Battle Over Retail Wine Shipping Comes to a Head in the Courts

All eyes are on Texas as federal judge examines whether consumers should be able to buy from out-of-state retailers, as they can from wineries
Nov 19, 2007

If you're a wine lover who lives in, say, New York, Michigan or Texas, right now you can legally order a few bottles from a winery in another state and have it shipped directly to your home. That's thanks to a 2005 U.S. Supreme Court decision. But in those same states, you may not be able to order a bottle from a wine retailer in Chicago, Washington, D.C. or thousands of other locations (currently, only 16 states allow some form of direct shipments of wine from out-of-state retailers). And that discrepancy is now the focus of several key cases making their way through the federal court system.

Consumers, retailers and wine wholesalers alike are all biting their nails in anticipation of a ruling from U.S. District Judge Sidney Fitzwater in Dallas, on a lawsuit brought by Sarasota, Fla.-based retailer Siesta Village Market against the Texas state government. The plaintiffs contend that Texas' law allowing in-state retailers to ship directly to consumers, but banning out-of-state retailers from shipping to residents, is unconstitutional. Even though any decision he makes is likely to be appealed, Fitzwater will give one side or the other a significant amount of momentum, as federal courts in Michigan and New York have already taken conflicting approaches to whether consumers should or shouldn't be able to buy wine from retailers in other states and have it shipped to them.

The case isn't as simple as following the precedent of the 2005 Supreme Court ruling, referred to as the Granholm decision, in which 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.

The wine retailers, represented by a group called the Specialty Wine Retailers Association (SWRA), which was formed in 2006 specifically to pursue this issue, argue that the Supreme Court decision applies to them as much as it did to the wineries. On the other hand, wine wholesalers, represented by the Wine and Spirits Wholesalers of America (WSWA), believe that the cases are apples and oranges since the Supreme Court, in the same ruling, upheld the three-tier system under which producers sell to wholesalers, who sell to retailers, who sell to consumers.

"The wholesalers have put their wagons in a circle whenever there's any thought they might have to sell their services based on value received," said Corbin Houchins, a Seattle-based attorney who specializes in alcoholic-beverage law, "and some of the retailers believe they have a lay-down slam because of Granholm." However, he noted that there is an important difference in the retailers' case: Wineries are federally regulated and if they break the law, their federal basic permit to produce wine can be revoked. Retailers, which are more numerous, do not rely on federal permits, nor are they regulated in the same way or have the same reporting requirements.

The courts, so far, haven't taken a firm stance either way. Two other U.S. District Court cases, one in Michigan and one in New York (the two states whose winery direct-shipping laws were the basis of the Granholm case), have gone in opposite directions in recent weeks.

The Michigan case involves Siesta Village Market (the same plaintiff as in the Texas case), which was unable to sell wines direct to Michigan consumers, and therefore sued the state. That case is still pending, but the judge did deny the state's motion to dismiss. "It is at the very least arguable that the Supreme Court intended for Commerce Clause protection to apply to out-of-state retailers as well," Judge Denise Page Hood wrote.

In U.S. District Court in New York, however, Judge Richard J. Holwell handed down a dismissal in a suit that Indiana retailer Kahn's Fine Wines & Spirits brought against the state, claiming, essentially, that the Granholm decision does not apply to retailers.

"Granholm is perfectly clear," argued Tom Wark, executive director of the SWRA. "It said a state can regulate alcohol the way it wants as long as it doesn't discriminate against in-state and out-of-state interests. If you're going to make the argument that Granholm only applied to wineries and not to retailers, then you're saying that Brown v. Board of Education only applied to black people, and that you could still discriminate against Hispanics."

The wholesalers, on the other hand, claim that the Granholm decision was only about wineries. "Justice Thomas explains it in the dissent very well," said WSWA CEO Craig Wolf. "What the Supreme Court was saying, when it comes to the wholesale and retail trade, by its very nature it's exclusive. When the three-tier system is unquestionably legitimate, when it comes to wholesalers and retailers, you can treat them differently. I think the New York judge got it absolutely correct."

But the New York judge particularly cites the Granholm dissent in his ruling rather than the majority opinion, noted Tracy Genesen, a partner in the San Francisco office of law firm Kirkland & Ellis, which is representing the plaintiffs in the Texas case. "The judge in New York had a collage approach," she said. "He took the 'unquestionably legitimate' language from the majority, and then took Justice Thomas' dissent, which was a dissent, a very full-throated upholding of the three-tier system under any circumstance, and lobbed them one on top of the other. It's just an inappropriate application of a piece of the majority opinion, coupled with a dissent."

Why do wholesalers care? If retailers are selling the wine to a consumer in their own state or another, a wholesaler has made money from the sale—which it doesn't in the case of wineries selling directly to consumers. So why fight retailers, who support the wholesalers with every sale they make, no matter where the consumer happens to live?

"The misconception is that it was ever about money for wholesalers. It never was," said Wolf. "The reason [we] don't like [direct shipping] is that it's a bad public policy. No wholesaler is going out of business because of direct shipping. Our perspective is real simple: Don't deregulate the system. Don't take away from its value. We recognize that it's not a perfect system. But the answer to an imperfect system is not to make it less perfect."

The retailers contend, however, that it is very much about the money, and that wholesalers don't want to have to compete for business across state lines, as they currently have no need to.

"Any bottle of wine that gets sent to Michigan from an out-of-state retailer has not gone through a Michigan wholesaler. When you look at it from that perspective, the Michigan wholesaler has lost a sale," Wark explained. "Everything about the profitability and the control wholesalers have goes back to a strict interpretation of the three-tier system. Their future profitability depends on the system staying in place in a strict way."

Even if Fitzwater upholds Texas' shipping ban, that doesn't make it impossible for out-of-state retailers to ship wine to Texas residents. New York residents, for example, who place an order with a retailer as nearby as New Jersey or as far away as California, are likely to receive the shipment from a distributor in New York. So while the money may have crossed state lines, the wine never did. And there's nothing illegal about that.

"We'll look for alternative legal methods to get into states that have become restricted," said Brian Rosen, CEO of Illinois-based retailer Sam's Wine. However, Rosen wouldn't say on the record, specifically, that Sam's sells wine to its New York customers through a distributor in New York. "We abide by any law that's put out by any state," he said. "The law is the law, and we adhere to it."

Fitzwater's ruling is expected to be handed down by the end of this year, and both the SWRA and WSWA said they will appeal if they're on the losing end. The same is likely in both the Michigan and New York cases. So could the same states, plus Texas, wind up taking their direct-shipping cases all the way to the Supreme Court again? Both the retailers and wholesalers said they'll take it that far, but Houchins doubts whether the Supreme Court wants to hear a direct-shipping case again so soon. And even if it does, it'll be years before it has the chance to decide, as the cases work their way through various appeals.

"We're going to have to accumulate a record of fundamental differences among the circuits before we have another important statement from the Supreme Court," said Houchins. "I think we would need to see more differences develop on the circuits on a fundamental Commerce Clause point before I would be optimistic about this going all the way to the top."

In other words, it'll be years before retailers can ship wherever they want or consumers can get exactly the wines they want—if that even turns out to be legal. But that's why the looming Texas decision is so important to everyone involved—at least it will give them a hint.

Direct Shipping News

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