Wine Institute's Wendell Lee Speaks on HR 5034

FILED JULY 19, 2010

Dear Client:

Wineries have adamantly opposed HR 5034 (or the CARE Act) since it was introduced in April. For the Wine Institute, it's about disrupting the balance of power between the supplier and wholesaler tiers. We spoke with Wendell Lee, general counsel for the Wine Institute, who outlined their thoughts on the bill and what it would mean for the industry. "The Commerce Clause is not the kryptonite to the Twenty-first Amendment," he told us. "They just have to live together and peacefully co-exist. But if you remove the Commerce Clause, and if you remove the federal and Constitutional influence over state laws, then you have a situation where nobody's monitoring the exercise of that super power." You, dear reader, are a fly on the wall.

WINE & SPIRITS DAILY: What is the Wine Institute's main beef with HR 5034?

WENDELL LEE: I think the bill is really intended to benefit wholesalers more than anything else. Our beef with HR 5034 is that the bill is really not necessary. It's based on myths. It's almost as if the wholesalers have built this alternate universe so that they can justify going to Congress and seeking Congressional intervention. From the wholesalers' standpoint, the foundation of the bill is the belief that states are faced with deregulation, or faced with countless lawsuits, or losing their power to regulate alcohol, but these claims aren't really true. The states have ample power to regulate alcohol and they do that effectively every day. The real reason for HR 5034 is that it would give wholesalers a more favorable legislative environment in which to pass laws that would benefit them.

WSD: Wholesalers claim HR 5034 wouldn't be used to overthrow direct-to-consumer shipping but is that still a concern for wineries?

WENDELL: It's a major concern. While the bill goes far beyond direct shipments, direct shipments are a major issue for us. The scope of the bill gives to the states the power to pass laws that totally disregard the Commerce Clause or federal statutes. I don't know any other industry sector that has that kind of power. It goes far beyond any other bill in the US Congress at this point but I think many legislators and groups don't quite understand or fully grasp alcoholic beverage distribution. In order to explain HR 5034, it takes a good hour or so.

So I like to tell people first off what the bill isn't. It's not a bill that helps states regulate alcohol more effectively because states already do that very well. And it's not a bill to release states from what the wholesalers would say is this avalanche of lawsuits because by my count there's only three cases pending on the Commerce Clause. And it's not a bill to clarify evidentiary rules because evidentiary rules are clearly established now by case law. And it's not a bill that protects Granholm. I know the wholesalers will say that this bill doesn't immediately repeal any direct shipment law and that is true. But what they don't say is that if this bill were passed, it allows states to go back and pass the very same laws that were the core of what Granholm was all about. And it would allow states to pass those discriminatory laws deliberately and openly.

WSD: It seems that one of the biggest disagreements between the wholesalers and suppliers is that HR 5034 bans facial discrimination but would allow non-facial discrimination, such as volume caps and face-to-face transactions. Is that true?

WENDELL: HR 5034 does two things. One, it provides state alcohol laws immunity for dormant Commerce Clause challenges, which is at the core of Granholm. But the other thing it does is create a new set of evidentiary standards. It creates a presumption of validity and shifts the burden of proof to the challenger and changes what needs to be proved. HR 5034 only prohibits facial discrimination if it's not justified. So first, that means that non-facial discrimination would be perfectly legal. That's a great message to send to state legislatures. It tells a state that anytime it can be covert, subtle and sneaky when they're discriminating, that would be perfectly fine and legal. For facial discrimination, HR 5034 only prohibits facial discrimination that's not justified. Who proves that? The bill requires challengers to take a state law and prove that it's not justified facial discrimination by HR 5034's new rules. It is up to the challenger and the challenger alone to prove it not by today's Constitutional standards, but by HR 5034's standards. When you look at the totality of HR 5034, not only is non-facial discrimination green lighted but facial discrimination is as well. While it looks like they're prohibiting it, when you apply the bill's evidentiary rules to a challenge to facial discrimination, the challenger would have to prove by clear and convincing evidence that there's no effect on temperance or on the other reasons given in the bill. That is very difficult to prove and carry, it is almost insurmountable. While it looks like wholesalers are prohibiting facial discrimination, they're really not.

WSD: Do you think this puts an even bigger strain on the relationship between wineries and wholesalers? And what about the relationship between the supplier trade groups and wholesaler trade groups?

WENDELL: I think it does put a strain on all of us. I think it brings to the forefront the efficiency of the alcoholic beverage distribution systems, which is an issue that for various reasons we've been reluctant to discuss. But this bill brings it out in the open the same way the internet brought out the three-tier distribution systems in other industries, like buying your airline tickets, your music, or buying groceries. People started to look at the efficiency of distribution systems and then questioned whether they benefited consumers or not.

Alcohol is very different from any other product. For other products, if you came up with a way to eliminate the middle man or any other distribution layer so that you can deliver product to a consumer for a better price, you would be considered a business genius. For alcoholic beverages doing the same thing can make you a felon or a criminal. It's a very difficult concept for consumers to understand and requires an historical and economic context of alcohol in this country which many of us don't possess. But this bill should raise some questions in the minds of consumers about whether the distribution systems for alcohol are efficient or necessarily inefficient.

We recognize the states' power to regulate even inefficiently to protect legitimate state interests. Yet we also think that the state power is very well intact and we don't see any threat to state deregulation. When you look at the cases that have gone before us in the last 50 years where state laws have been challenged for constitutional deficiencies, in every situation the cases didn't result in deregulation. Rather, the cases usually result in a remanding back to the states to make fair, nondiscriminatory regulatory decisions. For example, even in the Granholm case, Michigan could choose whether to level up or level down. So states still have the power to regulate. They just have to do it fairly and without discrimination.

WSD: What is the Wine Institute's official stance on the three-tier system?

WENDELL: We are in favor of distribution options, and any state-authorized option that would allow our members' businesses to thrive, to make their products accessible and available to consumers for the best possible price. I think three-tier has its advantages. It's not easy to be a wholesaler. If you want to do volume distribution, three-tier is probably the most efficient way. But there are problems with three-tier as well. Many of our smaller members can't acquire distribution in many states. And consumers suffer for that because they don't get the availability and accessibility to products from smaller wineries. We believe distribution systems don't need to be rigid or inefficient to adequately address a states' interest in temperance, safety, and revenue. We know that many states have come to understand that because 37 states now allow out-of-state wineries to ship directly to an in-state consumer.

WSD: Is there any chance of a compromise with the WSWA and NBWA?

WENDELL: That's hard to say, if the bill comes back next year in its present form then we would continue to be opposed. Would we ever sit down and compromise? I think that with a bill like this it's very difficult to compromise and I wouldn't expect us to. I don't think it's our jobs to change HR 5034 to their liking. I think that if they have problems and they want our support, then they really need to come to us and let us know where those problems are. I think that the politics and rhetoric around HR 5034 has been a lightning rod for random but frequent bolts of accusations. There needs to be a cooling down and there needs to be reasonable discussion in the not-too-distant future.

WSD: On another note, what is The Wine Institute's position on privatization attempts in Washington, Virginia and other states?

WENDELL: We haven't taken a position on those but we watch them intently.

WSD: Any final thoughts on HR 5034?

WENDELL: When the Twenty-first Amendment was passed, it was like giving states a superhero costume where they could regulate alcoholic beverages with their newfound powers. And as with all superheroes, there are always vulnerabilities. But there is hardly a vulnerability out there for the Twenty-first Amendment. The Commerce Clause is clearly not the kryptonite to the Twenty-first Amendment. These two Constitutional provisions just have to live together and peacefully co-exist. But if you remove the Commerce Clause, and if you remove the federal influence over state laws, then you have a situation where nobody's monitoring the exercise of that super power and consumers will have a world where their states have a legal right to be unfair and discriminatory. That's a situation that we want to avoid and that consumers will not tolerate.

WSD: Thanks for speaking with us.


TEQUILA PARTIDA has appointed Kevin Moodie as evp, chief operating officer, US effective immediately. Kevin was formerly president of Scottish & Newcastle Importers, and left when the parent company was acquired by Heineken N.V. and Carlsberg Breweries, and the US subsidiary shut down.

MARTIGNETTI COMPANIES has appointed Mark Fisher as president, corporate sales and marketing, and Peter Colettis as evp, sales and marketing operations.

JACKSON FAMILY WINES has named Fred Reno as evp of its Artisans and International group of wineries.

Until tomorrow, Megan

"To play it safe is not to play."
Robert Altman

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