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Direct Shipping of Wine
I met local winery owner Juanita Swedenburg of Swedenburg Winery in Middleburg a couple of weeks ago and that reminded me of her direct wine shipping case that is currently before the Supreme Court, a case that has significant implications for the way wines are distributed and sold and significant implications for all interstate commerce in the Internet age.
The crux of the matter is that in many wine producing states, local wineries have the right to distribute their wines directly to consumers in their state, while out-of-state wineries do not. On the face of it, this smacks of protectionism and restraint of trade (the average man might claim, “No fair!”). However, this system appears to be permitted under current law. There is a mass of conflicting laws and issues that the Supreme Court is attempting to iron out.
Under the 21st amendment (which repealed prohibition) each state has the authority to regulate sales of alcoholic beverages within its borders. Under that authority, currently each state requires that anyone selling alcohol (including even little old One Block West) be licensed by that state. Most states do not license out-of-state businesses to distribute alcohol within their boundaries.
To sell their wines within a state, out-of-state wineries must contract with a distributor in that state or set up a licensed office and warehouse in that state. However, most distributors are not willing to distribute just a few cases of wine; they make their money on volume. And it is cost prohibitive to set up warehouses in the states where small wineries would like to do business. Thus, small out-of-state wineries are effectively denied the right to distribute their wines, while the local wineries, being local corporate entities, can obtain a license and, where permitted such as in Virginia, do sell directly to consumers.
This is a perfectly expected outcome of leaving licensing to the several states. However, the reason that the Supreme Court is involved is that the Constitution also prohibits restraint of interstate commerce in the so-called Commerce Clause. And clearly this situation is de facto restraint of interstate commerce.
The issue is which part of the Constitution should take primacy in this case, the 21st amendment or the Commerce Clause, a classic butting of the heads between the states and the Federal government. Recently, Federal district judges have issued many conflicting opinions. In general, however, the courts have not allowed states to use the 21st amendment to establish protectionist policies. And in 1984, the Supreme Court itself ruled that the states cannot hide behind the 21st amendment to protect local liquor industries.
As you might suspect, the real issues are monetary. Liquor distributors want to protect their industry and livelihoods and direct distribution by wineries infringes this. Before you say “aw, too bad for the poor little rich kids,” consider that the liquor distributors play a vital role in the market. They provide the sales force and the delivery mechanism to get alcoholic beverages to the customer. Not many wineries can afford to set up a nationwide sales and delivery force: this is the service that the distributors provide for them. By and large, we all benefit from this.
The other monetary issue arises from taxation. States make revenues from taxing the sales of alcoholic beverages and the current distribution system ensures them a certain, predictable, and largely stable revenue stream. Generally, the states get taxes when the distributor buys the beverage alcohol. Direct shipping threatens this, although not to any huge monetary extent.
These are the real economic issues that need to be ironed out. There are other less valid arguments against direct shipping. One of the most common goes: in the Internet age, underage kids can buy wine anonymously via the web. Show me the kid that is going to buy a case of Ridge Lytton Springs to drink with his buddies on a Saturday night, rather than get one of his older friends to get a 18-pack of beer at the quickmart. If this argument were not ridiculous enough on the face of it, wineries already require an adult signature to deliver the wine. Wineries have no more incentive to lose their license by selling to underage consumers than do any of the rest of us in this business. Without our license, we have no business.
This case before the Court has implications for many industries. Think about some of the things that you buy commonly via multi-tier distribution such as automobiles and pharmaceuticals.
I am not a professional Court watcher, but it seems clear to me that the current Court has little tolerance for the states hiding behind the 21st amendment. What is less clear is what the future holds should the court rule for direct shipping. One possible outcome is that wineries will be able to ship out-of-state as they are attempting to do now. Another possible outcome is that to level the playing field, all wineries may be required to ship through distributors. This would put both small in-state and small out-of-state wineries in the same predicament: total lack of distribution, clearly not the outcome Mrs. Swedenburg would like. The Court will likely rule in May.
Postscript, January 2008 Mrs. Swedenburg did prevail in her case. The Court ruled in her favor in May 2005 as expected. The ruling caused the several states to treat all who would sell wine equally regardless of provenance, but left the details of implementation up to the states. Here in Virginia, that led to chaos for the small producers, because the Commonwealth forced all producers to use licensed distributors, including the small farm wineries that had been selling direct to restaurants and wine stores. The net effect was as I mentioned above: the small wineries were totally disenfranchised. Our list of Virginia wines contracted by a third.
Mrs. Swedenburg died in June of 2007 and she did not get to see the changes to the Code of Virginia that are slowly letting the small farm wineries self-distribute once again. |
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