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Wine suppliers are not the new Mafia

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Joshua T. Block and Sharon Silber, two New York residents, and Kahn’s Fine Wines & Spirits, an Indiana liquor store that wanted to send them wine, never thought they had anything in common with Al Capone, until the 2nd U.S. Circruit Court of Appeals, sitting in Manhattan, compared them to “organized crime” figures who, if allowed to get away with their scheme, might illegally “dominate the [wine] industry.”

alcaponemugshotcpd
Notorious wine merchant Capone, c. 1936

That was the language the Court used in striking down the three plaintiffs’ lawsuit against New York State’s Alcoholic Beverage Control Law (ABC Law), which prohibits suppliers from selling wine directly to consumers. The Circuit Court ruled instead in favor of the New York State Liquor Authority, the main defendant, and declared that New York’s law does not violate the Commerce Clause of the U.S. Constitution.

The case was closely watched by all parties in the wine industry, particularly because it was one of the most important test cases following the U.S. Supreme Court’s Granholm v. Heald 2005 decision, which held that States may not prohibit out-of-state suppliers from selling direct to consumers, if they allow in-state suppliers that freedom. The Circuit Court, however, held that the ABC Law does apply equally to both in-state and out-of-state suppliers and hence “these provisions are within the authority granted to New York by the Twenty-first Amendment [to the Constitution, which repealed Prohibition]. Having so ruled, the Court finds it unnecessary to undertake a dormant Commerce Clause analysis. There being no further basis for plaintiffs’ challenge to the constitutionality of the ABC Law, the Complaint is dismissed.”

I guess I can see why the three Circuit Court judges ruled the way they did. Writing for the majority, Judge Richard C. Wesley said New York’s law “treats in-state and out-of-state liquor evenhandedly,” and “thus complies with Granholm’s nondiscrimination principle.” It isn’t up to these non-elected judges to make new laws, but only to interpret existing laws, no matter how loathesome.

What I don’t understand is why Wesley couldn’t leave it at that. Instead, he went on a rant when he called the plaintiffs’ lawsuit “a frontal attack on the constitutionality of three-tier system itself,” which he said the Supreme Court in Granholm found “unquestionably legitimate.” That is true, but the High Court also cast considerable doubt on the underlying merits of the three-tier system, which was not itself at issue. Justice Anthony Kennedy, writing the majority opinion, conceded the three-tier system “substantially limits the direct sale of wine to consumers, an otherwise emerging and significant business.” Noting a decline in the number of wholesalers (and it’s even worse today), Kennedy added: “The increasing winery-to-wholesaler ratio means that many small wineries do not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products.” He correctly noted that direct-shipping of wine to consumers (in States where it is permitted) represents a hope for these small family wineries. But, he pointed out, “In many parts of the country, however, state laws that prohibit or severely restrict direct shipments deprive consumers of access to the direct market,” and he quoted the Federal Trade Commission as saying, “[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine.”

So it seems to me that the Supreme Court, at least, is aware of the inadequacies and unfairness of the three-tier system. It’s going to take the wine industry years more to topple it, or at least by-pass it, but it’s incredible to me that Mr. Block and Ms. Silber, two New Yorkers who just wanted to buy some wine from a fine wine shop that happened to be located out of their State, are unable to do so, because of an antiquated law that was designed to prevent Al Capone and the Mafia from taking control of the liquor industry. I mean, come on!

I called the owner of Kahn’s Fine Wines & Spirits, Jim Arnold, and asked him what he’ll do next. “We’re re-evaluating that with our attorneys,” he replied. When I asked what specific wines he had tried to send to the New Yorkers, he said, “Collectibles. We’ve had lots of requests from New York residents to send to them, which is why we brought this suit.”

  1. “[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine.”

    I’d call that an understatement :-)

  2. The verdict rest aside, I’m surprised by the judge’s reaction. Perhaps his passion stems from his interpretation of the law. When you reach that level of rank within legislation system, you must hold the law dearly–anything that strikes against it, especially for its own benefit, must wreak of foul injustice no matter how minor we may view the issue at hand. In the judge’s eyes, he was protecting something that day. Whether anyone thinks that system needs no protection, again, is a matter of interpretation.

  3. Tom Wark says:

    Regarding the judge’s reaction, it’s important to know that this is the same judge that was overruled by the Granholm decision. In my view, he never got that memo.

    The premise here is that Granholm only applies to wine producers and that its principles do not apply to simple wine shippers, ie: retailers. It’s a flawed argument that has no constitutional basis.

  4. Tom Wark says:

    “it’s incredible to me that Mr. Block and Ms. Silber, two New Yorkers who just wanted to buy some wine from a fine wine shop that happened to be located out of their State, are unable to do so”

    The better question is this: If NY allows it’s own wineries, out-of-state wineries and it’s own retail shops to ship to NYers, what’s the rationale for not allowing out-of-state retailers to do the same.

    If you want an answer to that question, you need to call the Wine & Spirit Wholesalers Association, Southern Wine & Spirits, Charmers and the state politicians they contribute to.

  5. Tom, thanks. Let’s hope this mess gets sorted out fast.

  6. George Parkinson says:

    The issue is politcal liasons and constituency. Judges that are elected and run on a specific platform for an elected office owe their benefactors as do most politicians making many of their decisions, biased as in this case. The simple truth in this argument for or against DTC laws, is that freedom to ship wine will open more commercial opportunities, not only for the small winery, but the wholesaler as well who would potentially ship DTC with their portfolio through e-commerce if they took off their blinders and realized the opportunity DTC would offer. A truely FREE commerce system turns the wheels of a FREE market economy and enpowers society to accomplish great things for the good of all the people not just the few.

  7. George, you raise a great point: DTC will benefit, not just small wineries, but wholesalers and distributors! Thanks for pointing that out.

  8. Tom Wark says:

    With the exception of a few states, the battle for WINERY to Consumer shipping is over. Just a few loose ends need to be tied up. However, retailers may now only ship into 13 states. This means that the majority of wine in the American marketplace, particularly imports, is unavailable to most wine lovers in most states.

    Tom…

  9. Tom, thanks for continuing to clarify this complicated issue.

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