Vineyard & Winery Management Magazine
Feature Story
A Run for the Border
Interstate commerce for retailers becomes the new wine battleground
Story by Tyler Colman
Although Illinois vintners and vineyard owners surrounded Illinois Governor Rod Blagojevich last fall when he signed HB 429 into law, one wine group was absent from the photo opportunity: out-of-state retailers. Indeed, this absence was as symbolic as those standing behind the governor since the legislation he signed barred them from shipping directly to wine consumers in the state.
Effective June 1, Illinois-home to Chicago, the third-largest municipal wine market-ceased to be a so-called "reciprocal" state and shifted to requiring a permit for out-of-state wineries. Non-Illinois retailers, however, could not be granted a permit under the legislation, leaving the bourgeoning ranks of Illinois consumers with only local options for purchasing wine from retailers.
In an era of legislative recalibration, such changes risk becoming more common and could also affect some of California's smallest and most sought-after wineries.
Shipping Wine Post-Granholm
In a landmark case for the wine industry, the Supreme Court handed down a decision in May 2005 in the case of Granholm v. Heald. Writing for the five members of the majority, Justice Anthony Kennedy effectively argued that the systems in place in New York and Michigan, which allowed in-state wineries to ship wine to those residents but not out-of-state wineries, were unconstitutional since they blocked interstate commerce. So states had to choose to open to all wineries in the United States or prohibit any winery, including in-state wineries, from shipping to their residents. New York and Michigan joined most states in opening up; New Jersey is one state that closed down all shipping from wineries.
Jeremy Benson, executive director of Free the Grapes, a winery-supported organization that encourages consumer awareness of the winery-to-consumer shipping issue, says that before Granholm, half of the wine drinking population in the country could buy wine directly from wineries. Today, he estimates that 80% can.
In the pre-Granholm era, the legal basis of this interstate commerce was reciprocity: Thirteen states allowed the free shipping of wine from both shops and wineries. It was simple for consumers and wine vendors alike since all that the consumer had to do was call the store or surf on over to their websites to complete the transaction.
After Granholm, this reciprocity, too, was in legal limbo since it only allowed unfettered wine trade between select states, not all states. So state legislatures passed bills to require out-of-state wine vendors to purchase a permit to ship to their residents. These permits range from free-of-charge to more than $1,000. To get a permit in some states, wineries may be subject to limits on the overall volume of wine they produce (as is the case in Arizona and Massachusetts). Or they may not be able to ship directly if they already work with a wholesaler in the state (such as Louisiana and Indiana). Or the quota for residents may be too low to be interesting to wineries (such as Washington, DC, which only allows one quart of wine per resident per month). Jason Haas of Tablas Creek winery estimates that complying with these various laws costs the winery $20,000 a year in personnel.
Squeezing Retailers
"Consumers today have less access to wine because more states have prohibited retailers from shipping," says Tom Wark, executive director of the Specialty Wine Retailers' Association, a group formed in 2006 that advocates free shipping from retailers
Indeed, as the number of states has increased for wineries, it has decreased for retailers who can now ship to only 13 states, according to Wark. Big markets such as Texas and New York are off-limits to retailers even though wineries can ship directly to residents in those states-which is why there is litigation in both of those states.
In the Texas case, Siesta Village Market v. Perry, District Judge Sidney Fitzwater handed down a ruling in January and both sides claimed victory-but then they also both appealed. Fitzwater ruled that the Granholm decision applied to retailers as well, striking down the status quo by deciding in favor of the Florida-based Sunset Village Market. However, this victory for retailers was dashed by the judge's remedy: Out-of-state retailers must buy wine from a Texas wholesaler, take it out of state and then send it to the consumer.
"Neither legally nor practically possible," is how Tracy Genesen describes it. She is a partner in Kirkland and Ellis' San Francisco office, which argued the case along with Kenneth Starr, former solicitor general and current Dean of the Pepperdine Law School. It also eliminates the advantage of shopping for wines in other states since many consumers seek a wine that is not already in their local market. The appeal is pending in the Fifth District Court of Appeals and will be argued later this year.
In New York, different parties had an outcome that was against the retailers as the judge there decided that Granholm only applies to producers, not retailers. That case is currently on appeal. Other litigation is pending in Michigan, where the judge denied the state's motion to dismiss, a sign that another decision could be forthcoming.
California will close to out-of-state retailers on January 1, 2009 unless a deal can be struck or legislation is passed before then.
Access to Everclear
"Opening up is asking for trouble," said Karin Moore, assistant general counsel at the Wine and Spirits Wholesalers' Association, the main group advocating the status quo. "Our position goes against our economic interest-the more retailers sell, the more we sell. But we feel that the states don't have the necessary resources to keep up with the thousands of online retailers. I could go online now and buy Everclear right now and have it shipped to me in an unmarked box. It's the black market goods and underage access that are the biggest issues."
While minors are an issue, Wark of the SWRA points out that in Illinois, for example, in-state shipping and delivery of wine is still allowed. "The transaction is identical, whether the retailer is in-state or out-of-state. Go to the website and plug it in," he says.
Wark elaborated that he would prefer to have a transparent system that allows shipping with regulation and oversight, summarizing his comments at the recent National Conference of State Legislatures as: "I would like you to regulate us. Make us pay your taxes. Make us submit to your legal jurisdiction. Please!" He is seeking a regulated market with permits, filings and tax collections similar to that for wineries.
Genesen of Kirkland and Ellis also points to the regional nature of wholesalers and how a dominant distributor in Texas, for example, might not have the same position in California.
Prices often reflect a lack of national competition. A search for Veuve Clicquot Champagne on winesearcher.com shows it is easily available in California for about $36 a bottle. In Texas, by contrast, the same wine starts at $50.
Challenges Ahead
As it stands, some retailers are taking advantage of the lack of legal clarity and enforcement and shipping to consumers anyway. In a high-profile clash of the business models, wine.com successfully ordered wine from dozens of out-of-state retailers to ship to their office in Washington state, despite it not being legal to do so. Then they sent letters to the state regulators detailing who had sent them wine. (Although wine.com may appear at first glance to be a national wine retailer, they actually operate as a licensee in each state where they sell wine.) This action lost them lots of love from wine consumers, at least judging from the outpouring on wine blogs and bulletin boards that eventually reached The New York Times.
In that Times story, Keith Wallenberg of K&L, a California retailer, explained that for out-of-state purchases, his company transfers the title of the wine to the buyer in California, so that the owner is shipping wine to himself.
Another challenge to retailers is a lack of unity: While in the fight for winery-to-consumer shipping wineries across the country were united, it is actually only a handful of retailers who support free national shipping. Other, local retailers may actually be against it.
Catching Winemakers in the Cross-hairs
What do Hundred Acre, Cameron Hughes Wines, and Scholium Project have in common? Besides making wines that are very much in demand, they all are a new type of winemaker-one without a physical winery.
As wine has become more popular across the country, the number of wineries has risen, particularly in California, which makes about 90% of American wine. As new entrants rush in to supply this demand, more winemakers seek to reduce the costs of entry and make wine at a custom crush facility. Thus, instead of receiving a type 02 winegrower license from the state, they have type 17 and type 20 licenses, which are wholesaler and retailer licenses, respectively.
Although the consumer cares a lot more about the vintage conditions and grape varieties, the license type is actually what will prevent consumers from having access to all states. According to the California Alcohol Beverage Control, there are currently 1,650 licensees who hold both a type 17 and type 20 license. For these producers, their market is legally the 13 states open to retailers, not the 35 open to wineries.
"We can't be involved in everything," said Paul Kronenberg when asked why his organization is not involved in the Texas lawsuit. Kronenberg is the president of the Family Winemakers, a trade organization for wineries that includes 17/20 as well as bonded wineries in their membership. "It's more the domain of the Specialty Wine Retailers." Family Winemakers is involved in a lawsuit right now to open winery-to-consumer shipping in Massachusetts.
Steve Gross, director of state relations at Wine Institute, which includes no 17/20 wineries, points out that wineries and retailers were both included in the model direct shipping bill, developed in 1997 as a template for state legislators. "We have worked with them in the past and look forward to working with them in the future," he said speaking of the retailers.
"Wineries benefit immediately from liberalized retailer-to-consumer shipping," says Wark. "It's their products that are being promoted, sold and shipped by wine merchants. Not caring about retailer-to-consumer shipping and not actively supporting their efforts to open up this channel is akin to not caring if retailers sell their wines at all."
Headed to the Supreme Court?
Regardless of whether wineries agree with Wark's assessment, it's likely that the retailers will eventually have their day in the highest court in the Land.
"It's got all the makings of a Supreme Court case," said Genesen of Kirkland & Ellis. "Split decisions at the circuit court level are a template for Supreme Court review."
Will she argue it all the way there? "That's up to the client to decide."
Tyler Colman is the author of "Wine Politics: How Governments, Environmentalists, Mobsters, and Critics Influence the Wines We Drink" (University of California Press). He teaches wine classes at NYU and writes the popular wine blog, drvino.com.