The Wine Wars: Tide Turns in Direct Shipping

Wine lovers across the nation are winning hard-fought battles to secure the right to buy the wines they want
Dana Nigro
Issue: October 15, 2002

In many states across the country, collecting wine can be a risky passion. Robert Gammon, for example, used to enjoy buying wines from small start-up California wineries, seeking out good values before their names became widely known. Since few such wines were available near his home in College Park, Md., he joined a wine-of- the-month club that specialized in boutique bottlings. After six months of having wines delivered to his home, he received a "very dramatic" letter from the Maryland comptroller's office threatening him with criminal prosecution and confiscation of his wines.

"The state scared me," said the University of Maryland professor of optical physics, who hadn't known that he and the wine club were breaking the law. "I thought it was curious that they would come down so hard on such a small amount of wine, maybe $30 a month."

Gammon, 61, wrote to his state representatives to complain, but nothing came of it. Discouraged, he not only stopped his wine-club orders, he scaled back what was a $4,500-a-year hobby, settling for the limited selection available at local stores. "Right now, I'm sort of closed down," he said. "I read about a great wine, and I wait to see if I'll ever see it on the shelf."

Today, you can go online to buy out-of-print books, bid on rare artwork, download music from unsigned bands, fill a medical prescription, even purchase ammunition and accessories for an AK-47. But in 26 states, it is still illegal for an out-of-state winery to ship a bottle of Cabernet directly to your home—even if not a single retailer in your state carries that wine.

Wine drinkers and wine sellers are fighting back. Flying the banner of free trade, they have been taking their arguments to state legislatures and to federal courts in attempts to have state shipping bans overturned. Their efforts are paying off, after years of ugly battles reminiscent of the dark days of demon rum and the Anti-Saloon League. But their foes haven't been modern-day Carry Nations. Rather, the enemy ranks are full of the very people who handle most of the wine in this country: alcohol wholesalers and distributors who have used scare tactics and legislative muscle to protect an enormously lucrative—and virtually closed—market.

"It's not just about wine; it's about liberty," said Robin Brooks, one of three consumers who has filed a lawsuit charging that New York's ban on interstate wine shipments violates the U.S. Constitution's Commerce Clause, which ensures free trade among the states. "It's not kiddie porn, it's not drug para- phernalia. It's a legal commodity."

Over the past several months, three U.S. district judges, in decisions that could have far-reaching consequences, have overturned what they called discriminatory interstate shipping bans in Virginia, North Carolina and Texas. A ruling is expected later this year in the case in New York, one of the country's largest wine markets. Wine lovers hope to take one of these cases all the way to the U.S. Supreme Court, to settle once and for all whether or not bans on interstate wine shipments are constitutional.

The Federal Trade Commission is also taking up the issue: Antitrust regulators there announced in July that they will be scrutinizing state laws to see if any are unfairly restricting e-commerce in order to protect local businesses from competition. Among the industries the FTC plans to examine at an open forum this October are automobile, real estate and wine.

"Robust competition is vital to our economy," said FTC chairman Timothy Muris. "Reducing the barriers to e-commerce dramatically could increase competition and benefit consumers."

At the state level, the tide seems to be turning as well. More and more states are allowing consumers to order hard-to-find wines via phone, mail or the Internet. "Starting from zero, every year we have picked up a state or two," said Steve Gross, state relations manager for the Wine Institute, an advocacy group of 550 California wineries. "We now have 22 states that allow direct shipping, and a couple where they fiddled around the edges. The overall trend continues to go in the direction of consumer access."

Yet the wholesalers should be counted as down but not out, if their past tactics are any guide. For several years, starting in the mid-1990s, wholesalers found a sympathetic ear in many state officials who feared that kids could easily buy alcohol online or that their treasuries were missing out on substantial tax revenues. Televised sting operations targeted unsuspecting wineries with orders ostensibly placed by minors. Seven states made direct shipping of wine a felony, and several more considered doing so.

In 1999 and 2000, the dot-com boom added fuel to the fire that lobbying groups had built out of underage drinking. Spurred on by wholesalers' cries of "black-market alcohol" and their depictions of the Internet as a "bootleggers' paradise," the U.S. Congress passed a law giving states more power to crack down on illegal shipments. And, in three separate cases, federal courts upheld states' rights to control alcohol sales.

All the thrusts and counterthrusts in the direct-shipping battle illustrate the fact that the United States does not treat alcoholic beverages like other products—nor has it for much of its history. Settled by Puritans who denounced drinking as a sin, then populated later by immigrants who viewed wine, beer or spirits as an integral part of their culture, the country has seen attitudes on drinking swing back and forth over the centuries. When the temperance movement led to the ratification of the 18th Amendment, which banned the manufacture and sale of alcoholic beverages throughout the nation, it set in motion a chain of events that has led to today's complex system of alcohol regulations.

In order to repeal Prohibition in 1933, Congress had to promise states the means to encourage temperance, allow counties and towns to remain "dry," keep out organized crime and prevent the monopolistic practices of the past, in which brewer- and distiller-owned retail outlets encouraged abusive consumption habits. The 21st Amendment gave the states broad rights to regulate the sale, distribution and importation of alcoholic beverages within and across their borders.

Most states follow the "three-tier system" of alcohol distribution through state-licensed, privately run companies. A winery (or brewer or distiller) must sell its products to a wholesaler, which collects excise taxes for the state. The wholesalers, which add on a markup for their services, market and distribute the many brands they represent to restaurants, bars and retail shops, which must ensure that minors don't purchase alcohol.

"Society has a legitimate interest here," said Juanita Duggan, executive vice president and CEO of Wine and Spirits Wholesalers of America, a Washington, D.C.—based trade organization that has stridently opposed most direct-shipping initiatives. Duggan argues that wholesalers essentially perform state functions, and insists they are as much in the business of encouraging social responsibility as in that of alcohol sales. "Sometimes it is forgotten in some of the wine communities that half of America doesn't drink, half of Texas is still dry, you still have dry counties in Tennessee and North Carolina. There is a failure to recognize that there are deep currents not supportive of alcohol."

For 50 years, regulatory powers granted the states by the 21st Amendment went unquestioned, and interstate direct shipping was not allowed anywhere in the United States, though some quietly took place anyway. In the 1980s, winery trade groups—recognizing the lost business opportunities and potential legal problems—began to attempt to change the laws.

The market for home delivery of fine wine is small—perhaps 0.5 percent to 1 percent of the total $24 billion wine market in the United States, according to estimates by winery trade groups. Many of the wines purchased online or by mail-order are the most sought-after: tiny-production bottlings sold only by mailing list; tightly allocated prestige labels that go to key clients; up-and-comers that could prove the next California cult Cabernet; Bordeaux futures; older vintages; special releases for winery club members.

The people hurt most by shipping bans are not the average drinkers who buy mass-market wines, which are, in fact, most efficiently handled by the three-tier system due to their large volumes; they are the collectors and connoisseurs whose purchases pose little threat to the existing system.

"A lot of the wines I buy, [distributors] aren't ever going to see. The production isn't big enough, they don't want it, they're not going to make any money off it," said Jim Yochim, a Houston collector with a 1,600-bottle cellar, who currently resorts to carrying home as much as he is allowed from his trips to California, Oregon and Washington. "Most of the wineries I deal with can sell out their wines right there."

But this isn't just a matter of collectors not being able to get their hands on the latest hot bottling. During holidays, people want to send gifts of wine to friends and relatives in other states. Countless casual wine drinkers visit wineries as part of a vacation and are introduced to new wines they like, but can't buy in their home state. And many small wineries, especially in states that don't yet have well-established wine regions, depend on tasting-room sales. Each time a potential buyer finds out that they can't ship a purchase or order more wine when they return home, it squashes another bit of growth in the wine market.

Juanita Swedenburg, owner of Swedenburg Winery in Middleburg, Va., said out-of-state customers—mainly East Coast tourists visiting nearby historical sites—make up about half of her tasting-room visitors. She estimates that she loses about 20 percent of her business in potential sales each year because she can't ship to these buyers. Advocates of shipping bans "don't realize what a mobile country we are," said Swedenburg, who is a plaintiff in the New York lawsuit. "When the 21st Amendment was passed, we didn't travel as much."

The Internet has also been a tremendous force in breaking down the invisible walls between states. Accustomed to the convenience of e-commerce, consumers expect to be able to order wine online. But when they go the Web sites of wineries and retailers, which are generally plastered with warnings that shipping to many states is illegal, they find that there are laws restricting their choice. Wineries face tough penalties and fines if they run afoul of the law. Those found guilty of illegally shipping to a felony state face revocation of their federal permit to make wine.

"Until the Internet came along, there was a compelling economic logic for local wholesalers to be the place where pretty much all the wine came through," said Christopher Carroll, a professor of economics at Johns Hopkins University in Baltimore. Also the co-chair of a National Bureau of Economic Research group on consumption behavior, Carroll began researching the issue of wine shipping after he discovered that he couldn't order a wine-of-the-month club membership for his wife's birthday.

"The costs of finding out all the things that are available were too high for it to be worthwhile for a typical person to explore on their own," explains Carroll. "In this case, as in many others, the Internet has made information a lot cheaper and more convenient. It has had the effect of increasing competition, which monopolies always hate."

When the direct-shipping battle really began to heat up in the late '90s, wine retailers seemed to be popping up all over the Internet. Some operated only online, and others were brick-and-mortar shops that wanted to reach a new market. Each seller tried to attack the shipping problem from a different angle: Some tried to bypass the three-tier system, others acquired retail licenses in each state. Ultimately, many of these e-tailers began merging or falling by the wayside, overwhelmed by the legal and logistical complexities of filling orders in states with so many differing rules.

The "Great Wine Hopes" were two big, well-funded Web sites, WineShopper.com and Wine.com. For a while, some wine industry members hoped that WineShopper.com might actually have come up with a solution to the issue of direct shipping, as it concentrated on working with wholesalers to create a legal fulfillment model to ship wines nationally through the three-tier system. The site even had the backing of WSWA. Then in 2000, WineShopper consolidated with its biggest competitor under the better-recognized Wine.com name, and the company struggled to merge conflicting operations.

When the dot-com bubble burst, Wine.com/WineShopper had reportedly burned through $180 million in venture capital. After it went bankrupt in April 2001, its wine inventory was sold at auction and its name was bought by eVineyard.com, a small competitor that has survived by following the retail-license approach. But online wine sales have persisted. EBay and Yahoo!—both of which had previously banned wine sales due to concerns about the legality of shipping—recently began allowing wine to be sold on their sites, by auction and at fixed prices, via companies such as Winetasting.com (a winery cooperative that ships only to legal states) and New Vine Logistics, which has grown out of the ashes of WineShopper, using its system of compliance to assist wineries, wine clubs and other sellers with shipping.

Meanwhile, the traditional distribution system has been pushed to its limits, as the number of wholesalers has shrunk and the number of wineries has exploded. There were 2,188 wineries in the United States as of 2000, up from 579 in 1975, reports the Bureau of Alcohol, Tobacco and Firearms. The vast majority of those wineries each produce less than 25,000 cases a year. In contrast, WSWA had 450 members in 1975, down to only 170 today.

"There are many markets where there are only going to be two or three major wholesalers," said David Sloane of the American Vintners Association, which represents 650 wineries across the nation. For many small wineries, "the problem is that they can't get the brand-building attention that the bigger brands get." Some small wineries claim that they cannot even find or afford wholesale representation in many states, so they get locked out of those markets entirely. "Direct shipping is the only avenue for many wineries to get their product in the stream of commerce," said Tracy Genesen, legal director for the Coalition for Free Trade, a winery-backed group that provides support for shipping-related lawsuits. "We are not trying to tear down the three-tier system. We just want to open up an avenue for businesses to thrive that would not otherwise thrive."

But some wholesalers argue that the real problem is oversupply, or the winery's unwillingness to invest in marketing efforts, not lack of access to customers. "The market drives what's out there," said Smoke Wallin, executive vice president and director of National Wine & Spirits, an Indianapolis-based distributor that serves four states and carries 8,000 items—everything from Wild Irish Rose to Lafite, including small brands. "If you can't get access to a market, it's because there's no demand for your product."

Nonetheless, acknowledges Wallin, "it's important to have a mechanism for consumers to get what they want. Where there has been disagreement is what that mechanism should be."

To wholesalers, that mechanism would still be the three-tier system, with all shipments coming through them first. Recently, rather than continuing to fight for felony penalties or opposing direct-shipping bills outright, some regional wholesalers have tried another tactic: compromises that appear to address the issue yet maintain the wholesalers' hold on the market.

For example, in Pennsylvania, Maryland, Delaware and Arizona, wholesalers have helped to craft "special order" laws, allowing customers to place an order through a complicated process and have it delivered via a distributor to a retail outlet for pickup.

Wallin claims that these laws can work and that wholesalers will be willing to handle split cases and bottle orders in the interest of consumer access. But wine lovers in these states said they have been unable to order successfully or were unlikely to use the new laws because they were too complicated.

Said one former wholesaler employee in Arizona who worked on a committee to create compromise legislation at the urging of a legislator: "We came to the conclusion that we just had to put something in front of the legislator in order to make it go away. So we devised a very detailed but unusable system to handle it." He has since left the wine industry and is now a frustrated consumer himself. "To date," he asserts, "I can almost assure 100 percent that not a single case of wine has been shipped via that method."

As it is, many wineries have had the "don't ship illegally" message drummed into them so much by now that they are reluctant to ship even to states where it is legal. Confusion is one of the biggest problems for consumers and wineries alike. Others are deterred by the cost of licenses or have insufficient staff to handle reporting requirements in so-called permit states. "A small winery doesn't have a lot of resources in the office," said Jack Galante of Galante Vineyards, a 5,000-case winery in Carmel Valley, Calif.

Devoted wine buyers, of course, have long found ways of getting around the laws (having wineries ship to friends in reciprocal states or taking the wine to a freight-forwarding company and shipping it themselves). But every consumer interviewed insisted that they would much rather do what it takes to get their wines shipped legally.

"I'm more than happy to pay the sales tax if they can figure out a way to do it," said Bob Buttrill, a Dallas collector frustrated by Texas' shipping ban. He said direct shipments aren't a way to save money anyway, contrary to the wholesalers' argument that they could lose business if wineries tempt consumers with lower prices that don't include the markup. "By the time you throw in air-freight charges, you're not saving anything."

In the 1980s, winery trade organizations concentrated on passing reciprocal shipping laws (wineries from one state can ship to consumers in another state if both states allow shipments). They have since expanded their approach. More of the bills introduced now address state concerns by allowing only limited shipments and incorporating shipping permits, tax collection and reporting procedures, as well as safeguards to prevent delivery to minors.

"We intend to be tenacious and pursue every opportunity we can to open up states, if necessary one by one," said Bill Nelson, director of government relations for the AVA. "Our belief is that the pressure of rationality and the American way will overwhelm the political insider influence of the wholesalers, but it's a tough battle."

In 1998, realizing that things weren't going their way in the state legislatures, five advocacy groups founded Free the Grapes! to recruit frustrated wine consumers to their side.

Free the Grapes! now has some 300,000 registered members upon whom it can call to oppose or support pending state bills. Its Web site has an automated system that allows visitors to send a letter to their legislator in any state where wine shipping is at issue. When the New York legislature was considering a shipping bill earlier this year, resident consumers sent in nearly 700 letters within six weeks.

"In almost any state outside of California, the wineries themselves are not a really powerful political force," said Jeremy Benson, executive director of Free the Grapes! "The consumer helps provide the constituency that we hope legislators will listen to."

So far, the added voices seem to be helping. "We've seen the biggest turnaround in the last three years," said Benson. "In '98 and '99 about two-thirds to three-quarters of the bills being introduced [on this issue] at the state level were felony bills. Now about 80 percent of those bills being introduced are pro—direct shipping."

In several states, consumers have gone even further to challenge the laws. In 1998, shortly after Indiana passed its felony law, a group of wine lovers filed a lawsuit in U.S. District Court that challenged the constitutionality of the statute. It was soon followed by similar consumer lawsuits in Texas, Michigan, Florida, Virginia, North Carolina and New York—with a predominance of cases in the South, where the attitude toward alcohol has tended to be more restrictive.

The fundamental premise of all of the cases is that the Commerce Clause of the U.S. Constitution prevents states from discriminating against interstate commerce or from favoring in-state interests over out-of-state businesses.

And interstate shipping bans—particularly in states that allow in-state wineries or retailers to ship to residents—amount to a "parochial trade barrier created for the economic protection of wholesalers," said Clint Bolick of the Institute for Justice. Bolick is a plaintiff in the Virginia suit and the attorney in the New York case.

Although filed by a few different sets of lawyers, these legal efforts have now come together with the assistance of the Coalition for Free Trade, which provides research support and coordinates communication among the attorneys in different states. The organization's overall strategy is to "target the states with the most punitive direct-shipping statutes, to get a definitive decision from the Supreme Court to clear up the question of whether the Commerce Clause takes precedence over the 21st Amendment or vice versa," said Genesen.

Wine lovers initially received encouraging news when a U.S. District Court judge ruled that Indiana's direct-shipping ban was unconstitutional. But that ruling was later overturned by an appeals court, and in 2001, the U.S. Supreme Court declined to hear the case.

After the appeals court decision, CFT and the lawyers retooled their pending cases and refined their strategy. "The biggest thing the industry learned from the first suit was that the absence of winery plaintiffs made a big difference in the judge's analysis," said Genesen. "He indicated that no functional discrimination was proven. No sellers were complaining that they had tried to get wine in and couldn't."

In subsequent lawsuits, wineries have joined consumers as plaintiffs, and lawyers have used the argument of eco- nomic harm to out-of-state firms, resulting in more success. Although U.S. District Court judges upheld shipping bans in Florida and Michigan in 2001, this year saw back-to-back decisions in which federal courts overturned the bans in Virginia and North Carolina, calling them protectionist because the states allowed for in-state shipments.

These decisions were followed in July by a second ruling in a Texas case in which the judge had earlier deemed the state's shipping ban unconstitutional but had granted the state's motion to reconsider. When the Texas legislature later passed a law allowing in-state wineries to ship, the judge came back with a new ruling that said the state's laws now more clearly discriminated against out-of-state wineries in favor of in-state businesses.

"Three cases decided in our favor in the last six months is solid momentum for our position that the 21st Amendment does not insulate states from allowing some kind of access for out-of-state wine producers," said Genesen.

The stage is now set for the battle to move to the highest court in the land. The CFT's strategy is to get a disagreement between at least two circuit courts that would have to be resolved. The consumers already have the appeals court loss in Indiana, and now there are five cases—three wins and two losses—pending appeals. "If any of those go in our favor, if we are comfortable with those cases, then we would petition the Supreme Court," said Genesen.

But it could take two to five years before that happens. In the meantime, the struggle remains at the state level.

"Even if you got a sweeping court decision, you still have to come back and clarify legislation in all the states," said Steve Gross of the Wine Institute, who said that creating new regulations would take years. Even then, a Supreme Court ruling may only affect states that allow intrastate shipping and ban interstate shipments, so states that ban all shipments would remain unaffected.

Will all 50 states ever open up to direct shipping? Probably not, say winery and consumer advocates. "The places where we are still fighting are the places where you have very powerful, entrenched wholesaler interests," said Gross.

But with the current momentum in the courts and the powerful economic forces at work, it appears only a matter of time before the majority of the U.S. retail market allows direct shipping. Consumer demands may ultimately win out over an established system that no longer serves everyone's needs.

"The courts are blunt instruments," said Nelson of the AVA. "Our hope is that the wholesalers will come to their senses at some point and work out some reasonable compromise that doesn't threaten the key elements of the three-tier system, which works pretty well for the vast majority of the marketplace, and acquiesce on serving the needs of the small wineries. Failing that, it's war to the death."

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