TCS Daily


The Wrath of Grapes

By Stephen Bainbridge - June 12, 2006 12:00 AM

Almost exactly one year ago, oenophiles received the Supreme Court's decision in Granholm v. Heald with glee and anticipation. Today, however, the harsh reality is that many of our hopes have been dashed.

In today's remarkable economy, with just a few minutes online, you can buy almost any product imaginable from almost anywhere in the world and have it delivered to your front door. Except wine.

The history books teach us that one of our Founding Fathers' primary motives for ditching the Articles of Confederation in favor of the U.S. Constitution was fear of economic Balkanization.

"[A] central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." (Hughes v. Oklahoma, 441 U.S. 322, 325-326 (1979))

In order to prevent any such Balkanization, the Commerce Clause gave Congress plenary power to regulate commerce among the states and with foreign countries. In addition, the courts have interpreted the so-called "dormant" Commerce Clause as prohibiting states from discriminating against out-of-state producers or unduly burdening interstate commerce.

The drafters of the 21st Amendment to the Constitution, which repealed Prohibition, however, gave states considerable power to regulate alcohol by providing that:

"Section 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

In most states, regulations passed pursuant to the powers thus granted by Section 2 of the 21st Amendment created an elaborate three tier system for distributing alcohol: Producers sell to wholesalers who sell to retailers who sell to consumers. Unlike most products, which consumers can buy directly from producers, in many states the three tier alcohol distribution system is rigidly enforced by laws banning direct-to-consumer sales by producers (or, for that matter, wholesalers).

As interest in wine grew, and especially as the wine regions of California became major tourist destinations, consumers began looking for ways to ship wine home when they visited Napa or Sonoma on vacation. Wine enthusiasts around the country also began looking for ways to buy boutique and cult wines sold only by mail order. Once the Internet age began, consumer demand for interstate wine shipping rights soared.

A number of states, especially those with growing wine industries of their own, liberalized their Prohibition-era distribution laws to allow direct-to-consumer sales. In many states, however, the vested interest of liquor wholesalers and retailers in preserving the existing three tier system prevailed. State legislatures effectively controlled by those interest groups blocked reform efforts.

We thus ended up with precisely the sort of economic Balkanization the Constitution was intended to prevent. Some states allowed interstate direct-to-consumer sales freely, others allowed such sales but subject to conditions and requirements that varied widely from state to state, others allowed intra- but not interstate direct-to-consumer sales, and some still banned all direct-to-consumer sales. From the consumer perspective, whether you could order wine online thus depended on where you lived. From the producer perspective, the maze of state laws made it hard for small wineries that depend on direct-to-consumer sales to compete with the major brands.

In Granholm, the Supreme Court by a 5-4 vote struck down New York's and Michigan's bans on direct-to-consumer wine sales. Unfortunately, the court did so on the narrowest possible grounds, holding those bans violated the Commerce Clause because they were discriminatory and protectionist:

"States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses."

Accordingly, Granholm did nothing to protect consumers from state laws banning direct-to-consumer sales by both in- and out-of-state wineries.

According to FreeTheGrapes.org, 17 states have such bans in place. In many of the other 33 states, direct-to-consumer sales are allowed but remain subject to a confusing welter of often inconsistent regulations. In all but 12 states, moreover, interstate shipment of wine by retailers is prohibited. In short, we're no closer to a true national wine market; instead, both producers and consumers are still mired in the economic Balkans.

Interestingly, however, a new line of attack has been launched against the three tier system. Costco has sued the State of Washington, arguing that Washington's especially strict version of the three tier system violates the Sherman Antitrust Act. Last month, U.S. District Judge Marsha Pechman agreed with Costco.

There is no doubt that the three tier system is anti-competitive. As Ken Starr has explained:

"Who could possibly support these discriminatory laws? Those who have the most to lose from repeal: the liquor distributors, known in the trade as the "booze boys." These distributors exact massive, and in many areas oligopolistic, profits from wineries as a price for distributing their products to retail stores -- and in some cases, refuse to distribute wine from smaller wineries at all. Like pirates exacting a ransom, they add no value. But they have a powerful incentive to keep the current system in place."

The impact on consumers is clearly negative, as demonstrated by a study of Virginia's direct-to-consumer sales ban, which found that the "ban reduces the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online."

The Costco decision is now up on appeal, raising very difficult questions about the relationship between the 21st Amendment and the antitrust laws. Even if Costco prevails, moreover, the present suit deals not with direct-to-consumer sales but rather direct producer-to-retailer sales. In addition, Washington's version of the three tier system is especially draconian, eliminating almost all market forces so as to keep prices high.

Yet, the Costco suit gives oenophiles hope for several reasons. First, given the clear evidence that state regulation is anti-competitive, the case for antitrust relief is overwhelming provided the 21st Amendment obstacle can be cleared. Second, Costco has a strong incentive to shake up the three tier system. Savvy wine buyers know that Costco has become a major player, offering very high quality wine - such as first growth Bordeaux and even some California cult wines - at bargain basement prices. At the moment, Costco ships wine only to California, Idaho, Illinois, New Mexico, Oregon and West Virginia addresses. And, it's not just Costco. Even Amazon is getting into the mix, through a partnership with Wine.com.

A year after Granholm, the fight to free the grapes goes on. Many battles will still have to be fought before we have a true national wine market. Finally, however, consumers have some deep-pocketed interests on our side.

Steve Bainbridge is a Professor of Law at UCLA. He writes two popular blogs: ProfessorBainbridge.com and ProfessorBainbridgeOnWine.com.

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1 Comment

Great title, good article
I wondered why no one had commented yet, but realized that any sort of constitutional scholarship scares away anyone from commenting (at least on my blog).

As a student at Penn and a PA resident, I feel the primary effects of this terrible, terrible legislation.

All of our wine is sold at "wine and spirits" -- which happens to have more of the latter than the former. Very little selection, as it's state owned and we know that a command economy doesn't work.

I've been spoiled by a girlfriend who lives in Napa. Spoiled! I fell in love with Chateau Montelena. Now, prey tell me, where can you find Chateau Montelena in the city? NOWHERE!

What's a boy to do?

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