Wineries and consumers faced off against the New York State Liquor Authority and alcohol wholesalers again in federal court this week. On Sept. 3, the 2nd Circuit Court of Appeals in Manhattan heard the debate over New York's ban on direct-to-consumer wine shipments from other states.
While it's impossible to predict what the court will decide, the three-judge panel appeared to take a dim view overall of the rationale for preserving New York state's current system for regulating alcohol shipments. What's not clear is what the appeals court will do about the situation, if the judges do agree with a lower court ruling that New York's shipping ban is unconstitutional.
New York allows in-state wineries to ship directly to New York customers, but prohibits out-of-state producers from doing the same. The latter must distribute all their wine through the three-tier system, selling it to a licensed wholesaler who then resells it to retailers. But small wineries claim that they often can't find a distributor to take their business or can't afford one.
The New York assistant attorney general defending the state's laws was left sputtering at times in the face of the judges' aggressive questioning and frequent interruptions to his arguments. "If you are excluding a whole class of products, how isn't there an effect on interstate commerce?" asked Judge Sonia Sotomayor, in response to the claim that the shipping ban doesn't interfere with trade because New York residents' demand for wine is adequately filled by the numerous brands that are sold in the state.
But Sotomayor's tart response that "I'm somehow missing this argument" only gave a brief pause to high-powered attorney Howard Graff, who represented Charmer, one of the wholesalers that intervened in the case on behalf of the state. He was joined by a former deputy mayor of New York City, Randy Mastro, the attorney for Peerless Importers, who argued that the Constitution's Commerce Clause protects the free flow of goods among the states, but doesn't protect individual brands.
Still Sotomayor's comment that "the identical wines won't be sold" (if small out-of-state wineries without a distributor can't ship to New York) echoed the argument made by Clint Bolick, attorney for the three New York wine consumers who filed the lawsuit against the state. "Marlboros are Marlboros, but Gallo is definitely not Cakebread," said Bolick, vice president for the Institute for Justice, a public-interest law firm in Washington, D.C.
The consumers were joined by two small wineries from Virginia and California in their suit, which argues that New York's laws amount to illegal economic protectionism.
Last year, U.S. District Judge Richard Berman agreed, ruling that New York laws discriminate against out-of-state wineries and are therefore unconstitutional as they violate the Commerce Clause. He issued an injunction to prevent New York from enforcing its shipping ban, but that has been on hold while the state and the wholesalers pursued their appeal.
Much of the discussion in the appeals court hearing on Wednesday focused on an appropriate remedy: whether the judges should rule that out-of-state wineries can ship if they obtain a license to do so (the consumers' preference), strike down the provision that allows local wineries to ship (the wholesalers' preference), or leave it up to the state legislature to craft new regulations that address any unconstitutional provisions (New York state's preference).
The judges acknowledged that there were strong legal arguments for each of the approaches. Some of their comments seemed to imply that, from a judicial perspective, the simplest approach -- taking out the shipping exemption for New York wineries and leaving the rest of the rules intact -- was the best. The wholesalers argued that many New York wineries have distributors and the amount they ship directly within the state is so small as to be insignificant in the overall market.
But Judge Richard Wesley noted that taking away the ability to ship would cut the revenues of nearly 90 percent of the state's wine producers, as most are small, family-owned wineries. He added that the growth of New York's wine industry in recent years had greatly improved the economy in parts of the state. "If you think I'm excited about going home and striking the farm winery exception, you're crazy," he commented.
For a complete overview and past news on the issue of wine shipments, check out our package on The Direct Shipping Battle.