INTERVIEW: CRAIG WOLF CLEARS THE AIR
With all the litigation swirling in the air, we thought this would be the perfect time to speak with WSWA president and chief Craig Wolf. Craig helped clear up some of the fuzziness surrounding the multitude of direct shipping cases in our country, as well as shed some light from the perspective of the WSWA. Here’s part one of a two part interview.
WSD: Thanks for speaking with us. There is a ton of litigation going on in the U.S. right now. Generally speaking, what is the WSWA doing to help the state and the wholesalers?
Craig Wolf: Let me break it down for you. There were a number of cases that were filed leading up to the Granholm decision. Those were almost invariably about a winery seeking to ship directly to a consumer outside the state. The one exception prior to Granholm was the Costco case, which was a play on that [direct to consumer] but on the direct to retail side. So the Supreme Court gets the case and what they basically say is that you can’t discriminate based on the producer, or where the product is coming from. Product based distinction is the language that is relevant to that decision. You have to understand that because it is very important as to everything that has come since.
The Supreme Court said a state cannot discriminate based on where a product comes from. So for instance in New York, where they allow their in-state wineries to ship direct, the court said that they were discriminating against out-of-state wineries because those products that come from out of state have a different method of getting to the consumer than the New York wineries do. That’s what you have to understand.
Now, they [the Supreme Court] didn’t say that you can’t have disparate treatment – there’s a distinction between the two . And it’s evident because the Supreme Court said that control states are unquestionably legitimate. And what are control states? Control states are the very pinnacle of discrimination. In the control state, only state run wholesalers can bring in spirits or wine depending on the state; nobody else can. If anybody else wants to come in, nope they have to go through the state. In other words it is inherently discriminatory at the wholesale level and often at the retail level where you have state stores. But that was okay according to the Supreme Court. And the three-tier system is something they said was unquestionably legitimate. So what does that mean? What that means is that the state can require that all alcohol from out of state, and in state for that matter, be funneled through in-state wholesalers and retailers. That is by its very nature disparate treatment because guess what, if you’re not a licensed wholesaler or retailer in that state then you can’t sell in that state. So what they were saying was that it is ok to treat the in-state people differently than out-of-state people simply because the three-tier system requires that. So what they were saying was, look you can’t discriminate against products but guess what, you can require that alcohol be sold through your three tier system. As long as it doesn’t discriminate against out-of-state products you’re okay.
So now we go post-Granholm. The plaintiffs in these cases have decided to expand upon Granholm, which dealt only with wine products from wineries from out-of- state. So there are different types of attacks that you’re seeing. The first kind, of course, is the reciprocal problem. Arkansas still had that problem and Missouri had a reciprocal problem that they’re challenging. That’s understood.
But, what the plaintiffs then did was say, ‘now let’s talk about on-premise sales,’ and when you talk about these cases you’re talking about Maine, Kentucky, Delaware, New Jersey, Tennessee. What they’re saying is if a winery in Delaware can sell to a retailer on-premise, at its location, then that is discriminatory against out-of-state wineries that are located further away, and that’s unfair because they can retail and we can’t. Now, that’s not quite true. Delaware consumers can go out-of-state and buy from those wineries as well. But they then say that it’s unfair because they are further away, and that’s discriminatory. But the Supreme Court has never said that you have to offer remote retailers the same opportunities as in-state retailers . There is simply a natural problem for out-of-state retailers around the country with every product. You don’t have to do anything to level the playing field because your guys are local and their guys are not. In other words, geography itself cannot create discrimination . So what did the main courts say, what did the Delaware courts say? They said exactly that. There’s no discrimination here. A consumer in Delaware, a consumer in Maine, a consumer in Tennessee can buy at the local winery and they can go out of state and buy at the local wineries there, no discrimination. The answer the plaintiffs wanted was that because they can’t retail they should ship direct, even though the in-state people can’t. So actually they were asking for more discrimination. That only they should be allowed to ship direct.
The Courts have almost resoundingly rejected that with the exception of Kentucky. There the judge upheld a gallonage limit, and he upheld a case limit, but he struck down the on-premise face-to-face transaction. Kentucky law is a little different from Maine, Tennessee and Delaware. In Kentucky you could ship direct but you had to be in person to make the purchase. What the judge said was that’s geography. It’s harder for a Kentucky resident to get to California than a Kentucky winery and that’s discrimination. Well, that’s nonsense, that’s geography. So I think that will go by the wayside on appeal. They have the wrong logic. In fact, he was internally inconsistent because he said geography cannot create discrimination after the gallonage cap and the case limitation. So he used two different standards in his own opinion.
So that’s one on-premise challenge post-Granholm. Then you have the retailer challenges, and they’re pending in Texas, New York and Michigan. And now they’re being threatened in Illinois. Now, you have to understand Granholm to understand why thee challenges are going to ultimately fail. Remember that Granholm said that it’s a product-based distinction. Let’s take the situation in Texas. Every bottle of wine that is home-delivered by a retailer in Texas—there’s no discrimination there. Every bottle, whether it come from a California winery or a Texas winery, that comes through the wholesaler to the retailer can be home delivered. There’s no discrimination there. In other words the practice itself is not discriminatory based upon where the product comes from. A California wine, a Texas wine all are treated the same to the point they get to the retailer, and then the retailer can home deliver. So there is no product-based discrimination there. That’s why I think they ultimately lose. The Supreme Court said the three-tier system is unquestionably legitimate so that means you can force all wines to go through your system and how they are treated at the wholesale and retail level, as long as they are all treated the same once they get to the wholesale and retail level, that’s okay with the Supreme Court. That’s why I think the specialty retailers are ultimately going to fail.
What the specialty wine retailers are saying is, ‘wait a minute you’re hurting the consumer,’ but that’s not true. Let’s take the Illinois case specifically. They are opening up the door to direct sales from 5,000 plus wineries in this country. The consumer is going to be able to order from up to 5,000 wineries if they all want to get licenses in Illinois. I guarantee you that there is virtually no product that any of these specialty wine retailers’ members sell that can’t be purchased directly from the winery. They get their product after all through wholesalers from wineries. And I guarantee you secondly that there are substantial retail outlets in Illinois that have these products. Basically if you listen to the specialty wine retailers you’d think the regular retail stores must be deficient, they can’t get products. That’s nonsense. The Illinois retailers are some of the most heavily SKU’d retailers in the country. There is a huge number if SKU’s, a very great variety of selection. So the specialty wine retailers are saying that normal wine retailers are not as consumer friendly as the out-of-state retailers and that’s absurd. The consumers in Illinois will have the option now, under the new law, of going direct to wineries that ship to Illinois or going to their local retailers that will have as good of or better of a selection than any other retailer in this country.
WSD: It looks like the specialty retailers plan to file a lawsuit if…
CW: Yeah, their members have filed these lawsuits before in Texas, Michigan and New York. This threat is nothing new. They want to coerce the state into doing something that the Supreme Court did not require and that in the end is a much more dangerous practice. Why do I say that? What the Supreme Court said was that as far as wineries are concerned, wineries are federally regulated. If they screw up then the TTB can pull their license. And after all there are about 5,000 wineries. At the time of the Supreme Court ruling there were less than that. Now, let’s think about this. What specialty wine retailers are now saying is the retailers should be able to ship direct. There are scores of thousands of retailers, and if the state allows retailers in addition to wineries to ship, how is it possible that they will ever be able to regulate those sales?
It’s hard enough with wineries. You rely on the records they give you because you can’t trace the bottles themselves. You don’t have an ABC regulator at Federal Express or UPS to watch that the deliveries are not made to minors. You don’t have the regulators in Illinois going to the on-premises of these thousands of wineries in other states and checking their tax records. They rely upon those wineries to give them information about what they are doing and then say ‘thank you for the taxes; I hope you gave us what you really owe us.’ Because there is no possible way they could regulate all the taxes.
WSD: It seems like there is a lot of trust involved.
CW: It’s all trust. Sting after sting has proved that it is impossible to prevent that underage access. Now the retailers come along and say, ‘well we’re not federally licensed, and we’re the ones who have had traditionally a very difficult time policing underage activity in face-to-face transactions at the state level. But given all that, you should now allow us to ship across state lines and we’ll be fine.’ And again, I think it is a very unsafe practice.
Now, just to be clear, WSWA doesn’t think that any wineries or any retailers want to sell to kids . That’s not our point. People in the past have accused us of using language that implies that. That’s not the issue here. The issue is that the practices themselves are unsafe, and that creates a risk that kids will gain access. Today’s generation of kids, as one of our surveys shows, are much more computer savvy, they know that alcohol can be purchased online and they’re doing it. The issue is the safety of it; it’s an unsafe practice. You cannot assure anyone that in any direct sale kids are not going to get a hold of it. UPS has said over and over again ‘oops, but we’re not responsible’, and that’s what they’ve testified to in Pennsylvania’s and Florida’s legislatures. They say ‘we have good practices in place, but you know what, we are not responsible, it is the seller who is responsible.’ And the seller says, ‘well, we require UPS to get an adult signature,’ so everybody’s passing the buck. Yet, when we do stings, Massachusetts did stings, the fact is that these carriers are not doing their job, and we don’t expect them to. They are not alcohol regulators, they deliver boxes. So they drop it off, they don’t require adult signatures, and this is a huge safety risk for us. We in the industry need to be careful. We try to be very responsible practitioners. We want the public, and the policy makers and the regulators to understand that we are good businessmen, good members of the community, and we want to be responsible in what we do. We realize we have a socially sensitive product and the practice of direct shipping is not a safe practice. While wholesalers don’t do it at all, if and when a kid buys online, gets drunk and goes and kills somebody, it’s not just that one direct shipper that is going to be tarred, it’s the entire industry that’s going to be tarred. We’ve worked so hard to show how responsible and caring we are that we don’t think that is a risk worth taking.
Stay tuned tomorrow for the second half of Craig’s interview.
WSD: Thanks for speaking with us. There is a ton of litigation going on in the U.S. right now. Generally speaking, what is the WSWA doing to help the state and the wholesalers?
Craig Wolf: Let me break it down for you. There were a number of cases that were filed leading up to the Granholm decision. Those were almost invariably about a winery seeking to ship directly to a consumer outside the state. The one exception prior to Granholm was the Costco case, which was a play on that [direct to consumer] but on the direct to retail side. So the Supreme Court gets the case and what they basically say is that you can’t discriminate based on the producer, or where the product is coming from. Product based distinction is the language that is relevant to that decision. You have to understand that because it is very important as to everything that has come since.
The Supreme Court said a state cannot discriminate based on where a product comes from. So for instance in New York, where they allow their in-state wineries to ship direct, the court said that they were discriminating against out-of-state wineries because those products that come from out of state have a different method of getting to the consumer than the New York wineries do. That’s what you have to understand.
Now, they [the Supreme Court] didn’t say that you can’t have disparate treatment – there’s a distinction between the two . And it’s evident because the Supreme Court said that control states are unquestionably legitimate. And what are control states? Control states are the very pinnacle of discrimination. In the control state, only state run wholesalers can bring in spirits or wine depending on the state; nobody else can. If anybody else wants to come in, nope they have to go through the state. In other words it is inherently discriminatory at the wholesale level and often at the retail level where you have state stores. But that was okay according to the Supreme Court. And the three-tier system is something they said was unquestionably legitimate. So what does that mean? What that means is that the state can require that all alcohol from out of state, and in state for that matter, be funneled through in-state wholesalers and retailers. That is by its very nature disparate treatment because guess what, if you’re not a licensed wholesaler or retailer in that state then you can’t sell in that state. So what they were saying was that it is ok to treat the in-state people differently than out-of-state people simply because the three-tier system requires that. So what they were saying was, look you can’t discriminate against products but guess what, you can require that alcohol be sold through your three tier system. As long as it doesn’t discriminate against out-of-state products you’re okay.
So now we go post-Granholm. The plaintiffs in these cases have decided to expand upon Granholm, which dealt only with wine products from wineries from out-of- state. So there are different types of attacks that you’re seeing. The first kind, of course, is the reciprocal problem. Arkansas still had that problem and Missouri had a reciprocal problem that they’re challenging. That’s understood.
But, what the plaintiffs then did was say, ‘now let’s talk about on-premise sales,’ and when you talk about these cases you’re talking about Maine, Kentucky, Delaware, New Jersey, Tennessee. What they’re saying is if a winery in Delaware can sell to a retailer on-premise, at its location, then that is discriminatory against out-of-state wineries that are located further away, and that’s unfair because they can retail and we can’t. Now, that’s not quite true. Delaware consumers can go out-of-state and buy from those wineries as well. But they then say that it’s unfair because they are further away, and that’s discriminatory. But the Supreme Court has never said that you have to offer remote retailers the same opportunities as in-state retailers . There is simply a natural problem for out-of-state retailers around the country with every product. You don’t have to do anything to level the playing field because your guys are local and their guys are not. In other words, geography itself cannot create discrimination . So what did the main courts say, what did the Delaware courts say? They said exactly that. There’s no discrimination here. A consumer in Delaware, a consumer in Maine, a consumer in Tennessee can buy at the local winery and they can go out of state and buy at the local wineries there, no discrimination. The answer the plaintiffs wanted was that because they can’t retail they should ship direct, even though the in-state people can’t. So actually they were asking for more discrimination. That only they should be allowed to ship direct.
The Courts have almost resoundingly rejected that with the exception of Kentucky. There the judge upheld a gallonage limit, and he upheld a case limit, but he struck down the on-premise face-to-face transaction. Kentucky law is a little different from Maine, Tennessee and Delaware. In Kentucky you could ship direct but you had to be in person to make the purchase. What the judge said was that’s geography. It’s harder for a Kentucky resident to get to California than a Kentucky winery and that’s discrimination. Well, that’s nonsense, that’s geography. So I think that will go by the wayside on appeal. They have the wrong logic. In fact, he was internally inconsistent because he said geography cannot create discrimination after the gallonage cap and the case limitation. So he used two different standards in his own opinion.
So that’s one on-premise challenge post-Granholm. Then you have the retailer challenges, and they’re pending in Texas, New York and Michigan. And now they’re being threatened in Illinois. Now, you have to understand Granholm to understand why thee challenges are going to ultimately fail. Remember that Granholm said that it’s a product-based distinction. Let’s take the situation in Texas. Every bottle of wine that is home-delivered by a retailer in Texas—there’s no discrimination there. Every bottle, whether it come from a California winery or a Texas winery, that comes through the wholesaler to the retailer can be home delivered. There’s no discrimination there. In other words the practice itself is not discriminatory based upon where the product comes from. A California wine, a Texas wine all are treated the same to the point they get to the retailer, and then the retailer can home deliver. So there is no product-based discrimination there. That’s why I think they ultimately lose. The Supreme Court said the three-tier system is unquestionably legitimate so that means you can force all wines to go through your system and how they are treated at the wholesale and retail level, as long as they are all treated the same once they get to the wholesale and retail level, that’s okay with the Supreme Court. That’s why I think the specialty retailers are ultimately going to fail.
What the specialty wine retailers are saying is, ‘wait a minute you’re hurting the consumer,’ but that’s not true. Let’s take the Illinois case specifically. They are opening up the door to direct sales from 5,000 plus wineries in this country. The consumer is going to be able to order from up to 5,000 wineries if they all want to get licenses in Illinois. I guarantee you that there is virtually no product that any of these specialty wine retailers’ members sell that can’t be purchased directly from the winery. They get their product after all through wholesalers from wineries. And I guarantee you secondly that there are substantial retail outlets in Illinois that have these products. Basically if you listen to the specialty wine retailers you’d think the regular retail stores must be deficient, they can’t get products. That’s nonsense. The Illinois retailers are some of the most heavily SKU’d retailers in the country. There is a huge number if SKU’s, a very great variety of selection. So the specialty wine retailers are saying that normal wine retailers are not as consumer friendly as the out-of-state retailers and that’s absurd. The consumers in Illinois will have the option now, under the new law, of going direct to wineries that ship to Illinois or going to their local retailers that will have as good of or better of a selection than any other retailer in this country.
WSD: It looks like the specialty retailers plan to file a lawsuit if…
CW: Yeah, their members have filed these lawsuits before in Texas, Michigan and New York. This threat is nothing new. They want to coerce the state into doing something that the Supreme Court did not require and that in the end is a much more dangerous practice. Why do I say that? What the Supreme Court said was that as far as wineries are concerned, wineries are federally regulated. If they screw up then the TTB can pull their license. And after all there are about 5,000 wineries. At the time of the Supreme Court ruling there were less than that. Now, let’s think about this. What specialty wine retailers are now saying is the retailers should be able to ship direct. There are scores of thousands of retailers, and if the state allows retailers in addition to wineries to ship, how is it possible that they will ever be able to regulate those sales?
It’s hard enough with wineries. You rely on the records they give you because you can’t trace the bottles themselves. You don’t have an ABC regulator at Federal Express or UPS to watch that the deliveries are not made to minors. You don’t have the regulators in Illinois going to the on-premises of these thousands of wineries in other states and checking their tax records. They rely upon those wineries to give them information about what they are doing and then say ‘thank you for the taxes; I hope you gave us what you really owe us.’ Because there is no possible way they could regulate all the taxes.
WSD: It seems like there is a lot of trust involved.
CW: It’s all trust. Sting after sting has proved that it is impossible to prevent that underage access. Now the retailers come along and say, ‘well we’re not federally licensed, and we’re the ones who have had traditionally a very difficult time policing underage activity in face-to-face transactions at the state level. But given all that, you should now allow us to ship across state lines and we’ll be fine.’ And again, I think it is a very unsafe practice.
Now, just to be clear, WSWA doesn’t think that any wineries or any retailers want to sell to kids . That’s not our point. People in the past have accused us of using language that implies that. That’s not the issue here. The issue is that the practices themselves are unsafe, and that creates a risk that kids will gain access. Today’s generation of kids, as one of our surveys shows, are much more computer savvy, they know that alcohol can be purchased online and they’re doing it. The issue is the safety of it; it’s an unsafe practice. You cannot assure anyone that in any direct sale kids are not going to get a hold of it. UPS has said over and over again ‘oops, but we’re not responsible’, and that’s what they’ve testified to in Pennsylvania’s and Florida’s legislatures. They say ‘we have good practices in place, but you know what, we are not responsible, it is the seller who is responsible.’ And the seller says, ‘well, we require UPS to get an adult signature,’ so everybody’s passing the buck. Yet, when we do stings, Massachusetts did stings, the fact is that these carriers are not doing their job, and we don’t expect them to. They are not alcohol regulators, they deliver boxes. So they drop it off, they don’t require adult signatures, and this is a huge safety risk for us. We in the industry need to be careful. We try to be very responsible practitioners. We want the public, and the policy makers and the regulators to understand that we are good businessmen, good members of the community, and we want to be responsible in what we do. We realize we have a socially sensitive product and the practice of direct shipping is not a safe practice. While wholesalers don’t do it at all, if and when a kid buys online, gets drunk and goes and kills somebody, it’s not just that one direct shipper that is going to be tarred, it’s the entire industry that’s going to be tarred. We’ve worked so hard to show how responsible and caring we are that we don’t think that is a risk worth taking.
Stay tuned tomorrow for the second half of Craig’s interview.
posted at 7:14 AM
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