THE THREE-TIER MAY HAVE AN ACE
Today we reprint an article from our sister publication, Beer Business Daily, regarding an important development in three-tier law.
Dear Client:
I just knew it. Years ago I had a dream that the three-tier system was crumbling under judicial rulings and one state, one state, came to the rescue. And that state was, of course, North Dakota. In retrospect, how could it have been any other state?
Here in Texas, where the state election commission is debating on whether to put "Grandma Rylander" and "Kinky Friedman" on the governor election ballet, or the names their parents gave to them which, curiously, aren't election-friendly Carol and Fred; we have much heavier matters to weigh in the courts.
You'll recall that two out-of-state retailers are suing the state under the same reasoning that wineries did five years ago: that Texas law discriminates against out-of-state retailers who wish to ship wine direct to consumers. Wine and spirits distributors Glazers and Republic Beverage, along with in-state retailer Pinky's, sought to be interveners in the case against the state's wishes. The Judge has granted them their wish, with certain limitations attached.
But the three-tier legal community as a'buzz with excitement as there is some chatter that Texas assistant Attorney General Jim Todd may have hit upon a winning strategy to preserve Texas' three-tier system in the post-Granholmian world.
THE ARGUMENT. Todd is arguing that it is irrelevant whether Texas'
three-tier laws are discriminatory to out-state entities, because those laws ought to be upheld under the Granholm language that specifically endorses the mandated in-state DISTRIBUTOR requirement as "unquestionably legitimate"
(despite the fact that it clearly discriminates against out-of-state distributors).
The in-state distributor requirement could, in effect, inoculate direct shipping bans in effect by requiring all booze to travel through in-state distributors, as the in-state distributor requirement is a by-product of Texas' three-tier laws and not intentionally discriminatory or protectionist. Of course, the result of requiring in-state bump-the-dock is that wine direct shipping then becomes entirely infeasible.
Is the in-state wholesaler requirement the great savior distributors are looking for? Granholm seems to say that having an in-state distributor requirement is okay. Justice Kennedy cites a previous case involving North Dakota when saying that three-tier is "legitimate". He writes in his majority opinion that the 21st Amendment specifically "empowered North Dakota to require that all liquor sold for use in the state be purchased from a licensed in-state wholesaler."
CURB ENTHUSIASM. Let's not get too hasty. Our resident antitrust and three-tier legal expert, Drew Jaglom of Tannenbaum Helpern Syracuse & Hirschtritt tells BBD that there are other issues to contemplate. Says Drew:
"Justice Kennedy did note the North Dakota decision in Granholm, saying 'We have held previously that States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment.'
In the context of Granholm, however, this is classic dicta - legalese for a statement by a court that is not necessary to the ruling at hand, and is not binding precedent. Now, it's still the Supreme Court talking, and so lower courts, at least, do need to pay attention.
"But the logic of Granholm seems inescapable. If a State cannot mandate a physical presence in the state for wineries who ship direct to consumers, what possible justification is there for mandating an in-state physical presence for wholesalers and retailers?
"If the question is whether a state can require goods to pass through an in-state wholesaler after Granholm, I think it's a tough argument, notwithstanding North Dakota. In Granholm, the court did say (in dicta) that you can require three-tier. That certainly means that a state can mandate that alcohol pass through licensed wholesalers and retailers. But it may also mean - under the principle of Granholm - that the state has to license out-of-state wholesalers. That's the most likely way I can see to reconcile Granholm's holding with its lip service to three-tier.
"On the retail side, the states' position may be a little stronger, but I suspect not strong enough. What the states do have is a legitimate interest in collecting taxes, but the Court seemed to think that with modern technology and reporting requirements (which could be imposed on carriers as well as sellers), the states could find a way to ensure that even out-of-state businesses paid their due. Controlling underage consumption is also a legitimate state concern, but I think that's a hurdle that will be tough to overcome from a practical standpoint.
"It will be interesting to see how this all plays out. At the end of the day, given the inconsistency between what the Court said in North Dakota and what it did in Granholm, it may take another Supreme Court ruling to resolve the issue. And that is at least years away.
"The long and the short of it is that all three tiers need to be prepared for out of state competition. For the middle tier especially, that means, as you have said early and often, providing added value in terms of services to suppliers and retailers so that use of a distributor becomes a benefit, not a burden."
So there is your wet towel. However, BBD has spoken with a regulator and several three-tier specialists who think that, given its limitations, Jim Todd's arguments in his briefs are the best blueprint to date, based on the language of Granholm, for slowing down the direct-shipping juggernaut spreading through the states.
-Harry Schuhmacher
Dear Client:
I just knew it. Years ago I had a dream that the three-tier system was crumbling under judicial rulings and one state, one state, came to the rescue. And that state was, of course, North Dakota. In retrospect, how could it have been any other state?
Here in Texas, where the state election commission is debating on whether to put "Grandma Rylander" and "Kinky Friedman" on the governor election ballet, or the names their parents gave to them which, curiously, aren't election-friendly Carol and Fred; we have much heavier matters to weigh in the courts.
You'll recall that two out-of-state retailers are suing the state under the same reasoning that wineries did five years ago: that Texas law discriminates against out-of-state retailers who wish to ship wine direct to consumers. Wine and spirits distributors Glazers and Republic Beverage, along with in-state retailer Pinky's, sought to be interveners in the case against the state's wishes. The Judge has granted them their wish, with certain limitations attached.
But the three-tier legal community as a'buzz with excitement as there is some chatter that Texas assistant Attorney General Jim Todd may have hit upon a winning strategy to preserve Texas' three-tier system in the post-Granholmian world.
THE ARGUMENT. Todd is arguing that it is irrelevant whether Texas'
three-tier laws are discriminatory to out-state entities, because those laws ought to be upheld under the Granholm language that specifically endorses the mandated in-state DISTRIBUTOR requirement as "unquestionably legitimate"
(despite the fact that it clearly discriminates against out-of-state distributors).
The in-state distributor requirement could, in effect, inoculate direct shipping bans in effect by requiring all booze to travel through in-state distributors, as the in-state distributor requirement is a by-product of Texas' three-tier laws and not intentionally discriminatory or protectionist. Of course, the result of requiring in-state bump-the-dock is that wine direct shipping then becomes entirely infeasible.
Is the in-state wholesaler requirement the great savior distributors are looking for? Granholm seems to say that having an in-state distributor requirement is okay. Justice Kennedy cites a previous case involving North Dakota when saying that three-tier is "legitimate". He writes in his majority opinion that the 21st Amendment specifically "empowered North Dakota to require that all liquor sold for use in the state be purchased from a licensed in-state wholesaler."
CURB ENTHUSIASM. Let's not get too hasty. Our resident antitrust and three-tier legal expert, Drew Jaglom of Tannenbaum Helpern Syracuse & Hirschtritt tells BBD that there are other issues to contemplate. Says Drew:
"Justice Kennedy did note the North Dakota decision in Granholm, saying 'We have held previously that States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment.'
In the context of Granholm, however, this is classic dicta - legalese for a statement by a court that is not necessary to the ruling at hand, and is not binding precedent. Now, it's still the Supreme Court talking, and so lower courts, at least, do need to pay attention.
"But the logic of Granholm seems inescapable. If a State cannot mandate a physical presence in the state for wineries who ship direct to consumers, what possible justification is there for mandating an in-state physical presence for wholesalers and retailers?
"If the question is whether a state can require goods to pass through an in-state wholesaler after Granholm, I think it's a tough argument, notwithstanding North Dakota. In Granholm, the court did say (in dicta) that you can require three-tier. That certainly means that a state can mandate that alcohol pass through licensed wholesalers and retailers. But it may also mean - under the principle of Granholm - that the state has to license out-of-state wholesalers. That's the most likely way I can see to reconcile Granholm's holding with its lip service to three-tier.
"On the retail side, the states' position may be a little stronger, but I suspect not strong enough. What the states do have is a legitimate interest in collecting taxes, but the Court seemed to think that with modern technology and reporting requirements (which could be imposed on carriers as well as sellers), the states could find a way to ensure that even out-of-state businesses paid their due. Controlling underage consumption is also a legitimate state concern, but I think that's a hurdle that will be tough to overcome from a practical standpoint.
"It will be interesting to see how this all plays out. At the end of the day, given the inconsistency between what the Court said in North Dakota and what it did in Granholm, it may take another Supreme Court ruling to resolve the issue. And that is at least years away.
"The long and the short of it is that all three tiers need to be prepared for out of state competition. For the middle tier especially, that means, as you have said early and often, providing added value in terms of services to suppliers and retailers so that use of a distributor becomes a benefit, not a burden."
So there is your wet towel. However, BBD has spoken with a regulator and several three-tier specialists who think that, given its limitations, Jim Todd's arguments in his briefs are the best blueprint to date, based on the language of Granholm, for slowing down the direct-shipping juggernaut spreading through the states.
-Harry Schuhmacher
posted at 8:35 AM
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