Tue07292014

Food & Wine

Supreme Court sympathetic to interstate wine sales

I don't think the week after New Year's is the greatest time to tell you what you should be drinking or what I have been drinking. It may be the time to contemplate what the rest of the country may soon be able to drink (wines with little or no distribution outside of California) if the Supreme Court of the United States so decides.

The Supreme Court in early December heard oral arguments concerning the banning of interstate direct wine shipments to consumers in Michigan and New York. At issue was whether the 21st Amendment, which repealed Prohibition, gave states the right to discriminate against out-of-state wineries.

The 21st Amendment did give states control over alcohol distribution. The controversy, 70 years later, is whether the 21st takes precedence over the Commerce Clause, which prohibits states from discriminating against out- of-state competition.

The clamor to allow direct shipment has been spurred by the tremendous increase in the number of small family-owned wineries (more than 3,000 and counting). For many, the Internet has given these wineries a tool not only to increase their scope of distribution but to increase their profit due to the elimination of a middleman.

There are still 24 states that do not allow receipt of interstate shipments. It is a felony in Florida and Maryland.

Douglas Glen Whitman has written a book "Strange Brew: Alcohol and Government Monopoly." His thesis is that government has empowered the three-tier system. The Federal Alcohol Administration Act of 1935 forbids the vertical integration of the liquor business. It created three separate entities; suppliers, wholesalers/distributors and retailers.

Whitman says "franchise termination laws" (protected by the government) restrict suppliers from changing their distributors, thwarting competition and encouraging price gouging. These franchise rights are in effect for beer in all 50 states and wine and spirits in 20 states.

The wholesalers and distributors have a very powerful lobby, which does not want alcoholic beverages distributed any other way than their way.

Whitman says the only clear winners are the wholesalers who can increase their profit margins. There are political benefits for state legislators who pass protective laws. They receive funds from special interest groups.

When the Supreme Court heard the case, Justice Stephen Breyer said there was no language in the 21st Amendment permitting discrimination. Justice Ruth Bader Ginsburg stated that the purpose was not to favor local liquor industries by prohibiting competition. New York allows out-of-state shipment if the winery establishes an office in state. The justices questioned how an additional office would help to control underage drinking. The decision will be made by June, and hopefully there will be some relief so that small family wineries can benefit from Internet distribution.

Hicks is a wine consultant who lives in Los Altos Hills.

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