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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MARCH 21, 2001 LAW Fermenting a Wine-Sales Revolution With one eye on the Internet, wineries are battling post-Prohibition laws that often stop producers selling directly to consumers
That's because Arkansas and 27 other states ban or restrict the direct shipment of wine, with seven of them treating violations as a felony. Under what's known as the "three-tier system," a creature of the post-Prohibition era, most states require liquor to be sold through in-state wholesalers, which then supply licensed retail outlets. On a practical level, that means local residents can't buy out-of-state wine from any source other than these retailers, and that local wineries can't ship to out-of-state consumers. Ostensibly, this system prevents sales to minors, ensures that taxes are collected, and protects liquor from adulteration. Whether these justifications still hold water so long after Prohibition's repeal is the central issue as consumers and wineries mount a nationwide challenge courts and state legislatures to update laws governing wine shipments. Lawsuits are in progress in seven states alleging that these laws violate the Interstate Commerce Clause of the U.S. Constitution by favoring state liquor distributors at the expense of out-of-state wineries and retailers. Since states derive their power to regulate liquor from the 21st Amendment, which ended Prohibition, the legal contest pits one constitutional principle against another and will require courts to balance states' rights vs. free trade. ONLINE BONANZA? However uncertain the legal issues may be, they are simplicity itself in comparison with the arduous task of hammering out compromises in state legislatures. Currently, 15 states have bills under consideration, and two -- Wyoming and South Dakota -- recently acted to amend their liquor laws to allow wineries to ship out of state. The just-passed laws, however, represent only modest gains for consumers: In Wyoming, the amount of wine that can be shipped directly is limited to 18 liters. In South Dakota, while in-state shoppers can place their orders through local liquor stores, they are not allowed to purchase wine online. That's only a partial victory for the wineries since what's driving their call for reform is the desire to cash in on online wine sales, which are estimated at between $750 million and $1 billion annually. Even tiny operations like Post's, which does $1 million in sales a year, are eyeing the possibility of Internet commerce. According to Paul Post, the company's vice-president and one of six siblings who run this fifth-generation business, the company has already added an interstate order form to its Web site in anticipation of the day when legal barriers are removed. VICTORY AND SETBACK. Several months ago, Post teamed up with several other local wineries and asked a state legislator, Rep. Herschel Cleveland of Paris, Ark., to sponsor a bill that would have included Arkansas among the states with reciprocal agreements permitting direct wine shipments within their borders. Twelve states have agreed that if a customer lives in one of the states, he can buy wine from one of the others and have it shipped directly to him. But since no consumer would be able to buy more than two cases a month, "We really didn't think it would affect local business," Post says. But no sooner had the bill cleared the Arkansas House on Feb. 16 than the state's package-store dealers struck back. They signaled their displeasure by canceling long-standing orders of wine through their wholesalers and telling the wineries to expect more of the same if the state Senate passes the bill. Paul Post, who estimates his sales were down by 50% immediately after the bill passed the House, is chagrined. "We weren't trying to offend our package-store customers. We were just trying to help tourists who couldn't get our wine in their state." At the nearby Wiederkehr Winery, CEO Troy Clark says: "We got numerous calls from store owners all over the state telling us they would boycott our wines." The vintners told their representative they no longer backed the bill, which, by then, was buried in committee. CLAIM AND COUNTERCLAIM. Instead of letting the matter pass, Cleveland says he's asking the state's Alcoholic Beverage Control Board to investigate. If the retailers acted as a group to influence the behavior of the distributors or wineries, it's a violation of federal antitrust laws, says Little Rock lawyer Phillip S. Anderson, a former president of the American Bar Assn. Charles Singleton, also of Little Rock, a lobbyist for the state's wholesalers, denies his clients exerted any illegal influence. "It wouldn't make sense for them to do something like that," he says, noting that one of his clients is a distributor for the wineries. Kevin Case, a spokesman for the Arkansas Package Stores Assn., declined to comment. It's clear, however, that much more is at stake than the right of wineries to mail the occasional case of chablis. Had the legislation passed, Arkansans would have been able to bypass their corner stores and buy wine from larger retailers as well as ma-and-pa wineries in other states. Actually, consumers in many states already have the opportunity to buy wines nationally through e-tailers such as Wine.com in Napa, Calif., and eVineyard.com in Portland, Ore. Not that figuring out a way around state laws has been easy for either of these businesses. ROUNDABOUT ROUTES. According to Brett E. Lauter, eVineyard.com's vice-president for marketing and sales, the company is able to sell wine in 27 states through a combination of reciprocal-shipping privileges, permits for limited-quantity shipping, and because it holds retail liquor licenses in 10 states. Wine.com has equally Byzantine distribution channels to 41 states, arrangements that, in some instances, require the company to route deliveries from a central warehouse in California to local wholesalers and retailers before it reaches the consumer, says company spokesman Scott Radcliffe. The emergence of online wine merchants selling boutique wines undercuts one of the small wineries' most persuasive arguments for legal reform: They need to sell direct because they have no chance of finding out-of-state distributors. Wine.com does distribute within Arkansas, but it's Wine.com's decision as to whether it wants to carry the wine or not. In fact, two-thirds of Wine.com's catalog is drawn from boutique wines, says Radcliffe. David Sloane, a legislative director for Wine & Spirits Wholesalers of America, which is headquartered in Washington, D.C., believes many small-winery owners' goal is to do their own distribution and sweeten their bottom line. As Sloane puts it: "There are boutique wineries that make lovely wines and have mailing lists, and have no desire to share the wealth with wholesalers or retailers." What's undeniable, however, is that the winemaking industry has undergone explosive growth at a time when wholesalers are consolidating. "Twenty years ago, there were 11,000 wholesalers. Today, there are about 3,000," notes Gladys Horiuchia of the San Francisco-based Wine Institute, which lobbies on behalf of California winemakers. During that time, the number of winemakers in California has tripled, from 300 to 900, she says. DIFFERENT STATES, DIFFERENT PROSPECTS. While these economic realities undergird the debate, the court battles center on fundamental fairness. Even though the 21st Amendment gives states special rights to regulate alcohol, Supreme Court rulings have made it clear that they may not enact liquor laws that blatantly discriminate in favor of in-state interests, says Marc E. Sorini, an expert in beverage law and a partner at McDermott, Will & Emery's Washington, D.C., office. "Usually, when there's a finding of flagrant discrimination, that's the end of the story." According to Sorini, that's why plaintiffs in New York and Virginia have a better shot at winning than in Indiana, where defendants scored a major victory in September. The U.S. Court of Appeals for the Seventh Circuit reversed a lower court's finding that Indiana's law was unconstitutional, noting that both in-state and out-of-state wineries had to go through a wholesaler. What is at issue in all of these cases is whether the law violates the Interstate Commerce Clause because it imposes an impermissible burden on out-of-state vendors. The Indiana Court ruled that the law was constitutional because it treated in-state and out-of-state wineries the same way. Since the New York and Virginia laws treat in-state and out-of-state wineries differently, which bolsters the case for unconstitutional discrimination. ONE FOR THE JUSTICES. Sorini predicts the U.S. Supreme Court will have the last word on the constitutionality of these laws -- although he thinks the justices are likely to wait until federal appeals courts decide two or three cases. In the meantime, state prosecutors have a new weapon in the 21st Amendment Enforcement Act, which became law in October 2000. This allows them to obtain federal injunctions against violators of state shipping laws regulating interstate transportation of intoxicating liquor. Interestingly, organizations on both sides of the issue feel the law is fair -- a rare moment in a contentious debate.  By Stephanie B. Goldberg in Chicago Edited by Robin J. Phillips  | | |
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