High Court Removes Barriers
To Online Wine Sales
Judges Strike Down Limits
On Out-of-State Wineries;
'Just the Tip of the Iceberg'
By JESS BRAVIN and VANESSA O'CONNELL
Staff Reporters of THE WALL STREET JOURNAL
May 17, 2005; Page A1
The Supreme Court struck down state laws that restricted direct sales across state lines by wineries to consumers, setting the stage for a wider industry shakeup and giving a boost to small vineyards seeking to sell their product over the Internet.
The 5-to-4 ruling rejected laws regulating out-of-state sales in New York, Michigan and six other states. The majority opinion, written by Justice Anthony Kennedy, declared the laws discriminatory since the affected states do allow direct-to-consumer shipping from in-state wineries. The court dismissed arguments that under the 21st Amendment repealing Prohibition, states were free to regulate interstate alcohol sales however they wished. Among those joining the opinion were Justices Ruth Bader Ginsburg and Antonin Scalia, who rarely find themselves on the same side of opinions. (See the full ruling.1)
The ruling is the latest of a series of legal and regulatory decisions that have weakened state and local government protections of local vendors -- especially against the global reach of e-commerce. It could embolden consumer demands for changes in fields ranging from beer to mortgage brokerages to contact lenses.
"Wine is just the tip of the iceberg when it comes to protectionist laws and regulations in this country," said Robert Atkinson, director of the Technology and New Economy Project at the Progressive Policy Institute, a centrist Democratic think tank in Washington. He cited cars and real estate as areas in which e-commerce is tipped in favor of the industries.
In siding against state curbs, the Supreme Court brushed aside concerns from local authorities that boosting Internet sales could make it harder to collect taxes from far-away vendors -- a thorny question prompted by the rise of e-commerce more broadly.
For consumers, the ruling means a greater choice of wines. Last year, Americans purchased 668 million gallons, or $23.2 billion, of wine, according to the Wine Institute, a trade group. But only an estimated 1% to 3% was bought online. A Federal Trade Commission report cited in the court ruling said state regulations were "the single largest regulatory barrier to e-commerce in wine."
E-commerce is believed to be a promising sales channel for wine, because wine lovers can easily access information about a particular vintage or vintner online. Wine.com Inc., a San Francisco-based online wine retailer, has reached $32 million in annual sales in 2004 from $3 million five years ago. (See related article3.)
The patchwork of state regulations has inhibited wine distribution, in part because of the cost. In April, for example, United Parcel Service Inc. adopted a policy prohibiting consumers from shipping wines through any of its nearly 3,900 retail outlets -- unless the customer has a license to do so.
UPS felt it had to set a consistent standard to avoid breaking any particular law, said UPS spokesman Bob Godlewski, adding that the shipper expects to review its policies in light of the court ruling. The Cargo Airline Association, a trade group of which UPS is a member, filed a brief in the case urging the court to strike down the state bans.
The ruling could take time to have an impact, as consumers learn of changes and as states take their time to change laws -- though they could suspend enforcement immediately. But for the nation's estimated 3,700 wineries, the ruling offers the chance to ramp up direct sales -- an especially appealing prospect to small vintners, who led the eight-year legal battle to overturn state restrictions.
Because of state limits on direct sales by producers, most wine is distributed by large, powerful wholesalers, who decide what wines to buy and sell. Wholesalers generally give preference to the largest producers, so smaller brands often are excluded from wholesaler inventories and don't make it to store shelves. The Wine and Spirits Association of Wholesalers, a trade group, opposed loosening state laws.
Reed Foster, co-founder of Ravenswood Winery, Sonoma, Calif., said the ruling likely would aid Ravenswood's marketing efforts. "Direct-to-consumer sales is a substantial part of the wine business -- and importantly, it's a big part of branding to be able to ship your wines to people who appreciate them," he said.
Over the long run, larger wineries, which have relied almost entirely on wholesale and wine-store sales, likely will face new competition from niche brands. That could mean that they lose market share. The top 50 wineries produce over 87% of all U.S. wine, according to industry estimates.
The ruling doesn't pertain to licensed retailers, only to wineries that sell wine directly to consumers. Wine.com CEO George Garrick says his company has been able to ship into states that prohibit direct-to-consumer shipping from out-of-state wineries, including New York and Michigan, because it is a licensed retailer in those states.
The ruling does not necessarily open the door to unfettered Internet wine sales everywhere. States remain free to prohibit such sales -- or for that matter, sales of liquor altogether. The ruling merely says states cannot set such rules if they favor in-state producers.
As a result, some states could respond by tightening rules, not loosening them. The head of the Liquor Control Commission in Michigan, which was one of the defendants in the case, said she would urge lawmakers there to expand the ban on direct shipments to consumers to cover both local and out-of-state sellers.
The ruling also could complicate state policies on alcohol taxation, which vary widely. "From the business perspective, states are now in the position of having to make a decision," said Matthew Botting, an attorney with the law firm of Nixon Peabody LLP in San Francisco who specializes in alcohol regulatory issues. "Are they going to ban all direct shipment or allow it? If taxation is that important, they are going to have to figure out a way to do it."
In California, the heart of the nation's wine industry, residents are allowed to receive up to two cases a month sales-tax-free from a licensee in any of the 13 or so states that afford their citizens the same shipping privilege, he notes.
The Michigan law struck down by the court allowed the state's approximately 40 wineries to obtain licenses allowing them to ship wine directly to Michiganders. Other producers of alcoholic beverages, including out-of-state wineries, were required to distribute their product through licensed in-state wholesalers.
The New York regulation also rejected by the court similarly channeled most liquor sales through a regulated wholesaling system, but permitted direct shipment of wines if they were made from New York-grown grapes. Out-of-state wineries could win similar privileges if they opened "a branch factory, office or storeroom" within New York.
In both cases, small out-of-state wineries and in-state consumers seeking to buy their wine brought suit against the laws. The states, backed by liquor distributors, defended their laws not only on constitutional grounds, but also as means to stop minors from drinking and make collecting liquor taxes easier.
The case attracted interest well beyond oenophiles, and split two Republican constituencies. Free-market advocates, including former Whitewater prosecutor Kenneth Starr and Clint Bolick, a co-founder of the advocacy group Institute for Justice, filed briefs on the wineries' side. The wholesalers hired lobbyist Ralph Reed, former head of the Christian Coalition, and won the backing of the National Association of Evangelicals.
"States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses," Justice Kennedy wrote in an opinion also joined by Justices David Souter and Stephen Breyer. "This rule is essential to the foundations of the Union," he wrote, citing the decision in 1787 to replace the loose Articles of Confederation that followed the American Revolution with a Constitution whose Commerce Clause lowered economic barriers among the states.
Justice Clarence Thomas wrote a dissent, in which he was joined by John Paul Stevens and Sandra Day O'Connor and Chief Justice William Rehnquist.
He argued the 21st Amendment effectively exempted alcohol from the federal Commerce Clause, through a provision prohibiting "the transportation or importation into any state...of intoxicating liquors in violation of the laws thereof." The amendment "took these policy choices away from judges and returned them to the states," he wrote.
The 85-year-old Justice Stevens, the court's oldest member, penned his own dissent, which was joined by Justice O'Connor. "Today, many Americans, particularly those members of the younger generations who make policy decisions, regard alcohol as an ordinary article of commerce," he wrote. "That was definitely not the view of the generations" that adopted Prohibition and later repealed it. "On the contrary, the moral condemnation" of alcoholic beverages -- "demon rum," he wrote -- "represented not merely the convictions of religious leaders" but a "large majority of the population."
--Mylene Mangalindan in San Francisco contributed to this article.
Write to Jess Bravin at
jess.bravin@wsj.com5 and Vanessa O'Connell at vanessa.o'connell@wsj.com