A Tale of CA Politics, Wine Politics and the Law

Posted by Tom Wark on Jun 27, 2005

If, as the Supreme Court said, a state has the right to regulate the sale of alcohol nearly any way it wants as long as in-state and out-of-state wineries are on equal footing, does this also mean that the same applies to wine retailers?

California’s answer to this question appears to be "NO", a response that could lead to more lawsuits dealing in discrimination just as the recent Supreme Court case did.

THE NEW CA WINE SHIPPING LAW
Currently California Senate Bill 118 is moving through committees and toward the Governor’s desk. SB118 would essentially allow any winery in any state to ship up to 24 cases a year to a California resident. It’s a bill that basically removes the "reciprocity" plan that had governed direct sales of wine into California for many years. Under reciprocity, a state’s wineries or retailers could ship into California so long as it allowed California’s wineries and retailers to ship to its residents.

The Supreme Court had something to say about these reciprocity laws. Writing for the majority in Granholm V. Heald, Justice Kennedy cited reciprocity laws as "low-level trade war among the states.  The perceived necessity for reciprocal sales privileges risks generating the trade rivalries and animosities, the alliances, and exclusivity, that the Constitution and, in particular the Commerce Clause, were designed to avoid."

Basically, Kennedy said reciprocity is unconstitutional. So California went about fixing this situation.

The new bill, authored by CA Senator Wes Chesbro, allows any state’s wineries to ship to California resident’s as long as they get a permit, don’t ship more than 24 cases per year to a single person, as well as follow other basic requirements.

NO SHIPPING TO CA FOR MOST OUT OF STATE RETAILERS
What’s really interesting, and short-sighted in this writers opinion, is that SB118 does not speak to out of state retailers’ rights to ship to California residents. In the bill’s original form retailers in all states would have been allowed to ship to California residents under the same guidelines as wineries. But after all the stake holders got together to talk about what should be done, and after the bill was amended in committee, the retailer privilege was largely stripped out.  In the current version of the bill, only retailers in those states that were formerly "reciprocal states" under California law (12 of them) will still have the right to ship into California. Why was this change to the bill made?

The only group that was opposed to retailers being able to ship into California were the big California wholesalers.

WHOLESALERS PUT THEIR FOOT DOWN…ON RETAILERS
The wholesalers objected to the competition on slippery slope grounds. The Santa Rosa Press Democrat reported that Don Robbins, General Council for Young’s Market, one of California’s largest wholesalers of wine, said the bill "would change the balance of the game. If it’s good for retailers then it’s good for wholesalers and if that’s the case, then everyone is in business everywhere."

I spoke with officials at the California Wine Institute, Family Winemakers of California, California Association of Winegrape Growers, as well as members of Senator Chesbro’s staff. Interestingly, when I asked why retailer privileges had been stripped from the bill, they all said the same thing…using nearly the very same words:

SB 118 brings California into compliance with the meaning of Granholm Vs. Heald. The Attorney General of California determined that the Supreme Court case only dealt with wineries so it was necessary only to deal with wineries in this legislation.

NARROW READING OF SUPREME COURT DECISION HELPS
EXCLUDE OUT OF STATE RETAILERS
This seems an extraordinarily narrow reading of the recent Supreme Court case. Those supporting this reading make note that the term "retailer" was never mentioned in the Supreme Court opinion. And that’s true. But the principle behind the opinion seems clearly to apply not merely to wineries but to alcohol regulation in general. One could easily read the Granholm V. Heald decision and determine that it applied to alcohol regulation in general, rather than simply wine. The choice not to open California up to all retailers under the SB118 scheme seems to be a purely political choice rather than a legal decision

RETAILERS GETTING THEIR COMEUPPANCE?
Retailers have never played any significant role in trying to overturn anti-direct shipping legislation in America. In addition, not one retailer or retailer organization filed an amicus brief in the Supreme Court case. The fact is, there is a division among America’s wine retailers when it comes to direct shipping. Some are all for it, wanting to cultivate customers and markets outside their geographic area. Other retailer fear the competition that direct shipping will result in. The upshot is that there has never been a consistent position among wine retailers on direct shipping like the wineries and wholesalers have maintained. You can see how it would be psychologically difficult for wineries to carry the water for retailers when the retailers never bellied up to the bar in the run-up to the Supreme Court case. In the case of SB118, California wineries decided they had no obligation to push for retailers to be included in the opening up of the State’s direct shipping laws.

CA’s OPEN ARMS A LITTLE LESS OPEN NOW
That said, the new direct shipping legislation will represent a change in California policy as to who the state wants shipping to California residents. Under old reciprocity agreements, California was happy to have all wineries and all retailers in any state ship to California residents as long as a reciprocity agreement was in place. There was no difference seen between an out of state winery and an out of state retailer. They were both equally encouraged to ship to California residents as long as their state had  a reciprocity agreement. Under SB118, only wineries in other states are now welcomed with open arms.

Senator Wes Chesbro, the author of SB118, along with California Attorney General Bill Lockyer believe that the Supreme Court decision clearly makes reciprocity agreements unconstitutional due to the way they discriminate against states that do not have reciprocity agreements. This is why they are changing California’s laws concerning direct shipping. Yet, the reciprocity scheme remains in place when it comes to retailers. If a state passes a new "reciprocity" law, that state’s retailers, according to California now and in the future, will be allowed to ship to California residents.

But I thought we had to change California law because reciprocity agreements were unconstitutional?

The New York wine shipping bill that just passed is in fact a "reciprocal" direct shipping bill. Will New York retailers be able to ship to California residents? The opinion of California’s Attorney General is that the Supreme Court said reciprocity is unconstitutional.

IS CA INSTITUTING UNCONSTITUTIONAL PROVISIONS?
The attorney for the California Alcohol Beverage Control Department thinks so too. He recently said in an interview with Santa Rosa Press Democrat’s Kevin McCallum concerning the constitutionality of SB118, "I think if we are challenged, it is my opinion that we would ultimately lose."

One must wonder how long it will take a wholesaler in California from filing suit to stop NY retailers from shipping into California on the grounds the State law permitting it is unconstitutional. For that matter, why wouldn’t a retailer in a state that does not have reciprocal legislation in place not file suit against California claiming it’s reciprocity statutes that now exist only for the purpose of governing which retailers can ship to California file suit. They could easily claim the law is unconstitutional based on Granholm vs. Heald.

But here is what I think is worst part of SB118, rather than the confusion it creates: as other states look to change their laws to adapt to the Supreme Court decision they will look to see what California has done, notice that most states have their retailers excluded from shipping wine to California and conclude that California retailers should be excluded from shipping into their states. In fact, it seems to this writer that this kind of discrimination put in place by California might easily convince other states to ban shipping all together. This is particularly possible in those states that do not possess much of a wine industry that would bring pressure to allow direct shipping.