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Legislation Grants Limited Power to States Against Wine DM’ers

Direct marketers of beer and wine said this week that the impending passage of a Senate bill allowing states to use the federal court system to seek injunctions against out-of-state wine merchants would not have any direct effect on their businesses. Although the bill angered some direct merchants, others were relieved that last-minute changes to the measure made it more difficult for states to pursue federal action.

The Senate could consider S. 577, the 21st Amendment Enforcement Act, as soon as the week of March 20; the Senate Judiciary Committee passed it March 2. If it passes the full Senate as expected, it will be reconciled with a similar House bill that passed last fall.

The bills would give state attorneys general the ability to obtain injunctions against out-of-state merchants that sell alcoholic beverages illegally to consumers in the attorneys’ states. Most states do not allow direct shipments of alcoholic beverages from producers outside their borders and require that all producers go through a wholesaler/distributor system.

Some wine and beer producers argue that such restrictions violate the Interstate Commerce Act and the spirit of the 21st Amendment, which repealed Prohibition but granted states the power to regulate alcohol sales and marketing.

“The core power of the 21st Amendment is temperance, and most of these [state] laws … are not dealing with temperance,” said Tom Shelton, president/CEO of Joseph Phelps Vineyards, St. Helena, CA. “These laws are dealing with the state protection of local businesses.”

Shelton, whose firm runs a direct sales wine club called Phelps Preferred, said that although the proposed legislation gives states more prosecutorial authority, it makes it more difficult for these states to invoke those powers.

Sen. Dianne Feinstein, D-CA, who originally opposed the bill, made some late changes to the measure in the form of rules of construction that prevent courts from discriminating against out-of-state sellers. Her changes effectively force states to prove that their laws are not designed to unfairly protect in-state businesses from out-of-state competitors.

The measure is taking on increasing significance as more and more wineries and brewers are turning to the Internet to sell their products and as consumers issue challenges to state laws prohibiting them from buying those products. Direct sales of wine total as much as $500 million annually, according to some estimates.

The Wine Institute, an advocacy group based in San Francisco, said many wineries and brewers are too small to gain adequate distribution through wholesalers and must rely on direct marketing to reach consumers. In addition, direct selling offers consumers more choices and more competitive pricing, the group argued.

In recent months, consumers initiated litigation in several states, including Florida and Indiana, seeking to allow limited purchases of wine and beer from out-of-state sellers. In seven states, including Florida, it is a felony to ship alcohol directly to a consumer across state lines.

Beer and wine wholesalers, which waged an emotional battle against direct merchants over the issue, argued that direct sellers deprive states of tax revenue and create the potential for minors to obtain alcohol. Wholesale industry advocates reacted favorably to the pending legislation, which they had supported as vigorously as the wine and beer merchants had opposed it.

“This is a significant, clear victory … for a state’s ability to enforce alcohol sales and distribution as it sees fit,” said Juanita Duggan, CEO of the Wine and Spirits Wholesalers of America Inc., Washington, in a prepared statement. “This is exactly what we wanted. Basically the vintners and others who wish to continue to ship alcohol illegally were handed a major defeat by the committee.”

John DeLuca, president/CEO of The Wine Institute, said he expects the court battles to continue at the state level.

“Nothing that was done in Washington will rescind or nullify the ability to sell wine as we do now or prevent us from going to the 30 states that do not allow direct shipments and try to get them to change the laws, and go to the Supreme Court,” he said.

Shelton of Joseph Phelps Vineyards agreed that litigation at the state level would continue, saying that free-market forces should be allowed to work in the wine and beer industries as they do in other sectors of the economy.

“The point of all this is to turn the authority to the business-to-business equation, so if all the rules were overturned and we became a free market, I would be able to decide how much of my production should be sold through [wholesalers] and how much should be sold directly by the winery,” he said.

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