Federal Judge Favors Retailer-to-Consumer Wine Shipping in Texas Case

But complex decision would require out-of-state retailers to buy their wines from Texas wholesalers--leaving shipping supporters and opponents alike dissatisfied

Eric Arnold
Posted: January 17, 2008

The most anticipated direct-shipping case of 2007 was finally decided this week. And when a federal district judge in Texas handed down his 55-page decision on Monday, supporters and opponents of retailer-to-consumer wine shipments responded, initially, with a collective head scratch. While the decision ultimately favors direct shipments across state lines, the manner in which the judge ruled shipments can occur is not only cost-prohibitive but apparently illegal under any state's alcohol regulatory system.

For now, consumers in Texas will have to wait before it becomes clear if they can order wine from retailers in other states and have it shipped to them.

The ruling by U.S. District Judge Sidney Fitzwater in Dallas was so highly anticipated because it would be the first major ruling as to whether the 2005 Supreme Court decision on direct shipments from wineries to consumers applied to retailers as well. In that case, referred to as the Granholm decision, the justices determined that the U.S. Constitution's Commerce Clause does not allow states to discriminate against out-of-state wineries in favor of in-state producers by having different shipping rules for each set.

Fitzwater agreed that the same goes for states' treatment of wine retailers, ruling in favor of Sarasota, Fla.-based retailer Siesta Village Market, which had filed suit against the Texas state government.

"I think it's a sweeping repudiation of the anti-consumer and protectionist restrictions, and of the notion that Granholm doesn't apply to retailers," said Tom Wark, executive director of the Specialty Wine Retailers Association (SWRA). The group formed in 2006 with the sole purpose of reforming retailer-wine-shipping laws. "A state cannot say, 'Retailers, you can't ship here,' while allowing their in-state retailers to ship. That's done. It's over. We won that battle."

But here's the rub: Fitzwater ruled that out-of-state retailers must follow Texas' existing alcohol laws, which require that anyone selling wine to a Texas resident must acquire it from a Texas wholesaler. So in theory, a retailer in California would have to buy the wine in Texas, have it shipped to California, then ship it back to the customer in Texas who ordered the wine. Not only is that cost-prohibitive, but typically, a consumer buying wine from an out-of-state retailer is looking for a wine he or she can't get from a nearby retailer, presumably because the local wholesalers don't carry it. So an out-of-state retailer buying from a Texas wholesaler defeats the purpose of direct shipping. Furthermore, retailers are only licensed in their own states—there's no way, that anyone knows of at the moment, for an out-of-state retailer to acquire a Texas alcohol retail license.

"This is new for the agency, and one of the things that lies in our future is some pretty detailed discussions among the staff of the agency on the nuts and bolts of, 'How are we going to make this work?'" said Lou Bright, general counsel of the Texas Alcoholic Beverage Commission (TABC). The first step for the TABC, he said, is to start looking at the other 16 states that allow shipments from out-of-state retailers, and learn from them. "I don't have a clear answer to how we're going to go about [ensuring compliance] or what changes or adjustments need to be made. … But at this point I'm not ready to say, 'Gosh, this is impossible for us to do.'" At the same time, Bright doesn't necessarily think the TABC will have to make adjustments right away, since he doubts an out-of-state retailer will apply for a Texas license before one party or another files an appeal of Fitzwater's ruling.

The wine and spirits wholesalers, in particular, may do so even though the judge upheld the state's three-tier system of alcohol distribution. But they don't necessarily want to see a system under which a retailer in one state can buy wine from a wholesaler in another, as Fitzwater's decision required for out-of-state retailers wanting to ship to Texas consumers.

"Our perspective is that direct shipping is bad public policy, so even assuming [out-of-state retailers] could receive alcohol from Texas wholesalers, and then ship it back to Texas consumers, we'd be opposed to the direct-shipping component of that," said Craig Wolf, CEO of the Wine and Spirits Wholesalers of America (WSWA). "There'd be all sorts of concerns with product safety, revenue issues. … Regardless of if it could occur, we'd be opposed to it in any event."

Wark has a different take on the wholesalers' response to the decision. "I have a feeling that the wholesalers unfortunately got what they asked for," he said, in terms of their staunch support of the in-state three-tier system. "Imagine if Texas passes a law that says an out-of-state retailer, to ship into Texas, has to buy from a Texas wholesaler. Then imagine if Oklahoma and New Mexico all did the same thing. And Colorado and Illinois. If that's what sweeps the nation, I think the wholesalers are in trouble. Because then retailers can start buying from whatever wholesaler offers the best price. And I don't think they want that."

But allowing retailers to buy from any wholesaler is not a goal Wark's organization plans to pursue. First on the agenda for the SWRA is to try and get Fitzwater to reconsider the wholesaler element of his decision.

"At this point, we are strategizing about how to best raise the in-state wholesaler requirement, whether to file a motion to reconsider, or go straight to the Fifth Circuit to appeal that particular point," explained Tracy Genesen, a partner at law firm Kirkland & Ellis, who argued the case for the retailers alongside Kenneth Starr, dean of Pepperdine University School of Law. "Our argument is that this application is cost-prohibitive and completely unworkable for retailers and regulators."

While both parties mull how best to react to the decision, the looming question is what effect Fitzwater's ruling will have on cases pending in other states. A federal judge in Michigan recently denied the state's motion to dismiss a suit, also filed by Siesta Village Market, arguing that it's plausible the Supreme Court meant the Granholm decision to apply to retailers, so her ruling could open up the state to retailers beyond Michigan's borders. While a federal judge in New York dismissed a suit brought against the state by an Indiana retailer, saying that Granholm doesn't apply, that case is being appealed by Alex Tanford, a professor at Indiana University School of Law who has been involved in several direct-to-consumer wine-shipping lawsuits.

The SWRA sees the Granholm element of Fitzwater's decision as ammunition that can be brought to the direct-shipping battle in several other states. "I don't have to go into a state anymore and hear a legislator say, 'We can discriminate against you because Granholm doesn't apply to retailers,'" Wark said. "Right now there's legislation under consideration in Maine, Virginia and Tennessee, and likely New Jersey. First thing I'm going to do is shuffle off this opinion to all these folks." He'll also send it to legislators in Illinois, who snubbed the SWRA last year and passed a law prohibiting out-of-state retailers from shipping to Illinois consumers.

The perplexing nature of the Texas decision is as good an indication as any, however, that rulings every bit as confounding are just as likely to come out of those other states.

"One of the things I've said for some time now is that alcoholic-beverage regulation generally is at a point where our future is as unpredictable as it's been at any time since 1935," said Bright of the TABC. "We're getting slightly different opinions and rulings from the trial court judges. I think the answer to the question [of what will happen next] is more damned unpredictable than I can be quoted on."