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

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.

Cherry Hill Decision

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.

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.

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.

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.

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.

Click here to read the full article

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.

Click here to read the full article

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 6^th 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.