Wine Distribution Notes – Release 26

Release 26 of Notes on Wine Distribution by R. Corbin Houchins is now available for viewing.

These notes are a great resource for keeping up to date with developing trends in direct shipping and direct distribution. As always, you can find the most recent version of these notes at the ShipCompliant Blog by clicking on the “Wine Distribution Notes” link under “Compliance Resources” on the right hand side of the page.
Each new release shows green highlighting on sections with changes from the preceding release. Release 26 highlights changes from the last two releases: highlights from release 25 include updates to Alaska, Maryland, New Mexico and Tennessee. Highlights from release 26 include updates to Florida, Indiana, and others. Read the notes to find out what else is new.

A call to action in Maryland

Maryland consumers want you!Maryland is currently one of six states, including Utah, Arkansas, Mississippi, Alabama, and Pennsylvania, where all direct shipping is prohibited for both offsite and onsite sales. In fact, shipping wine into Maryland today can result in a felony.

But, that could all change soon. House Bill 1260 and its companion, Senate Bill 616, would establish a system where permitted wineries and wine retailers could ship directly to Maryland residents.

The bills are endorsed by Maryland consumers, Maryland wineries, out-of-state wineries, and out-of-state retailers. But, these groups need help and are calling for action because the wholesaler lobby will fight the bills fiercely. If you are interesting in supporting consumer choice in Maryland, you can get involved by following one or more of the steps below:

1) Visit Free the Grapes!, click on the link for Maryland consumers, and follow the instructions in the Action Alert

2) Share this post with all of the consumers that you know in Maryland

3) A hearing has been scheduled for HB 1260. The House Economic Matters Committee (House Office Building, Room 231) will begin the hearing on Monday, February 18, 2008 at 1pm. If you are able, or know anyone that is able, attend the hearing on Monday and voice your support.

Maryland Comptroller

A DIRECT WINE SHIPPER SHALL:

(1) ENSURE THAT ALL CONTAINERS OF WINE SHIPPED DIRECTLY TO A RESIDENT IN THE STATE ARE CONSPICUOUSLY LABELED WITH THE WORDS “CONTAINS ALCOHOL; SIGNATURE OF PERSON AT LEAST AGE 21 YEARS OLD REQUIRED FOR DELIVERY”;

(2) REPORT TO THE OFFICE OF THE COMPTROLLER ANNUALLY THE TOTAL OF WINE, BY TYPE, SHIPPED IN THE STATE THE PRECEDING CALENDAR YEAR;

(3) PAY ANNUALLY TO THE OFFICE OF THE COMPTROLLER ALL SALES TAXES AND EXCISE TAXES DUE ON SALES TO RESIDENTS OF THE STATE IN THE PRECEDING CALENDAR YEAR, THE AMOUNT OF THE TAXES TO BE CALCULATED AS IF THE SALE WERE MADE AT THE DELIVERY LOCATION;

(4) ALLOW THE OFFICE OF THE COMPTROLLER TO PERFORM AN AUDIT OF THE DIRECT WINE SHIPPER’S RECORDS ON REQUEST; AND

(5) CONSENT TO THE JURISDICTION OF THE OFFICE OF THE COMPTROLLER OR OTHER STATE UNIT AND THE STATE COURTS CONCERNING ENFORCEMENT OF THIS SECTION AND ANY RELATED LAW.

(B) A DIRECT WINE SHIPPER MAY NOT:

(1) SHIP MORE THAN 24 9–LITER CASES OF WINE ANNUALLY TO ANY ONE INDIVIDUAL; OR

(2) SHIP WINE TO AN ADDRESS IN AN AREA IN WHICH THE BOARD OF LICENSE COMMISSIONERS FOR THAT AREA MAY NOT ISSUE A LICENSE AUTHORIZING THE SALE OF WINE.

The broader effects of Costco

I. Discrimination against Direct Distribution from Outside the State

There seems little doubt that Costco�s reading of Granholm will survive appeal. Nothing appeared in the Costco record to distinguish direct shipment of beer and wine to retailers from direct shipment of wine to consumers.

Most states with wine industries allow local wineries some form of direct distribution. Only Washington extends an equal privilege to out-of-state wineries, a result of the Costco remedial legislation. A few states, such as New Jersey, have taken preemptive action by eliminating or restricting direct distribution rights of in-state producers. Limiting direct distribution according to annual production of the producer is emerging as a common theme. Florida recently arrived at a legislative “compromise” that set the cutoff just above the size of the largest Florida winery, a transparently protectionist measure that may or may not evade analysis as discrimination, but, like all size caps, is open to Commerce Clause objection for disproportionate burden on commerce originating outside the state.

Thus, the immediate concern is with legislation in the states that must level up or down. The Costco decision accommodated state concerns by leveling down (with a stay for legislative override) and thus does not constitute precedent for requiring open access to local markets. Because other lower courts may also find the unconstitutionality of discriminatory schemes in the protectionist measures favoring local wineries, rather than in the more basic regulatory objective of controlling the traffic pattern of liquor entering the state, neither Granholm nor Costco suggests that suppliers can rely on widespread opening of markets to direct distribution.

II. Posting and Ancillary Restraints

Costco illustrates a great divide in basic Sherman Act jurisprudence. For some observers, no contract, combination, or conspiracy can be inferred from private actors� facially unilateral acquiescence in state restraints, even if the effects are anticompetitive. That is, roughly, the Fisher v. Berkeley view. See, e.g., Sisters of St. Vincent Health Services, Inc. v. Morgan County, 397 F. Supp. 2d 1032, 1046 (S.D. Ind. 2005), citing Massachusetts Food Ass’n v. Massachusetts Alcoholic Beverages Control Comm’n, 197 F.3d 560, 564-66 (1st Cir.1999).

Naturally, the district court in Seattle regarded Miller v. Hedlund as controlling 9th Circuit precedent. The reasoning in Miller is difficult to pin down. It appears influenced by anticompetitive effects (which we know are alone insufficient), but also to rely on the participation of private actors, consisting of filling in the blanks of a posting system which was then enforced by the state. The opinion mentions potential for collusion, but does not seem to require it. Last December�s antitrust rulings in Costco clearly rest on the wholesaler�s participation in the form of supplying prices that then become mandatory by the power of the state, resulting in a hybrid system requiring state supervision (which was lacking in Washington’s case) to survive preemption. However, all the U.S. Supreme Court authority overturning price posting deals with systems that require or condone private conduct that itself violate the Sherman Act. The Costco judge, like the Court of Appeals in Miller, seems to find a combination by, so to speak, putting the state in the same room with each private actor who posts a price. By contrast, Midcal and the other Supreme Court cases invalidating price posting laws deal with systems that send the private actors to a room where they constitute the unlawful combination on their own. How the Fisher-Miller dissonance resolves is, I think, the most important issue for the Costco appeal.

Another significant issue in applying Costco to the law in other states is the extent to which the cluster of other restraints that frequently accompany posting would fall with it. I see three bases on which that might occur. First, the court might conclude that the system is so integrated that the legislature would not have enacted the other restraints if it had known posting itself to be illegal. Second, on general principles of equity, a court issuing an injunction against unlawful conduct has power to enjoin lawful conduct associated with it if necessary to render complete relief from the threatened harm. Third, a court might conclude that the other restraints constituted per se antitrust violations on their own, which appears as an alternative basis for decision in the December opinion on summary judgment motions, incorporated by reference in the conclusions of law for the final judgment.

That third possible approach would extend Costco�s effects to more states, including some without price posting. It is, however, the most controversial of the three, as it requires finding a public-private hybrid restraint without an overt role for private parties, such as providing prices the state then enforces.

In sum, Costco is not carte blanche for ignoring other states’ posting laws, although within the Ninth Circuit an aggressive position could be justified. As a rough first look, here are some immediately vulnerable points: AZ quantity discount limits, CA beer posting, CT posting, DE delivered wholesale pricing, FL malt beverage price change waiting period and possibly the limits on quantity discounts, GA posting, HI possibly restrictions on quantity discounts, ID posting, IN posting, IA posting (possibly), KS posting (possibly), ME posting and discount restraints, MD posting and quantity discount ban (already analyzed in TFWS I through III), MA posting, MI posting and quantity discount ban, MN posting and possibly restriction on quantity discounts, MO posting and 1% limit on quantity discounts, NH beer posting, NY posting (including amendments effective in September), NC quantity discount ban, OH posting, OK posting and quantity discount ban, OR price record-keeping (possibly, because of deterrent effect on spot pricing) and price uniformity requirement, SD posting, TN posting and quantity discount ban, VT posting, VA posting, WV beer posting.

III. Central Warehousing

Central warehousing bans are difficult to analyze, because (unlike the case in Washington) they are often based on interpretation of retail license privileges or tied house laws, rather than on express prohibition. Caveats regarding ultimate application of Costco to posting and its ancillary restraints apply strongly to central warehousing bans, because they may appear more severable from direct restraint on price than, e.g., quantity discount bans. The Costco antitrust opinion of December and the recent findings of fact and conclusions of law do not present a clear rationale for distinguishing the central warehousing ban, which it classified as an antitrust violations, from the retailer-to-retailer sales ban, which it found was unilateral state action not preempted by federal antitrust law. Thus, it is difficult to predict how courts, even those following the Miller v. Hedlund line on antitrust combinations, will respond to the Costco ruling if asked to evaluate central warehousing in other states.

The following represents a currently incomplete survey of states potentially affected by Costco on use of central retail warehouses:

Central retail warehouses banned: AL, AR, CO, DE, ID, IL, IA, KS, MD, MI, NH, NM

Not banned: AK, AZ, CA, CT, DC, MA, OR

We are still researching the status of central warehousing in the states not listed above.

Maryland to allow self-distribution

Maryland Governor Robert Ehrlich is expected to sign into law a bill that would allow in-state and out-of-state wineries to sell directly to retailers. Senate Bill 812 would allow any licensed U.S. winery that produces less than 27,500 gallons to self distribute to Maryland restaurants and retailers.

This bill does not improve the situation in Maryland. Although it is being advertised as a “compromise” between Maryland wineries and wholesalers, it is basically par for the course. The only change is that now out-of-state small farm wineries can self distribute to Maryland retailers. Direct to consumer shipments will remain prohibited.
Score one for the wholesalers, who got their way at the expense of Maryland consumers.