Having covered the drinks industry for more than two decades it is easy to see how the tangle of post-Prohibition rulings are hard to follow and easy to distort. To make matters more complicated, they are enforced on a state-by-state basis, making operating in the US wine market tantamount to trying to set up shop in 50 different countries.
With average consumer and winery executives' legal comprehension of these laws on the low side, various organizations – with the aid of their in-house counsel – have been able to carefully adapt the laws to their advantage. So using alcoholic beverage attorney John Hinman – a partner at the San Francisco law firm of Hinman & Carmichael – as a guide, I delved into how these laws can be misinterpreted and manipulated to various entities' advantage.
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Why are people in the wine business so confused by the current laws in the US?
Because the laws are complicated and vary significantly from state to state and alcohol product to alcohol product. Many of the laws and restrictions make little business sense and are enforced only when someone complains. We used to joke that it is easier to deliver a gun than a bottle of Chardonnay.
Finally, the laws are not intuitive and marketing and sales practices that are perfectly acceptable for other products are often unlawful with alcohol; except when they are not because of some special interest's exception.
The three-tier system isn't federally mandated, so it is not federally enforceable. It is a creature of individual states' laws. There is not one three-tier system but rather 50 different ones. This is likewise the subject of much confusion.
Are these laws really so much more complicated than in other countries?
Yes. In other countries there are often more draconian laws dealing with consumption and retail sales, but they are generally based in some societal value. US laws are based on limiting market access so that the middlemen – the distributors – can maintain their historically large sales margins.
Do these laws really protect US citizens from tainted product, underage purchases and alcohol abuse?
Tainted product protection is the responsibility of the Tax and Trade Bureau's (TTB) – which regulates the sale of alcoholic beverages on a national level. The TTB does an excellent job and clears all alcohol products produced in and imported into the US.
Underage purchasing is the responsibility of each state's individual Alcohol Control Board (ABC) and their success rate varies from state to state. Alcohol abuse is not just an American problem but one that is worldwide. Marketing, advertising and promotional regulations do make a difference. False advertising, including unsupported health claims, is prohibited; intemperate promotions, all-you-can-drink type of programs, are restricted; and advertising that encourages excessive consumption is generally discouraged through voluntary programs operated by the producers' trade associations.
How and why do some of our institutions such as the Wine & Spirits Wholesalers Association (WSWA) – which represents wholesalers nationally – misinterpret these laws to their own benefit?
The wholesalers are dedicated to maintaining their position as mandatory middleman at artificially inflated margins. This is why they continue to perpetuate the fallacy that the three-tier system is necessary to protect the public. The wholesalers are, however, necessary to move boxes. They excel in that role and they deserve to be paid for that function.
Wholesalers have historically monopolized the shipment of alcoholic beverage products from state to state and within states. Shipment from a producer to a retailer by anyone other than a wholesaler represents competition that endangers their monopoly on product movement.
Can you give me a few examples?
The best example is the Internet and direct-to-consumer (DTC) sales. The wholesalers have grudgingly given up wine producer to consumer DTC but have just as stubbornly resisted beer and spirits DTC and direct to trade (DTT) which is direct producer-to-retailer sales. Intrastate DTC and DTT are happening anyway because of small businesses, but enforcing interstate DTC and DTT laws is a constant battle in the state legislatures.
How have some of these interests used their own interpretations and misinterpretations of these laws to their own advantage?
The anti-alcohol forces such as the Marin Institute/Alcohol Justice – a Prohibitionist "public health" group dedicated to reducing alcohol abuse through higher taxes and restrictions on advertising and points of sale – parrot the wholesalers' line because it plays into their agenda. This game plan includes raising alcohol taxes to fund social responsibility programs and generally supports their basic thesis that alcohol consumption is a scourge that needs to be stamped out. These are the folks that brought you Prohibition and voted against repeal.
How was the historic 2005 legal case of Granholm versus Heald misinterpreted and do you think that this issue can be fixed to eventually allow retailers to ship into all states?
There was a gratuitous observation in a footnote in the Granholm decision to the effect that the "three-tier system is unquestionably legitimate." This statement has been used by wholesalers to attempt to distinguish retailers from wineries, even though both sell to consumers at retail and all retailers have to buy through the three-tier system. Most law review commerce clause commentators point out that shipping to consumers by wineries and retailers are both legally identical acts.
Why did UPS and FedEx decide last month not to allow retailers to ship into 36 states?
The wholesalers forced the carriers' hand by going to state regulators and saying that the laws have to be enforced and that the carriers were being complicit in unlawful shipments. FedEx and UPS really had no choice but to crack down because if they were shipping in violation of state laws – which is a subject of much debate – they would be at risk of having their carrier permits pulled for shipping of all products.
Might wholesaler lobbyists push the interpretation of Granholm far enough as to not allow wineries, as well as retailers, to ship into 36 states?
Wineries can ship to 45 states and wineries do not buy from wholesalers, but produce wines, so it would be difficult to use the three-tier system arguments that are used against retailers against wineries. However the wholesalers' position in the original Granholm case was that wineries should not be allowed to directly ship to consumers because it would disrupt the three-tier system.
How else are the Tied House rules – which were created on federal and state levels to prohibit brewers, distillers, winegrowers and other alcohol beverage suppliers from exerting undue influence over retailers – being used inappropriately by institutions to get what they want?
The biggest offenders are the credit laws. As credit and delivery technology gets more automated, wholesalers resist any change and want to do business with paper, strict credit rules and no or little rights of retailer return of products. Currently all the mistakes, and there are constantly mistakes made in the delivery process, are resolved in the wholesalers' favor.
How can we, as citizens and wine professionals, better inform ourselves about our rights?
Demand that the state ABC authorities explain the laws in a clear, concise fashion and enforce them vigorously. That way the sheer lunacy of the current policies will soon become apparent.
Comments
This becomes more convoluted by state laws which vary in allowing wineries to produced distilled product such as brandy. Why do some states allow wines, beers and whiskey to be produced under one roof and other not? Also, large wineries pushing bulk products to non-producing faux "wineries" are creating a scourge of confusion among consumers. This high variation in laws governing production and representation ultimately keeps the tiered system in place through legal chaos.
In 2005, the Supreme Court held that the Twenty-first Amendment did not allow States to discriminate against interstate commerce in violation of the Commerce Clause.
The Supreme Court found that the States claims that direct shipment of wine would increase the risk of underage drinking
were not supported by concrete evidence;
and
would not justify regulations limiting only out-of-state
direct shipments.
So, who is against? Who believes that may not follow the Supreme Court decisions? Corrupted state legislators? insolent WSWA? UPS, FedEx?
Where are the real lawyers? Put all those violators behind the bars. In jail without bail.
If I may interject a footnote here. There was an opportunity to avert, or at least curbed, all this legal wrangling in the 80's. I grew up in the wine business in Washington, DC. Since it is not a state, there are no laws that govern how wine was shipped, or imported. The only caveat was that direct importing any wine or spirit could not violate the three tier system. Example: we could not buy Cakebread wines direct because it was already available through a local distributor. So, shipping these hard to obtain wines that included wines from bordeaux, burgundy and even California wine was our stock-in-trade. At that time the states began complaining about lost alcohol tax revenue had the wine been purchased in their states. The state of Ohio required the purchaser to submit an invoice of goods from our store. They would then pay the appropriate tax, a copy of the tax payment would be sent to us to be included in the shipment of alcohol. We were happy, the state was happy the consumer delighted to get their wine.
Bear in mind that this was made possible without the intervention of the local distributors. I am sure they wanted something to be done. All the state wanted was their lost revenue.
Opportunity lost.
These laws are in effect and enforced simply because the overwhelming majority of politicians at the state and federal level are corrupt. They accept "campaign contributions" and many work as lobbyists for the very industries for which they write legislation when they leave office. And it's not just the liquor business that benefits from their legislative largess. It's any business sector that contributes some of the billions of lobbyist dollars that corrupt our government each year. They should be ashamed of themselves, but greed seems to overwhelm the stench of corruption for these shameless "public servants."
Wholesalers are "always right" just because WSWA's mad dog Craig Wolf being young was shining shoes door to door and still he is shining shoes door to door, but now in White House.
Name-calling is always pertinent and necessary here, Michael. Consumer has to know his enemies by names. You can contest if you want, though.
Name-calling is so unprofessional, so Donald Trump. Alcohol Justice is not a "Prohibitionist" organization. And none of us were even alive during that period of time. Alcohol Justice actually supports moderate, unharmful consumption for anyone 21 years of age or older. Let's stamp out abusive, insulting, inaccurate name-calling instead. Spend a little time at AlcoholJustice.org and see what we really do care about.
On July 17, 2014, FedEx was indicted for conspiracy to distribute controlled substances. According to the U.S. DOJ, "FedEx is alleged to have knowingly and intentionally conspired to distribute controlled substances and prescription drugs to customers who had no legitimate medical need for them. A representative for the company contested these claims, stating that it would violate personal rights of customers to deny service and that "We are a transportation company we are not law enforcement". On July 17, 2016 the DOJ U.S. Attorney's Office confirmed in a statement that it had asked U.S. District Court Judge Charles Breyer to dismiss the indictment.
Liquors sold by retailers to consumers do not belong to retailers. Those liquors are already consumers' private property when retailers tender them to a carrier for delivery.
What FedEx and UPS are trying to enforce now when they deny service to those 36 states?
Thank you for the great article Liza!
Dear Liza and John, please quit if you don't understand law! Please quit and stop misrepresent it!
A) In more than 220 years, Congress has only once given to the states the power to regulate interstate commerce: In 1945 when Congress gave the states the power to regulate interstate commerce in the area of Insurance.
So, states do not have and never being given any power to regulate interstate sales and shipments of alcohol except as explained in 21st Amendment Enforcement Act. Debates are closed here!
B)While the Three-tier regulatory system is unquestionably legitimate it is not the closed circuit. Nothing limits third-tier retailer to sell all alcohol to all consumers. Moreover, civil law prohibits retailer to deny sale. Yes, state may prohibit in-state retailer to deliver/ship alcohol to consumer. No, state does not have power to regulate retailer in another state.
C) The 2005 Supreme court decision did not permit any DTC wine shipments. It only did not allow to a state discriminate against out-of-state wineries if state permits in-state wineries to sell directly to consumers. DTC is perfectly explained by TTB - shipment by Federal Basic Permit holder directly to consumer. That's it!
D)WSWA represents only interests of very few largest distributors who already distribute in almost all states. Since 2005 WSWA introduced several bills to Congress begging to amend Constitution and allow states to regulate interstate commerce(HR1161, HR5034, etc.) None of those bills became law and only exist in WSWA's ill imagination.
E)FedEx and UPS are common carriers who were obligated to serve general public without any discrimination. As we might remember common carriers exist for convenience and necessity of that general public. They are simply not permitted to decide what and where they will or will not transport. They are both regulated by Congress (by virtue of Commerce Clause) when it comes to interstate transportation. Several complaints to ADA will put them right into place.
F)Purchase of alcohol by any adult for such adult's personal use or consumption is absolutely private action of such adult! Unless possession and consumption or any other legal use is permitted there is absolutely no law, WSWA, FedEx, UPS or anything else that might regulate it. Carve out this civil right on your foreheads and remember it forever!
If you don't understand these simple ABCs
This is a great article that details the layers of complexities. We can speak only in terms of liquor enforcement an can say that the funding and resources vary greatly from state to state as well.
The consumer really needs to be aware of what they are drinking and report any suspicious bottles and drinks to www.SafeProof.org
Yes the TTB does a great job but their focus are at the main points. Producer and Ports. That leaves a lot in the middle for local enforcement. They rely on tips to catch violations.
Nicely done, Liza. Reading between the lines, Hinman does not seem to have an easy way to curb the wholesaler's power, although he obviously sees a need to do so. It's always good to see our tax dollars at work, as politicians fueled by the industry's donations have consistently found ways of hurting the consumer.
I shipped wine and spirits to every state in my 25 years as a retail store owner in the form of gift baskets, mixed cases, gift boxes, etc. Just do it !! Quit making things so complicated!!