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No on HR 5034!

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I haven’t yet addressed the issue of HR 5034, now going through the U.S. House of Representatives, because it seemed complicated, and I didn’t want to take a position until I understood the details.

I wanted to try and see this from the distributors’ point of view. There may be a case in favor of restrictions on alcohol sales of the kind they’re trying to push through in 5034. After all, alcohol isn’t your average consumer product, it’s a drug. If it gets into the wrong hands, it can cause lots of pain. So I didn’t want to have a kneejerk reaction and just say, “All distributors are jerks,” even though my initial instincts were strongly in favor of direct shipping. Sometimes, instinct needs to be tempered by informatio, and gathering information takes time. In the end, though, I’m coming out against 5034, because the arguments in favor of it are very weak, and they don’t stand up to intellectual scrutiny.

Most of what I knew about 5034 came via Tom Wark, who’s blogged extensively against it at Fermentation. As Tom explained it to me, 5034 was a sort of end run around the Supreme Court’s famous 2005 Granholm v. Heald decision, in which SCOTUS said (I’m paraphrasing) states cannot prohibit wineries from other states from sending in their wines to consumers, if those same states allow their own wineries to disseminate wines. It was a basic issue of fairness, but also seemed to comply with the Commerce Clause (Article I, Section 8, Clause 3) of the U.S. Constitution, which gives the Congress — not the separate states — the power to regulate interstate shipping.

That was a good development, especially for smaller wineries, who had found themselves locked out of the distribution system. The smaller wineries wanted to be able to ship their wines directly to customers anywhere in the country, especially in the age of the Internet; and Granholm v. Heald seemed to give them that right (although when I interviewed Ken Starr, who successfully argued the case, he told me it would be many years before there was unfettered wine shipping across U.S. states, and boy, was he right).

Tom also explained to me that 5034, if enacted, “would give states the ability to enact discriminatory bans on wine shipping,” reasons too complicated to get into. Bottom line, according to Tom: “The law encourages and will result in states… passing bans on direct shipping that cannot be challenged in court.” (Disclosure: Tom is the paid executive director of the Specialty Wine Retailers Association, which is very anti-5034, and so he’s not exactly unbiased. But I am.)

I always operate on the theory that you can figure out what’s up with an issue by seeing who’s for it and who’s against. So who’s in favor of 5034? Let’s start with the Wine & Spirits Wholesalers of America. In a press release last April, they “encouraged members of Congress to support state-based regulation of alcohol and look beyond the mischaracterizations and misinformation being circulated” by its opponents, like Wark and SWRA. They took a states-rights position — the kind that conservative red states always take when they want to be discriminatory — and said 5034 would “place the burden in litigation where it should be: on the plaintiff challenging a state alcohol law.” That’s pretty much the same flimsy argument that opponents of Brown v. Board of Education used in the 1950s: the Federal government doesn’t have the right to desegregate public schools, and if a black family doesn’t like a school’s admission policy, they can sue that school board in court. If not for Brown v. Board, we’d still have segregated schools today.

WSWA also argued that 5034 doesn’t violate the Commerce Clause because it “does not expand state legislative or regulatory authority into what is currently and appropriately federal jurisdiction.” This seems to me to be disingenuous, an Alice-through-the-looking-glass playing with words. WSWA says that the Federal government, through agencies like TTB, FTC and FDA, remains free to regulate alcohol “in such areas as labeling, advertising and food safety.” Okay, but if the Feds can regulate in those areas, why can’t they regulate interstate shipping? Totally bogus argument.

Finally, WSWA asserts 5034 “does not favor any segment or tier of the industry.” Puh-leeze! Everybody knows 5034 favors wholesalers. Who’s kidding whom?

Who else is in favor of 5034? Well, there’s the National Beer Wholesalers Association (NBWA), whose position is a carbon copy of WSWA’s (and for similar reasons). Then there are 5034’s backers in the Congress, about 100 of them. There’s ample evidence that WSWA and NBWA have contributed boatloads of money to their supporters, as for instance here and here and, especially, here, where you can draw direct lines between WSWA’s main contributors (all the big distributors) and individual congressmen who are beneficiaries of its largesse (and by the way, this isn’t a partisan issue: Democrats and Republicans alike take campaign donations from WSWA and NBWA).

So what we have is a collection of odd bedfellows lined up in favor of 5034: wholesalers, distributors, and the politicians who take their money to run for election or re-election.

Now, who’s against 5034? Like I said, there’s Tom Wark and his Specialty Wine Retailers Association. No surprise there, since their members are smaller wineries and merchants, and their slogan is “wine without borders.” Also against the bill is Free the Grapes!, which is a leading group in favor of direct interstate shipping of wine; various state legislatures (including the New Jersey Senate, where my cousin, Sen. Loretta Weinberg, voted to open up interstate wine shipping); the Wine Institute; Family Winemakers of California, and many congressmen from wine-producing districts, including Rep. Mike Thompson, who represents the North Coast.

For me, the good guys are against 5034 and are in favor of the free, unfettered shipment of alcohol, to and from adults, throughout the 50 states. Isn’t that as it should be in America — isn’t that as Thomas Jefferson intended? I don’t want to say those in favor of 5034 are bad guys, because I’m sure they’re good people who are simply trying to protect their economic interests, same as all of us do. But I’m siding with those trying to defeat 5034. It’s a bad bill. Please call your Congressional representative and urge him or her to oppose it.

  1. Strong piece Steve….people need to act now…last I heard there were 108 co-sponsors of this bill…that is only a 1/4 of Congress…they still need a lot more votes to get it passed but I have also read that they are going to try to sneek it in as part of the tail end of another bill (that has much more of a chance to pass on its own)…thereby gaining the approval they need (sounds like a 3 card Monte or shell game)…I’m sure that it would end up in the Supreme Court…and for just the way they tried to get this bill put together (unannounced and behind closed doors) it should be thrown out (like Tom I am very much bias) but lets not allow it to get that far!

  2. Good stuff, Steve. Seems to me that the reasons are differing but most people who are pro-consumer are going against HR 5034. I wrote a piece about this for the Wine Crush blog, and basically what I found was that either this thing is gonna be bad for consumers, or it’s kind of useless because it doesn’t modify legislation all that much – in either case, that makes it poor legislation.

  3. Steve

    Good post. This is the response I received from a HR 5034 supporting congressperson. Please not the thinly veiled attempt to use the bill as a way to protect states rights:

    As you know, H.R. 5034, if enacted, would reinforce the current system of state-based regulation of alcoholic beverage sales and distribution by stating that it is the policy of Congress that each state or territory should continue to have primary authority to regulate alcoholic beverages. The bill would also limit discrimination against out-of-state producers of alcoholic beverages.

    This legislation was introduced on April 15th, 2010, by Rep. William Delahunt of Massachusetts , and is currently pending before the House Committee on the Judiciary.

    Please be assured that I will keep your views in mind should this bill come to the floor of the House of Representatives for a vote.

  4. Steve,

    Thank you for ‘looking before leaping’ and your well thought out response to this issue! I an also a no on HR 5034

  5. Greg, the “current system of state-based regulation” is exactly the problem! We need a single, nation-wide system of alcoholic beverage sales and distribution.

  6. Dude, poor legislation indeed. But that’s politics for ya. Money talks, nobody walks.

  7. Steve

    Agreed. Having owned a retail wine shop and dealing with the 3 tier system, the current system is not working. At least not to the benefit of the consumer.

    That response was from a Democratic Congressperson who is heavily funded by the distribution gang.

    Greg

  8. Kristy Charles says:

    If you want to come out against this bill but don’t have time to write something up to your representatives, then just go to the Free The Grapes Web site, customize their form e-mail and hit send. Easy peasy.

  9. Better late then never Steve. Bottom Line this Bill sucks. What is worse are the 110 or so co-sponsors. From the left and the right. All that Bi-partisan support makes you wonder what the motivation is all about.

  10. We are a small winery with two entities — Tudal Winery in St. Helena and Cerruti Cellars in Jack London Square in Oakland. We will be directly (pun intended) affectd by HR5034 if it passes.

    That’s because most of our production (less than 2,000 cases and about 10,000 respectively) are sold direct to the consumer, and totally in California.

    The progenitors of this arcane and another Machiavellian attempt to put the boot on the neck of wineries, is pure greed because they want every bit of the pie.

  11. To be sure that states would ratify the 21st amendment and end prohibition, FDR handed them the power to regulate, it worked. Whether it was absolutely necessary for ratification we’ll never know, but now we’re stuck with a balkanized backwards system. I see no compelling reason for states to have such control. The system we have now emerged from the 30s, the three tier system designed primarily to create a funnel (the middle tier) that facilitated the full and complete collection of excise taxes.
    States were most interested in taking their cut of the trade, pure and simple. The unintended consequence of that was the accumulation of wealth (and thus power) to distributors. We now see what that brings, suppression of innovation and modernization at the expense of the common good (everybody else besides the distributors) in a way that can no longer be justified (if it ever really was justifiable). In the modern world
    we need to not allow special interest status quos to be perpetuated for the few at the expense of the many.

  12. “Why can’t we all just get along…”
    With more than 100K SKU’s (wines available in the marketplace), and driving up and down Hwy 29 on some days, seemingly just as many wines, isn’t the sandbox big enough for us all to play in?

  13. Bruce, you’d think so. But apparently not, from the point of view of the distribution network.

  14. 5034 does two things. First, it removes language prohibiting discrimination against other States, originally found in the Wilson Act. Second, it makes changes from the Webb-Kenyon Act to shift the burden of proof in a constitutional challenge. There is a more detailed, but I hope not too legalese, analysis here- http://palatepress.com/2010/04/hr-5034-an-analysis/ It goes into the history of alcohol legislation BEFORE Prohibition, essential to an understanding of Granholm and how 5034 is drafted to overturn that decision.

  15. David B. says:

    The three tier system is a legalized cartel. In Ohio the law mandates a 25% wholesale markup and a 50% retail markup. This is why the money is spent on people who write the laws.

  16. I dont understand. There are over 8000 wineries in the US and growing. No distributor no mater how large, overstaffed, educated, sampled, etc can represent even 10% of these brands. Shelf space is a premium in every retailer. Most stores carry big hitters an then a sampling of the niche wines ( yes there are exceptions). I read the average is about 300 SKU’s. That leaves many of the 40,000 plus labels without a home.

    Direct shipping gives many just that.

    Distributors should embrace with open arms, the whole process. Wineries can ship goods, building a brand, and then if the demand is high enough enlist a distributor to seel much of the product with a good track record. the would also have a good isdea as to what isnt seeling in what markets right away ( how many $250 cabs are selling in the unemployment belt)

    Just my 2 cents

  17. Try and tell your club members in GA, NC or MA that they possibly will not be receiving any more small production wine and it’s directly because of THEIR specific REGIONAL representativeS. Yikes!!! It’s wasn’t much fun, however the fire was lit… as in lit up and raging on the phones and emails. I know one client actually went to the ofc. of her Rep. from the great state of MA… She was of the opinion that he was paying back before he bails ofc.

  18. One thing not mentioned here is the synergy between state legislatures and the wholesalers. States have long tried to create protectionist laws for their own wineries. Would Indiana like to create laws that prefer Indiana wines over those from California? Absolutely, and that is really what Granholm is about, not wineries shipping to individuals.

    HR 5034 attempts to remove the limitations against state-to-state discrimination. The result could be a law that allows in-state wineries to ship to consumers, but not out-of state winers. But they could be far more onerous, too.

    Here is an interesting thought exercise. What if a State required the labels to have a more strict alcohol warning than that required by Federal regulations? No, you say, that could not happen because of federal preemption. Oh but wait, is that really true with the 21st Amendment and HR 5034? It is actually not so clear. The result, should a Court decide it’s okay? State-specific labels. Smaller wineries will not be able to make them, and some larger ones won’t bother in smaller markets. Et voila! the perfect protectionist scheme for local wineries. And of course, the big wholesalers will only be willing to help out for wine bought by the palate, not the case.

    There are dozens, perhaps hundreds, of similar schemes that state legislatures can use to favor their own constituents.

    I just believe it is important to understand this is not just about the wholesalers. The States have their own bad-faith interests here, too.

  19. A report out of last week’s Direct Shipping Seminar on a study of direct shipping volume tallied 2.6 million cases — ONE PERCENT of US wine production — currently moves in the direct-to-consumer channel. One would think that wholesalers could use their $millions of PAC funds for better purposes than protecting 1% of wine volume, most of which is shipped by producers too small to fit their model.

    And there’s more to HB 5034 than direct-to-consumer. Look at Indiana, where Warren Buffet’s McLain Distributors is making a move into delivery of licensed beverages.

  20. Hi Steve,

    Thanks for weighing in. I agree, there’s really no one who benefits, and no one who supports, this bill aside from the wholesalers’ associations.

    But one thing that I think you don’t point out is worth including, because it helps explain why the wholesalers are putting in so much money and effort on an issue — the 1% of wine that is shipped direct in the USA — of so little financial relevance for them. That is that they see the Granholm as a crack in the three-tier system that might, if left unaddressed, eventually lead to big retailers being able to buy direct from suppliers. And this is something that would make a big, big difference to them. Imagine stores like BevMo, Costco and the major supermarkets buying direct from the importers or producers… that would hurt their pocketbooks.

    And so they’re willing to champion an issue that gets them a lot of negative press and might put lots of small wineries (who they theoretically represent) out of business. They see it as self-protection.

    That doesn’t make it a better law — worse, if anything — but does explain their vigor, I think.

    I wrote about this at some length on the Tablas blog a couple of weeks back: http://bit.ly/d37yVm

    Thanks for continuing to build awareness!
    -Jason

  21. Jason, it’s hard to imagine how big retailers could deal individually with hundreds if not thousands of wine companies. I would think, though, that computer software is the key. I wonder if somebody is working on anything like that.

  22. Steve:

    What Jason Said. Wholesalers are deathly afraid of Self Distribution by producers to retailers. It’s already allowed in CA and WA and other states. Self Distribution may not be realistic in some circumstances, but in others it makes perfect sense, particularly for a winery that makes about 6-10K cases and wants to work only a few (say, 10) markets.

    Tom…

  23. Tom, obviously I am on your side.

  24. Steve, Tom, David, Jason, others
    What are the politics and influence of the Distilled Spirits Council (most also deal in wine) and the Ky Distillers’ Association (Bourbon) in opposing HR 5034?

  25. Kathy –

    What the argument is really about — and the reason the distillers and spirits producers are interested in this — is that allowing direct shipping to consumers allows direct shipping to retailers as well. (Retailers are, after all, people.) That means your corner wine store can get a case of that exotic, small batch Russian River Pinot you read about in Wine Enthusiast. It also means Walgreens can deal directly with Kendall-Jackson.

    Imagine, for example, if KJ could sell a few million cases at a time to Walgreens, instead of selling to 30 different regional distributors who then sell to Walgreens. Sales costs would go down, and the 30% middleman’s cut would be eliminated. Walgreens could lower prices 10%, KJ could raise prices 10%, and the wine would still sell for 10% less than it sells for now. Everyone makes more money except the distributor, who makes nothing.

    Distilled spirits work the same way: if Jack Daniels can cut one deal that covers Liquor Barns in 44 states, instead of 44 separate distribution deals, Jack Daniels makes more money, and so does Liquor Barn.

    We talk a lot of about shipment to individuals; that’s not what this is about, even a little.

  26. Today, at its blog, The Legal Pulse, Washington Legal Foundation (WLF), a nonprofit public interest law and policy center, posted a commentary on the CARE Act and its ramifications for interstate commerce and regulation of the multi-billion dollar alcohol industry: http://wlflegalpulse.com/2010/07/13/care-proposal-more-effective-state-alcohol-regulation-or-just-more/.
    For more information about WLF, please visit our institutional website at http://www.wlf.org. Thanks very much for you time, and we hope you enjoy the commentary.

  27. Steve — Good article. Thought you should know that the link on the third blue “here” is dead.

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