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Mark Squires' E-Zine on Wine

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Articles, February, 2000

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The Worm turns......

     Well, well, well. That’s all I can say. The other shoe is about to drop. Over the years, I have written before on issues concerning freedom of competition in the wine business. See, for example, Public Enemy #1. These articles were largely prompted by the aggressive and self-serving tactics of the Wines and Spirits Wholesalers Association in attempting to ban interstate shipping and impede internet sales. Now, it seems that the tide is about to turn, and the wholesalers aren’t going to like things much when it does. 

    I remember being interviewed, about this issue on a radio show a couple of years ago. At one point, the host and I paused in our anger and expressed bewilderment that people we considered to be our wine friends had adopted such unreasonable policies and attitudes. At the time I said, “Well, they had better be careful. Because there is going to be a backlash over this. No one made the three-tier system constitutionally protected.” It did not take long.  

    First, a few months ago, an Indiana federal court ruled certain Indiana anti-shipping regulations to be unconstitutional under the Commerce Clause to the U.S. Constitution. Bridenbaugh v. O'Bannon (N.D. Indiana, April 16, 1999, 3:98 CV 0464 AS).  That decision was a thunderbolt, but confined at the moment to Indiana. Now, the Institute for Justice, a non-profit legal advocacy group has taken up the cause. This is bad, bad news for the wholesalers. The Institute for Justice specializes in attacking laws that trample upon economic liberties. They are well funded. They are effective. They are smart. In the past, the wholesalers had big monetary advantages They outspent even the wineries, and consumers lacked the numbers and resources to fight back effectively. The balance of power has just changed. [After this article was written, Texas Federal Judge Melinda Harmon made a ruling similar to the Bridenbaugh one, in Dickerson v. Bailey (S.D. Texas). That should provide additional precedent.]

    On Thursday, Feb. 3, the Institute filed a lawsuit “that seeks to repeal New York state laws prohibiting the direct shipment of wine to consumers from out-of-state wineries. The suit also seeks to take off the books state laws that limit all advertising, including Internet advertising, for wines by out-of-state wineries. The Washington, D.C.-based Institute for Justice will file the suit on behalf of small wineries in California and Virginia as well as wine consumers from New York. The suit will be filed in U.S. District Court for the Southern District of New York. New York is the second largest wine market in the country."   (IJ press release)

    If this latest lawsuit succeeds in the high profile wine market of New York, where wholesalers spitefully and senselessly defeated reciprocal shipping proposals not too long back, it will be a new ball game. The theory in the Indiana case, which will likely be echoed in New York, is that, whatever the 21st Amendment to the Constitution says [This is the amendment that repealed prohibition and gave the states wide powers over the regulation of alcohol], free trade is still mandatory. That is, states may regulate for their own police power purposes, but not to give ill- disguised monopolies and preferences to in-state wholesalers. The wholesalers risked everything to maintain their anti-American monopolies, when they might have compromised in small ways and relieved some of the pressure for free trade. Now, the potential ramifications of the Indiana/New York actions are countless. Will the three-tier system of distribution survive? Who says we really need wholesalers? Further, given the theory espoused in the Indiana case, will the door be opened to private antitrust actions against WSWA members for its role in promoting the monopolies of its members? 

    Wine lovers may also find that there is good reason to celebrate on practical grounds. Small wineries, dedicated to craftsmanship and quality, may flourish and winemakers may find it more economically feasible to operate. Who knows...with direct shipping, prices may also moderate. (Marcassin, direct shipped, is not so expensive. But on store shelves the markups are often outrageous.) 

    The reality is that the absurdity of the wholesalers’ position has come back to haunt them. Their arguments (see my article, cited above) were not only weak, but deliberately deceptive. They treated everyone like fools when they made arguments about shipments to minors, and tax problems. Their self-interest was transparent, and the holes in their arguments were and are wider than the Grand Canyon. In making such arguments, they have left themselves open to exactly what they now face—someone coming into Court and saying, “Look. These regulations aren’t intended to protect anyone. They are just monopolies created by the pressure and deceit of an industry trade group. All we are talking about here is self-serving protectionism for people already in the state. That’s illegal, and not what was intended under the 21st Amendment.” 

    As the Indiana court, per Judge Allen Sharp, said:  "For whatever reason, the General Assembly of Indiana has chosen to discriminate as between in state (Indiana) and out of state purveyors of alcoholic beverages.  ....[Permits to sell alcohol] simply are not granted to out of state distributors and at that point, there is an interference with interstate commerce that cannot be gainsaid under the Commerce Clause."

    The road ahead is a long one. Filing a suit is not the same as winning one, and the Indiana decision [and the Texas ruling] will be appealed. The current Supreme Court, where this case may wind up, has come down lately with some “states’ rights” decisions. Someone might stretch those into an argument to leave every state regulation in place, however anti-competitive. Still, things are suddenly looking up. If you’re not a wholesaler, that is.

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