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WineDirect Blog

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July 8, 2015 | Matthew Mann

A decade after Granholm: Have the tectonic plates of DTC shifted?

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Ten years in, was Granholm earthshaking?  Or was it just a tremor?

Ten years in, was Granholm earthshaking?  Or was it just a tremor?

What it was

It’s been 10 years since Granholm v. Heald, the seminal 2005 U.S. Supreme Court case pitting the 21st Amendment against established dormant Commerce Clause jurisprudence, was decided. The case was brought by two groups of wine consumers and wineries independently against the states of Michigan and New York to dispute the alleged discrimination by those states against out-of-state wine producers.

The plaintiffs complained both states’ direct-to-consumer shipping laws unfairly permitted in-state wineries to ship wine directly to in-state consumers while prohibiting out-of-state wineries from doing so, in contravention of Commerce Clause limitations on discriminatory restraint of trade and the federal government’s exercise of authority over interstate commerce.

In particular, the Court sought to determine whether the 21st Amendment’s broad grant of authority to the states to regulate alcohol distribution within their borders was unfettered, or if instead it was restrained by other constitutional rights when they came into conflict?

After analyzing established Commerce Clause jurisprudence and the history of alcohol regulation in the years prior to Prohibition, including an attempt to divine the intent of Congress, the Court reached the decision the 21st Amendment was not absolute when in conflict with other constitutional principles, essentially ruling the federal Commerce Clause powers limited the exercise of the states’ 21st Amendment authority. The states were required to treat in-state wineries and out-of-state wineries alike, absent some compelling public interest, so that each operated on a level regulatory playing field in accessing the potential direct-to-consumer wine market in their respective states.

What it did

In short, states granting the privilege of direct-to-consumer shipments to in-state wineries were required to provide the same privileges, on similar terms, to out-of-state wineries. However, to be clear, states were still free to prohibit direct shipments to consumers altogether, forbidding both in-state and out-of-state wineries to that market.

While not express in the Court’s holding, the previous system of “reciprocity”, wherein “State A” would grant to “State B” the right for its residents to receive wine shipments from “State B” provided that same privilege was extended in return to “State A”, also became effectively unconstitutional due to an unfair favoritism between the two states to the exclusion of other states. As such, “reciprocity” between the 14 participating reciprocal states came to an end.

In place of reciprocity, a somewhat haphazard system of regulated direct shipping began to emerge, with each state’s legislatures determining whether direct shipments would be permitted and under what terms. Many states simply outright banned direct shipments under any circumstance, while initially just a handful of states enacted statutes permitting direct shipments.

Unfortunately, in the states permitting direct shipments, the rules of the road governing how they operated were as disparate as were the states.Some state’s regulations were permissive and straightforward, easily navigated by wineries seeking to ship direct.Others were complex and difficult to understand. This was sometimes the result of strong political forces within a state seeking to limit as much as possible the availability, and consequently, the economic viability of direct shipments as a pathway to market; at other times it was simply the result of the legislature and public agency responsible for oversight merely bootstrapping direct-to-consumer licensing rules onto existing statutory and regulatory structures, often when they were poorly aligned or even incompatible. Regardless of the reason, it all created tremendous confusion, stifling wineries ability to take advantage of the laws in many of the states where it was in fact legal to ship.

Still, over the decade since its issuance, direct shipment laws have slowly increased in number and in uniformity. With the addition of South Dakota in January 2016, 45 states covering over 90% of the U.S. population will permit direct interstate shipments under some type of regulatory formula. The trend is continuing and it is reasonable to expect that someday soon all 50 states plus the District of Columbia will allow direct shipments of wine.

Perhaps more importantly, the laws in place are becoming more uniform, addressing key issues of licensing cost and availability, individual and aggregate volume limitations, reporting and taxation, and restricting access to minors in conformity with a gradually emerging set of standards that is proving to be both responsive to state concerns for accountability and revenue collection, while not so onerous or confusing as to discourage wineries from availing themselves of the opportunities direct shipment presents.

What it didn’t do

There are some misconceptions about what Granholm did…and didn’t do.For one, the decision did not necessarily make direct shipment of wine “legal”. Rather, it simply prevented states from using the authority granted to them in the 21st Amendment to discriminate between in-state and out-of-state wineries in their direct shipments laws. States are still completely free to make all direct shipments illegal, and Alabama, Kentucky, Mississippi, Oklahoma, Pennsylvania, and Utah, have effectively done so.

Also, the decision is presumptively not limited to tension between the 21st Amendment and the Commerce Clause.Rather, though not expressed in binding terms, such restrictions would also apply to the Due Process, Equal Protection, and other clauses of the Constitution.

In addition, it should be remembered that Granholm was a narrowly decided case, meaning simply that it only applies to the issue at bar and does not have broader application. For example, the decision is directed at the producer segment of the 3-tier system, specifically wineries. It should not be read to apply in equal measure to wine wholesalers or retailers. It is also limited to the issue of direct shipments to consumers. It does not necessarily apply to other distribution methods involving the three tiers, such as “self-distribution” to restaurants and retailers by wine producers.

What’s next?

Predicting the future of anything with any degree of certainty is inherently foolhardy; however the trends are pushing strongly in the direction that direct shipping of wine to adult consumers will continue to increase in importance to the marketing and financial plans of most wineries.

Indeed, the list of holdout states prohibiting direct shipments gets smaller every year. Movements are afoot in Pennsylvania and other states to remove the restrictions. Wineries are developing a track record of compliance with direct shipment laws over the last 10 years, overcoming fears by regulators they would disregard the laws, making the marketplace a “wild, wild west” of irresponsible wine shippers. The continuing movement towards uniformity of the rules bolsters this compliance by wineries, who realize that playing by the rules is not as difficult as it might at first appear and allows them to operate responsibly.

The market for direct wine shipments also continues to grow. According to Wine and Vines Wine Industry Metrics April 2015 data, direct to consumer shipments increased in value by 15% to $1,890 million from April 2014 to April 2015, a $241 million jump in 12 months. With over 90% of adult Americans accessible to direct shipments and the wine industry growing overall in the U.S., it seems reasonable to expect this trend to not only continue but to accelerate.Much of this growth is driven by the internet and the expansion of social media. Awareness and access to different wines, emerging wine regions, and the introduction of wine into culinary lifestyle choices by young and old alike, have been greatly enhanced by technology and the spread of information.

So was Granholm earthshaking?

In a word, “yes”, however, whether Granholm will ultimately serve as precedent for other inroads into how wine, and alcoholic beverages generally, are distributed in the U.S. remains to be seen. Court challenges have been made by wine retailers seeking to overturn direct shipment bans by the tier on similar grounds as Granholm, to less than encouraging results so far. That struggle will invariably continue, as market demands for more access to imported and obscure boutique wine brands are only increasing.It seems clear the demands of the market are a key impetus in the movement towards greater consumer access.

Still, with all of this good news springing from the 10 year old Supreme Court decision, the mistake should not be made that direct-to-consumer wine shipping is inviolate and cannot be retracted.The decision prevents discrimination, not prohibition.Failure by the wine industry to be responsible corporate citizens and following the requirements of each state’s laws will invariably result in many state legislatures, already subject to the powerful lobbying efforts of parties interested in rolling back direct shipment statutes, doing just that in response to recalcitrance by wineries. Continued adherence to the law, the support of the industry in fostering reasonable and responsible rules, and the accountability of wineries to the state’s to where they ship by obtaining licenses, filing reports, and remitting taxes will ensure direct wine shipping will flourish today and into the future.

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