Direct Shipper Victory in Massachusetts

FILED JANUARY 1, 2010

The 1st Circuit Court of Appeals upheld a lower court ruling yesterday in favor of Family Winemakers of California that says the state’s 30,000 gallon cap is unconstitutional.

BACKGROUND. The Massachusetts legislature approved HB 4498 in 2006 over the veto of then-Gov. Mitt Romney. It stipulates that wineries who sell over 30,000 gallons a year must choose whether they want to sell wine through the licensed three-tier system, or to apply for a license to ship direct. They cannot, however, do both. After HB 4498 became law, Family Winemakers of California v. Jenkins was filed on September 18, 2006, stating that it violated the nondiscrimination principle of the Commerce Clause because it favored in-state wineries. Note that all the wineries in Massachusetts produce less than 30,000 gallons of wine a year. On November 19, 2008, Judge Zobel ruled that the production cap statute was unconstitutional and, later, enjoined the state from enforcing Sections 2, 18 and 19(F) of the Massachusetts General Law Chapter 138. The state appealed Judge Zobel’s ruling, and oral arguments were heard November 2 in the 1st Circuit U.S. Court of Appeals.

THE DECISION:

In its decision, the judges wrote: “We hold that 19F (the gallon cap) violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors.” Here are some of the bigger arguments that the appellate court struck down:

THE GALLON CAP IS NON-DISCRIMINATORY. The state argued that the gallon cap promotes competition because it opens the market to small wineries across the country. However, the court says the number of large wineries that are burdened by the law far outweighs the number of small wineries that benefit. “The discriminatory effect is because [the law’s] definition of ‘large’ wineries encompasses the wineries which produce 98 percent of all wine in the United States, all of which are located out-of-state and all of which are deprived of the benefits of combining distribution methods...These disadvantages exceed the benefits that out-of-state "small" wineries receive.”

The court also contends that Massachusetts put the cap in place “to artificially limit the playing field in this market in a way that enables Massachusetts's wineries to gain market share against their out-of-state competitors.”

DIRECT SHIPPING LEADS TO ILLEGAL ACTIVITY. Furthermore, the judges did not agree with arguments from the state that direct-to-consumer wine shipments could result in illegal activity: “These states also make the parade of horribles-style argument that a state's loss of control over the alcoholic beverage market ‘can lead to illegal activity, including shipment to underage individuals, the sale of adulterated products, and the possibility of organized crime involvement in disguised internet schemes.’ Massachusetts has not advanced any of these theories, and it is difficult to see the claimed causal relationship.”

21ST AMENDMENT PROTECTS AGAINST COMMERCE CLAUSE. The state argues that the law is not explicitly discriminatory and is therefore protected under the 21st Amendment. The judges disagreed, claiming the law is discriminatory in both purpose and effect. Although the law “is neutral on its face,” the judges ruled that it’s not protected by the 21st Amendment: “Against this background, we hold that the Twenty-first Amendment does not exempt facially neutral state alcohol laws with discriminatory effects from the non-discrimination rule of the Commerce Clause. Nor, of course, are such laws exempt when they also discriminate by design.”

WSWA’S REACTION

The Wine & Spirits Wholesalers of America (WSWA) issued a statement this afternoon “deriding” the appellate court’s decision for several reasons. For one, they feel states have the right to enact their own alcohol system. “It is the opinion of WSWA— and indeed other courts—that the 21st Amendment empowers states to make decisions on how alcohol is regulated within the states’ borders. The First Circuit decision undermines states’ authority under the 21st Amendment,” said chief Craig Wolf.

Secondly, they feel the statute is non-discriminatory because it applies “equally to both in-state and out-of-state wineries, evenhandedly complying with the requirements imposed by the Supreme Court in its 2005 decision in Granholm v. Heald. Similar statutes were upheld in Kentucky and Arizona.”

WSWA also addressed public health concerns. “WSWA also finds it troubling that the Court blithely dismissed public health and policy concerns expressed by New Jersey, Ohio, Rhode Island and Wyoming in their amicus brief filing.”

Craig went on to say: “This is yet another example of judges believing it is their prerogative to substitute their individual judgments for the will of the people of the state as expressed through their elected legislators. Unfortunately, when courts refuse to defer to state authority under the 21st Amendment, that only serves to embolden those who seek to further deregulate the distribution of alcohol in this country.”

THE BIG PICTURE

So how will this federal court decision affect other states? It will certainly add fuel to the argument against gallon caps. A district judge tossed out a challenge to Arizona’s 20,000 gallon volume cap and face-to-face transaction requirement in 2008. The 9th Circuit Court of Appeals heard arguments in September and we await their decision. Other states with production caps include Florida and Ohio. Florida has attempted to pass a capacity cap of 250,000 gallons for three years now but has not yet succeeded. Ohio has a capacity cap of 250,000 gallons. Regardless, this ruling is going to open up a lot more lawsuits.

INTERESTINGLY, the hotly contested federal Senate seat vacated by the late Sen. Kennedy is sought after by the Attorney General, Martha Coakley. She is in a dead heat race with her GOP opponent. She is also defending the state's alcohol law. Says the Associated Press: "Attorney General Martha Coakley's office had appealed the earlier ruling by a federal district court judge on behalf of the Massachusetts Alcoholic Beverages Control Commission. The attorney general's office said in a brief statement Thursday that it would review the decision with the commission before commenting."

To read about the issues at stake straight from the horses’ mouths, check out our November interview with Family Winemaker’s president Paul Kronenburg, general counsel Tracy Genesen and Craig Wolf, president of the WSWA, click here.

PRECEPT BRANDS ACQUIRES CORUS ESTATES & VINEYARDS

Effective January 1, Seattle-based Precept Wine Brands has acquired Corus Estates & Vineyards including its winemaking operations, accounting, sales, marketing and retail locations. Corus Estates & Vineyards was owned and operated by the Baty family who has a 30 year history in the northwest wine industry. Dan Baty is also co-owner in Precept Wine Brands. The newly acquired brands include: Sawtooth Winery, Alder Ridge, 6 Prong, Zefina, Blue Pirate and Battle Creek.

“Dan and his family felt that it was time to consolidate some of the efforts of their wine entities,” said Precept chief and co-founder Andrew Browne. “These additions to our Northwest portfolio will strengthen our commitment to producing, marketing and selling wine of outstanding value in the region. We feel posed for success with our core portfolio and the additions of these new brands.”

The Baty family will maintain separate ownership and operations of their vineyard company, Winemakers LLC. Precept Wine Brands will continue to source grapes from Winemakers, and all of Corus Estates & Vineyards’ Oregon facilities will also continue to operate under Winemakers.

WSD BRIEFS:

THE WASHINGTON STATE LIQUOR CONTROL BOARD (WSLCB) has requested legislation to prohibit pre-mixed, energy-enhanced malt beverages because “research suggests that alcohol-energy drinks create a dangerous mix – especially for youth,” said Sharon Foster, board chair. These beverages are typically sold in cans in convenience stores statewide. House Bill 2804 will be up for consideration during the 2010 regular session. Recall that the FDA sent a letters notifying 30 manufacturers of caffeinated alcoholic beverages that it intends to look into the safety of their products. If the FDA determines such products are not safe or lawful, it will take action to remove the products from the marketplace.
Related WSLCB policy

THE SOUTH DAKOTA legislature will consider HB 1002 to allow Sunday sales on- and off-premise statewide and also remove restrictions during holidays. The bill was referred to the House Committee on Commerce where it will first be considered. Currently, Sunday sales are only allowed by a local option vote.

CONSTELLATION BRANDS has completed the sale of its Gaymer Cider Company business to C&C Group PLC of Dublin, Ireland for a purchase price $70 million, subject to closing adjustments. The company expects to use the proceeds from the sale to reduce borrowings.


Until Monday, Megan

“The gods too are fond of a joke.”
Aristotle

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