Craig Wolf Speaks on HR 5034

FILED JULY 16, 2010

Dear Client:

Since Congress introduced HR 5034 (or the CARE Act) in April, there's been a cacophony of noise from suppliers and wholesalers on what the bill actually means and what it would do if it becomes law. Supplier trade groups have formed a united front in opposition to HR 5034, resulting in a number of press releases and other statements to the press. So we first wanted to hear from the wholesalers. We sat down with the president and ceo of the Wine and Spirits Wholesalers of America (WSWA), Craig Wolf. When speaking about HR 5034, he said: "We are not looking to change the world here. We are looking to set down a bright line in the sand for courts to understand what the rules of the road are.... HR 5034 would create that bright line." We also sat down with Wendell Lee, general counsel of The Wine Institute, who we'll hear from next. But here's what Craig had to say:

WINE & SPIRITS DAILY: We heard last week that the House Judiciary Committee hearing was postponed. Are there plans to reschedule the hearing?

CRAIG WOLF: Congress is like that. You hear rumors and then you hear 'maybe not.' There was never any formal notice of the hearing put out by the Committee, put it that way. Therefore I don't think you can say that the hearing was either scheduled or postponed. There was talk about doing it and then there was talk about not doing it right now for whatever reasons. I think there will be a hearing at some point. I just think they have to make sure they have all their ducks in a row when they do it.

WSD: So what is the NBWA and WSWA's ultimate goal with the CARE Act?

CRAIG: We want to pass it. There's a simple proposition here, which is that we have a fundamental disagreement with those who oppose the CARE Act about what the Twenty-first Amendment means. We believe the Twenty-first Amendment means that states should have the power to set alcohol policy. And those who oppose it want to leave too much power in the hands of the courts to alter that policy or destroy it. That's really what it boils down to. If you actually read the law [HR 5034], you know that all it does is serve as a guideline for the courts in how to approach cases where there's an attack on state law. It doesn't overturn any state law. It doesn't, in fact, direct states on how to pass a law or what potential laws they should pass. The only real issue in terms of the substance of the law is that states are clearly told that they can't pass facially discriminatory laws relating to suppliers. So we're in agreement with the suppliers in that vein.

We think that the Granholm decision was correct when it comes to facial discrimination. You should not be able to facially discriminate when it comes to producers. But beyond that it's [HR 5034] really a guideline for the courts to tell them that states should have the benefit of the doubt when they have a debate about alcohol policy and a law is passed.

WSD: Are you surprised by the reaction of the supplier trade groups?

CRAIG: I'm not surprised at their opposition necessarily. I'm surprised about the type of misinformation and hyperbole that's out there. There seems to be some belief on their part that they can throw up whatever arguments they want, whether they're truthful or not, and that people will believe them. I think 125 co-sponsors thus far on Capitol Hill have said we don't believe the wild rhetoric put out by those opposing the legislation.

Wineries are saying this would overturn direct shipping laws. Of course it doesn't overturn direct shipping laws. In fact this bill would support direct shipping laws to the extent it would support any other policy enacted by a state legislature. So they're misleading Congress. And when Congress actually reads the bill they do understand this. With respect to the other arguments that are being made out there - the so called 'unintended consequences' or the 'balance between the federal and state laws' - there's no attempt in this bill to alter the federal or state balance whatsoever.

Again, I think there's a lot of misinformation being spread out there. I don't know what purpose is served by this because everybody knows that the last thing wholesalers want to do is create a market that is inimical to their interests. One of the arguments out there is that HR 5034 would enable all the states to suddenly change the bourbon standard. As if wholesalers would want that to happen. Wholesalers have vested interest in the bourbon products we sell. We sell all the Kentucky distillers' bourbon products. We don't want there to be a dilution in their value. So there's a lot of misinformation out there that is designed to rile up partisans on the issue, but it's really divorced from the reality of the facts on the ground.

WSD: Although HR 5034 doesn't allow facial discrimination, wineries complain that it would allow non-facial discrimination, which includes volume caps and face-to-face requirements. How do you respond?

CRAIG: Well first of all two courts, both the Ninth Circuit and Kentucky have approved those types of laws [volume caps]. The problem is that the First Circuit struck them down. In other words, the weight of the law, frankly, is on our side on that issue.

Originally the wineries and others complained that Massachusetts prevented direct shipments because they only allowed their in-state people to ship direct. So what did Massachusetts do? They said: 'We'll pass a law that will allow all small wineries in the country under 30,000 gallons to ship direct. If you're in distribution in that state then it's not a problem because you're not going to ship direct. But if you're not in distribution, you can ship direct to consumers.' So they opened the door to tremendous competition for Massachusetts wineries and for the consumers to choose from around the country. That was a rational decision. There is nothing facially discriminatory about that law. It was even handed, approached every player inside and outside the market the same way. That's what Granholm said should be done. And yet it was still struck down. So I think states should have the ability to make rational decisions like that about their alcohol policy as long as they are not discriminatory at the producer level. It should not be a problem for the courts.

When the opposition talks about 'balkanization,' there are two things you have to think about. One is that the Twenty-first Amendment was always designed to facilitate individual state policies because every state is different and they all have different ideas about what alcohol policies should be. So the Twenty-first Amendment was designed to give each state the ability to create its own rules when it comes to alcohol. Secondly, to say that there's some equilibrium or balance out there is absurd. We know that the court cases have created a patchwork of state laws. You know now that in certain jurisdictions face-to-face transactions can be demanded by the state, but because of the litigation other states can't do that. You know that in certain locations gallonage caps are okay. But you know what? In others they're not. In other words, the patchwork that's really being created is by the litigation itself because there is no uniform rule the courts have to follow. They're all over the board. Courts should not be setting alcohol policy, the legislature should.

WSD: What about when suppliers say that litigation is necessary and is not leading to the deregulation of states?

CRAIG: Consider the internal inconsistency there. On the one end they're saying that they want uniformity of state laws. On the other hand they know very well that the court decisions are creating a patch work of decisions that are confounding the courts and therefore confounding legislators around the country as to what laws are going to withstand scrutiny and which are not. There is a rather large hypocrisy there, to say that they are supporting a uniformity that does not exist and expressing support for litigation that has created more balkanization.

WSD: Do you think the NBWA and WSWA will be able to reach some sort of compromise with suppliers?

CRAIG: We have been open to talking to them and asking for their recommendations, but they flatly said at the NCSLA meeting recently that they are just not going to come to the table. They are digging in their heels and saying 'we just oppose it and that's it.' The supplier tier has uniformly said that they support cooperative efforts in working with their partners in the wholesale tier. For them to basically say 'I'm taking my toys and running home and not going to play with you,' I think it is just a little bit ridiculous. We are open to hearing them out but all we've heard from them is 'no.' There have been no solutions offered by the opposition to this bill.

We are not looking to change the world here. We are looking to set down a bright line in the sand for courts to understand what the rules of the road are. And right now there is no uniformity in court decisions and there is no uniformity in terms of their understanding of what state power is with respect to alcohol policy. So they're all over the board. HR 5034 would create that bright line.

WSD: Do you think this is putting a big strain on the relationship between supplier and wholesaler trade groups?

CRAIG: To some extent. I've made it clear to all of the wine and spirits supplier groups and I think Craig [Purser] has to the beer supplier groups as well, that we will continue to work with them on other issues. We just have a fundamental disagreement about this issue. Everyday wholesalers work with suppliers. That's what we do. And we work with retailers. That's what we do. We are close with all of them and that won't change. But we will stand up for things that we believe are correct. And we will vehemently oppose those who seek to deregulate alcohol and to create chaos through that course of action.

WSD: On another note, what are your thoughts on the two privatization measures (I-1100 and I-1105) in Washington? [Ed note: I-1100 is backed by Costco and would allow retailers to cutout distributors when purchasing spirits. I-1105 is backed by wholesalers and would require that retailers go through distributors when purchasing spirits].

CRAIG: The position that WSWA has taken is that we are adamantly opposed to I-1100. Regardless of how you feel about the privatization issue, 1100 is about the deregulation of alcohol. If you institute 1100, there's nothing left of the rules of the road for the different tiers. If you're a supplier and you want to have a tied house, go to it because there are no more rules at that point. That's the fundamental difference, I think, that has to be understood by those who are going to be asked to look at these two initiatives. The deregulatory aspects of 1100 are just so severe that it basically removes every regulation that governs the tiers, such as credit regulations, relationships between the tiers and so on and so forth. It just, it creates a Wild West market that's similar to pre-Prohibition America. And they want to create a vertically integrated world that resembles England and Germany with all its problems today. These things, to me, are just the wrong way to go.

WSD: Thank you for your time.

Until Monday, Megan

"Health consists of having the same diseases as one's neighbors."
Quentin Crisp

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