GRAND RAPIDS — Tensions between Michigan craft beverage producers and the state regulatory agency appear to be ratcheting up with the filing of a new federal lawsuit, MiBiz has learned.

In the case filed last week in the U.S. District Court for the Western District of Michigan, Sawyer-based Greenbush Brewing Co., Hudsonville-based Farmhaus Cider Co., the Michigan Cider Association and Grand Rapids-based Vander Mill LLC are suing the Michigan Liquor Control Commission. The parties allege the agency’s enforcement actions and revisions to state liquor code enacted last fall are unconstitutional, and that the state laws are preempted by federal laws regarding the production and sale of alcohol, particularly cider, which is classified as wine.

Plaintiffs, who say their businesses are being financially harmed because of the actions, also allege the new law is unconstitutionally vague, leaving beverage producers open to “arbitrary and capricious” enforcement actions.

The lawsuit stems from the MLCC enforcement division’s finding on June 19 that Greenbush, which holds both microbrewer and small winemaker licenses, was in violation of state law over its bonded transfers of cider, which it purchased from Vander Mill.

In the court documents, Greenbush said the enforcement division told the company it “was required to ferment every drop of wine that it sold,” seized all of its cider inventory and told the company to stop using its small winemaker license, effectively barring the producer from selling all cider and wine.

The lawsuit challenges the constitutionality of the seizure, which was effected without a search warrant. The state currently is holding about $7,200 in Greenbush’s property, according to court filings.

Regardless of the federal question regarding the state law, Greenbush owner Scott Sullivan said the company met the requirements in the revised Michigan Liquor Control Code that would allow it to participate in the bonded transfer of wine. Greenbush produces some of its own wine and cider under the new definitions, thereby qualifying it under state law to be eligible for bonded transfers.

“This has happened to a number of breweries before us, and for whatever reason, no one has been willing to stand up and take MLCC head on,” Sullivan told MiBiz. “If I think something is wrong, I will stand up, and I think the Liquor Control Commission is acting illegally here.”

Federal law, which Michigan adopted “by reference” in 1970, allows a bonded winery to buy wine in bulk or wine that is unlabeled and resell it, without any requirement that they perform any of the actual winemaking process.

Under revisions to state law passed last fall, the receiving winery must manufacture an unspecified portion of the wine it sells. The new law said a winery could not simply bottle bulk wine or affix a label to a bottle and count that as producing it.

The law defines “manufacture” as the process to “distill, rectify, ferment, brew, make, produce, filter, mix, concoct, process or blend” the alcoholic beverage, or completing a portion of one or more of those activities.

Because none of the terms in the definition are defined in the law, they are “subject to arbitrary application,” as evidenced by the enforcement division’s actions, Greenbush alleges in the lawsuit.

Greenbush also is alleging that the seizure of the federally bonded wine came without a search warrant, in violation of Michigan law and the 14th Amendment, and that the MLCC has “no authority to regulate wine held under federal bond and no authority to seize federally bonded wine.”

The Southwest Michigan producer is requesting the federal court issue a declaratory judgment that the new state laws are preempted by federal law, and asked the court to issue an injunction and temporary restraining order that would restrict the MLCC from prohibiting federally bonded wine transfers. The company also is asking for damages, court costs and attorneys fees.

“In 2018, the enforcement division of MLCC took the position that bonded transfers of wine were not legal in the state of Michigan and began seizing wine and the transfers in bond and began issuing violations. This has never been the position of Liquor Control Commission prior to these actions,” said Joseph Infante, principal in Grand Rapids at Miller, Canfield, Paddock and Stone PLC and chair of the firm’s alcoholic beverage regulation team, who is representing the plaintiffs.

Waiting for the enforcement process to play out “is not a viable option” for Greenbush and the other plaintiffs because it could drag out for a period of years, he said.

“It could be two years down the road, and all that time, my clients are losing revenue,” Infante said.

MLCC spokesperson David Harns said the agency was unaware of the lawsuit and was otherwise “unable to comment on pending litigation.”

The latest federal case follows a string of enforcement actions regarding wine and cider transfers, as well as challenges with producers over other statutes. For example, five Michigan breweries last month sued the MLCC over its move to quash their free bingo promotions, which the agency says is a form of illegal gambling, as MiBiz previously reported.

The ongoing Kent County Circuit Court case appeals the MLCC’s denial of a request for declaratory ruling that free bingo games are legal in the state.