New Lawsuit Challenges Arizona's Wine-Shipping Ban

State joins several others where consumers and small wineries are using the courts to open the market for fine wine

Dana Nigro
Posted: September 20, 2005

Arizona has become the next battleground in the fight over access to fine wine, as five consumers and a Michigan winery have sued the state in federal court. Their lawsuit is attempting to open up the Arizona market to wineries in other states, in part by overturning the current ban on interstate direct-to-consumer shipments.

This is the latest in a series of market-access cases being handled by the attorneys who were behind the Michigan lawsuit on which the U.S. Supreme Court ruled in May. "Arizona is a populous state where a lot of people live a long way from the nearest wine store, so there is a lot of interest from small wineries in having access to the market and from people who live there who want to get wine," said Alex Tanford, an Indiana University School of Law professor, who is working on the case with Indianapolis attorney Robert Epstein. He noted that a lot of small wineries in other states have customers who originally lived nearby and then retired to Arizona.

In their suit, filed in the U.S. District Court for the District of Arizona, the plaintiffs are arguing that Arizona has one set of laws for in-state producers and another set for out-of-state producers, and that these laws work primarily to protect local wholesalers and retailers. The consumer plaintiffs--John Norton, Gary and Michelle Frisch, and David and Melissa Monheit--say they are prohibited from buying wines that aren't available in Arizona, while Black Star Farms winery of Michigan claims it cannot do business in Arizona because it is too small to afford or attract a distributor.

This isn't the first time Arizona has been sued over the shipping issue. The Institute of Justice, the Washington, D.C.-based law firm that handled the New York case heard by the U.S. Supreme Court, filed a suit in 2003, but suspended it in 2004 while waiting for the high court to address the issue.

In May, the Supreme Court ruled that economic discrimination against out-of-state companies violates the U.S. Constitution's Commerce Clause. In his decision, Justice Anthony Kennedy wrote that a state's laws must treat all wineries evenhandedly.

Currently, wineries in other states can only ship directly to Arizona residents under limited conditions. Interstate wine shipments were banned in Arizona until September 2003; consumers are now permitted to have wine shipped back home to them if they visited wineries in other states, but they have to be physically present at the winery for the purchase and are limited to two cases per year per winery.

The state also established a provision in 1999 to allow consumers to order wines they can't find in the state, through the three-tier system. An out-of-state winery would have to ship the wine to a wholesaler, which would send it to retailer for pickup or delivery to the customer. However, direct-shipping advocates deemed this impractical, as wholesalers and retailers were not likely to be bothered with small orders from wineries that are not their clients.

In contrast, local farm wineries are allowed to sell wine directly to Arizona consumers and, the lawsuit claims, can also accept orders via the Internet, phone or mail and ship unlimited quantities of wine to residents.

Whether such shipments are allowed as official state policy is under question. The Arizona Department of Liquor Licenses and Control would not comment on anything to do with a pending lawsuit. The state's liquor code spells out that farm wineries are permitted to sell directly to retailers and can sell wine to consumers at their tasting rooms and off-site events, but it does not explicitly address the issue of direct shipments.

"If you look at the law and read it, it's pretty clear that we do not have the right to sell to consumers except through the same mechanism that consumers use when they go to California. They have to visit and we can ship up to two cases a year," said Rod Keeling, president of the Arizona Wine Growers Association, which represents 16 wineries. "The lawsuit makes the argument that Arizona wineries have been shipping to Arizona residents for years, and that's true. But it's not legal. California wineries have shipped to Arizona residents for years too and that's not legal."

But Tanford said the ability of local wineries to ship through a carrier such as UPS--or how the consumer gets the wine home--is not really the point. "The core issue is access to the market," he stressed. Tanford added, "Any Arizona winery can sell its wine to the public in Arizona. An out-of-state winery is prohibited from selling the wine to the public in Arizona. They are instead at the mercy of a small number of wholesalers, and whether the wine can be sold to the public is at the whim of a wholesaler."

In addition to the Michigan case, Tanford and Epstein recently scored legal victories in Ohio and Florida, and they also have cases pending in Arkansas, Kentucky, Massachusetts, New Jersey and Pennsylvania. Since he and Epstein started pursuing the issue in 1998, Tanford said, "We've run into small wineries of all kind that are afraid of retaliation by state wholesalers and the state legislature. This very fear is what exemplifies the constitutional harm of the current system. These wineries are completely at the mercy of this powerful political force."

Indeed, Keeling, who also owns Keeling-Schaefer Vineyards, said Arizona wineries are concerned about the suit because they don't want to lose any of the rights they do have, as may happen in Michigan, where pending legislation could prevent wineries in that state from selling directly to clients. "We're in the middle, like a lot of state wineries. We're getting battered on both sides."

But the Arizona producers have no objection to competition from small out-of-state producers, Keeling said, as they would like to have other markets open to them as well. So the association is working with an attorney and a lobbyist, and meeting with legislators, to craft a potential solution before the legislature's next session begins in January.

"We believe small wineries need some flexibility to operate outside the three-tier system because they are so small," Keeling said. "Our strategy is to make the argument about large versus small, not in-state and out-of-state. So any winery that makes less than 75,000 gallons a year would fall under the Arizona farm-winery license and would have all the same rights that we have." The association's proposal could include direct sales to retailers and tastings at off-site events, he added. "That would still maintain the three-tier system for 95 percent of the wine sold in Arizona."