Food

A free-trade fight over wine

Robert Plummer had no desire to flout his state's laws.

The clinical psychologist from Saginaw, Mich., convinced his favorite wineries, tiny California operations, to ship him a precious few bottles each year. He often trusted winemakers enough to place orders by phone after a mere description of their latest bottlings. Then in 2001, UPS discovered what they were delivering to Plummer's door.

"And the state promptly smashed all the bottles," Plummer says. "Lost some very good pinot that year."

Wine lovers in two dozen states, where wine cannot be directly shipped to consumers, share the same frustrations. These connoisseurs enviously watch their counterparts elsewhere in the nation buy wine not available in their own states online or by phone, and have it delivered to their doorsteps.

Over the past five years, direct shipping has become the wine industry's most contentious fight, and perhaps the most convoluted issue in interstate commerce.

On Tuesday, the U.S. Supreme Court will take up the debate. Sometime next year, the justices will answer a specific question: Can a state let its own wineries ship wine to residents, yet prohibit other states' winemakers from doing so?

That's just what Michigan and New York, two states with rapidly growing wine industries, have done. So Virginia winemaker Juanita Swedenburg, California winemaker David Lucas and three New York wine lovers sued New York officials; Michigan wine critics Ray and Eleanor Heald sued their state. The Healds won their case in federal appeals court, while winemakers lost the New York case on appeal.

Now, the high court justices must decide whether the Commerce Clause, a long-held federal doctrine that bars states from limiting interstate commerce, trumps the 21st Amendment,which gives states the right to regulate alcohol.

Even if the Supreme Court sides with wineries, wine won't freely flow across all state borders. States such as Utah prohibit any shipping, and dry localities across the country would continue to limit sales.  But anyone who can buy directly from a winery in their state could do the same with wineries elsewhere.

Legal celebrities weigh in
The case pits two conservative values — free trade and states' rights — against each other. That wine is at issue only complicates the matter because although it is alcohol, it can be either a commodity or a luxury collectible.

As such, it has attracted legal celebrities like Ken Starr (for the wineries) and Robert Bork (siding with wholesalers), and legal briefs from shippers like UPS and FedEx, dozens of state attorneys general, Nobel laureates and conservative groups like the Eagle Forum.

"There are deeper principles involved here," says Daniel McFadden, a Nobel-winning economist at the University of California at Berkeley who filed a pro-shipping brief. "I would hope the Supreme Court would go back to fundamental principles, which is that the government should not interfere with private commerce unless there's a clear and pressing social objective to do so."

Direct sales soar
Wine shipments have little direct impact on the average American. Most drinkers still buy their wine in stores, and the nation's largest wineries sell most of their wine through a "three-tier" system, which ensures that different companies produce, distribute and sell alcohol. That system has been enforced since Prohibition ended in 1933, and it all but guarantees wholesalers a lucrative role in the liquor industry.

Yet direct shipments of wine have been an accepted practice for nearly two decades in states such as California, which produces most of the nation's wine, and twelve other states where reciprocal laws guarantee residents' shipping rights.

Prior to the mid-1990s, shipments often quietly crossed state lines, but the advent of e-commerce caused direct sales to explode.

These sales mean a lot to businesspeople like Swedenburg, whose winery in Middleburg, Va., relies on tourists to sell most of its 2,500 cases of wine each year. Though many are eager to buy, she must ask where they live, and often refuses to sell. To her, this is nothing more than the wholesalers engaging in protectionism.

"They're really determined to protect their monopoly," Swedenburg says. "They don't want one bottle of wine to go through."

Most wholesalers would agree with her on that last point, actually. They defend their role as gatekeepers of a sin product, keeping liquor out of the wrong hands and ensuring that states collect taxes.

"You start breaking down these systems of safeguards and you create virtual alcohol anarchy," says Karen Gravois, a vice president of the Wine and Spirits Wholesalers of America.

Competing with the three-tier system
Many in the industry believe the three-tier system rewards economies of scale. The top 50 U.S. wineries — familiar names like E&J Gallo and conglomerates like Constellation Wines (think Inglenook or Arbor Mist) — produce 95 percent of the wine Americans consume.  Similarly, the $32 billion wholesale liquor industry has consolidated since the 1960s, with more than two-thirds controlled by the top 20 wholesalers, according to Impact, an industry newsletter.

Wholesalers largely control which brands make it to shelves, a process that necessarily highlights producers with big marketing budgets. Small wineries see direct shipping as the only way to compete in markets where their wine isn't otherwise sold.

Few small wineries believe a victory would vastly boost revenues, though some believe it would expand their customer base by up to 60 percent.

These shipments represent a tiny fraction of overall liquor sales, and little evidence exists that they are a drain on distributors or retailers. Still, the wholesale industry portrays dire consequences should shipping laws change — when they discuss the matter at all. None of the nation's top three wholesalers, which earn nearly one-third of the industry's revenues, would discuss direct shipping on the record for this article.

Underage drinkers
Wholesalers view the current case in part as a threat to 75-year-old protections against what long ago was a largely corrupt industry.

They, and officials in states with shipping bans, insist that minors exploit direct sales — especially those conducted online. They believe a retail clerk must verify buyers' ages in person. Juanita Duggan, CEO of the wholesalers' association, has called online sales "fraught with danger."

States such as Massachusetts occasionally find instances of underage purchases. So do private groups, including an effort this year by a Gonzaga University student organization with ties to billionaire activist Richard Mellon Scaife. But there is little evidence of a widespread problem shipping premium wines.

A 2004 National Academy of Sciences study found 10 percent of underage drinkers purchased alcohol online, but also noted that 40 percent to 90 percent of all retailers report selling to minors. It said liquor shipments should be marked as such and require an adult signature, but saw bigger concerns with minors buying liquor in person, or getting it from family and friends.

Similarly, a 2003 Federal Trade Commission report determined many states effectively handled underage shipping concerns, often by requiring out-of-state wineries to obtain sales permits. Wineries themselves endorse tougher measures like adult signatures.

"This temperance issue really is another one of their red herrings," says Tracy Genesen of the Coalition for Free Trade, who is coordinating wineries' legal efforts. "They want control over choice."

Lost tax dollars
States, at least, haven't raised any big flags over lost revenue.

In Texas, where direct shipments began in July 2003 after a court invalidated a shipping ban, the state's Alcoholic Beverage Commission estimates 20,000 bottles are being shipped each month, with a cumulative loss of about $8,000 in excise taxes. But steadily rising wine consumption and tax revenues on wine have more than made up the difference.

"Right now, we don't feel like we're losing a lot of tax money," says Carolyn Beck of the Texas commission.

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