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
Oct 21, 2002

In many states across the country, collecting wine can be a risky passion. Robert Gammon, for example, used to enjoy buying wines from small start-up California wineries, seeking out good values before their names became widely known. Since few such wines were available near his home in College Park, Md., he joined a wine-of- the-month club that specialized in boutique bottlings. After six months of having wines delivered to his home, he received a "very dramatic" letter from the Maryland comptroller's office threatening him with criminal prosecution and confiscation of his wines.

"The state scared me," said the University of Maryland professor of optical physics, who hadn't known that he and the wine club were breaking the law. "I thought it was curious that they would come down so hard on such a small amount of wine, maybe $30 a month." Gammon, 61, wrote to his state representatives to complain, but nothing came of it. Discouraged, he not only stopped his wine-club orders, he scaled back what was a $4,500-a-year hobby, settling for the limited selection available at local stores. "Right now, I'm sort of closed down," he said. "I read about a great wine, and I wait to see if I'll ever see it on the shelf."

Today, you can go online to buy out-of-print books, bid on rare artwork, download music from unsigned bands, fill a medical prescription, even purchase ammunition and accessories for an AK-47. But in 26 states, it is still illegal for an out-of-state winery to ship a bottle of Cabernet directly to your home -- even if not a single retailer in your state carries that wine.

Wine drinkers and wine sellers are fighting back. Flying the banner of free trade, they have been taking their arguments to state legislatures and to federal courts in attempts to have state shipping bans overturned. Their efforts are paying off, after years of ugly battles reminiscent of the dark days of demon rum and the Anti-Saloon League. But their foes haven't been modern-day Carry Nations. Rather, the enemy ranks are full of the very people who handle most of the wine in this country: alcohol wholesalers and distributors who have used scare tactics and legislative muscle to protect an enormously lucrative -- and virtually closed -- market.

"It's not just about wine; it's about liberty," said Robin Brooks, one of three consumers who has filed a lawsuit charging that New York's ban on interstate wine shipments violates the U.S. Constitution's Commerce Clause, which ensures free trade among the states. "It's not kiddie porn, it's not drug para- phernalia. It's a legal commodity."

Over the past several months, three U.S. district judges, in decisions that could have far-reaching consequences, have overturned what they called discriminatory interstate shipping bans in Virginia, North Carolina and Texas. A ruling is expected later this year in the case in New York, one of the country's largest wine markets. Wine lovers hope to take one of these cases all the way to the U.S. Supreme Court, to settle once and for all whether or not bans on interstate wine shipments are constitutional.

The Federal Trade Commission is also taking up the issue: Antitrust regulators there announced in July that they will be scrutinizing state laws to see if any are unfairly restricting e-commerce in order to protect local businesses from competition. Among the industries the FTC plans to examine at an open forum this October are automobile, real estate and wine.

"Robust competition is vital to our economy," said FTC chairman Timothy Muris. "Reducing the barriers to e-commerce dramatically could increase competition and benefit consumers."

At the state level, the tide seems to be turning as well. More and more states are allowing consumers to order hard-to-find wines via phone, mail or the Internet. "Starting from zero, every year we have picked up a state or two," said Steve Gross, state relations manager for the Wine Institute, an advocacy group of 550 California wineries. "We now have 22 states that allow direct shipping, and a couple where they fiddled around the edges. The overall trend continues to go in the direction of consumer access."

Yet the wholesalers should be counted as down but not out, if their past tactics are any guide. For several years, starting in the mid-1990s, wholesalers found a sympathetic ear in many state officials who feared that kids could easily buy alcohol online or that their treasuries were missing out on substantial tax revenues. Televised sting operations targeted unsuspecting wineries with orders ostensibly placed by minors. Seven states made direct shipping of wine a felony, and several more considered doing so. comptroller's office threatening him with criminal prosecution and confiscation of his wines.

In 1999 and 2000, the dot-com boom added fuel to the fire that lobbying groups had built out of underage drinking. Spurred on by wholesalers' cries of "black-market alcohol" and their depictions of the Internet as a "bootleggers' paradise," the U.S. Congress passed a law giving states more power to crack down on illegal shipments. And, in three separate cases, federal courts upheld states' rights to control alcohol sales.

All the thrusts and counterthrusts in the direct-shipping battle illustrate the fact that the United States does not treat alcoholic beverages like other products -- nor has it for much of its history. Settled by Puritans who denounced drinking as a sin, then populated later by immigrants who viewed wine, beer or spirits as an integral part of their culture, the country has seen attitudes on drinking swing back and forth over the centuries. When the temperance movement led to the ratification of the 18th Amendment, which banned the manufacture and sale of alcoholic beverages throughout the nation, it set in motion a chain of events that has led to today's complex system of alcohol regulations.

In order to repeal Prohibition in 1933, Congress had to promise states the means to encourage temperance, allow counties and towns to remain "dry," keep out organized crime and prevent the monopolistic practices of the past, in which brewer- and distiller-owned retail outlets encouraged abusive consumption habits. The 21st Amendment gave the states broad rights to regulate the sale, distribution and importation of alcoholic beverages within and across their borders.

Most states follow the "three-tier system" of alcohol distribution through state-licensed, privately run companies. A winery (or brewer or distiller) must sell its products to a wholesaler, which collects excise taxes for the state. The wholesalers, which add on a markup for their services, market and distribute the many brands they represent to restaurants, bars and retail shops, which must ensure that minors don't purchase alcohol.

"Society has a legitimate interest here," said Juanita Duggan, executive vice president and CEO of Wine and Spirits Wholesalers of America, a Washington, D.C.Ðbased trade organization that has stridently opposed most direct-shipping initiatives. Duggan argues that wholesalers essentially perform state functions, and insists they are as much in the business of encouraging social responsibility as in that of alcohol sales. "Sometimes it is forgotten in some of the wine communities that half of America doesn't drink, half of Texas is still dry, you still have dry counties in Tennessee and North Carolina. There is a failure to recognize that there are deep currents not supportive of alcohol."

For 50 years, regulatory powers granted the states by the 21st Amendment went unquestioned, and interstate direct shipping was not allowed anywhere in the United States, though some quietly took place anyway. In the 1980s, winery trade groups -- recognizing the lost business opportunities and potential legal problems -- began to attempt to change the laws.

The market for home delivery of fine wine is small -- perhaps 0.5 percent to 1 percent of the total $24 billion wine market in the United States, according to estimates by winery trade groups. Many of the wines purchased online or by mail-order are the most sought-after: tiny-production bottlings sold only by mailing list; tightly allocated prestige labels that go to key clients; up-and-comers that could prove the next California cult Cabernet; Bordeaux futures; older vintages; special releases for winery club members.

The people hurt most by shipping bans are not the average drinkers who buy mass-market wines, which are, in fact, most efficiently handled by the three-tier system due to their large volumes; they are the collectors and connoisseurs whose purchases pose little threat to the existing system.

"A lot of the wines I buy, [distributors] aren't ever going to see. The production isn't big enough, they don't want it, they're not going to make any money off it," said Jim Yochim, a Houston collector with a 1,600-bottle cellar, who currently resorts to carrying home as much as he is allowed from his trips to California, Oregon and Washington. "Most of the wineries I deal with can sell out their wines right there."

But this isn't just a matter of collectors not being able to get their hands on the latest hot bottling. During holidays, people want to send gifts of wine to friends and relatives in other states. Countless casual wine drinkers visit wineries as part of a vacation and are introduced to new wines they like, but can't buy in their home state. And many small wineries, especially in states that don't yet have well-established wine regions, depend on tasting-room sales.

Each time a potential buyer finds out that they can't ship a purchase or order more wine when they return home, it squashes another bit of growth in the wine market.

Juanita Swedenburg, owner of Swedenburg Winery in Middleburg, Va., said out-of-state customers -- mainly East Coast tourists visiting nearby historical sites -- make up about half of her tasting-room visitors. She estimates that she loses about 20 percent of her business in potential sales each year because she can't ship to these buyers. Advocates of shipping bans "don't realize what a mobile country we are," said Swedenburg, who is a plaintiff in the New York lawsuit. "When the 21st Amendment was passed, we didn't travel as much."

The Internet has also been a tremendous force in breaking down the invisible walls between states. Accustomed to the convenience of e-commerce, consumers expect to be able to order wine online. But when they go the Web sites of wineries and retailers, which are generally plastered with warnings that shipping to many states is illegal, they find that there are laws restricting their choice. Wineries face tough penalties and fines if they run afoul of the law. Those found guilty of illegally shipping to a felony state face revocation of their federal permit to make wine.

"Until the Internet came along, there was a compelling economic logic for local wholesalers to be the place where pretty much all the wine came through," said Christopher Carroll, a professor of economics at Johns Hopkins University in Baltimore. Also the co-chair of a National Bureau of Economic Research group on consumption behavior, Carroll began researching the issue of wine shipping after he discovered that he couldn't order a wine-of-the-month club membership for his wife's birthday.

"The costs of finding out all the things that are available were too high for it to be worthwhile for a typical person to explore on their own," explains Carroll. "In this case, as in many others, the Internet has made information a lot cheaper and more convenient. It has had the effect of increasing competition, which monopolies always hate."

When the direct-shipping battle really began to heat up in the late '90s, wine retailers seemed to be popping up all over the Internet. Some operated only online, and others were brick-and-mortar shops that wanted to reach a new market. Each seller tried to attack the shipping problem from a different angle: Some tried to bypass the three-tier system, others acquired retail licenses in each state. Ultimately, many of these e-tailers began merging or falling by the wayside, overwhelmed by the legal and logistical complexities of filling orders in states with so many differing rules.

The "Great Wine Hopes" were two big, well-funded Web sites, WineShopper.com and Wine.com. For a while, some wine industry members hoped that WineShopper.com might actually have come up with a solution to the issue of direct shipping, as it concentrated on working with wholesalers to create a legal fulfillment model to ship wines nationally through the three-tier system. The site even had the backing of WSWA. Then in 2000, WineShopper consolidated with its biggest competitor under the better-recognized Wine.com name, and the company struggled to merge conflicting operations.

When the dot-com bubble burst, Wine.com/WineShopper had reportedly burned through $180 million in venture capital. After it went bankrupt in April 2001, its wine inventory was sold at auction and its name was bought by eVineyard.com, a small competitor that has survived by following the retail-license approach.

Continued on page 2

Direct Shipping News

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