Maryland

Marylanders have long awaited a bill that would allow direct wine shipments into the Old Line State. This past Tuesday, both the Senate and the House acted on all three direct shipping bills proposed in the current session. The Economic Matters Committee both withdrew HB 234 and passed as favorable, HB 1175. SB 248, the counterpart to HB 234 (introduced not long after the Direct Wine Shipment Report by Maryland’s Comptroller, in support of winery direct shipping), was also passed as favorable, but includes amendments, touted as a “compromise”, which removed in-state and out-of-state retailers’ ability to ship direct to consumers. Additionally, the customer volume limits are now set to 18 liters per household per year (down from the original 24 cases per individual per year, as was initially introduced), the permit cost has increased to $200.00 per year, and the bond security increased to $1000.00. As introduced, HB 1175 also made no allowances for direct shipments from retailers. The Senate and House bills are scheduled to be presented for a third reading today on the floor of the House. Amendments concerning a new study on retailer shipping and the ability of Maryland retailers to ship Kosher wines to Marylanders will likely be introduced on the House floor.

New Jersey

If direct shipping legislation passes this year, New Jersey could open up to wineries for direct shipments for the first time. S 766 and counterpart A 1702 would allow permitted wineries to ship up to 24 cases annually. S 766 passed the Senate on 2/4/2010. The Assembly bill remains in the Regulatory Oversight and Gaming Committee, which is chaired by the bill’s lead sponsor, Assemblyman John J. Burzichelli. Burzichelli is also the lead sponsor of another, less desirable, direct shipping bill (A 3897) that would impose a capacity cap of 250,000 gallons on direct shippers. A3897 is also waiting for a vote in Committee. It remains to be seen if the recent Freeman decision will complicate the bills that are on the table.

Florida

Florida is currently open to direct shipments from wineries. The state’s previous direct shipping legislation was found to be unconstitutional under Granholm and was overturned in a 2005 court ruling under Bainbridge, et al. v. Turner. For the fifth time in six years, direct shipping legislation is being considered in Florida (no bills were considered last year). As introduced, HB 837 and counterpart SB 854 would allow wineries (not retailers) to ship directly to consumers. The bill contains severely onerous restrictions that would prevent most wineries from obtaining a permit or shipping into the state, including a 250,000 gallon production volume cap (capacity cap), bond, and a mandate to give wholesalers a year’s notice that the winery plans to direct ship.

HB 837 was voted on and determined “favorable” by the Business & Consumer Affairs Subcommittee on March 22, 2011, and is now in the Government Operations Appropriations Subcommittee.

Massachusetts

There are several problems with Massachusetts’ existing unworkable direct shipping laws. The 30,000 capacity cap restriction was found to be unconstitutional by the First Circuit Court in 2010, but other statutes regarding customer aggregate volume limits and carrier licensing remain in effect, and need to be updated in order to truly open the state to direct shipping. HB 1029 and HB 1883 would address these issues and would allow permitted wineries to ship wine to consumers. Both bills were referred to the Joint Committee on Consumer Protection and Professional Licensure in February, and still have a ways to go before becoming law.

Indiana

Currently, only wineries that have not had a relationship with a distributor in the past 120 days can obtain an Indiana direct shipping permit, and wine can only be shipped to Indiana residents who have previously visited the winery in person. Two bills in the current legislative session aim to remove these restrictions and open up direct shipments in Indiana to many wineries that are currently unable to get a permit. HB 1081 would remove the requirement for an initial face-to-face transaction, as well as remove the restrictive wholesaler relationship provision in the law. A similar bill, HB 1132, was also introduced in January of 2011, but has been amended to become a study “concerning the viability and efficacy of instituting a policy to permit the direct shipment of wine to consumers in Indiana.”

Rhode Island

Rhode Island remains closed to offsite direct wine shipments. SB 170 would create a direct shipping permit and allow shipments of up to 24 cases of wine per year, per resident from permittees. On March 23, 2011 the Senate Special Legislation Committee recommended the measure be held for further study.

Tennessee

Pending legislation in Tennessee would open up the entire state to direct wine shipments, eliminating the “dry” areas of the state that wineries are not allowed to ship wine into. The bill is currently on the calendar in both the Senate and the House.

Pennsylvania

At a hearing on March 22, 2011, the Liquor Control Board asked that the legislature “modernize” the liquor code. As part of the modernization, the PLCB asked that direct wine shipments to consumers’ doorsteps be allowed. Pending legislation (HB 110) would allow for a workable permit system. Thus far, the bill has yet to move out of the House.

Bonds

Some states require wineries to obtain a bond in order to secure a direct shipping license. A bond is a written guaranty, purchased from a bonding company (usually an insurance firm or a surety company), to guarantee that all taxes due will be paid to the state. If there is a failure to pay, the bonding company will make good up to the amount of the bond.

Bonds for direct shippers range from $500-$1500 depending on the state, but premiums, or out-of-pocket costs, to wineries typically average around 10% of the total bond price, or $50-$180 out-of-pocket on an annual or biannual basis. Different bonding agents may quote different rates, so it pays to shop around.

Connecticut, Idaho, Illinois, Indiana, Kansas, Texas and Wisconsin all require that wineries secure a bond before submitting your license application. For wineries that ship 40,000 gallons or more annually, Oregon issues a bond document after the license application has been received but before the license is issued. Wineries that ship less than 40,000 gallons to Oregon annually can apply for a bond wavier.

Label Registration

Several states require brand or label registrations for direct shipping. Ohio, a state that 26% of direct shippers have in their program, requires wineries to register all the labels that will be shipped into the state for a one-time registration fee of $50 per label.

If that sounds pricey to you, consider Connecticut who charges $200 per label and requires labels to be re-registered every 3 years if they are still actively shipped into the state.

Georgia, Michigan, New York, North Carolina and Virginia do not charge a fee though label or brand registration is required in these states.

Application Fees

Some states may require business, Secretary of State or tax registration, or other one-time application fees. This varies from state to state and depends on how your business is structured. Wineries that start shipping to Arizona, Connecticut, Hawaii, Kansas, Maine, Michigan, North Carolina, Ohio, Tennessee, Virginia or Wisconsin may encounter one or more of these fees.

License, bond, label registration and application fees all factor into the true break-even costs of shipping to a new state. The key to ensuring a profitable direct shipping program is to research thoroughly in order to avoid getting caught off-guard with unexpected costs.

On May 18, 2009, the Supreme Court denied the plaintiffs’ petition without opinion. The consequence is that the Circuit Court opinion remains the last word on the subject, at least among the federal courts of Illinois, Indiana and Wisconsin. (The case does not address a subsequent statutory change disqualifying wineries with Indiana wholesaler relationships from direct shipment, but a similar Massachusetts provision that fell disproportionately on out-of-state wineries was invalidated in Family Winemakers of California v. Jenkins.)

Denials of certiorari carry no legal weight as to the merits of the issues, but the ruling illustrates the propositions that Granholm does not “open the states” to direct shipment (in case there is anyone who hasn’t yet gotten that message) and that clarification of Granholm is probably not a high priority for the Court. For the near term, Granholm’s many unanswered questions will continue to leave lower courts considerable freedom in deciding how much a state may burden cross-border wine commerce. If conflicts among the circuits develop over time, chances of Supreme Court review will improve.

Annie Bones, State Relations – Wine Institute

Annie Bones, State Relations – Wine Institute

It’s important to keep in mind in reading the opinion that the Court of Appeals is affirming the lower court’s granting of summary judgment against the state on one point and reversing it on another. That is, the district court had decided no trial was necessary because uncontested facts established the unconstitutionality of both the wholesale licensee ban and the initial on-site visit requirement. The appellate court agreed with the former conclusion and disagreed with the latter.

Statutes that openly discriminate against out-of-state wineries are almost always unconstitutional and provide fit subjects for summary judgment. Statutes without openly discriminatory provisions, but whose effect in practice is to impose a greater burden on out-of-state wineries than on local wineries, may be unconstitutional, depending (in the locution of the leading case) on whether the burden is “clearly excessive in relation to the putative local benefits.”

That determination of excess is at the heart of the 7th Circuit opinion. The appellate court had little trouble in concluding that the kinky ban on shipment by wineries that had direct distribution rights anywhere provided virtually no benefits, except to wholesalers, and was substantially burdensome. Because uncontested facts in the district court demonstrated exclusion of a substantial number of out-of-state sellers, the plaintiffs had met their burden of showing discriminatory harm to interstate commerce, shifting the obligation to produce evidence to the defendants. The state and wholesalers had offered only one intelligible counterargument –the claim that requiring commerce to go through a local middle tier makes it easier to monitor sales and collect state excises. We can keep Baude v. Heath in the column of cases that do not consider that claim a substantial justification for demonstrated burdens on commerce.

In the other (and more important) half of the 7th Circuit opinion, the same burden-benefit analysis reached a different conclusion with respect to the supposed economic consequences of Indiana’s requirement that the consumer travel to the winery site before receiving the first direct shipment order. Faced with a contention that such a burden is inherently excessive, the chief judge offered some unvarnished advice to plaintiffs’ counsel: “It is impossible to tell whether a burden on interstate commerce is [excessive] without understanding the magnitude of both burdens and benefits. . . . . Exact figures are not essential (no more than estimates may be possible)[,] and the evidence need not be in the record if it is subject to judicial notice, but it takes more than lawyers’ talk to condemn a statute . . . .” In other words, you can’t litigate a burdening case as if it were a case of overt facial discrimination. See Notes on Wine Distribution, pages 8-10, for my discussion of that point and of Cherry Hill Vineyard (which was cited in Baude) and similar cases.

Regarding judicial notice (which occurs when a court accepts something, such as a tide table, as true from published sources, without live testimony), courts seldom take notice of controversial facts. That point came up when the chief judge, sounding a bit offended by plaintiffs’ argument that there was no point in having a face-to-face screening system because determined underage purchasers would defeat or circumvent it, declined to take judicial notice of propositions they advanced in support. Plaintiffs cited some studies and attempted to use an on-line ID check provider’s advertising to show on-site screening is unnecessary. The appellate court wasn’t having it and noted that “it would be awfully hard to take judicial notice that in-person verification with photo ID has no effect on wine fraud and therefore flunks the interstate commerce clause.”

Thus, although delivery requirements involve face-to-face proof of age, Baude stands for the proposition that plaintiffs would have to prove that carrier screening undercuts the enforcement benefit of the initial winery site requirement. The appellate opinion refers to Rowe v. New Hampshire Motor Transport Ass’n, a case involving a specific tobacco-regulating statute, as forbidding states to require carriers to check age of persons receiving intoxicating liquor. That is, I believe, an egregiously wrong reading of the case (see blogging on both sides of the issue here), but the opinion does not rely on it. Rather, it describes the face-to-face transaction between carrier employee and recipient of the shipment as facially inferior to age screening at a winery, to a degree that allows the state to treat the former as inadequate. As with economic effects, plaintiff evidence was, in the court’s view, simply absent on the efficacy of at-delivery age screening: “Given the state of this record, and the state of the empirical literature, we know very little.” The take-away is that before you can knock down a duly enacted state statute, you need to know –and show– rather a lot about its discriminatory effects.

The primary importance of Baude is to add weight to an already substantial body of judicial opinion that suits based on a facially neutral law’s burdensome effects on interstate commerce relative to local commerce have to be tried quite differently from suits like Granholm, which was based on overt and explicit discrimination against interstate commerce. The case does not say that the face-to-face law would prove constitutional in a properly presented case, only that it was wrong to conclude that its unconstitutionality was so clear as to require no presentation of quantitative evidence on its burdens.

Reversing a grant of summary judgment does not require that the lower court enter summary judgment for the other side. Rather, it provides guidance to the district court as to evidentiary requirements if the case goes on to trial, and leaves the statute in place if there are no further proceedings below. The plaintiffs’ burden of proof in Baude is substantial but not unsupportable. It ain’t necessarily over.

None of the plaintiffs contends that Indiana’s law has led him to buy more wine from Indiana and less from other states. The law simply shifts sales from smaller wineries (in all states, including Indiana) to larger wineries (all of which are located outside Indiana). The Indiana Winegrowers Guild has filed a brief as amicus curiae opposing the face-to-face clause, which the Guild maintains has made it unduly difficult for its members to ship their wine direct to consumers. But if what the Guild says is
true, then the statute—although bad economically for Indiana’s wineries—must be sustained against a challenge under the commerce clause. Favoritism for large wineries over small wineries does not pose a constitutional problem, and the fact that all Indiana wineries are small does more to show that this law’s disparate impact cuts against in-state product than to show that Indiana has fenced out wine from other jurisdictions.

The judgment of the district court with respect to the wholesale clause is affirmed, and with respect to the face-to-face clause is reversed. The case is remanded for the entry of a judgment consistent with this opinion.

We expect to receive clarification from the lower court or from the Indiana ABC on how current and future permit holders can comply with the existing statutes. We’ll update you here as we receive more information.

If HB 520 or its companion SB 412 in Alabama, and S 2125 in Rhode Island pass, they would allow for any licensed wine producer, supplier, importer, wholesaler, distributor or retailer to apply for a direct shipper license ($100 initial fee; $50 per year thereafter) that would allow them to ship up to 24 cases of wine per year to an of-age resident of the state, as long as the resident is not located in a dry area. Sales and excise taxes must be paid annually.

In-person purchase as a precondition to direct shipment solves a fundamental political problem for the middle tier. Although Granholm allows states to eliminate discrimination against interstate direct shipment by forbidding in-state shipment, pursuing that “level down” strategy requires extravagant expenditure of political capital, because it constitutes a death sentence for a significant fraction of local wineries. Thus, wholesaler trade associations are faced with reconciling survival of direct shipment for local wineries with the core objective of forcing wineries in other states to go through three tiers, a conceptual problem after Granholm.

The solution is the “accident of geography” theory, which contends that the impracticality of, e.g., an Arizona consumer’s visiting a Yakima Valley winery to place an order for a wine advertised on the Internet, compared to the convenience of visiting an Arizona winery for the same purpose, does not discriminate against interstate commerce. The Black Star court, like a New York federal district court in Buy Right, Inc. v. Boyle and a Tennessee federal district court in Jelovsek v. Bresden, appears to have bought the theory; federal district courts in the Kentucky case, Cherry Hill Vineyards, LLC v. Hudgins, and the Indiana case, Baud v. Heath, rejected it. Appeals are reportedly under way in the fourth, sixth and seventh federal circuits; if the plaintiffs appeal in Black Star, the ninth circuit will also be involved.

At first impression, the wholesalers’ argument does not seem logical. With respect to governmental restrictions, the Commerce Clause is supposed to provide equal access to markets for interstate commerce originating in any location. True, it does not require states to neutralize natural effects of geography, such as the greater cost of shipping from a distant point, but the trade restriction in question arises from the legislative pen, not from geography itself. For legislation, the Commerce Clause supports location parity by voiding state enactments with substantial discriminatory effects, including the effect of leveraging location advantages of local businesses against distant competitors.

Ironically, the court in Black Star appears to have recognized that aspect of the Commerce Clause, as it cited a 1994 Supreme Court case on the subject, C & A Carbone, Inc. v. Clarkstown, which invalidated a facially neutral city ordinance requiring all nonhazardous solid waste received and processed in the town to be deposited at the defendant township’s transfer station. The fatal flaw of the Clarkstown ordinance was that in practice it favored local waste management business to the exclusion of all non-local competition, which sounds pretty similar to a three-tier requirement for out-of-state businesses, but the Black Star court decided not to follow that precedent for reasons that are difficult to divine in its opinion.

There is, nevertheless, a solid basis for the anti-trade result in Black Star and other recent cases, which is widely (and perhaps erroneously) understood as endorsement of a geographic accident defense to Granholm-based suits. If there were only one message I’d want readers of these blogs and Notes on Wine Distribution to take away from discussion of Granholm, it would be the enormous evidentiary difference between a facial discrimination case like Granholm itself and a de facto discrimination case like Black Star. The latter category, which includes challenges to volume caps as well as to on-site limitations, requires much more extensive preparation, with economic expert testimony, to satisfy the plaintiffs’ substantial burden of proof. The Black Star judge underlines that point in refusing to reach the same result as Hudgins and Baude: “However, Plaintiffs proffer no evidence to suggest that such a limited exception, applicable to both in-state and out-of-state wineries, erects a barrier to Arizona’s wine market that in effect creates a burden that alters the proportional share of the wine market in favor of in-state wineries, such that out-of-state wineries are unable to effectively compete in the Arizona market.” Providing the kind of evidence the court would have to see before invalidating a facially neutral statute adds something like $150,000 on top of all the other costs of the litigation, which should be a sobering, but not surprising, fact for enthusiasts of law reform by litigation, and especially for those who think Granholm provides a lay-down slam in direct shipment cases.