Posts from the Kentucky Category
Notes on Wine Distribution v.32
February 4th, 2010
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.”
Kentucky On-Site Requirement Invalidated, but Questions Remain
December 31st, 2008
On December 24th, the US Court of Appeals for the Sixth Circuit affirmed, in the Cherry Hill case, the judgment of the district court, invalidating the on-site purchase requirement.
The district court ruled, pursuant to the Supreme Court’s decision in Granholm v. Heald, 544 U.S. 460 (2005), that the in-person purchase requirement in portions of Kentucky’s statutory scheme discriminated against interstate commerce by limiting the ability of out-of-state small farm wineries to sell and ship wine to Kentucky consumers.
Although this decision sets an important precedent, especially in light of a contradictory decision in Indiana, several questions remain unresolved. Despite the justifiably positive news in the press, direct shipping to Kentucky seems unlikely in the near term.
The biggest obstacle is the fact that the common carriers (FedEx and UPS) have not approved the state of Kentucky for direct shipping. Among other reasons for not yet opening up the Bluegrass State, the carriers are not thrilled about dealing with the 53 Dry and 16 Moist counties.
Furthermore, in spite of the recent victory in Massachusetts where the 30,000 gallon capacity cap was declared unconstitutional, the Cherry Hill challenge of the 50,000 gallon capacity cap in Kentucky was not successful. So, even if the carriers approved Kentucky for shipping, only “small farm” wineries would be eligible for a permit.
Corbin Houchins provided great analysis of the original district court ruling two years ago, and I recommend revisiting that post for more information on Cherry Hill. He highlighted an additional question about the two case “per visit” limit, and how that would apply given the unconstitutionality of the on-site visit requirement.
Caps Off to Dolan’s Intentions
April 11th, 2008
In October of last year, wineries began shipping directly to Ohio residents under a new direct shipping permit law. When the provisions of the law in Ohio were first announced, one of the major subjects of controversy was the capacity cap, which only allows wineries that produce less than 150,000 gallons annually to obtain a permit. Capacity caps continue to be a subject of controversy in all the states that use them (currently Arizona, Massachusetts, Indiana Kentucky and Ohio; Florida could adopt a 250,000 gallon cap if SB1096 or HB1293 is passed).
Continuing the controversy, Ohio Representative Matthew J. Dolan is looking to increase the capacity cap for wineries from 150,000 to 250,000. Though the increase in production volume may be a “little step” in the right direction, it certainly seems like a very little step, allowing only 17 more California wine labels to be shipped to Ohio residents. According to The Plain Dealer, Dolan originally vowed to eliminate the cap altogether, but got a lot of pushback from the Ohio Department of Commerce and from Ohio Distributors (as Uncorked points out, “no surprise”).
Just next door, Indiana also prevents wineries producing over a certain amount of wine per year from shipping directly to its residents. Indiana’s original capacity cap was 500,000, but will increase on July 1, 2008 to 1,000,000 gallons since SB0107 was signed on March 13th by governor Daniels. Though this is the highest volume cap of the four states that have said restrictions,
Many will agree that any permit system that discriminates against a winery for the amount of wine produced is not an ideal permit system. Furthermore, the constitutionality of these caps is being challenged through litigation (see Family Winemakers of California vs. Jenkins). State legislators may adopt a capacity cap restriction for any number of reasons, but none of them seem very fair. The state may claim that it is trying to protect its own wineries by establishing the volume cap just above that of the highest producing in-state winery, but who else is being protected while the consumer’s interests fall by the wayside?
Update: In our original post, we mistakenly stated that that Indiana has a capacity cap that is similar to OH, KY, MA, and AZ. The 500,000 gallon “cap” in Indiana that will increase to 1,000,000 gallons on July 1st, 2008 only applies to wineries in that the applicant must not sell more than this amount of wine per year IN Indiana, excluding wine shipped to an out-of-state address.
Kentucky posts permit instructions
February 19th, 2007
Kentucky recently posted instructions for obtaining a Kentucky out-of-state small farm winery license. There are ten steps (actually eight steps – they skipped steps 6 and 8!) that a winery that produces less than 50,000 gallons can follow to receive a license to ship directly to consumers.
STEP 1. KRS 243.360 requires you to first advertise your intentions to apply for this license once in the legal section of the Kentucky State Journal newspaper located at 1216 Wilkinson Blvd. Frankfort, Ky. 40601. (502) 227-4556. (Example is attached.) An officer of the newspaper must complete the affidavit of publication, which is also attached. The completed affidavit and clipping must be submitted along with your application.
STEP 2. Answer all questions and have the form notarized. Incomplete or deficient applications delay processing and your application may be returned.
STEP 3. Attach a certified check, cashier check, or money order payable to Kentucky State Treasurer:
Licenses issued between July 1st. and December 31st. pay $ 50
Licenses issued between Januarys 1st. to June 30th. Pay $ 100
WE MAY NOT ACCEPT CASH BY MAIL OR HAND DELIVERY!STEP 4. Non Ky. residents are responsible for providing a statewide police record check from their state(s) of residence for the past five (5) years. If you have not lived in Kentucky for five (5) years, you must obtain a statewide police record check from the state(s) of your residency in for the past (5) years. Web site addresses are attached that will link you to that states’ instructions for obtaining your own background check.
STEP 5. If you apply as a corporation, limited partnership, or limited liability company, attach a copy of your articles of incorporation, partnership papers, or organizational papers from the state of your incorporation.
STEP 7. Under KRS 164.772 Ky. State ABC may deny a license to defaulted student loan borrowers of a Kentucky Higher Education Loan. Therefore, complete the attached Self-Certification Compliance Form enclosed in this packet and return it with your State ABC application.
STEP 9. Attach a copy of your Federal basic permit and proof of annual production. TTB’s federal form 5120.17 may be submitted as proof of production.
STEP 10. Attach a copy of your license issued by the state where your small farm winery is licensed.
The twelve page document, which we converted to PDF form for those that do not have Microsoft Word, also includes instructions for obtaining your state criminal history information (step 4), an example of the public notice that you must post (step 1), an affidavit of publication (step 1), a self-certification of repayment of educational financial assistance form (step 7), the and the basic application for alcoholic beverage licenses. Once you make it through this arduous process, don’t forget about the 53 dry counties in Kentucky.
Bourbon County, KY – Wet, Dry, or Moist?
February 11th, 2007
We’re getting word that Kentucky will soon make public the requirements for out-of-state wineries to get a small farm winery license for shipping wine directly to consumers. Regardless of the difficulty of the process that Kentucky unveils, wineries will surely face a challenge in keeping track of the 53 dry and 16 “moist” counties in Kentucky. A moist county is a dry county with the exception of one or more wet cities within its borders.
Click here to see a list of the dry counties and here for the colored map.
Just in case you were wondering, Bourbon County, KY is one of the 30 wet counties.
News from Kentucky
February 7th, 2007
The headline said, “State drops out of wine suit: Small operators can ship directly,” but the reported change in direct shipment rights occurred in December of last year. What’s new is that the state has abandoned its appeal, leaving the wholesaler trade association to continue alone in attempting to persuade the Court of Appeals to reverse the pro-commerce part of the Huber/Cherry Hill ruling. (The ruling is not entirely favorable; see the current revision of Wine Distribution Notes for details.) The practical effect is that whatever chance the wholesalers may have had to get a stay from the Court of Appeals, to render the lower court decision ineffective during the appeal, is vastly reduced by the acquiescence of the state in the December judgment.
“New Vintage” of Wine Litigation
February 5th, 2007
There’s an excellent article on law.com titled “New Vintage of Wine Litigation is Fermenting”. The article summarizes the “next wave” of wine lawsuits that will continue to shake up the landscape of direct shipping.
New suits and amended complaints filed in the past year are attacking requirements that consumers must purchase wine in person, with the first court decisions recently issued in Maine and Kentucky. Wineries also are challenging legal shipping limits that are based on production volume.
In both types of cases, out-of-state wineries accuse the states of discriminating against them.
It’s interesting that almost two years after the Granholm decision there are over 30 lawsuits in over 20 states, and almost all of them are trying to clarify what the ruling actually meant. Richard van Duzer predicts,
Ultimately, this will be back before the Supreme Court, which will have to be more explicit about what it said and what it hasn’t said.
Ken Starr also contributes a quote to describe the de facto discrimination,
It appears that the wholesalers are simply seeking legislatively to do indirectly what the Supreme Court said in Granholm they can’t do directly.
Below is a summary of the litigation discussed.
Maine: In Cherry Hill Vineyard v. John E. Baldacci, No. 1:05-cv-00153 (D. Maine), the judge upheld the in-person requirement in Maine’s law , claiming the face-to-face restriction applies equally to in-state and out-of-state wineries.
Kentucky: In Cherry Hill Vineyards v. Hudgins, No. 3:05-cv-00289 (W.D. Ky.), on December 26th, 2006, the judge struck down the in-person requirement, but did not strike down the 50,000 gallon capacity cap restriction.
Indiana: In Baude v. Heath, No. 1:05-cv-00735 (S.D. Ind.), IN residents are suing over the requirement that the initial purchase of wine be made in person.
Massachusetts: In Family Winemakers of California v. Jenkins, No. 1:06-cv-11682 (D. Mass.), the Family Winemakers of California is suing over the 30,000 gallon capacity cap, which is conveniently just over the production of the largest producer in MA.
Arizona: In Black Star Farms v. Morrison, No. 2:05-cv-2620 (D. Ariz.), five AZ consumers are suing over the 20,000 gallon capacity cap.
Results from Federal District Court in Kentucky
December 27th, 2006
It was pretty good, though it could have been better.
Yesterday, Judge Charles R. Simpson III reaffirmed his analysis of last August in the Cherry Hill case, finding that on-site only requirements in the direct shipment law effective on January 1 are unenforceable because they unduly burden interstate commerce relative to in-state direct shipments. The ruling, which has direct effect only in Kentucky, deprives anti-commerce elements of a frequently employed rear guard tactic against Granholm –the introduction of illusory equality by requiring both in-state and out-of-state wineries to sell only from orders placed by the buyer in person at the winery site.
Other aspects of the new law remain in place, including the right of out-of-state wineries to hold “small farm winery” licenses. The winery and consumer plaintiffs had also challenged two restrictions on small farm winery licensees, (1) that the license is available only to wineries producing no more than 50,000 gallons annually [~21,000 cases], and (2) that wineries may ship no more than two cases in a single order. While there is no doubt that many out-of-state wineries and no Kentucky wineries are affected by the volume cap, or that small order requirements are more onerous for longer distance deliveries, the court decided both restrictions were constitutionally permissible because the inequities arose from “mere geographic happenstance.” Where one draws the line between geographic happenstance and an impermissibly protectionist system remains to be decided another day. (The same opinion also upholds a peculiar part of the new law that creates state funding for zero-markup distribution of small farm wines by distributors, if any, who choose to participate, on the grounds that it will be available to all farm wineries, wherever located.)
The pro-commerce part of the opinion rests on the court’s finding “that each winery’s products are distinctive,” a principle of potentially far-reaching significance. If wholesalers and their governmental allies cannot impose on-site requirements, they are left with either accepting direct shipment or achieving the politically challenging objective of cutting it off for their own state’s wineries. As Judge Simpson put it,
“The principal problem faced by the defendants herein is that the legislature chose to permit direct shipment of alcohol. The choice to do so has thus taken us down the current road.”
Where the current road leads will be the subject of appeals in the 6th Circuit. The state’s and wholesalers’ appeal from the August ruling has been parked in the Court of Appeals, pending today’s judgment. Their appeal from both will doubtless now go forward. At this point, it is unknown whether the plaintiffs will cross-appeal on the volume cap and maximum order quantity issues.
Update: An unanswered practical question is how the two-case limit will be applied in the absence of an on-site requirement. Unless the Court of Appeals stays it, the December 26th order simply snips the in-person ordering requirement out of the statute. It makes no change in the two parts of the statute that provide, “The amount of wine shipped is limited to two (2) cases per customer per visit.” Even if the state must substitute “order” for “visit” in practice, the opinion seems to leave room for banning cost-saving measures like consolidating orders for shipment.
Kentucky Court Opinion and Judgment Posted
December 27th, 2006
The US District Court in Kentucky ruled yesterday on the lawsuit filed by Cherry Hill Vineyards, challenging provisions in Kentucky’s recent direct shipping legislation. Here are links to the court’s opinion [Huber Memorandum Opinion.pdf (324 KB)] and judgment [Huber Order and Judgment.pdf (239 KB)]. An excerpt from the opinion:
The court has evaluated the new statutory scheme put into place by SB 82. The new legislation has, for the most part, resolved the constitutional infirmities addressed by the Granholm decision. The court has rejected all challenges made by the plaintiffs but one. The court determined in the August, 2006 opinion and has reaffirmed herein that the in-person requirement in KRS 243.155 and 244.165 is unconstitutional as it discriminates in practical effect against out-of-state small farm wineries, and has not been shown to advance the legitimate local purposes asserted that cannot be adequately served by reasonable nondiscriminatory alternatives. For these reasons, the court will strike the in-person requirement from both statutes and uphold the remainder of the statutory scheme. A separate order will be entered this date in accordance with this opinion.
Update: Lexington Herald-Leader Article
Terroir II: Another Word Soon from the Court that Decided All Wines Aren’t Alike
December 22nd, 2006
A new ruling is expected before the end of the year in the Granholm-based lawsuit that challenges the states’ and wholesalers’ “on-site only” strategy for resisting direct shipment. That line of defense argues it’s equal treatment to restrict all wineries, near and far, to the same limitation of in-person orders (which seems true in the same sense that a stew is equal parts horse and rabbit if made from one rabbit and one horse.)
On August 22, 2006, in the case then known as Huber Winery v. Wilcher but subsequently renamed Cherry Hill Vineyards, LLC v. Hudgins, a federal district court in Kentucky enjoined the state from prohibiting direct shipment to Kentucky consumers by out-of-state wineries of a certain maximum size that are properly licensed in their own states. See the initial report of the case here and further analysis here for perspective on its potential long-range importance.
The district court judge adopted a far-reaching analysis in rejecting the state’s argument that it could eliminate discrimination by applying the same on-site-only rule to all wineries, noting the real-world discrimination against a much larger number of wineries in states far from Kentucky than in neighboring states and the unique nature of wine, which supports a right in consumers to purchase from distant producers. His August order removed the instate location and fruit production requirements from licensing a “farm winery,” which is the category of producer entitled to retail to Kentucky consumers, but did not remove the requirement that licensees be located on a “farm with a producing vineyard” or the 25,000-gallon annual production cap. The order also enjoins application of the criminal penalty statute against out-of-state wineries that ship to consumers, if they qualify as small farm wineries.
The motion for judgment on the pleadings that produced the August opinion and order did not require the court to rule on the constitutionality of enacted Senate Bill 82, which is now the subject of further summary judgment motions. If not blocked by the court, the bill will be effective on January 1, 2007, purporting to reinstate the on-site requirement and raise the production cap to 50,000 gallons.
The rationale of the August 2006 opinion would invalidate the new law’s on-site limitation, but the ruling of current motions could be differently reasoned after the extensive briefing that has taken place. If the judge rules consistently with the previous order and is sustained on appeal, the case will represent a significant advance for freer interstate trade by banning the level-down prohibitionist strategy of a uniform on-site only rule.
In a December 20, 2006 ruling, the court granted the intervening wholesaler trade association until December 22, 2006 to file its reply brief to the plaintiff winery’s response to the wholesalers’ motion for summary judgment, rather than January 2, 2007, as the intervenor had requested, and an attorney for the plaintiff has reported that the judge intends to rule by December 31st. The December 20th ruling also disposed of various procedural rulings. Another substantive motion in the district court, to stay or suspend the August injunction, is also pending and will likely be decided (or dismissed as moot) in the year-end ruling, but stays in the appellate court remain a possibility.
Important ruling in Kentucky expected by year-end
December 22nd, 2006
U.S. District Judge Charles R. Simpson III is expected to give a very important important ruling in Kentucky by the end of the year, according to the Louisville Courier-Journal. The ruling will help decide the fate of the Kentucky law that was set to take effect on January 1st. The new law would allow for direct shipments into Kentucky, but only for wineries with production under 50,000 gallons. The law also includes a requirement, inserted by the wholesale lobby, that the sale takes place while the customer is physically present at the winery. The original Huber lawsuit claims this requirement puts small out-of-state wineries at a competitive disadvantage.
Stay tuned for more information on Kentucky as the events unfold. Also, see our previous posts on 8/28, 9/20, and 10/2 for background information on this important battle.
Terroir in Court
October 2nd, 2006
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.
A response to the Family Winemakers lawsuit
September 24th, 2006
Doug Caskey, from the Colorado Wine Industry Development Board, responded to our post about the lawsuit in Massachusetts with a lengthy comment. I wanted to republish it in a new post because it is well worth reading.
At the risk of sounding like a traitor to the cause of wine, free trade and the American Way, I would like to challenge the premises that underlie Mr. Kronenberg’s lawsuit against the revised wine shipping statutes in Kentucky. As a representative of the very small wineries in Colorado, the last thing I want to do is “protect and perpetuate a wholesaler monopoly at the expense of wineries seeking market opportunities,” as Mr. Kronenberg accuses the Kentucky legislature of doing. Yet, I take exception to his comment that we are “one national economic market.” As recent court rulings in Virginia and Michigan have shown, the local implementation of the three-tier system was reinforced, not invalidated by the Granholm decision, as long as the implementation is not discriminatory or preferential. States still have the right to regulate alcohol in a meaningful way that suits the “needs and desires” of their residents, as the language of the Colorado Liquor Code requires.
If a state chooses to impose size limits on certain privileges for liquor distribution or market access, that state may well be doing so because it has determined that small wineries have more difficulty getting their products through the three-tier system than large wineries with sales teams and marketing budgets. That state could be saying that it values small businesses that stimulate agriculture, and it should not have to defend that position against the legal whims of wineries that produce more wine in a year than the entire state. While the Family Winemakers of California represents the “smaller” wineries in that state, I doubt if many of Mr. Kronenberg’s members produce less than the entire state of Kentucky or Colorado or both states combined.
We should remember that prior to Prohibition and the 21st Amendment, the beverage alcohol industry was made up of small, local breweries and wineries in almost every community. The advent of the mega-breweries and corporate wineries was something that happened as a result of Prohibition. The 21st Amendment was designed to protect states against the liquor monopolies spawned in the void created by Prohibition. The framers of that amendment wanted to return to the alcohol industry model of the late 19th and early 20th Centuries. It is easy to accuse the wholesale industry of being monopolistic because a handful of companies dominate the market in every state. But the same can be said of the large wineries in California.
The grape growing industry did not disappear in California and New York as a result of Prohibition the way it did in most other states, such as Colorado. Our vineyards were replanted to peach trees. Consequently, California wineries, and certain breweries in St. Louis and Golden, were able to capitalized on the demise of the local wine industries and recover more quickly than those in the rest of the county. The wine industries in states other than New York, California and Washington are just now coming back from Prohibition.
So at this point in history when California’s wine industry, which has been growing nicely for 40-50 years, complains that states are discriminating in favor of small wineries, it is in truth asking the courts for special protections. In effect, the 40-50 year advantage that California has over wine industries in the rest of the country, during which time small wineries enjoyed special protections and privileges from the California government, makes them the monopoly now. Under the guise of “equal protection” as spelled out in the Granholm decision, their legal actions have the impact of squelching the advantages that state governments want to give small agribusinesses like wineries.
The economic reality is that large wineries can afford to navigate the spiffs and expenditures of the three-tier system. Just because few states have wineries that produce more than 20,000 gallons annually, or whatever number a state uses to define a small winery, imposing size limits on direct shipment or self-distribution is not an attempt to inhibit trade. It is an acknowledgement we are not starting with a level playing field.
To my friends (and I hope we remain friends, as this is a friendly debate) Paul, at the Family Winemakers, and Steve, at the Wine Institute, I call on you to recognize the historic disparity between where your industry is and where the industries are in Colorado, Kentucky, Missouri and other states. You have a big economic head start on the rest of us. Our attempts to limit how the “big boys” play in our states are not attempts to keep you out. They are the implementation of each state’s right to define the rules for the three-tier system within our state, to identify who is small enough to need help and who doesn’t. This is the American Way.
Kentucky appeals court ruling
September 20th, 2006
The State of Kentucky yesterday appealed the court ruling in August that struck down the interstate shipping ban in Kentucky. The State disagreed with the court’s finding that the in-person requirement for purchasing wine is unconstitutional. Thanks to the folks at Stoll Keenon Ogden for the tip and the insight. Their article was used a basis for the court’s finding that the in-person requirement was unconstitutional. It’s a great article that is well worth reading. As always, we’ll keep a close eye on this case as it will further slice and dice the Granholm opinion of 2005 that continues to shake out in the courts of Kentucky, Massachusetts, Washington, Texas, and many other states.
Kentucky court strikes down interstate shipping ban
August 28th, 2006
A US District Judge in Kentucky struck down the current regulations that allow only Kentucky wineries to ship to Kentucky consumers. Bill Nelson has the full scoop in the WineAmerica News Brief and at their state issues website. As expected, the judge found the discriminatory nature of the Kentucky statutes to be unconstitutional and in violation of the Granholm decision because Kentucky wineries could ship to consumers while out of state wineries were prohibited from doing the same.
However, a new twist to the ongoing Granholm compliance issue emerges from this case. In his opinion, Judge Charles Simpson finds that the “in-person purchasing requirement discriminates, in practical effect, against interstate commerce.” He goes on to say that the onsite requirement is unconstitutional because it amounts to ‘differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’” His solution is to require that offsite purchases are allowed if onsite purchases are allowed.
The end result of all of this is that licensed in-state and out-of-state wineries that produce less than 50,000 gallons (roughly 21,000 cases) per year can now ship directly to Kentucky residents for both off-site and on-site sales. Of course there will be appeals and much will continue to shake out in Kentucky, but the new twist sets a precedent that could create yet another ripple effect in the realm of wine shipping compliance.
Read the full Opinion here
Read the full Court Order here
Costco-Granholm battle lines forming in Ohio
July 9th, 2006
Ohio wineries selling to state residents operate under a mandatory 33.3% markup system, whether distributing directly or through a wholesaler.
Under past law, wineries outside the state could not sell to Ohio consumers at all. To comply with Granholm, the state accepted a consent decree permitting consumers to purchase directly from out-of-state wineries, beginning in July 2005. The decree makes no provision for minimum markups, and shipments are authorized so long as the parties comply with pre-existing § 4307.08 of the statutes and § 4301:1-1-23 of the regulations and use the new form at www.liquorcontrol.ohio.gov/1516pdf.pdf.
Although the Commerce Clause may not prohibit Ohio’s treating interstate commerce more favorably than local commerce (the reverse of local protectionism condemned by Granholm), the current system could be interpreted as favoring in-state wineries by shielding them from local price competition. More immediately significant is the political problem arising from competitive pricing by out-of-state sellers, to the detriment of Ohio wholesalers and retailers.
Governor Taft’s response has been to propose legislation applying the mandatory markup to out-of-state sellers. A rival proposal would limit all direct selling to wineries producing no more than 150,000 gallons annually. State legislative hearings are likely this fall.
Both proposals raise significant legal issues. Minimum markups were invalidated under federal antitrust law in Costco, a result consistent with earlier cases in Kentucky and Kansas. Volume caps are problematic, with court challenges now in early stages. Invalidity under Granholm is possible, if a court finds the threshold, which is typically just above the largest home state winery, a de facto discrimination against interstate commerce relative to local commerce. Otherwise, the law will be evaluated under an “unreasonable burden” test, in which the regulatory interest of the state is weighed against disadvantage to out-of-state sellers, with a less certain outcome than in cases of outright protectionist discrimination.
Legislation update
April 10th, 2006
There has been a flurry of wine legislation activity around the country recently…
Indiana: House Bill 1016 was approved by the Indiana House and Senate and awaits signature from the governor. This is one of the stranger bills out there to say the least. It allows for limited direct shipments from both in-state and out-of-state wineries if they get a $100 permit. However, lawmakers inserted a previous visit requirement that says an initial onsite visit to the winery must be made before consumers can make offsite purchases. There is also a requirement that each consumer is limited to 24 cases per year across all wineries. This is crazy. How will one winery know how much wine a consumer has received from other wineries?
Oklahoma: The Oklahoma Grape Growers and Wine Makers Association is pitted against the wholesalers in a battler where the two sides seem too far apart. Although President Gary Butler proclaimed that both House and Senate versions of direct shipping legislation died on the floor, the OGGWMA continues to fight for direct to consumer shipments through lawsuits and public relations campaigns.
Louisiana: Two separate bills are under consideration in the LA House to allow for the direct shipment of wine. The wholesalers are putting up a good fight as usual and of the options would create a small farm winery exception where wineries that produce less than 2,000 cases only could ship directly to consumers. This would merely create an “incubation period” where small wineries could get off the ground before being forced to use distributors.
Kentucky: Compromise legislation passed the House and is expected to pass the Senate that would allow direct shipments from in-state or out-of-state small farm wineries for onsite sales only.
Maine: Two proposed bills and a lawsuit to lift the current ban on direct shipments have muddied the waters significantly in Maine. Resolution seems pretty distant at this point.
Florida: Florida is currently open to shipments, but on the “honor system” until permanent legislation is passed. A couple of different bills are on the table that would allow for direct shipments with restrictions. Florida consumers and wineries are pushing SB 282, which does not include a “capacity cap” that would prevent wineries that produce more than 250,000 gallons from shipping directly to consumers.
Kentucky bill passes Senate, would prohibit direct shipments
March 6th, 2006
Senate Bill 82, which prohibits direct shipments in Kentucky, passed the state Senate and now moves to the House. Winery owners claim that this bill would kill the Kentucky wine industry. A second bill in Kentucy that would allow small wineries to ship directly to retailers remains in House committee.
This article has some very interesting facts about the Kentucky wine industry.
In the late 1700s and early 1800s, Kentucky was the third largest grape producing state in the country. The Civil War and Prohibition slowed graped production significantly and farmers thus turned to tobacco as a cash crop. In the 1990s, tobacco production declined. The state Congress then moved in with statutes designed to bring back the wine industry that once flourished.
“Small wineries” in Kentucky are those that produce less than 50,000 gallons (roughly 21,000 cases). The Kentucky legislature created laws to help these small wineries get off the ground. Small wineries would get an exemption to distribute directly to retailers because distributors would not pick up their wine. SB 82 would change that.
According to Jeff Tatman of Felice Vineyards in Kentucky, “Unless you are producing 100,000 cases a year, the distributor doesn’t want to carry your product because you aren’t making them enough money. Even if they are forced to pick us up, they are not going to push us.” In 2004, the total production of Kentucky wineries was 96,000 gallons and “most winery operators in the state are only producing about 3,500 cases of wine a year”.
This seems like a Catch 22. Distributors are not interested in picking up your wine until you produce a certain volume – let’s say 20,000 cases rather than the 100,000 suggested by Tatman (which could very well be true in Kentucky) to be conservative. But under the proposed legislation, all Kentucky wineries must use a distributor. This doesn’t add up and the assertion that Kentucky wineries would be killed by this legislation seems all too valid.
Competing bills in Kentucky
February 18th, 2006
Two competing bills are alive in Kentucky, but neither are very favorable for wineries. One that made it out of state House committee would only allow onsite sales for small farm wineries. The second made it through the state Senate and would force all wineries to use wholesalers.
Indiana (and Kentucky) wine law challenged
November 18th, 2005
Nine Indiana wineries push the courts to allow in-state shipments of wine. Add Kentucky and Indiana to the list of states that will revisit their legislation in 2006.
