Caught Between Two Amendments
November 20, 2002
Caught Between Two Amendments
By FRANK J. PRIAL
ALMOST 70 years after the repeal of Prohibition,
the country may finally be moving toward more consumer-friendly laws
that will make it easier to buy wine.
In United States District Court in Manhattan last week, a federal
judge ruled that a New York State law that bars out-of-state wineries
from shipping wine directly to New York consumers while allowing New
York wineries to do so was unconstitutional. (Out-of-staters are required
to sell their wine in New York only through wholesalers.) In his ruling,
Judge Richard M. Berman went to the heart of a constitutional controversy
that has been raging in the wine industry for more than 20 years:
which should prevail, the 21st Amendment, which ended Prohibition
and gave all alcohol regulation to the states, or the Sixth Amendment's
commerce clause, which bans all barriers to interstate trade?
Many states, heavily supported by the powerful wine
and spirits wholesale distributors, insist that the 21st Amendment
prevails. They fear a big loss of excise taxes, and the distributors
fear a major loss of income if wineries can bypass them and ship directly
to consumers' homes. The winemakers and many consumer groups, angered
by what they see as a confusing array of state-imposed barriers to
the free flow of wine shipments, insist that the commerce clause of
the Sixth Amendment is unequivocal.
A number of recent judgments in state and federal courts have, like
Judge Berman's, favored the commerce clause. Earlier this year, bans
on direct interstate wine shipments were ruled unconstitutional in
North Carolina and Virginia; a similar ruling was made this month
in Florida. But enough rulings in recent years have gone the other
way to almost ensure that the issue will eventually find its way to
the Supreme Court.Even so, the reaction to the New York ruling among
retailers and consumer advocates was upbeat.
James Trezise, president of the New York Wine and
Grape Foundation, the promotional arm of the state's wine business,
said the ruling "crystallizes the choices for the state government
and the Legislature."
"Either there will be no direct shipping from any winery or there
will be equal opportunity for wineries everywhere to ship into New
York," Mr. Trezise said. Under the first outcome, he said, "New
York wineries would lose current business and jobs and sales taxes
during the current budget crisis." Under the second, the wineries
"would gain new markets, New York consumers would have more choice
and the state would get new tax revenues."
Michael Aaron, chairman of Sherry-Lehmann, said, "This is a major,
major victory for the wine consumer," even though interstate
shipments would inevitably cut into his business. "My share of
the pie might get smaller," he said, but "the pie will get
immeasurably bigger."News of the ruling was hailed by small wineries
who claim that they are ignored by the large distributors. "None
of them want to take on wines like my Charbono or my Critique of Pure
Riesling," said Randall Grahm, president of Bonny Doon Vineyards
in Santa Cruz, Calif.
Stu Smith, a partner in the Smith-Madrone Winery in the Napa Valley,
said that distributors had it all wrong. "Direct shipping is
an adjunct to the classic distribution system," he said, "not
a competitor." On Nov. 2, President Bush signed legislation allowing
people visiting wineries to ship their purchases home. Although the
measure grew from efforts to reduce the volume of baggage at airports,
Mr. Smith cited it as another victory for wineries.
At the heart of the matter is the three-tiered system sacred to the
powerful wine and spirits distributors. Under this system, a winery
must sell to a licensed wholesaler - the distributor - who may in
turn sell only to a licensed retailer. The distributors, who control
90 percent of all wine and spirits shipments, see direct shipment
as a serious threat. Direct shipping opponents contend, too, that
bypassing the three-tiered system makes it easier for under-age people
to obtain alcohol.
Direct shipping has grown rapidly in the Internet age. "What
began as a cottage industry catering to collectors has become a coast-to-coast
$1-billion-a-year enterprise," the Wine and Spirits Wholesalers
of America, an industry group, said in a statement. State taxes on
alcoholic products are estimated at nearly $10 billion a year.
Judge Berman set Dec. 5 to hear proposals for a solution in New York.
Whatever he decides, his ruling will almost certainly be appealed.
Craig Wolf, general counsel for the wholesalers' group, said he was
confident that Judge Berman's decision would be reversed on appeal.
"He was absolutely incorrect in his ruling," Mr. Wolf said.
"From a legal standpoint, he ignored every bit of evidence"
supporting state control. To Mr. Wolf, the 21st Amendment is sacrosanct
and will always supersede the commerce clause.
More and more, however, the "evidence" seems to support
the direct-shipper advocates, like the Wine Institute, the promotional
arm of the California wine industry, which has long favored legislation
to end the shipping dispute."The 21st Amendment has its limitations,"
the institute said in a recent report to the Federal Trade Commission.
"The central purpose of the provision was not to empower the
states to favor local liquor industries by erecting barriers to competition."
John DeLuca, the Wine Institute's president, criticized the wholesalers
for successfully pressing several states to make direct shipping a
felony but added that he too believed the whole issue would be settled
by the Supreme Court. "The New York decision should be seen as
added incentive to work this out at the highest judicial level,"
Mr. DeLuca said. In any event, while it may seem that the tide is
turning in favor of direct shipping, the battle is far from over.
Too much money is at stake. It will be a long time before your friendly
wine merchant is replaced entirely by your computer mouse.
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