Direct shipping loses a big one

Nationwide direct shipping is not just around the corner and the maze of liquor laws known as the three-tier system that limits what wines we can buy and how we can buy them is not going to go away anytime soon -- if ever.

That's the bad news from a federal appeals court decision this week that upheld a Texas law that allowed the state to forbid non-Texas retailers from selling in Texas. The Fifth Circuit decision, Siesta Market, said that not only does the 21st Amendment, which repealed Prohibition, give the states almost unlimited leeway in regulating liquor sales, but that the 2005 Supreme Court Granholm decision that allowed winery direct shipping is very limited in its scope. Wrote the court: "Regulating alcoholic beverage retailing is largely a State's prerogative."

Or, as attorney Andy Siegel (no relation), who deals in alcoholic control issues, told me today: "I'm only a little bit surprised there has been been such a swing against Granholm. This is a sweeping, unequivocal response against Granholm."

After jump, background and more about what happened:

Four and half years ago, those of us who support direct shipping and a loosening of the three-tier system thought that the 2005 case, known as Granholm, was going to do just that. In Granholm, the Supreme Court ruled that state laws that discriminate against out-of-state wineries at the expense of in-state wineries were unconstitutional. In other words, states couldn't allow consumers to buy wine directly from in-state wineries unless they allowed consumers to buy wine directly from out-of-state wineries as well.

At the time, Granholm was going to be the key that would unlock the three-tier system. I thought so, and wrote that. Siegel, a partner with Shackelford, Melton & McKinley in Dallas, told me that he saw Granholm as the dam buster. It unlocked winery direct sales; the next door to be opened would be out-of-state retail direct sales, in which consumers would be allowed to buy from any liquor store or on-line retailer anywhere. That's what Siesta Market was about, brought expressly for that purpose. The pillars, Siegel said, would start to fall.

Currently, out-of-state retail is illegal under three-tier and Internet retailers like Wine.com actually have a physical presence, like a warehouse, in the states where they sell wine to comply with the law. The reason for all this? The three-tier system -- the legal framework that has regulated alcohol sales in U.S. since Prohibition was repealed. In three-tier, which exists in some form in every state, consumers (with some exceptions) must buy wine from retailers or restaurants, which must buy from wholesale distributors, who buy from the producers. Retailers can’t buy direct from the winery and consumers mostly can’t either. I wrote a piece for the on-line wine magazine Palate Press about three-tier, which offers a good description of how three-tier works and why it exists.

Instead, the Fifth Circuit decision locks the door again. Yes, it applies only to Texas and a couple of states in the South, and only to wine, but the precedent has been set. Other states and other courts looking for an excuse to limit Granholm will gladly quote it, and Siegel says it will be a powerful weapon. "This is an important decision," he said.

In one respect, this decision should not be surprising. Granholm, in the past 4 1/2 years, has not been as sturdy as it seemed to be at the time. The states, which have a financial, social, and legislative interest in the three-tier system, found ways around it. In Michigan, for example, the legislature effectively prohibited shipments from in-state wineries to consumers, so that its ban against out-of-state wineries was not seen as discriminatory. Most of the lawyers I've talked to since then have said the same thing, and one predicted that the Supreme Court could eventually reverse itself on Granholm and reinstate the ban on winery direct shipping.

three-tier system, direct shipping, Granholm, Siesta Market

Comments

[Craig]

Stupid question here, probably, but -- how do wineries ship directly to Texas, then? In the past, I've been a member of various wineries' "wine clubs" and gotten bottles shipped directly from the winery in CA to my address in TX. Does this new decision modify that?

[Jeff Siegel]

Not stupid at all. Just goes to show how confusing the issue is. The 2005 Supreme Court decision said Texas can't discriminate against out of state wineries that ship into the state. So Texas allows out of state to ship in, if they follow the same rules that in-state wineries do. I think they have to get some sort of license. Hence you can get your wine shipped directly from the winery.

What you can't do is order wine from an out of state retailer like Sherry-Lehmann in New York or Kermit Lynch in San Francisco. That's illegal, and the court upheld that law. The point here is that these retailers may carry wines you can't get in Texas, which is why you would want to order them from somewhere else.

The fear among direct shipping advocates is that this decision will lead to restrictions for wineries shipped from wineries, which is currently legal.