A welcome wet start to Spring
A beautiful day in the neighborhood

Zombie legislation: HR 5034 lurches back to life as HR 1161

Last year, beer and wine wholesalers' associations spearheaded the introduction of HR 5034 into the US House of Representatives.  Although the legislation was never passed (it never even made it out of committee) by the end of the legislative year it had amassed 153 co-sponsors, or more than one-third of the House's total membership.  The bill would have effectively rolled back the status of alcohol law to where it was before the Granholm v. Heald decision required states to treat in-state and out-of-state wineries equally.  This is potentially significant to wineries like us because the voices of in-state wineries (and the local jobs that they represent) proved decisive in several state legislatures who were forced either to open up direct shipping to all wineries or cut off their own wineries from the bulk of their customers.  We can now ship to 32 states, with Maryland expected to be the next that will come on line later this year.

Beyond wineries, the principal beneficiaries of liberalized wine shipping laws are consumers, who receive greater choice and lower prices thanks to increased competition.

Although HR 5034 did not make it into law, on March 17th an updated piece of legislation was introduced into the 2011 Congress.  Perhaps the sponsors thought that last year's "Comprehensive Alcohol Regulatory Effectiveness (CARE)" title wasn't sufficiently caring; this year's bill is slightly renamed to the "Community Alcohol Regulatory Effectiveness (CARE)" Act.  It states its purpose "to recognize and reaffirm that alcohol is different from other consumer products and that it should continue to be regulated by the States".  More specifically, the legislation clarifies that "Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the ‘Commerce Clause’) to the regulation by a State or territory of alcoholic beverages."  Interested readers can read the complete text of HR 1161.

Why would anyone want the US Congress to differentiate alcohol from other consumer products?  Because of the money at stake.  As a quick review (I wrote about this more extensively last year, to which I refer anyone wanting more background) the 21st Amendment to the Constitution, which repealed Prohibition, grants states the rights to regulate alcohol within their borders.  State legislatures have traditionally taken an expansive view of what this permits, at times bringing them into conflict with the Commerce Clause of the Constitution that gives the US Congress sole authority to regulate interstate commerce.  The end result has been the near-universal adoption of the three-tier system, where producers or suppliers of alcohol (the first tier) must sell to state-licensed wholesalers (the second tier) who must sell to retailers and restaurants (the third tier).  Only this third tier, in the classic three-tier system, can sell to consumers.  Each tier has its profits built into the system, which means that the typical price that a winery like Tablas Creek sells to a wholesaler is about half the end sale price to a consumer.

With the increasing ease of Internet and mail-order commerce -- and the move of small wineries and wine tourism into the American wine consuming mainstream -- cracks have appeared in the foundation of the government-protected wholesale tier.  Exceptions to the three-tier system are now the norm for wineries, and the Granholm decision made explicit the Court's opinion that states cannot discriminate against out-of-state wineries but must establish a level playing field.  Wholesalers see the logic used by the Supreme Court in Granholm as a threat.  What if, they worry, courts permit out-of-state wholesalers to make deliveries to in-state restaurant and retail accounts?  What if chain retailers can purchase from whichever wholesaler, in whatever state, will give them the best price, and then supply their in-state stores out of a central warehouse?  Or, scariest of all, what if retailers cut out the middleman wholesaler in one of the states that allows them to do so (like California) and then begin self-distributing to their locations around the country?  It's fairly clear to me that wholesalers view stores like Costco as their biggest threats, not small wineries like us.

Of course, all these steps that alcohol wholesalers fear have already happened in nearly every other consumer product.  Consumers have the option of buying direct from the manufacturer, or from stores in other states, or in person.  The result has been a dramatic lowering of prices and a proliferation of innovative producers, who can leverage the power of Internet long-tail marketing to reach customers whose concentration in any one area may be low, but whose cumulative buying power is significant.  Wholesalers have not disappeared in other consumer products, but their power has been limited as their customers have more options and demand better service and more competitive prices.  But understanding why alcohol wholesalers are worried doesn't mean that one should feel sympathetic to their efforts.  The casual disregard the bill's wholesale advocates show for the harm that this bill would cause their suppliers (wineries, breweries, distilleries and importers) their customers (restaurants and retailers) and consumers around the country can be breathtaking.

Despite the claims of proponents of the legislation that wineries wouldn't be harmed -- and the phrasing of the bill does include some safeguards for nondiscrimination in winery direct shipping that were absent from HR 5034 -- the proposed legislation would still be bad for both wineries and consumers, and terrible for retailers.  Although a clause states that states "may not intentionally or facially discriminate against out-of-State or out-of-territory producers" there are many non-facial discriminations that can be put into place that have similar effects.  Some states have put into place capacity caps, where only wineries under a certain size can ship to in-state consumers.  Of course, the cap is carefully set just above the size of the largest in-state producer.  Other states require that wine be purchased in-person, which of course is much easier at an in-state winery than an out-of-state one.  And retailers, who should by any logic I can understand also be subject to the same legal principals espoused in Granholm, would not be covered by the language protecting "producers".  This omission is particularly important because retailers were recently rebuffed without comment by the Supreme Court in their effort to apply the logic of Granholm to their businesses and are still unable to access most out-of-state markets.

The proponents of the legislation take pains to refer to the bill's supporters as "bipartisan", and I imagine it's no coincidence that the bill's eight co-sponsors include four Democrats and four Republicans.  I think it's more accurate to say that the bill is nonpartisan than that it is bipartisan; there is really no overriding constitutional principle here except for a very narrowly-defined emphasis on states' rights (if you consider it a state right to put into place discriminatory laws regulating commerce).  But what is at play, like last year, is money.  The Wine Spectator found last year that beer and liquor wholesalers had made over $11 million in campaign donations over four years to House and Senate campaigns, a total that rose dramatically after the Granholm decision.  In total, the organizations that supported HR 5034 outspent those that opposed it by a total of more than four to one.

The risks of this year's bill are real.  Last year, Nancy Pelosi (whose district contains dozens of wineries) was an important opponent of the legislation.  With the change in leadership in the House, Pelosi's influence is diminished while new Speaker John Boehner's position on the bill is unknown.  I urge wineries and wine lovers not to be complacent about the act's prospects.  With the money at stake, wholesalers' organizations are committed to protecting their interests over the long haul, and are willing to continue to pour money at legislators to ensure that their opinions are heard.

Join Free the Grapes to get involved

There are two important actions we can all encourage.  First, we in the wine industry need to continue to spread the word that this bill is a threat not just to the livelihoods of family wineries but also an anticompetitive piece of legislation that will raise prices and dramatically reduce availability of wines for consumers around the country.  And the second is to make sure that our congressional representatives know that we're watching.  As usual, the Web site Free the Grapes has great tools to make this easier, principal of which is a form with a customizable letter that will be sent automatically to your congressional representatives.  I have already reached out to Representative Kevin McCarthy (whose insight and behind-the-scenes work last year was welcome) and will let readers know what I hear back.