More bad news for direct shipping

And no, it's not necessarily the bill introduced in Congress that would reaffirm the power of the states to regulate alcohol sales within their boundaries. And no, it's not necessarily several recent federal court decisions that seem to strike at the Supreme Court's establishment of direct shipping in 2005.

And it's not even the request by 39 state attorneys general, asking Congress for relief from what the attorneys general called the "the growing threat" of deregulation.

Rather, says Tampa lawyer Richard Blau, one of the foremost experts in alcohol law in the U.S., what matters is what's going on behind the scenes, because that's what's driving these developments. And that is the re-emergence of the country's beer, wine, and spirits distributors as a potent political force in the battle over direct shipping and the reform of the three-tier system.

What's going on and why wine drinkers need to be concerned that they could lose the ability to buy wine from out-of-state wineries, after the jump.

"What's happened over the past several years has pushed the distributors to be more aggressive," says Blau, who chairs the alcohol beverage practice for GrayRobinson in Tampa, and has been involved in several precedent-setting three-tier cases. "It has awakened a sleeping giant."

And that sleeping giant likes the three-tier system exactly the way it is. Our three-tier system primer is here; briefly, it mandates that retailers must buy wine, beer, and spirits from a distributor, who must buy them from the manufacturer. In most instances, the consumer is not allowed to buy alcohol from the manufacturer, which is called direct shipping. In other words, the three-tier system guarantees distributors a lucrative slice of the wine, beer, and spirits market.

Until 2005, the three-tier system was protected not just by law, but by the Constitution. The 21st Amendment, which ended Prohibition, gave the states the power to regulate alcohol sales within their borders any way they wanted to, and each chose some form of the three-tier system.

Then came Granholm vs. Heald, which carved out an exception in the 21st Amendment for limited direct shipping. In some states, but not all all, Granholm says that consumers can buy from out-of-state wineries, circumventing retailers and distributors. The Supreme Court ruled in Granholm that the commerce clause of the Constitution allowed direct shipping. Blau says this was not only a shock to distributors, who had assumed the 21st Amendment trumped all, but surprised the legal community as well. Almost no one, he says, expected the Court to allow direct shipping through the commerce clause (and he isn't so sure that several justices, who are well-known wine geeks, didn't vote with their hearts instead of their legal minds).

Three-tier reform seemed to be making steady progress over the next five years. Costco sued the state of Washington and won a key victory in federal court in 2006 overturning parts of Washington's three-tier system. Many states, in the wake of Granholm, rewrote their laws to allow direct shipping. In addition, several cases working their way through the federal courts seemed to offer an opportunity to expand direct shipping to allow out-of-state retail sales, which are still mostly illegal.

"The distributors had been sitting on their hands," says Blau. "They had a good deal. The law protected them. What did they have to care about?"

Granholm and Costco changed that attitude, and the spate of activity we've seen in the past 3 1/2 years is the work of distributors and their allies in state government and on the retail side who see their livelihood threatened. This is the key to understanding what's going on. Yes, part of the backlash against three-tier reform is coming from the states, which have a legal and economic interest in three-tier. The system makes it easier for the states to tax and regulate alcohol sales.

But the leadership for halting reform, says Blau, is coming from the wine, beer and spirits distributors. They have the most to lose, and they've been fabulously successful in protecting their interests.

A federal appeals court reversed Costco in 2008, upholding the state's three-tier regulations. Two other federal court cases this year -- Siesta Village Market in Texas and Black Star Farms in Arizona -- tightened the direct shipping exceptions allowed under Granholm. One reason for the victories? Better lawyering from the three-tier side, says Blau, an example of putting more effort into the process.

Stepped-up lobbying on the state and federal level has halted the momentum direct shipping made in many states, the most notable of which was in Maryland this year. And that request from the 39 state attorneys general? Blau notes that it can be traced to better education, in the form of distributor-backed conferences and forums that address alcohol abuse and the concerns of state regulators and law enforcement.

Meanwhile, the distributor-backed bill to tighten three-tier that has been introduced in Congress, and that has the Winestream Media rending its garments and gnashing its teeth, is not going anywhere. This Congress, which is trying to pass a renewable energy bill that defines nuclear power as renewable, would be hard-pressed to pass a bill that said the U.S. had 50 states.

Besides, not only are the distributors not especially concerned if the bill passes, but the main distributor trade groups (beer, spirits and wine) don't even agree that it's needed. Rather, the proposed legislation is a reminder to Congress that the distributors are key economic and political forces in this members' home districts.

This is what is almost always overlooked in the debate about three-tier. Distributors provide jobs, often in key rural districts where there aren't a lot of jobs. So when the local beer distributor tells the local congresswoman or state rep that direct shipping means the local beer distributor will go out of business, what's the congresswoman or rep going to do? And the campaign cash that the distributors throw around doesn't hurt, either -- $3 million in Maryland over the past decade, for example.

And that's where the real threat to direct shipping lies -- on the state level. Blau says there is only a slim chance that the Supreme Court will overturn Granholm any time soon. What's more likely is that the distributors will flex their muscles in state legislatures, as they did in Maryland, and prevent -- and even repeal -- state legislation that allows direct shipping.

One key is what happens in Massachusetts, where the state's shipping laws were overturned in federal court in the California Family Winemakers case. The Massachusetts legislature has two choices: to allow direct shipping under the provisions of Granholm, or to forbid direct shipping, which is also allowed under Granholm. That's what happened in Michigan. And which approach do you think the distributors favor?

direct shipping, three-tier system

Comments

[Tom Johnson]

Granholm did not, in fact, carve out an exception for limited direct shipping. It simply reaffirmed a long-standing legal precedent that states could not use the 21st Amendment to discriminate against out-of-state producers. The only states affected were those that allowed shipping by in-state wineries but banned shipping by out-of-state wineries. As many states used Granholm to restrict the in-state shipment of wine as used it to de-regulate out-of-state shipping, so whether it was a great victory for direct shipment or not is open to debate.

[Jeff Siegel]

I'll tell you what, Tom. You argue the point with Blau. I'm content with his explanation -- that no one expected the Supremes to stick the commerce clause in an alcohol case.

[WineHarlots]

The bill is in the House of Representatives Judiciary Committee at this time. Here's the link for the list of members of the Committee.

http://judiciary.house.gov/about/members.htm

[Alfonso]

I somehow think this might be more tied to extracting more taxes from consumers in these lean times than in any distributor conspiracy. But, hey, what do I know?