Beverage Industry

Industry Gets its day in Court

October 1, 2004

Industry Gets its day in Court

A battle has been brewing in the world of alcohol beverages and it will be fought in the nation’s highest court before the year is over. The U.S. Supreme Court is scheduled to hear arguments on Dec. 7 regarding direct shipping lawsuits in Michigan and New York — a fight that pits two aspects of the U.S. Constitution against each other, as well as two parts of the beverage industry.
Although the cases to be heard by the court involve wine sales, the issue of direct shipping affects beer and spirits as well. In question are laws in Michigan and New York that prevent out-of-state wineries from shipping products directly to consumers in those states. Both states allow local wineries to ship product to residents, and the organizations behind the lawsuits say that violates the Commerce Clause of the Constitution, which is meant to protect interstate commerce. But the Constitution has a competing interest in the form of the 21st Amendment, which gives each state the right to regulate the sale and distribution of alcohol beverages within its borders.
For history buffs, even those not directly involved with the issue, the case provides an interesting look at the way the industry has evolved. The repeal of Prohibition in 1933 recognized the range of attitudes toward alcohol by giving control to the states, which created a patchwork of local alcohol laws and sales methods. Most states use a three-tier distribution system in which alcohol manufacturers sell their products to wholesalers, who navigate local laws and make sure alcohol is sold only to retailers and other establishments that will legally sell it to consumers.
But technology often moves faster than the law, and during the ’90s, the Internet created new opportunities to expose consumers to niche products, and sell items that previously were only available in other states.
Naturally, wholesalers and manufacturers have different takes on the situation, and their respective livelihoods depend on the outcome. Wholesalers, represented in part by the National Beer Wholesalers Association and the Wine and Spirits Wholesalers of America, believe they play an important part in encouraging responsible consumption of alcohol and upholding local laws. Wholesalers also are responsible for collecting government excise taxes for the states.
Wineries involved in the case say their small volumes, combined with widespread wholesaler consolidation have shut them out of the market, and their businesses depend on being able to sell directly to consumers. WineAmerica, the Coalition for Free Trade, Family Winemakers of California, and other supporters of the wineries say state licensing agreements would provide for tax collection, and argue that a 2003 Federal Trade Commission study indicates direct shipping does not promote alcohol sales to minors.
While the beverage manufacturers involved in the current case are small boutique wineries, challenges to the system could have much bigger, farther-reaching effects. In theory, retailers also could bypass wholesalers and buy directly from manufacturers. Costco already has challenged the state of Washington, which prevents out-of-state suppliers from selling directly to the retailer, while in-state companies can do so.
Of course, the issue will not be decided by one  case — the question at hand deals with only part of the battle. But all sides of the debate will be watching closely for the decision, which is expected to be announced next year and could shape the future direction of the industry. BI