The battle over alcohol shipping in the US kicks off

The battle over alcohol shipping in the US kicks off

The House Judiciary Committee Hearing on HR 5034, the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act, got under way in the US on Wednesday (29 September). Here, we hand over to Wine & Spirits Daily in the US for coverage of the hearing on its first day.

Several Congressmen testified on the act in the first session. Reps. Mike Thompson (D-Calif.) Peter DeFazio (D-Oregon and co-chair of House Small Brewers Caucus) and George Radanovich testified in opposition to the bill. Meanwhile, Reps. Bruce Braley (D-Iowa), Ed Towns (D-N.Y.) and Gary Miller (R-CA) are all co-sponsors of the bill. HR 5034 has 148 co-sponsors in the House but none from the Senate.

THE WINE INSTITUTE - NO PROBLEMS WITH STATE REGULATION

Tracy Genesen, on behalf of The Wine Institute, argued that “HR 5034 is a drastic solution to a problem that does not exist”. She explained to the committee that small- and medium-sized wineries often have a hard time finding distribution, so it's especially difficult for them to enter states that bar direct-to-consumer shipping. “Wholesalers tend to focus almost exclusively on the well-know high-volume wines to the exclusion of the smaller, lesser-known brands,” she said. Genesen claimed that wholesalers “ordinarily do little in exchange for the high costs they charge small and medium wineries. Not surprisingly, wineries that succeed in obtaining wholesalers often complain that the wholesaler fails to maintain contact with restaurants or wine shops after making an initial sales call.”

As a result, US wineries "have an interest in even-handed regulation permitting them to ship wine directly to consumers and retailers”. But, wholesalers “have an interest in maintaining” their grip on the three-tier system. She went on to say that HR 5034 benefits wholesalers “at the expense of producers, retailers and consumers”.

The “only state alcohol regulations that are truly vulnerable”, she said, "are ones that discriminate against out-of-state businesses”. HR 5034 “gives states free reign to pass intentionally and facially discriminatory statues that foreclose out-of-state wholesalers and retailers from market access,” she said.

HR 5034 is “not about protecting the overwhelming majority of state alcohol regulations at all”. Instead, the bill “is about protecting wholesalers from competition... . What wholesalers want is nothing less than a power grab designed to protect their market share … the opportunity to develop in-state cartels, free from competition from out-of-state wineries, breweries, retail outlets, and other wholesalers.”

HARPOON BREWERY - MORE DIFFICULT FOR SMALL BREWERS TO FIGHT FRANCHISE LAWS

Rich Doyle, chairman and CEO of Harpoon Brewery, gave the small brewers' perspective by speaking on behalf of the Brewers Association. He noted that beer distributors are “very important to small brewers”. He said that the “current system has also served the public well” but passage of HR 5034, “even in its amended form, risks exposing that delicate balance to unintended consequences”.

A big issue for small brewers is state franchise laws, which protect “wholesalers from dominant large brewers”. “I have worked through franchise agreements mandated by state laws with dozens of wholesalers (but) those negotiations are always tough because state laws provide wholesalers with strong leverage.” The proposed legislation “would undeniably make this situation worse”, he argued. “Not only would we be playing away, but the state-based referee would not have any concern about being tempered by federal oversight.”

He said he “appreciates the threat that wholesalers feel to their business from a change of the status quo, and more power flowing to large retailers. However, we do not think that solving a problem for wholesalers by creating a problem for brewers makes sense”.

In closing, Doyle stated: “I respectfully urge the Committee to refrain from reporting HR 5034. Federal legislation is not needed to better address underage drinking, drunk driving, or other problems.... Our industry is already adequately regulated at the federal and state level … .”

MICHIGAN LCC - STATE REGULATION IS "UNDER SIEGE"

Meanwhile, Nida Samona, chairperson of the Michigan Liquor Control Commission, supports the legislation. She said: “Michigan and other states continue to be challenged with lawsuits whose goal is to eviscerate effective state regulation of alcohol beverages, by opening the floodgates and allowing entities over whom state regulators have little or no control to distribute alcoholic beverage free of the oversight and rules that govern in-state licensees.”

She brought up out-of-state retailers as an example. The Specialty Wine Retailers Association sued Michigan for the right to ship direct to consumers. She claims the District Court sued against Michigan's position and “rather than face the additional costs of litigating”, the state legislature “restricted the ability of all retailers [in-state and out-of-state] to ship to consumers”.

She believes that, because states are being subjected “to this type of expensive and uncertain litigation where a state may be forced to expend great manpower and incur great defence costs … a federal statute is needed to confirm the primacy of State regulation over dormant commerce clause and antitrust challenges that might apply to other products.” Furthermore, HR 5034 “is also needed to help states defend against attacks that are motivated by economics not for public health reasons”.

MARIN INSTITUTE - REGULATION IMPORTANT TO PUBLIC WELFARE

Michele Simon, research and policy director for the Marin Institute, argued on behalf of public advocacy groups. “It is irrelevant to us if the bill favours any particular party's economic interests,” she said. Instead, their “goal is to advance policies to reduce alcohol harm”.

HR 5034, she said, is very important in preserving public welfare. But, “as long as the public and policymakers think this is all just an industry food fight, the science and the historical context to support strong state regulation gets lost in the shuffle. While the fight between alcohol distributors and producers presents an obvious disagreement of economic interests, HR 5034 must not be dismissed as industry infighting.”

She said that the “benefits of state alcohol control are significant”, such as “lower consumption”, “less alcohol-related harm”, and a source of revenue for state programmes. “State laws and regulations controlling alcohol sales were passed to help protect the health and safety of the public; however, certain special interests are challenging state regulatory authority and threaten to undermine the very protections every state has established.”

“Maintaining the integrity of the three-tier alcohol control system is necessary for ensuring the health and safety of the public,” she said.

UTAH AG – ANHEUSER-BUSCH COMPARED TO ARTISAN WINERY

Utah Attorney General Mark Shurtleff is all for the Care Act. “Alcohol … is a unique product both constitutionally and physically,” he said. “It is restricted for good reason … . The people of Utah feel differently about alcohol than the people in Detroit. That is the beauty of the American system. Just because alcohol can be sold like toothpaste, doesn't mean it should”. Shurtleff pointed out that Utah is a control state and that it “takes alcohol very seriously”.

Referring to the US Supreme Court's ruling in favour of interstate wine shipments from 2005, Shurtleff noted that the court “believed that the Michigan system impermissibly harmed a poor artisan out-of-state winery”. But now “fast forward” five years and ask, “where are the states in trying to understand what this decision meant? The answer is the legal waters are muddier, not clearer.”

Shurtleff contrasted that “small artisan winery” where “now we have Anheuser-Busch InBev … using the same theory … to say they are being discriminated against in Illinois. Last I checked, A-B InBev was everywhere. How are A-B InBev and a small winery similarly situated? I don't know.”

And then you also have “out-of-state retailers saying that the Granholm decision means that out-of-state, remote sellers of alcohol have the same rights as entities licensed to sell alcohol in the state. There are 2,966 accounts that sell alcohol in Utah and Utah does a fine job regulating them. We cannot regulate 521,000 accounts that sell alcohol across the country.”

Here's the money shot from the AG: “Michigan has been hauled into federal court over this very issue of retailer shipping. Texas and New York were sued too. Michigan lost at the district level. Texas and New York won at the 5th and 2nd circuits. What am I to tell the Utah legislature? Go with the Texas and New York ruling, or race to the bottom and abandon regulation to be safe from a Michigan-type decision?”

HARVARD PROFESSOR - BILL IS PROTECTIONIST AND NEEDLESS

Testifying on behalf of the Beer Institute, Harvard Law School professor Einer Elhage made the case that not only is the new Care Act not necessary, because most of the legal conflicts have been “largely resolved … and that none of the cases has resulted in deregulation”, but that the Act would still “allow many types of protectionist state laws and could allow state regulations that conflict with federal antitrust statutes or other important Congressional Acts”.

LAW SCHOOL PROFESSOR - CARE WOULD "PRESERVE" MODERATION

Professor Steve Diamond, from the University of Miami School of Law, testified in favour of HR 5034. Post-Prohibition state laws have been largely successful in controlling the “appetite for drink … and the pursuit in profit in selling it,” he said. The three-tier system, he said, created an environment where “no particular segment of the industry was to feel disproportionately over-regulated”, but rather to create “a culture and a climate of control. They were aimed just at the few. The alcoholic was not the only problem consumer; the gangster was not the only problem seller. The aim was moderation in drinking, moderation in selling, and moderation in law-making”. Was it perfect? "Of course not," said Professor Diamond, but it still “commands respect” and HR 5034 is a “moderate, reasonable effort to preserve this programme of moderation”.

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