, the 1st U.S. Circuit Court of Appeals upheld the 2008 district court ruling that found that the state law governing direct-to-consumer shipments by wineries was unconstitutional.

The court said the law has a discriminatory effect on interstate commerce because it favors instate interests by preventing direct shipments of nearly all out-of-state wine to Massachusetts consumers while allowing direct deliveries by all Massachusetts wineries.

The flawed shipment law provided that only wineries that produce less than 30,000 gallons a year and had not used a wholesaler for distribution in the last six months could ship directly to local consumers. The wholesaler backed law was enacted in 2005 and vetoed by then Governor Mitt Romney. It was enacted over his objection in 2006.

The Massachusetts Legislature is now considering legislation that will mimic the model direct shipping law which will establish a new regulatory framework for shipments by all wineries, large and small, including licensing, reporting and tracking requirements.

The Joint Committee on Consumer Protection and Professional Licensure in February reported favorably on legislation submitted by Senator Robert O’Leary (S 176) and Representative David Torrisi (H 317), two long time supporters of the model legislation. These two bills were combined into a single committee bill, H 4497. H 4497,”An Act regulating the direct shipment of wine”, has been referred to the House Committee on Ways and Means. It provides for a $100 per winery licensing fee, requires monthly reporting and tax collections, limits shipments to four cases per consumer per year per winery and establishes stiff penalties for noncompliance.  The bill also attempts to address a cost-prohibitive issue that has kept common carriers such as FedEx and UPS out of the delivery market.

Wine Institute is currently working with the House Ways and Means Committee to improve the bill by addressing the common carrier issue and the four case limit. Once the bill clears this House committee, it will likely be approved by the full House.

-Carol Martel, Counsel for the Northeastern States, Wine Institute

Possible Effects of Recent Congressional Hearing on Direct Shipping

You may have seen reports about a recent U.S. Congressional subcommittee hearing on “Legal Issues Concerning State Alcohol Regulation.” The hearing was important for anyone concerned about direct-to-consumer wine shipping since a primary question was whether federal courts should be stripped of their authority to strike down state alcohol laws that discriminate against out-of-state businesses—the very issue at the heart of the Supreme Court’s decision in Granholm v. Heald.

Congressional hearing
Click image to view video (RealPlayer required)

The hearing followed a reportedly aggressive lobbying campaign by the National Beer Wholesalers Association (NBWA). The common speculation is that NBWA is concerned that large retailers and global brewers are trying to put beer wholesalers out of business, and that litigation over self-distribution—Costco v. Hoen and a recent lawsuit in Illinois over whether Anheuser-Busch can obtain a wholesaler permit—is a particular threat to their state monopoly pricing power. The undertone of the NBWA effort is that the industry needs to return to a simpler time when the 21st Amendment meant what the wholesale tier thought it did, before the Supreme Court had a chance to weigh in and reset the balance.

While the wine industry has not always benefitted from court decisions, the federal circuits and the Supreme Court have for more than 40 years consistently sought to weigh the interests of states and the market carefully when examining state alcohol laws. Under this court precedent, states have broad authority under their police powers—their ability to protect the public—and the 21st Amendment to regulate the movement and sale of alcohol beverages. But they cannot use state power to discriminate against interstate commerce or to protect in-state monopoly behavior. Despite NBWA’s apparent beliefs to the contrary, there is no evidence that courts have abused their power of judicial review in any way that would justify the blunt reconfiguration of the relationship between federal and state law.

Not that all the state regulators who testified at the hearing would agree. The chairman of Michigan’s Liquor Control Commission offered completely unsubstantiated testimony that because of litigation, direct shipping is a free for all, allowing out-of-state wineries to deliver wine into Michigan on the “honor system,” and resulting in the loss of millions in uncollected tax revenue. This position is questionable since in the wake of Granholm states have more aggressively regulated shipping and have established comprehensive systems of licensing and compliance.

Apart from the fact that state licensing systems make it easier for states to determine whether alcohol is contraband—wine can only be shipped by licensees—Michigan has at least two substantial hammers to ensure their state direct shipping laws are followed. The 21st Amendment Enforcement Act allows states to file for federal injunctions against out-of-state businesses that ignore their laws, and Alcohol Tobacco Tax & Trade Bureau (TTB) policy provides TTB authority to punish federal basic permittees, such as wineries, that violate state law.

Whether the subcommittee hearing will lead to legislation is anyone’s guess. But should a new federal law along the lines sought by NBWA come to fruition, the impact could be substantial for winery direct-to-consumer shipping. States would be free to rewrite their laws to discriminate against out-of-state wineries and subsidize local monopoly behavior. Such a federal law would be an open invitation to roll back the gains wineries have spent nearly two decades fighting to achieve.

Notes on Wine Distribution v.32

The latest version of “Notes on Wine Distribution”, by R. Corbin Houchins, is now available. Release 32 includes updates on legislation, litigation and general discussions on available distribution channels for wine. This release includes substantial changes, including new sections on age and identity, facial neutrality, and logistical support services, as well as updates to state summaries in Arizona, Delaware, Kansas, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. Read about these and other updates that affect the way wine is sold and shipped within the United States.

If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading.  You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

Click Here to View NWD Release 32