Practical Winery
65 Mitchell Blvd, San Rafael, CA 94903
phone: 415-453-9700 ext 102
email: Office@practicalwinery.com
JULY/AUGUST 2010
FREE RUN
House bill threatens direct - to - consumer wine sales
BY
Charles F. Reidelbach, Jr.,
Rohan A. Shrikhande,
Higgs, Fletcher & Mack LLP
San Diego, CA
R
ecently introduced in the U.S. House of Representatives, H.R. 5034 could limit consumers’ choice of wine from other states, and particularly reduce the availability of wines produced by small, less wellknown wineries.
The proposed Comprehensive Alcohol Regulatory Effectiveness Act (CARE), would have the biggest impact on California producers, and could stagnate innovative and forward-thinking ways of selling wine that lie on the periphery of the “three-tier system” — such as many internet wine sellers ("third party marketers" like Gilte Groupe and RuLaLa) who have benefitted fromthe Supreme Court's decision in Granholm v. Heald, which assured many wineries and wine-sellers in the U.S. the ability to sell directly to customers in states which have laws allowing in-state direct-to-customer wine sales.
While three-tier is the predominant form of distribution, it is by no means the exclusive distribution method. Most states have adopted a three-tier system of wine distribution, which mandates that alcohol sales strictly flow from producer to distributor to retailer rather than directly to consumers, but most states also incorporate direct-toconsumer (DtC) shipments and winery self-distribution methods as well.
A handful of major distributors control the bulk of wine sales in the U.S., and these distributors prefer moving large volumes of wines. Although these distributors also carrywines by producers of all sizes, the limited number of distributors and other economic factors makes it very difficult, if not impossible, formany limitedwine brands to get their wine to retailers and restaurants in those states that still apply the three-tier system to sales of out-of-state wines.
Thirty-seven states, including California, have enacted rules that allow DtC sales of wine without the constraints of the three-tier system. These rules benefit a vast number of small wineries – and their customers – by allowing sales and delivery directly to consumers located in and out of the state.
Some states historically set up discriminatory laws or barriers to out-ofstate producers, giving greater preference to wineries within their own state. HR 5034, if passed, would effectively allow states to override the 2005 Supreme Court decision in Granholm v. Heald which held that the Commerce Clause of the Constitution prevents states from enacting discriminatory laws, which allow in-state wineries the benefits of selling DtC while not affording the same benefit to out-ofstate wineries.
Proponents of the new bill, introduced by Congressman Bill Delahunt (D-Mass.), argue that state laws (such as the discriminatory laws in Granholm) should be shielded with a strong presumption of validity in favor of state alcohol laws. HR 5034 would provide such an evidentiary presumption and further establish a higher burden of proof for out-of-state wineries to invalidate them. This may immunize state laws regarding alcohol sales from being invalidated as a constraint on interstate commerce. Wineries in every state will feel the impact of HR 5034.
Arguments in favor of the bill are that it will strengthen states’ ability to collect alcohol taxes and reduce the increasing legal challenges to state alcohol laws enacted by various states under the power granted to themby the 21st Amendment. Further, wholesalers argue that the law will assist in preventing underage drinkers from access to beverages purchased online.
However, the Federal Trade Commission examined these and similar concerns prior to the Granholm case and the states of New York and Michigan asserted them in opposition to the Granholm plaintiffs in the Supreme Court. The Court carefully considered, and dismissed, each one in balancing the Commerce Clause against the 21st Amendment.
Wineries of all sizes could be pushed into a corner by states passing laws aimed at promoting their own wine industry to the detriment of those in other states.
There is strong opposition to the bill. Speaker of the House Nancy Pelosi, an owner of a small vineyard herself, and most of the California congressional delegation, will likely side against the bill as it will negatively impact California’s robust wine industry.
A recently created Facebook group of nearly 12,000 people and counting is opposing this legislation, in addition to other websites such as FreeTheGrapes.org, which asserts the bill is “an unprecedented special interest power grab that is a direct threat to legal, regulated winery-to-consumer shipping now working successfully in 37 states.”
PWV recommendation
Everyone is invited to visit FreeTheGrapes.org to obtain/send a letter to your U.S. Congressional representative in both the House and Senate.
Speaking before the House Judiciary Subcommittee on Courts and Competition Policy in March, California Representative Mike Thompson (owner of a small vineyard in Lake County, CA) said: “State regulation of alcohol is alive and well and has not been impaired since the Supreme Court`s Granholm decision. In this direct-to-consumer shipping case, the decision was simple: states can regulate, but not discriminate. In truth, Granholm and the decisions that came before it give great deference to the 21st Amendment [repeal of Prohibition] and state regulation of alcohol, but it affirms that these rights do not supersede other provisions of the Constitution, such as the Commerce Clause.”
Thompson noted how direct shipping has allowed both the wine and craft beer industries to develop commercially, a view shared by many. “There has been a dramatic increase in the number of wine and beer producers, which has resulted in more jobs for American workers,” he said.
He added that the mandated threetier system, introduced after the repeal of Prohibition in 1933, has struggled to cope with this expansion. “Wine is produced in all 50 states, including more than 6,000 wineries, a 500% increase in the past 30 years. Yet the number of wine wholesalers has decreased by more than 50%, creating a distribution bottleneck. For example, in California, there are only two major wine wholesalers.”
While the likelihood of the passage of this bill remains uncertain, many fear the bill – if enacted – would protect otherwise unconstitutional state laws, damage the ability of small wineries to sell their wine, prevent creative online wine endeavors, and preserve the position of wholesalers in the alcohol sales chain.
While the wholesalers do have a weighted interest in retaining their position in the sales chain, they too have presented certain public concerns. Currently the bill has been referred to the House Judiciary Committee, which will hopefully shed more light on the intricacies and impact of this bill.
Feel free to direct inquiries to the authors
by email: Charles Reidelbach, reidelbach@higgslaw.com; or Rohan Shrikhande, shrikhander@higgslaw.com or telephone, 619-236-1551