Wholesalers and states convince Congress to consider new legislation to prevent direct-shipping lawsuits in a campaign to protect the three-tier system

The battle over whether consumers can order wine directly from wineries is moving to the halls of the U.S. Capitol. Members of Congress yesterday introduced a bill (HR 5034) that could end direct shipping of wine and other forms of alcohol in the United States, or at least put major roadblocks in front of lawsuits by consumers and wineries trying to reduce restrictions on direct shipping. Wine Spectator obtained a copy of a draft of the bill on Wednesday, which was crafted by the National Beer Wholesalers Association (NBWA). It would strengthen state governments' control of alcohol sales, allowing them to protect the three-tier system of distribution while putting a much greater burden on people challenging it.

Talk of a bill first surfaced when a Congressional subcommittee held a hearing with little notice on March 18. During the session, wholesalers and state regulators argued that the three-tier system is under attack and that the U.S. faces "an alcohol epidemic" if Congress does not intervene and prevent deregulation of alcohol sales. The hearing took many in the wine industry by surprise, and no winery-, retailer- or consumer-advocacy groups testified.

State leaders and alcohol wholesalers argue that a law is needed to prevent frivolous lawsuits and to allow states to maintain firm control of sales and prevent alcoholism and underage drinking. Critics argue that the bill would allow wholesalers to protect their turf from competition and prevent consumers from being able to buy wines and other alcoholic beverages not carried by local wholesalers. An original draft of the bill contained an antitrust exemption for wholesalers, but that was struck from the language.

"The whole idea [behind the bill] is to make it prohibitively difficult for wineries and consumers to challenge discriminatory and irrational laws that have little or nothing to do with the protection of the public," said Kirkland & Ellis attorney Tracy Genesen, who has been the lead attorney on many direct-shipping lawsuits that have resulted in state alcohol laws being overturned.

Those lawsuits have been growing in number since the landmark 2005 Supreme Court Granholm decision, which ruled that states cannot discriminate between in- and out-of-state wineries in matters of direct-to-consumer wine shipping. The Granholm decision argued that the 21st Amendment, which ended Prohibition and put states in charge of alcohol regulation, does not trump the Constitution's Commerce Clause, which prevents states from restricting interstate trade. Granholm has led to a wave of winery direct-shipping challenges and new laws; direct-to-consumer wine shipping is now legal to varying degrees in 37 states and the District of Columbia.

A Bill to End the Legal Challenges

Wine Spectator obtained a copy of the NBWA's draft bill earlier this week and the introduced bill, HR 5034, on Friday. They are largely identical. Titled the Comprehensive Alcohol Regulatory Effectiveness Act of 2010, or the "CARE Act," the proposed bill would effectively allow the 21st Amendment to trump the Commerce Clause, granting states immunity to litigation based on discriminatory alcohol distribution laws.

In the proposed bill, the Commerce Clause is weakened in respect to alcohol: "It is the policy of Congress that each state or territory shall continue to have the primary authority to regulate wine. Silence on the part of Congress shall not be construed to impose any barrier under [the Commerce Clause] to the regulation by a state or territory of alcoholic beverages."

The bill also includes an amendment to the Act of 1890, otherwise known as the Wilson Act. The Wilson Act states "that all fermented, distilled or other intoxicating liquors or liquids transported into any state or territory" are subject to the same rules as alcohol produced within the state. The proposed bill calls for maintaining the states' control over alcohol shipped in, but no longer requires the state to treat it the same as alcohol produced within the state. Thus, in-state wineries could be given preference.

The proposed bill continues, "Notwithstanding that the state law may burden interstate commerce or may be inconsistent with an act of the Congress, the state law shall be upheld unless the party challenging the state law establishes by clear and convincing evidence that the state law has no effect on the promotion of temperance, the establishment or maintenance of orderly alcoholic beverage taxes, the structure of the state alcoholic beverage distribution system, or the restriction of access to alcoholic beverages by those under the legal drinking age." Genesen said that will make it much harder to challenge laws. "To try to change the burden of proof to make it impossible to challenge these laws is turning the clock back 70 years."

Setting the Stage

The first hint that Congress was considering the wholesalers' proposed legislation was a Congressional hearing of the House Subcommittee on Courts and Competition Policy on March 18. Two panels of witnesses discussed the diminishing strength of the three-tier system for alcohol sales and the potential effects of deregulation of the alcohol industry.

Except for two Congressmen from wine-producing districts in California, no direct shipping advocates spoke. "It's pretty remarkable because it's not exactly like we have a clamor to examine the state-based alcohol regulations," said Tom Wark, executive director of the Specialty Wine Retailers Association. Wark believes the NBWA used its lobbying clout to raise the topic.

Among those testifying in favor of the three-tier producer-wholesaler-retailer system, several claimed that increased deregulation of the alcohol industry would lead to alcohol abuse and underage drinking. Pamela Erickson, an Arizona-based public policy advisor and a former Oregon state regulator, claimed that an "alcohol epidemic" has beset the United Kingdom due to deregulation of its alcohol industry. Erickson testified that as the U.K. deregulated between 1980 and 2007, "numerous nightlife centers sprung up … These became scenes of drunken debauchery, with people spilling out at closing time vomiting, urinating and passing out." She offered no explanation of how the three-tier system prevents "nightlife centers" from springing up.

Nida Samona, chairwoman of the Michigan Liquor Control Commission said, "In 1941, Supreme Court Justice [Robert] Jackson stated that liquor is 'a lawlessness unto itself.' That was true then and is true today. Alcoholic beverages must be highly regulated."

Samona went on to cite the Granholm decision as a reason that states should be exempt from antitrust laws on alcohol. "Because of this type of expensive and uncertain litigation, a federal statute is essential to confirm the primacy of state regulation," Samona testified.

Congressman Mike Thompson, a Democrat who testified against the proposed bill and whose district includes portions of Napa and Sonoma counties, rejected Samona's demand for protection against litigation. "We don't need a new federal law: The litigation will stop when the states stop passing discriminatory laws promoted by the wholesalers."

"For decades, wholesalers have expended great resources to protect their state-mandated distribution system in ways that have harmed wineries and breweries. These efforts have stunted competition and weakened producers, which ultimately leads to fewer choices for consumers," Thompson testified. "States should encourage, not stifle, competition."

"[The wholesalers] have done so well in exacting a monopoly for so long that they are now trying to pull out all the stops to make sure that we don't make any more progress toward a regulated wine economy in the future."—attorney Tracy Genesen

After the hearing, Wine and Spirits Wholesalers of America president and CEO Craig Wolf praised the idea of strengthening states' control over alcohol. "Easy and cheap access to alcohol is certainly not the answer—we know this from the many social ills that deregulation has brought on in the United Kingdom," Wolf said in a statement.

There was no testimony explaining how wholesalers, who never deal directly with consumers, prevent underage or excess drinking. "When Craig Wolf theorizes that without a strict adherence to the three-tier system, all bedlam will break loose, he [is] doing so to scare lawmakers and society into keeping the three-tier system in place," said Wark. "This is nothing more than a scare tactic."

"We have a very good system in this country. It is the best in the world," Wolf countered in an interview. "It is the most consumer friendly, but at the same time the safest and the most balanced. Look around the rest of the world and see the state of alcohol problems elsewhere that you don't see in this country, and our three-tier system helps prevent those problems."

"While we don't like these [direct shipping] laws, we're not out there trying to roll them back," Wolf said. "What we want to do is stop the litigation. It's got to stop."

On March 29, the National Association of Attorneys General (NAAG) sent a letter to Rep. Johnson and the Subcommittee in support of the bill. The letter, signed by attorneys general from 38 states and American Samoa, stated, "We are writing to seek your help with the growing threat facing our states from unprecedented legal challenges that seek to eliminate our ability to regulate alcohol."

"Alarmingly, legal challenges have been filed in over half of the states challenging their alcohol laws or regulations designed to encourage temperance, collect taxes and prohibit the sale of alcoholic beverages to minors," the letter continues. "All too often the judges hearing these cases have misinterpreted federal law and the intention of Congress regarding the states' right to regulate."

"I view this whole effort as a backlash to some of the successes that we've had, including Granholm," said Genesen. "This is an effort by the beer wholesalers to make sure that the status quo is protected at all costs, including the costs to consumers, the wine industry and the general economic welfare of our country."

"[The wholesalers] have done so well in exacting a monopoly for so long that they are now trying to pull out all the stops to make sure that we don't make any more progress toward a regulated wine economy in the future," Genesen said.

The Start of the Fight

Berkshire Hathaway chairman and CEO Warren Buffett might have given an important signal of the security of the wholesaler business and the future of the three-tier system when he purchased Georgia-based wholesaler Empire Distributors in March. "[Buffett] understands that alcohol wholesaling is one of the few government-protected industries in the country," Wark said. "When you find an industry where the state says these types of businesses must carry out all transactions, that's pretty good."

"The next step in this battle is to educate members of Congress on the importance of letting the federal courts around the country interpret the laws that currently exist, in light of Granholm," Genesen said.

The likelihood of the NBWA's proposed legislation coming to pass is still slight. A hearing and an introduced bill are very different from a signed law. But the lobbying battle is just beginning.

During the hearing, California Congressman George Radanovich, a Republican whose district includes parts of the Central Valley, urged the committee to closely examine whether the proposed legislation is "innovation or monopoly protection." He added, "[The wholesalers] present this committee with a very long, broad and, quite frankly, outrageous wish list. There must be extraordinary reasons why states should get a free pass from the Constitution or antitrust laws."