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Federal Trade Commission Examines State Barriers to Wine E-Commerce

Panel debates whether temperance and taxation concerns are enough reason to limit consumer choice.

Dana Nigro
Posted: October 9, 2002

What does wine have in common with cars, caskets and contact lenses? When it comes to Internet sales of these products, many states' regulations may be anti-competitive, according to the Federal Trade Commission, which is currently holding a three-day workshop in Washington, D.C., to examine restrictions on e-commerce.

On Tuesday, the commission heard testimony from members of the wine industry regarding state laws that restrict or prohibit online sales of wine -- and whether those rules are protectionist or serve a greater public good that outweighs consumers' right to choice.

Winery representatives were optimistic that the FTC would, in the future, weigh in on behalf of consumers when state legislatures or federal courts are considering laws that limit online wine sales -- as well as mail-order sales and shipments of tasting-room purchases.

"[The FTC] intends to use its position as a bully pulpit to make states aware when they step over the line," said David Sloane, president of the American Vintners Association, following the hearing. "They do carry a lot of weight. It is the federal agency charged with ensuring the preservation of competition and fair marketing practices. When they come in and say, 'This bill is not a good thing for consumers,' that has some significance."

The hearing on wine was the first of 10 industry- specific sessions, which also included cyber-charter schools, contact lenses, automobiles, funeral caskets, legal services, pharmaceuticals, auctions, real estate/mortgages/financial services and retailing.

The FTC included wine because 26 states currently ban out-of-state wineries from shipping their products directly to consumers. However, many of these states allow shipments from local wineries or retailers, raising the question of whether their laws serve primarily to protect in-state businesses from competition.

Roughly 75 people -- many of them wholesalers or representatives of alcohol-beverage trade groups -- turned out to listen to the hearing on wine, filling the room and peppering the panelists with questions submitted after their presentations.

FTC commissioner Orson Swindle, who moderated the panel discussion, asked some pointed questions at the outset: Why should wine sales be treated differently from other products, such as airline tickets, car rentals, cars or guns? Does the claimed efficiency of the traditional distribution system really exist, and if so, does it outweigh the conveniences for the consumer? What's the impact of that system on price and choice? Is diminished consumer choice, if that's the case, offset by the greater good created by the ban? How much do bans on Internet sales really have to do with temperance?

Attempting to tackle those questions, officials from three states -- Virginia, Michigan and Louisiana -- argued that alcohol is unique, as it is the only product that has its own Constitutional provision. The 21st Amendment was designed, they said, to protect state interests that predate the Internet, such as preventing underage drinking, promoting temperance, creating an orderly market, and collecting taxes. A system of licensed wholesalers and retailers that state regulators can monitor in person is an efficient way to achieve these goals, but it is difficult to impose the same level of control on out-of-state businesses, the state officials claimed. All agreed that it should be left to the individual states to decide how to regulate alcohol sales.

Most U.S. consumers are satisfied with their wine-shopping options, claimed C. Boyden Gray, outside counsel for the Wine and Spirits Wholesalers of America, which opposes direct-shipments of wine. He cited a new poll commissioned by WSWA, in which 86 percent of the drinkers said they were "very" or "somewhat" satisfied with the selection of alcohol products available locally. (Out of 800 respondents nationwide, 65 percent were drinkers.)

But that's not the case for wine aficionados, who often can't find the wines they want to buy, countered the winery contingent, represented by David Sloane of the AVA; Tracy Genesen, legal director for the Coalition for Free Trade; and Steve Gross, director of state relations for the Wine Institute, which represents more than 600 California wineries. "Only 17 percent of our winery members have distribution in all 50 states," Gross said. "That makes for a lot of frustrated consumers."

Consumers benefit from free markets with the minimum government regulation needed for their protection, said Dan McFadden, a professor at the University of California, Berkeley, who also owns a vineyard. In 2000, he won a Nobel Prize in Economics for his work on consumer choice behavior. Restrictions on interstate shipments of wine are, McFadden said, "another example of abuse of the regulatory process to protect concentrated economic interests, going far beyond the minimum regulations needed to maintain the integrity of state taxation and to protect minor consumers."

Less-restrictive methods exist for dealing with state concerns, said the winery representatives, citing the 24 states that do allow limited direct shipments of wine. "We're not here as proponents for an unregulated unlicensed marketplace," said Gross, noting that states can require out-of-state shippers to get a license, pay fees, file reports, and label their packages so that proof of age is required upon delivery.

While the tenor of Swindle's questions seemed to lean toward providing consumers with better access to more wines, it's uncertain what direction the FTC will take from here.

"I've learned something here at the Federal Trade Commission," concluded Swindle, saying the debate would continue. "Never are the benefits proclaimed or the harms bemoaned equal to the volume of what those who would cry in either direction would say. … Probably the least heard group in the whole debate is the consumers."

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