Liquor battle brewing
With Massachusetts law on wine shipments overturned, Congress struggles with who should regulate alcohol distribution
massachusetts has long guarded its unique rules for regulating alcohol, so state officials weren’t happy last year when the federal appeals court in Boston struck down a 2006 state law that barred large wineries from shipping their products directly to Bay State consumers. The three-judge panel ruled that the law violated the Constitution’s guarantee of free commerce across state lines because it exempted Massachusetts’ own smaller wineries from the rule.
Now Congress is pondering legislation that would make it clear that such rules should be left to the states. And alcohol wholesalers, who oppose direct shipping because it takes business away from them, are leading the battle to get the bill passed.
Massachusetts is at the center of the debate, not only because of the appeals court’s decision but because the proposed law was first introduced in the House last year by Democrat Bill Delahunt of Quincy. It would give states near-total control over alcohol distribution and essentially reverse court decisions like the one that struck down the Bay State wine law. Since Delahunt retired at the end of last year to become a lobbyist, a Utah Republican, Jason Chaffetz, is carrying the bill forward.
Beacon Hill lawmakers, who supported the measure overwhelmingly in 2006 and overrode then-Gov. Mitt Romney’s veto, are also watching the debate in Washington closely. Former state senator Michael Morrissey of Quincy, who was the wine law’s chief sponsor (and is now Norfolk County district attorney), says he pursued the legislation for fear that out-of-state wineries would avoid sales tax by shipping directly to consumers and because he wanted to protect the current distribution chain. He said the state’s small liquor store businesses—state law bars anyone from owning more than three liquor stores—rely heavily on wholesalers for their livelihood.
“These small mom-and-pops rely on the distribution chain to be able to get the product they need,” he says.
Large California winemakers challenged the law as a violation of the Constitution’s interstate commerce clause. They said it discriminated against them because it carved out an exemption for small vintners, including every winery in Massachusetts, so they could ship directly to Bay State wine drinkers. Wineries producing more than 30,000 gallons a year were denied the same privilege.
The court’s decision has left the shipping situation in limbo. Technically, Massachusetts is now allowing direct wine shipments, but it has capped the amount of wine that any one household can buy at 26 cases per year. Because it’s impossible for any winery to know what a consumer has bought previously from other vintners, the Wine Institute —the trade group for California wineries—has warned its members not to ship to Massachusetts consumers. Neither FedEx nor UPS will ship wine to the state.
The threat to wholesalers hasn’t come only from the demise of laws like Morrissey’s. Large retailers have also challenged the wholesalers’ dominance by trying to buy directly from vintners, brewers, and distillers. Costco Wholesale Corp., for example, has in recent years financed a legal and lobbying campaign in Washington state to win the right to buy directly from producers. If it succeeds, and expands its direct purchase arrangement nationwide, wholesalers would be badly hurt.
The wholesalers insist that their lobbying campaign in Washington, where they maintain one of the country’s largest political action committees, is about more than preserving profits. They say that a three-tier distribution system—producer to wholesaler to retailer—helps states ensure that underage drinkers can’t get alcohol and that the alcohol business isn’t beset by corruption.
“This was the system set up after Prohibition that prevents the abuses that led to Prohibition,” says John Stasiowski, president of the Beer Distributors of Massachusetts, a state trade group. “It insulates the supplier from the retailer and prevents overconsumption and crime.”
Legal experts are skeptical. Einer Elhauge, a Harvard Law School professor who has studied the issue, says that he fears the Delahunt bill could force the courts to oversee years of litigation over whether state rules supersede federal ones. In testifying before the House Judiciary Committee in Washington last fall, he argued the bill “would actually worsen the concerns about legal uncertainty and excessive litigation.”
In Elhauge’s view, the legal threat to state rules by alcohol producers and retailers has actually been minimal. States have continued to maintain their unique approaches to alcohol regulation, including the Massachusetts limits on liquor store ownership.
Delahunt insists the threat to state regulation is real. Citing his experience as Norfolk County’s district attorney prior to his seven terms in Congress, Delahunt says any threat to state alcohol regulation is a threat to public safety. The alcohol producers “have an economic interest to see the states not have the authority to regulate. Their economic interest is to have a wide open market, a Wild West,” Delahunt says, “despite the statistics in terms of drunk driving and alcohol and how it insinuates into criminal behavior among young people.”
Restricting direct shipments of alcohol, as the Morrissey law intended, will help prevent that, Delahunt says. “I bet there are a lot of teenagers now that are doing a healthy business, either consuming alcohol or selling it to minors after getting it by mail.”
Of course, Massachusetts alcohol producers point out that the state isn’t nearly so worried about the distribution chain when its own producers are involved. The state has long allowed in-state wineries to ship directly to consumers, and it allows in-state producers of all stripes to sell directly to bars and restaurants. It’s only out-of-state producers that must go through wholesalers.
That’s a huge loophole, all the more so since Anheuser-Busch—the beer maker that makes Budweiser and controls most of the US beer market—continues to be treated like an in-state manufacturer under the terms of the 1971 Massachusetts law that set the rules. That law grandfathered in out-of-state brewers that at the time had a license to do their own distribution in the state.
In his bill, Morrissey had allowed small vintners to continue shipping directly to consumers, he says, in order to protect the state’s own small wineries, which rely on direct shipping for a part of their revenue.
But local vintners say they never wanted the protection. “We don’t advocate any kind of protectionist measures,” says Kip Kumler, the owner of Lincoln’s Turtle Creek Winery and president of the Massachusetts Farm-Winery and Growers Association. “The more choices consumers have, the better.”
Kumler says that laws like Morrissey’s give license to other states to discriminate against his wines. “People come to Massachusetts. They taste our wine, they enjoy it, and they go home and they order it,” he says. “To lose that ability to ship would hurt us.”
As for the threat direct shipping poses to underage drinking laws, Kumler doesn’t buy it. Massachusetts teens could already try to buy Turtle Creek wine but don’t because of the shipping costs and the time lag before the product arrives. Direct shipping, he says, is a way for wine connoisseurs to get unique and often expensive products they can’t find in their local stores.Direct shipping isn’t as big a deal for Massachusetts brewers, who rely heavily on wholesalers to get their product to market. That’s created a quandary for them: fight a bill they don’t like and risk offending their wholesalers or steer clear of the issue. Doyle, of Harpoon, declined to be interviewed, his spokeswoman Liz Melby said, for fear of offending his wholesalers. He wasn’t so reticent last September when he told the House Judiciary Committee in Washington that the proposed federal legislation could create huge headaches for brewers by, for example, allowing every state to adopt its own labeling requirements for beer bottles. New York recently tried to do just that, before a federal court intervened.
“As a small brewer in Massachusetts, I do not have the resources to fight every discriminatory state statute and regulation that restricts my ability to compete,” he said.