Legal challenges to liquor laws across the nation continue to change the laws, and in perhaps the most important decision over the past year, reaffirm one state’s system of distribution regulations.
Costco Final Ruling
On January 29, 2008, the Ninth Circuit Court of Appeals reversed the district court’s decision that significantly limited Washington State’s ability to restrict pricing, discounts, retail locations, and sales between retailers of alcoholic beverages. In Costco v. Hoen, the district court concluded that state restrictions were anti–competitive and violated anti–trust laws. On appeal, the appeals court upheld all but one of Washington State’s restrictions.
Costco declined to appeal to the U.S. Supreme Court, making the appeals court decision the final decision in the case.
At the National Conference of State Liquor Administrators in Chicago earlier this month, attorney Richard Blau noted that the Ninth Circuit is the highest court to consider this issue. As a result, state laws that are intentionally designed to economically restrain trade in the alcoholic beverage industry appear to be validated by the Ninth Circuit’s authority, even though the laws are inefficient and place restraints on trade. Although others may challenge state regulatory schemes as being anti-competitive, the score so far is states: 1 – challengers: 0.
Direct Shipping Update and Direct Shipments to Tennessee
The industry continues to see fallout from the 2005 U.S. Supreme Court cases finding Michigan’s and New York’s prohibitions against and restrictions on in–state shipment of wine by out–of–state wineries (while allowing shipment by in–state wineries) unconstitutional. In its wake, multiple challenges of other states’ laws ensued, but more importantly, many states began to loosen similar prohibitions and restrictions legislatively. In sum, out–of–state wineries must be treated the same as in–state wineries.
The competitive landscape continues to change for small wineries as well. Wine wholesalers were once seen as a way to bring small winery product to market, but recent consolidation among wine wholesalers is not advancing small winery access to the marketplace. Thus, small wineries continue to press for unfettered direct shipment. Generally, they see it as their best chance to compete against large wineries that more easily obtain the attention of the large wholesalers and big box retailers and retail chains.
Against this backdrop, a new front in the direct shipment war has developed: challenges of face–to–face sale requirements. Many common carriers are currently delivering products to consumers from out–of–state wineries or retailers. State regulators generally contend that the common carriers have no sound way of regulating whether a minor or an intoxicated person receives the alcohol, purchased online or over the phone. At the NCSLA this past month, representatives from FedEx and UPS presented the steps that their companies take to ensure that deliveries are made to the individuals who legally purchased the alcohol. The U.S. Supreme Court has held that certain restrictions on interstate carriers related to tobacco are unconstitutional, and most believe that the same rationale applies to alcohol. More on this debate will follow.
Tennessee has consistently prohibited direct shipment of wine by any winery or retailer; out–of–state wineries and retailers receive the same treatment as local wineries. As a result, we never questioned the constitutionality of Tennessee’s direct shipping laws. The federal district court in the Eastern District of Tennessee agrees. In Jelovsek v. Bredesen, the court determined that Tennessee’s direct shipping laws are constitutional. If Tennessee residents want wine delivered directly to their home, the state legislature will have to act to allow it.
Wait a Minute, Mr. Postman! Direct Shipping Affects Carriers
Direct shipping is also an issue of concern for postal carriers delivering alcohol to consumers. Since there is no face–to–face sale requirement for over the phone or online alcohol purchases, state regulators believe that postal carriers have no definite way of regulating whether a minor or an intoxicated person mistakenly receives the alcohol they delivered. However, at the NCSLA last month, representatives from FedEx and UPS demonstrated the preventative steps their companies use to make sure that deliveries are made to people who can legally purchase alcohol. Although postal carriers seem to have recognized the problem, the debate continues on whether they are actually taking enough precautions.
Out–of–State Shipment to Texas: Be Careful What You Wish For
Those states longing for the legalization of out–of–state direct shipping may change their tune if in-state restrictions still leave small winery competition in ruins. In
Siesta Village Market, LLC v. Perry, the federal district court of Texas ruled that state laws restricting direct shipment by out–of–state retailers, while allowing direct shipment by in-state retailers, was discriminatory and therefore invalid. The court also held, however, that allowing out–of–state distributors to enter Texas would subject them to Texas law which includes a requirement that all wine be purchased through Texas wholesalers. The moral of the story: before you drop your money in a wishing well, make sure you know where it will land.
Are State Licensing Requirements for Airlines Preempted by Federal Law?
Currently, New Mexico requires airlines with flights originating out of or terminating in New Mexico to be state licensed to serve alcohol. New Mexico’s law has received turbulence from airlines as to whether New Mexico’s regulation is preempted by federal law governing airlines in general. The U.S. Supreme Court faced a similar analysis in 2007 for a case regarding interstate tobacco delivery by common carriers. The Court held that federal law governing common carriers of tobacco preempted state law. Perhaps the same rational will apply to alcohol.
Classification of Flavored Malt beverages as Distilled Spirits
On June 15, 2008, the Flavored Malt Beverage Coalition and Diageo–Guinness USA filed suit against California’s Board of Equalization (BOE). The suit alleged that the BOE’s recent reclassification of flavored beer as a distilled spirit caused taxes on beer to soar by over 1,600 percent, and that such a decision was beyond the BOE’s legal jurisdiction. Rather, the plaintiffs argue that the proper authority rests with the Department of Alcohol Beverage Control. In its defense, the BOE contends that the reclassification is in response to a concern for alcohol abuse by young adults and that many flavored beers use distilled spirits in their production to add flavor. The outcome of this decision could have drastic results for retailers, including the elimination of all flavored beers and malt beverages in grocery stores.
