Terroir in Court

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

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.

New York reciprocal shipping privileges and quantity limits

As if keeping track of over 7,500 direct shipping rules wasn’t hard enough already!

Let’s start with a little background on the issue of New York reciprocal privileges. Even though they published their advisory in August of 2005 (after the Granholm decision), the New York regulations included the following language about reciprocity.

The newly enacted ABCL 79-c indicates that the holder of a Direct Shipper’s License may ship up to (“no more than”) 36 cases of wine (no more than 9 liters each case) per year directly to a New York resident of legal age, “provided *** that the state in which such out-of-state winery is located affords to New York State winery and farm winery licensees reciprocal shipping privileges, meaning shipping privileges that are substantially similar to the requirements of this section” (emphasis added).

Language in the Bill Summary of S.5925 provides guidance with regard to the manner in which the Legislature intended the “reciprocal shipping privileges” requirement to be construed (emphasis added): “[I]f a winery is located in a state that has limitations on wine that can be shipped to that state, such winery shall be subject to the same limitations; providing that such limitation does not exceed the limitations set forth in the state of New York”.

An out-of-state winery applying for a New York State Out-of-State Direct Shipper’s License is required — at Questions 37-38 of the application — to provide advice regarding the quantity limits imposed by the applicant’s state upon New York State wine manufacturers seeking to directly sell and ship wine to resident customers of the applicant’s state.

An out-of-state wine manufacturer may not be issued a New York State Out-of-State Direct Shipper’s License unless such out-ofstate wine manufacturer agrees to limit the quantity of his wine shipments into New York to the maximum number of cases per month and per year that the applicant’s state allows New York wine manufacturers to directly sell and ship to a resident customer of the applicant’s state. (Question 39)

Basically, this is merely a more complicated version of the original interstate reciprocity arrangements. Prohibited states can not ship directly to New York. Limited states can ship what they allow NY wineries to ship into their state. States without a limit (California) can ship up to 36 cases per year to New York.

Does this sound like a violation of the Granholm ruling? I think so too.

Complicating things further, we heard an interesting twist from one of our clients yesterday. This California winery began the permit application process in December. Knowing that the California laws would change on January 1st, this winery did not put a limit on Questions 37 or 38 of the NY Out-of-State Direct Shipper’s License application. But when the NY ABC reviewed the application in January, they asked this winery to change their application to read 2 cases per month and 24 cases per year to reflect California’s pre-January limits. The winery obliged, and thought their limit was then set at 2 cases per month.

I called New York this morning for clarification because we knew that they were accepting new applications at 36 cases per year from California. We wanted to know if the winery could re-apply for their license under new terms. According to the ABC, this is not necessary. All California applications that originally read 2 cases per month were amended to read 36 cases per year and this winery is now safe to ship up to 36 cases to any NY resident each year.

FedEx approved to ship wine to New York

The State of New York Division of Alcoholic Beverage yesterday officially approved FedEx to make wine shipments directly to New York consumers. Carriers approved to ship to New York are required to “capture and maintain specific information, including a signature and the New York Out-of-State Direct Shipper�s license
number of out-of-state wineries.”
Both FedEx and UPS, who received approval in December, struggled with the approval process in New York.

See the press release from the NY ABC here

To view the FedEx wine shipping state pairing guide, click here then click on the Wine Shipping State Pairing Guide link.