The issue of direct shipments by retailers to consumers has become a very hot topic of late. As of today, retailers can ship to less than half of the number of states to which producing wineries can ship. The Specialty Wine Retailers Association is fighting hard with both legislative efforts and litigation to open more states for retail to consumer shipments. The heated battle in Illinois, where out-of-state retailers recently lost the ability to ship to consumers under HB 429, raised national awareness to this issue.
The fundamental question is whether the decision in Granholm v. Heald that said states must treat in-state and out-of-state wineries evenhandedly should also apply to in-state and out-of-state retailers. R. Corbin Houchins recently made two posts (September 18th and October 5th) that do an excellent job of highlighting the legal questions that come into play when attempting to extend Granholm to retailers. In his October 5th post, Mr. Houchins indicates his disagreement with the reasoning of the recent and important Arnold’s Wines v. Boyle opinion, which upheld discrimination against out-of-state retailers in New York.
There is a very interesting recent article, with substantial background materials for lawyers who do not practice in the subject area, on FindLaw.com titled “The Fight Over State Laws Favoring In-State Alcohol Purveyors: Do Such Laws Violate the Dormant Commerce Clause?” that also examines the important ruling in Arnold’s Wines. This article is definitely worth reading.
The Court has had to examine the intersection between the dormant Commerce Clause idea and the Twenty-First Amendment a number of times. Two years ago, in the seminal case of Granholm v. Heald, the Court appeared to send a message that while the Twenty-First Amendment may indeed empower states in some ways, it does not trump the anti-discrimination, anti-balkanization norm of the Commerce Clause.
The federal district judge in the recent Arnold case in New York properly acknowledged the importance of Granholm. Nevertheless, the judge held that Granholm’s ban on state discrimination against out-of-staters applied only to state laws regulating producers of alcohol, not laws (such as the one at issue in the recent New York case) that regulated wholesalers or retailers.
The New York judge’s interpretation of Granholm is, I believe, in error.
The Arnold’s Wines case will likely impact current (Texas, California) and future (Illinois?) cases in the battle over retail to consumer shipments and could possibly end up in the Supreme Court, where a favorable decision could potentially open the legislative floodgates for retailers as Granholm did for wineries in 2005.
Last week the California Department of Alcoholic Beverage Control took three “virtual” wineries to court stating that they violated the provisions of their licenses by pouring wine for consumers at a wine festival. So called virtual wineries typically hold two licenses in combination, a type 17 which is a wholesale license and a type 20, which is a conditional retail license allowing the licensee to sell wine directly to consumers via a wine club or internet sales. This combination of licenses allows a business owner to have a lot of the same privileges as a winery or type 02 license holder without having a bricks and mortar winery or the on-going compliance requirements that wineries have. The main prohibition of the 17/20 combo is that those licensees are not allowed to pour wine at consumer tastings and they cannot have tasting rooms. California is the only state that allows wholesalers to sell wine to consumers. The three wineries are arguing that the prohibition on public tasting is unfair to small proprietors and the charitable organizations that host the tasting events and are challenging what they claim is a “little known” law. The penalty for pouring wine at a consumer event without the correct permits is a 15 day suspension of the license or a fine. An administrative judge will give the ABC a decision within 30 days and the ABC will act on the decision within 100 days. At this point the California Assembly is not proposing a change in the law.
Tom Wark from Fermentation posted a lengthy comment in response to Doug Caskey’s thoughts on the Family Winemakers lawsuit. This was another great response, so I wanted to post it to make sure everyone reads it.
First, anyone accusing you of being a traitor to the wine industry simply doesn’t know you or doesn’t care for honesty.
That said, I want to comment on your elequent plea for respecting the postion Colorado and other smaller state wine industries find themselves in vis a vis the current debate over direct shipping regulations.
First, with regard to the Granholm ruling, it strikes me that the ruling did not so much “reinforce” the validity of the 3-tier system as much as it simply concurred that it was a legitimate way for a state to structure the distribution of alcohol. By this I mean, it did not endorse the excusionary charachter of system, but rather acknowledged its legitimacy. This is important.
The idea that the state is preventing direct shipping by those that produce over a certain amount because it “values small businesses that stimulate agriculture” belies the facts and machinations in the direct shipping debate. Were direct shipping to consumers open to all wineries, large and small, there is no reason to believe that a small Colorado winery would be hurt by CA wineries of any size trying to attracte consumers to wine clubs or occassional Internet sales. In fact, being closer to the Colorado consumer than a CA or WA winery, the Colorado winery should have an advantage in reaching that consumers.
The bottom line is that production limits are approved by Wholesalers becauase it keeps the vast majority of direct sales from occuring while allowing in-state wineries that they rarely deal with to go about their business without criticizing wholesalers. As a bonus for wholesalers, it puts wineries in-state into conflict with out-of-state wineries that are prevented from entering the market via direct sales.
As for monopolistic tendencies, it is indeed easy to accuse wholesalers of being monopolies. But the idea that “the same can be said of the large wineries in California” just doesn’t wash for one simple reason: The Wholesalers benefit from STATE SPONSORED monopoly status. By dictating the use of the three tier system the States guarantee that a smaller and smaller group of wholesalers take a piece of every sale in the state. Yet, there are no provisions that they represent any winery that wants to sell in that state. If in addition there are production requirements on those that can sell direct in a state that has granted a monopoly to wine wholesalers many wineries will be prevented entirely from doing business in that state.
The State of California does not impose any regulations that result in CA wineries selling the vast amount of domestic wine in the United States. This difference in who imposes a monopoly is important.
If the concern is for fairness and a desire to see Colorado wineries expand and prosper there is a simple way to accomlish this: Allow wineries to self distribute in the state as well as sell direct to consumers. No one represents a brand better than the owner. But as long as the state imposes the 3-tier system, this can never happen because under Granholm if CO wineries can self distribute then out of state wineries must be able to also. Wholesalers would just as soon see small state wine industries disappear altogether than allow this sort of situation.
And this brings us to the idea that “Under the guise of “equal protection” as spelled out in the Granholm decision, their (those bringing suits) legal actions have the impact of squelching the advantages that state governments want to give small agribusinesses like wineries.”
If government and legislators were truly interested in giving small agribusiniess a hand up, they would ignore the demands and campaign donations of wholesalers and allow unrestricted direct sales and unrestricttd self-distribution in their states. It’s clear the legislators too would rather throw CO wineries and other small state wine industries under the bus before upsetting the antiquated but very profitable apple cart known as the state sponsored wholesaler monopoly, AKA “Three Tier System”.
In the end, the restrictions that states put on who can ship to consumers don’t merely inhibit the “Big Boys”. They inhibit the very small boys too, the very boys that most distributors don’t want anything do do with. But the big problem is that as long as the three tier system is imposed by the state, small industries like that of Colorado will be hampered.
For the first time in post-Granholm legal maneuvering, a court has recognized the geographic distinctiveness of wine as a factor in applying the “level playing field” requirement.
Kentucky is one of about eight states that responded to Granholm by authorizing only on-site sales. The argument by the wholesalers and their allies in favor of that approach was that applying the on-site requirement to all wineries, local and out-of-state, constituted equal treatment for Commerce Clause purposes.
The Granholm opinion had, of course, rejected New York’s argument that all wineries were treated equally because out-of-state sellers were, like local producers, entitled to rent warehouses and maintain offices in the state. Thus, we already knew a state could not adopt facially equal provisions that introduce substantial impracticalities for interstate sellers not shared by local wineries. The question was whether an on-site-only law was such a provision.
In Huber Winery v. Wilcher, a federal court in Kentucky ruled that Granholm forbids laws that allow residents to purchase wine at wineries in all locations, noting that the effect is to foreclose a larger number of wineries in the major producing states, while imposing only a minor inconvenience on consumers who travel to wineries in Kentucky and adjacent states. The opinion is important because (1) it applies the “strict scrutiny” test, which is standard for overt discrimination, to the de facto discrimination before it, and (2) it recognizes that practical availability of wine from one growing region does not compensate for denying practical access to the greater variety of wines from others –i.e., that “interstate commerce” is not all the same. In reaching the latter conclusion, the court agreed with the plaintiffs that “each winery’s products are distinctive,” expressly declaring that the consumer rights to interstate commerce recognized in Granholm are not satisfied by Kentuckians’ ability to purchase Tennessee and Indiana wine on-site, to the exclusion by travel distance of the products of California, Oregon and Washington.
In the previous post, we mention that a group sued Arizona over the discriminatory nature of their 20,000 gallon capacity cap. Now, the Family Winemakers of California, a group representing over 740 small and medium sized wineries, is suing the State of Massachusetts for the same reason. Paul Kronenberg, President of Family Winemakers, said the following about the 30,000 gallon production capacity cap in Massachusetts
Last year, the Supreme Court told Michigan and New York to stop the discrimination. But the Massachusetts legislators have chosen to ignore the Court’s message that we are one national economic market. State laws that protect and perpetuate a wholesaler monopoly at the expense of wineries seeking market opportunities and consumers seeking a wider choice in wine, run counter to the concept of free trade within the nation.
Read the full press release here.
Other hurdles in Massachusetts have effectively kept it closed for direct shipping to date. On top of the 30,000 gallon capacity cap, there is a burdensome 14 page permit application as well as a 240 Liter (26+ cases) per individual volume limit across all wineries. Similar to the rule in Indiana, this would mean the winery that ships the 27th case would be in violation. FedEx and UPS are not shipping to Massachusetts for direct sales.
Hello again, back in the swing of things after a nice two week break. We’ve seen some big developments in the world of wine direct shipping over the last two weeks that we’ll look at in more detail over the next few weeks.
July 1st is a huge day for direct shippers as new laws take effect in Washington, Idaho, and Colorado. We also just learned that HB 1968 was signed by the Governor of Hawaii on Thursday and will also take effect on July 1st. We’ll give you the full breakdown on the new rules and permit requirements in each of the these states this week. It is important to note that all four were previously “reciprocal” states and are now moving to a limited direct model to comply with the Granholm ruling. By my count, that will leave only seven reciprocal states (Illinois, Iowa, Missouri, New Mexico, Oregon, West Virginia, and Wisconsin) after July 1st.
We will also look at other direct shipping developments around the country in the near future, including legislation in Kansas and Pennsylvania, the appeal of the Costco ruling in Washington, and the lawsuits filed in California to allow the direct shipment of wine by retailers.