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  • Tennessee’s AG Rules Consumers May Not Bring Wine into Tennessee, Federal On-Site Provision No Longer Applies

    On February 24th, 2009, Tennessee’s Attorney General issued Opinion No. 09-15, which concluded that consumers may not legally carry any amount of wine on their person into Tennessee. This ruling, prohibiting consumers from carrying wine into Tennessee, means that the federal on-site provision does not apply to consumers in Tennessee. Wineries are therefore prohibited from making shipments via common carrier to Tennessee consumers under any circumstance. All wine must enter Tennessee through the 3-tier system without exception.

    On a positive note, a number of favorable direct shipping bills (Bill H 1155, S 166 & S 1690) have been introduced and are currently awaiting action in the Tennessee legislature. If enacted, these bills would create a direct-to-consumer shipping permit for wineries, allowing for the payment of taxes and reporting. Wineries with a permit would be able to ship up to 24 cases a year to Tennessee consumers, depending on which bill might pass.

    Annie Bones, State Relations – Wine Institute

    Appeals Court Calls for More Facts in Challenge to Tennessee On-site Law

    The October 24th decision of the Sixth Circuit Court of Appeals in Jelovsek v. Bredesen has been widely reported as upholding face-to-face on-site purchase requirements for winery sales to consumers. There is, however, an interesting disconnect between what the district court said when it dismissed the complaint and what the appellate court said in partly affirming the dismissal.

    In March 2007 the district court judge upheld a statutory scheme he understood as an exception to the otherwise mandatory three-tier system, allowing Tennessee residents to buy wine at a Tennessee winery that used a certain proportion of Tennessee fruit and to transport the purchase in quantities of up to three gallons, while limiting transportation of out-of-state wine purchases to one gallon. The circuit judge, speaking for a three-judge appellate court, clearly upheld laws requiring both in-state and out-of-state wineries to use Tennessee’s three-tier system and clearly reversed the district court’s upholding the exception. The appellate opinion does not, however, say that Tennessee may continue allowing Tennessee wineries to sell at their premises to consumers so long as the transportation quantities are equalized.

    What the opinion appears to leave open is the fundamental question in the lawsuit: whether Tennessee can prohibit direct shipment to its residents by out-of-state wineries while allowing in-state wineries to sell out of their tasting rooms. The first line of attack on that proposition is that on-premises sale requirements, though literally neutral, so obviously favor nearby wineries over more distant ones that they should be analyzed as facially discriminatory against interstate commerce, putting the burden on the state to demonstrate that the differential is indispensable for carrying out a legitimate state objective. The second line is that, even if we read on-site requirements as facially neutral, the harm to interstate commerce from the difference in access to the market outweighs any benefit the differential may confer on the state; under that analysis, the plaintiffs, rather than the state, have the burden of factual proof. The main line of defense is that the differential is a mere “accident of geography” without Commerce Clause significance. Lower courts in other cases have disagreed on which view is correct.

    The Sixth Circuit held that discrimination in favor of Tennessee wineries would have to end and noted that good arguments in principle exist for leveling up and for leveling down. In the absence of a sufficient record for choosing one or the other, it remanded the case to the district court for further proceedings. The opinion provides no instructions on how much change would be required to achieve a level playing field if the district court decides to extend equivalent benefits to out-of-state wineries, rather than reduce privileges of in-state wineries. Thus, it looks as if the plaintiffs have an opportunity on remand to provide support for their proposition that leveling up requires allowing direct shipment.

    An Accident On The Way To Court

    The February 26, 2008 decision by an Arizona federal district court in Black Star Farms LLC v. Oliver supports an in-person purchase requirement, one of the principal legislative attacks on the level-field principle enunciated in Granholm.

    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.

    Tennessee Wholesalers – Crossing the Line?

    There are a couple of direct shipping bills in the Tennessee legislature that would allow Tennessee consumers to order wine from any winery or retailer in the country, with some of the regular restrictions. This would be a big deal, considering direct shipments into Tennessee have not been allowed from any state in recent history. However, what would normally be a run-of-the-mill direct shipping bill has turned into a subject of controversy over actions taken by Tennessee wholesalers to sway public opinion of the bill.

    Wine Spectator Online reports that Tennessee wholesalers have been sending direct-mail and online initiatives to Tennessee residents, saying that SB 1977 and its counterpart, HB 1850 are a threat to Tennessee’s youth and asking them to sign a petition for children to come first. Jackson, one of the authors of the bill, has notified the Tennessee ethics commission of the wholesalers’ intent, saying that this is illegal lobbying because the direct-mail and online initiatives say nothing about being funded by the Tennessee wholesalers. He argues, “[those who view the teen drinking initiatives] think it’s some sort of philanthropic organization that’s concerned about youth consumption of alcohol. But the populous is deprived of the ability to find out who’s really behind this campaign” and that the bill wouldn’t increase availability of wine to minors. Tom Wark of the Specialty Wine Retailers Association issued a press release about Tennessee SB 1977 and has this to say about minors obtaining wine via direct shipping:

    The Supreme Court of the United States and the Federal Trade Commission both looked at the issue and determined that minors are highly unlikely to use direct shipping to obtain wine. No state that allows direct shipping has reported even a small problem with minors accessing wine via direct shipping.

    That being said, we should focus on what is really important about this bill: consumer choice. If passed, SB 1977 would allow permitted wine manufacturers, producers, suppliers, importers, wholesalers, distributors and retailers to ship wine directly to Tennessee residents. Permitted shippers could ship no more than 18 liters per year to an of-age Tennessee resident in a “wet” area. The permitted shipper would have to pay a $100 application fee, a $50 annual license fee, and pay sales and excise taxes on all shipments.

    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.

    Free the Grapes! Legislation and Litigation Update

    From Jeremy Benson at Free the Grapes! :

    Free the Grapes! Media Update
    August 2007

    Now that we’re at the end of most state legislative sessions, we thought it timely to provide an update on direct-to-consumer (DTC) wine direct shipping as of month-end July 2007. Here are some highlights, followed by a more detailed description.

    Highlights:

    o DTC legislation was considered in 23 states;
    o Two states transitioned from reciprocal to a DTC permit system (MO, WV) with additional states pending (OR, IL).
    o The legal direct shipping states for wineries represent 78% of wine consumption in the U.S., although retailers can reach far fewer states.

    Wins:

    • Florida: the third largest state for wine enjoyment, remains a legal state for winery shipments after a fierce defense of the court order that allowed shipping;
    • Hawaii: a concerted effort to reduce quantity limits failed;
    • Missouri: transitioned from reciprocal to permit status (no fee);
    • North Dakota: increased shipping quantity limits;
    • Virginia: now allows Internet retailers without a physical presence to direct ship;
    • West Virginia: replaced reciprocal status with permit bill.

    Losses:

    • Arkansas: DTC permit bill failed in committee;
    • New Mexico: reciprocal transition bill failed due largely to opposition by wholesalers and the beer lobby;
    • Georgia: effort to replace cumbersome law with permit bill failed;
    • Texas: passed a law limiting DTC shipping from in-state retailers outside their particular county;
    • Ohio: passed potentially unworkable permit system for DTC shipments, including capacity cap of 150,000 gallons;
    • Legal rulings supported the on-site sale requirement in ME, and opposed a challenge to TN’s shipping prohibition.

    LEGISLATIVE UPDATE
    Wine Institute provided significant input to the following summary of state activity this year.

    States with Legislation Under Consideration

    Wisconsin – For 20 years, Wisconsin has been a reciprocal state, allowing its consumers to purchase wine directly from wineries as well as in-state wine retailers. But consumers will lose these privileges if the Budget Bill passes as it is currently written. Anti-consumer provisions were slipped into the Senate version of the 384-page, $66 billion, two-year Budget Bill in mid-July. The conference committee will now reconcile differences in the Senate and Assembly versions of the budget bill.

    Illinois – House Bill 429 passed both House and Senate and is before the governor for signature. It creates a winery-only DTC shipping permit that replaces the existing reciprocity law. The Specialty Wine Retailers Association was unsuccessful in securing an amendment continuing shipments from out-of-state retailers, although in-state retailers were successful at maintaining their in-state shipping privilege.

    Additional States

    Alaska –House Bill 34 (Ledoux) would specifically allow in-state wineries to make DTC shipments to AK consumers, with a 5-gallon per shipment limit. Status: passed House and Senate, and was signed by the Governor on 5/31/07.

    Arkansas – Senate Bill 592 (Whitaker), a positive bill that would have created a DTC shippers permit for wineries, died in House Rules Committee March 30.

    Connecticut — Senate Bill 1204 was passed into law and changes the time period specified in the DTC shipping statute from 60 days to 2 months for the 5 gallon limit.

    Florida – Shipping into FL is continues to be legal after competing bills—with and without discriminatory capacity caps—were considered but ultimately died in committees.

    Georgia – House Bill 159 (Willard) and its companion Senate Bill 56 (Untermann) would have replaced the state’s convoluted shipping law with a DTC shipping license for all wineries (and retailers in SB56). The bills died in committee. Wholesaler-supported House Bill 393 (Stephens) sought to create new “domestic farm winery” and national “farm winery” categories with discriminatory capacity caps. The bill died in committee.

    Hawaii – House Bill 1093 (Say) and Senate Bill 1019 (Taniguchi) sought to reduce consumer choice by limiting shipments under the existing DTC shipping permit from six cases per winery per consumer per year, to six cases per household per year. Both bills died in committee.

    Idaho – House Bill 11 would have modified the permit legislation passed in 2006 to allow wholesalers and retailers in Idaho and other states to ship wine directly to consumers. Bill died in committee.

    Maine – Senate Bill 54 (Bromley) would have created a DTC shippers permit for wine & beer. The bill passed the Senate on 6/12/07, but was killed in the house later that week.

    Missouri — The Governor of Missouri signed SB 299 transitioning Missouri from a reciprocal state to a permit state effective August 28, 2007. The new permit law requires all wineries to obtain a direct shipping permit (no fee), limit shipments to two cases per consumer per month, submit an annual report by January 31, and pay excise taxes. The direct shipping permit application and instructions are available on the Wine Institute website at www.wineinstitute.org/programs/shipwine.

    Nebraska – L441 (Mcdonald) will allocate funds raised by the existing $500 DTC shipper license fee paid by all wineries to be deposited to the NE Winery and Grape Producers Promotional Fund. The bill was signed by the Governor on May 30, 2007.

    New Mexico – House Bill 1018 (Silva) passed the House, but was killed in the Senate after intense pressure from wholesalers and the beer lobby. It would have replaced reciprocity with a DTC shipping permit for wineries and retailers.

    North Dakota – Senate Bill 2135 was signed into law and makes favorable changes to existing DTC shipping provisions, including: increased quantity limit from one to three cases per month, removed “reciprocal” provision passed in 2005 but never implemented, and removed vague language.

    Ohio – During closing stages of budget process an amendment was adopted that will create a potentially unworkable permit system for DTC shipments into Ohio. The law has a capacity cap of 150,000 gallons, along with “per family household” aggregate limit that may prevent wineries from being able to ship even if they qualify for the permit. The bill was signed by the Governor on June 30 and becomes effective October 1, 2007.

    Oklahoma – Several bills in the House and Senate were introduced, including a voter referendum to allow OK consumers to receive DTC shipments from out-of-state wineries, but a permit system has not been outlined. All bills died in committee.

    Oregon – House Bill 2171 (Minnis) would transition state from a reciprocal DTC to a permit system for wineries and retailers. Status: The bill passed the House & Senate, and was sent to the Governor for signature in June.

    Pennsylvania – House Bill 255 (Godshall) and Senate Bill 293 (Ferlo) are positive DTC shipping permit bills with a $100 registration fee, two cases per month to any individual. Taxes collected. Status: Both bills remain in Committee.

    Tennessee – House Bill 1850 (Todd) creates a DTC shipping permit for 2 cases annually. Provisions: $100 fee, annual reports, annual excise and sales tax payments (companion bill was SB 1977, Stanley). Both bills died in Committee.

    Texas – Senate Bill 1229 (Gallegos) was signed by the governor May 5, and limits the ability of TX retailers to use common carriers for DTC delivery outside their particular county. The bill was aimed at pending litigation spearheaded by the Specialty Wine Retailers Association seeking statewide sales via common carrier.

    Virginia – House Bill 1784 (Cosgrove) and Senate Bill 1289 (Watkins) augmented current direct shipper permit to clarify that those shipments are by common carrier only, and created separate allowance for any legal shipper to make deliveries of up to 4 cases of wine to a consumer in their own vehicle. Additionally, Senate Bill 984 (Edwards) also became law, creating an “internet wine retailer license” to allow sales by a retailer having no physical premise.

    West Virginia – Senate Bill 712 (Kessler) was signed by the governor and, among many other provisions, replaced reciprocity with a DTC permit bill for wineries, wholesalers and retailers.

    LITIGATION UPDATE

    Maine – As previously reported elsewhere, on March 5, U.S. District Court Judge Carter adopted the magistrate’s report and recommendation issued three months ago in the Cherry Hill (Tanford/Epstein) suit. This ruling supports an on-site sale requirement for any sales to consumers, contrary to an opinion rendered in December 2006 in KY ruling that on-site provisions were unconstitutional.

    Tennessee – As previously reported elsewhere, the U.S. District Court in Tennessee ruled in favor of the state regarding what most thought was an ill-advised lawsuit (Jelovsek v. Bresden). The plaintiffs alleged that consumers faced a greater burden in traveling to another state to purchase wine in person at a winery than they faced in buying wine directly from a TN winery tasting room. The judge was not convinced, and the wholesalers have promoted their “victory” to bolster arguments for the preeminence of the 3-tier system in all matters.

    Texas – All summary judgment motions have been filed. Oral arguments are scheduled for September 21 in Dallas. Wholesalers claim that passage of Senate Bill 1229 moots this lawsuit (see Texas paragraph under legislation, above).

    Massachusetts — Motions for summary judgment are expected this winter in the case that seeks to overturn the 30,000 gallon production cap in the DTC law. Family Winemakers of California is the lead plaintiff.