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Tide Turns in Direct Shipping Battle

Wine lovers across the nation are winning hard-fought battles to secure the right to buy the wines they want

Dana Nigro
Posted: October 21, 2002


Continued from page 1

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 proÐdirect 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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