CARE Act: Behind the Scenes

FILED SEPTEMBER 30, 2010

Dear Client:

Interestingly, it seems like some of the suppliers might have differing views regarding HR 5034. The brewers seem to want to maintain the status quo and appear less hostile, at least in their testimony, towards wholesalers. As Rick Doyle of Harpoon Brewery (who testified yesterday) put it, the "current system has also served the public well."

Meanwhile Tracy Genesen's, a partner at Kirkland and Ellis who was involved in the Granholm hearing, testimony suggests that wineries want to continue deregulating the system. And by deregulation, we mean they are in favor of overturning volume caps and face-to-face transaction requirements in states. Wineries view this as fair trade, not deregulation. The meat of the argument is that wholesalers think there is a problem, and wineries say everything is just fine. In fact Tracy called the wholesaler stance "hysterical." Wholesalers think states should have the right to enact their own regulations regarding alcohol, while wineries say states shouldn't be allowed to pass "discriminatory and anti-competitive alcohol regulations," said Tracy.

She also bashed the wholesaler argument that more regulation is needed to prevent underage access. In a press conference after the hearing, she urged Wine Institute lobbyists to publish a fact sheet for the Judiciary Committee based on a FTC report that says access by minors is not a problem.

Some lawmakers and state regulators, meanwhile, claim their respective states are overrun by expensive lawsuits and need Congress to intervene and clarify their intent regarding state regulation.

EVERYONE'S A WINNER. Even looking at the statements from the NBWA and Wine Institute after the hearing concluded was interesting because both sides feel they put up a strong case. NBWA said it "is encouraged by the widespread support for the continuation of the American system of state-based alcohol regulation, which balances the public's interest in effective regulation with the consumer's desire for choice and variety."

But the Wine Institute says Tracy "made a strong case for Congress to reject H.R. 5034." In the statement Bobby Koch, ceo of the Wine Institute, said: "Once again, the wholesalers failed to make their case and it is becoming well understood on Capitol Hill that this legislation serves to protect the economic interests of the wholesalers." Strong words indeed.

LOCAL PAPER SAYS NBWA HELPED DRAFT A TESTIMONY. There is certainly a level of in-fighting going on between the supplier trade groups and wholesaler trade groups. As we know, there are lots of behind-the-scenes dealings when it comes to Washington politics, and a new report from the Salt Lake Tribune reveals that NBWA general counsel Paul Pisano drafted Utah Attorney General Mark Shurtleff's testimony for the hearing yesterday.

Mark told the reporter over the phone that "he gave me some information. I was communicating with him, and he drafted it for me because I was coming straight here [to Washington, D.C.]." He explained that he took the red eye into DC and knew Paul could print it out for him. But his testimony "mirrors what 40 attorneys general said in a previous statement" where they asked Congress for relief from "the growing threat" of deregulation.

So how did this come about? Because an electronic copy of Mark's testimony submitted to the Judiciary Committee says the author was "ppisano." Although we doubt Mark was the only one to get help from others, it doesn't exactly look good.

Furthermore Rep. Jason Chaffetz, R-Utah, who co-sponsored the bill, "was one of 74 House members who received a $10,000 donation this election cycle from the National Beer Wholesalers Association, according to the nonpartisan Center for Responsive Politics," says the article.

Now that the hearing is over, what happens next? Not much since the next Congressional session doesn't convene until January. But we'll be watching closely....

HR 5034 COVERAGE CONTINUED: WHAT THE CONGRESSMEN SAID

Reps. Mike Thompson (D-Calif), Peter DeFazio (D-Oregon) and George Radanovich testified in opposition to the Care Act. Meanwhile, Reps. Bruce Braley (D-Iowa), Ed Towns (D-N.Y.) and Gary Miller (R-CA) are all co-sponsors of the bill and spoke in favor of it. Our coverage is based on a mix of notes from the actual hearing and the Congressmen's respective written testimonies.

REP MIKE THOMPSON SAY WHOLESALERS "THRIVING." The rewritten version of HR 5034 "is just as damaging as the original version," because it "still allows states to discriminate against producers" for economic advantage, said Mike products. He outlined various examples of consumers not being able to purchase certain beer, wine and spirits unless they order it online. "Small businesses are struggling in every one of our districts," and wineries are especially struggling in his 1st District of California, he said. "Many wholesalers won't give them the time of day."

"Are wholesalers being treated unfairly? No." He said wholesalers "are thriving" in California although wineries are able to distribute directly to consumers and retailers in the state. "The top 10 wholesalers control 60% of the market...clearly they are doing well."

He continued by saying that states have the right to administer their own regulations, "they just can't discriminate against out-of-state producers and products."

REP PETE DEFAZIO SAYS BILL WOULD DISRUPT CURRENT BALANCE. In addressing Chairman Conyers, Rep Pete DeFazio of Oregon said: "It's always good to see you, I just wish it wasn't for this issue today." As the cofounder and co-chairman of the House Small Brewers Caucus, he spoke on behalf of small brewers. Citing the Twenty-first Amendment, Commerce Clause and other statutes that regulate labeling and advertising for the alcohol beverage industry, Peter noted that "the federal government has always played a vital role in alcohol regulation. This balanced approach has helped the industry grow while at the same time protecting consumers and the general public."

But he calls the CARE Act "a direct threat to that success" because it "would demolish the constitutional balance and the federal oversight over alcohol regulation." CARE "would be devastating to America's small brewers" as it would "virtually eliminate the role of the federal courts in stopping states from enacting discriminatory laws, violating antitrust laws, and even undermining acts of Congress."

Furthermore, under HR 5034, "states would have free reign to come up with new ways to discriminate against small brewers." For the most part, small brewers "are not rich men and women."

He said it is not "the flood of lawsuits" that has prompted CARE advocates to act. "The litigation surrounding direct shipping of wine is not a threat to a state's ability to license and tax businesses engaged in the sale of alcohol beverages."

He noted that pending lawsuits challenging state alcohol laws are "in the low single digits." Therefore, "HR 5034 is a solution to a nonexistent problem."

REP BRUCE BALEY SAYS GROUPS ARE MISUSING COURTS. "I respect both of my colleagues who have already testified. I have a slightly different perspective...I'm here in support of the CARE Act because Congressional silence on the ability of the state right to regulate alcohol is being misused in the federal court system by private interest....seeking personal gain for themselves." Bruce said one of these special interests has been quoted saying "'they won't stop suing until no law is left standing.'"

There has been "exponential growth" in beer, wine and spirits in recent years that has been helped by regulations, he claimed. Iowa has a thriving craft industry for all these segments. "I look forward to working with small businesses to help them thrive and grow," he concluded.

REP ED TOWNS "SICK AND TIRED" OF LAWSUITS. Ed claims "states need assistance in defending laws which protect the public interest from those who are seeking to line their pockets by deregulating the alcohol industry." He pointed out that New York State has been sued twice "in the past 4 years alone" and they are "sick and tired" of these lawsuits. "Attorney General Cuomo and 38 other Attorneys General wrote to me in the spring seeking Congressional action to assist them in stemming the tide of these lawsuits and I'm proud to help."

Furthermore, he believes states should be able to determine how alcohol is controlled within their borders: "On a more personal level, I believe that our constituents know better than anyone the terms of how they want alcohol to be sold and supplied in their communities."

He gave two examples of how the bill would help protect communities. One, "laws that mandate identification checks have recently come under attack in court by online liquor stores who view them as discriminatory." Secondly, New York City and communities across the country have begun using "alcohol control zones" to stop the practice of "single sales" and the sale of certain products such as malt liquor" to promote health and public safety. "I fear that without Congressional action these laws will be challenged as well, erasing a great deal of progress."

REP GEORGE RADANOVICH URGES STATES TO UNIFY. Rep Radanovich of California, who is the co-founder of the Congressional Wine Caucus and also an owner of a California winery, stated: "In my eight terms in Congress, I do not recall another time when an industry group has come seeking complete immunity from nothing less than the US Constitution, when the continued application of one of the fundamental provisions of the Constitution, the Commerce Clause, has been associated with underage drinking, statewide loss of regulatory control, and market chaos; where facial and nonfacial discrimination is somehow needed by States to regulate effectively."

"Wine is a highly taxed" industry, he noted. He also outlined the difficulties wine owners have in dealing with all the various licenses and laws regulating the industry, particularly when looking at 50 different states.

He claimed that a "pure three-tier system" has not existed for some time, pointing out that many states allow in-state wineries to ship direct. He said that many wineries exist solely on the "strength of their direct to consumer wine clubs...operating a winery in this country in difficult and complex," as he reiterates the difficulty of navigating the various laws in each state.

He said he was "anxious" to hear from other speakers "why the dormant Commerce Clause is being portrayed as the dark precursor to all these things, and that the only way to prevent such deregulation is to surgically remove that portion of the Constitution from applying to the industry."

"When we allow states to discriminate, we lose the cohesiveness and energy of a nation of laws.... We become 50 nations instead of one."

REP GARY MILLER USES UNDERAGE ARGUMENT. "All alcohol regulation is a balance between competition, price, and availability, on the one hand, and appropriate control to mitigate immoderate and underage consumption, on the other," said Rep Miller of the 42nd District of California. "States view alcohol differently and the authority of each state to regulate according to its local norms and standards must be safeguarded. Surely it is not in the public interest to advocate for weak regulations and an unrestricted marketplace."

He claimed that "minors on the internet can purchase cheap wine, beer, or grain alcohol with the click of a mouse and have it delivered to their door. Sting after sting by law enforcement and media consumer protection advocates has shown just how easy it is for minors to buy alcohol online with no I.D. check or age verification."

He notes that many of the legal decisions resulting from Granholm "have been conflicting." So "we need to clarify Congressional intent that the states are the primary authority for regulating alcohol sales and that they should exercise that authority to protect the public interest."

MCDONNELL LOOKING TO EASE LICENSING COSTS FOR SMALL RETAILERS

Several local publications, including the Times Dispatch, Washington Post and Washington Examiner, are reporting that Gov McDonnell's staff is likely to tweak their proposal to privatize spirits in Virginia. A subcommittee scheduled to vote on the plan is expected to receive a new proposal for the state to finance the cost of liquor licenses for small retailers and c-stores to make it more affordable. The administration has been considering a payment plan that would span 2-4 years with low interest rates. Local reports suggest bids currently would start out at $100,000 in the state's smallest localities. The price would be even higher for populous areas.

Legislators are also asking McDonnell not to call a special session in November but instead introduce his privatization proposal at the regular assembly session in January. No decision has been made, but McDonnell said in a radio interview today that he would still like the special session to take place.

WSD BRIEFS:

IS SKYY TOO SEXY? Skyy Vodka is coming under fire from at least one watchdog group - The Marin Institute - for its new "sexy" ad, according to a recent USA Today article. ""Underage kids will look at this and associate sexual prowess with drinking Skyy," said Bruce Lee Livingston, executive director at Marin. But DISCUS says it is too early to comment on whether the ad violates their advertising code. Skyy's marketing director, Maura McGinn, defended the ad, saying "We're an adult product consumed mostly in the evening and in flirtatious situations."

MICHIGAN BILL TO EXPAND SUNDAY SALES PASSES LEGISLATURE. A bill that would allow spirits to be sold as early as 7am on Sundays was passed by the Senate and House on Wednesday. It would also allow wine and beer tastings at grocery stores, and allow alcohol sales until midnight on Christmas Eve and after noon on Christmas Day. It now heads to Gov Granholm's desk. A spokeswoman for the governor said she has some "concerns" to resolve before signing the bill.

WAL-MART HAS HAMED CHARLES HOLLEY the new cfo, who is succeeding Tom Schoewe. Tom, 57, will step down Nov 30 but remain at the company until the end of January to help with the transition. Charles joined Wal-Mart in 1994 and currently serves as treasurer and evp.

SOBIESKI VODKA ADDS FLAVORS. Sobieski Vodka, imported by Imperial Brands, is adding three flavors: Orange, Karamel and Raspberry. Their suggested retail price is $10.99 per 750ml bottle and joins Sobieski Cytron and Vanilia.

TTB HAS APPOINTED Special Agent Timothy Marsh to fill the position of Special Agent in Charge (SAC), TTB Field Operations.


Until tomorrow, Megan

"The problem with people who have no vices is that generally you can be pretty sure they're going to have some pretty annoying virtues."
Elizabeth Taylor

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