H.R. 5034: Its History and Meaning Explained
THE HISTORICAL BACKGROUND
For decades the state-mandated 3-tier system of alcohol
distribution worked. This is the system of sale and distribution of alcohol
that nearly every state mandated at the end of Prohibition. It ordered that
only licensed in-state wholesalers buy wine from producers around the country,
that only wholesalers then sell to restaurants and retailers, who in turn sell
wine to consumers. The market for wine from the 1930s through the 1970s was
such that this system worked well for all.
Then something happened in the late 1970s. Americans began
to become interested in fine wine and the market responded with a substantial
growth in wine producers. This growth in drinkers and producers continued
unabated and continues today. The flourishing of the American wine market found
wineries cropping up in every state. Today, more than 7,000 wineries exist in
the United States, most of them making very small amounts of artisan wines.
At the same time the number of wineries was expanding, the
number of wholesalers was being diminished, primarily as a result of buyouts
and consolidation. Today, 6 wholesalers control over 50% of wine distribution
The increased number of wineries combined with the decreased
number of distributors meant that the three tier system of distribution was
unable to satisfy all the wineries that wanted to expanded from selling in
their home state to other states. Wholesalers simply could not handle all the
Small and medium sized wineries took to marketing direct to
the consumer using mailing lists, tasting rooms and other methods of selling
direct and bypassing wholesalers and retailers. The margins were better by 100%
and their customers tended to be very loyal.
By the early 1990s wholesalers across the country, used to
having a monopoly on wine sales, began to take a dim view of the practice of
wineries selling direct to consumers and shipping the wine to them via common
carrier. Using the enormous political power they had accumulated over the years
in their home states, wholesalers began sponsoring and seeing passed laws that
banned out-of-state wineries from shipping direct to the consumers. Some states
passed felony laws, putting the shipment of wine on par with rape. In many
cases, these state laws facially discriminated against out of state wineries by
allowing their own in-state wineries to continue to ship to state residents.
Frustrated by the wholesalers, the lost sales and by the
growing number of consumers that wanted their wines but could not be serviced,
producers went to the courts knowing that the wholesalers controlled the
legislatures. Lawsuits were filed in a number of states including Indiana,
Texas, New York and Michigan. Each lawsuit claimed the discriminatory bans set
in place by the states violated the Dormant Commerce Clause that gave the
Federal government the right to regulate interstate commerce. Wholesalers and
states claimed that section 2 of the 21st Amendment gave them broad
powers to regulate wine coming into their state, including banning it all
together from being shipped to consumers.
Eventually two of these cases wound up in the Supreme Court.
In 2005, in the case of Granholm v. Heald, the Supreme Court rule in a 5-4
decision that the 21st Amendment did not take precedent over the
Commerce Clause where wine sales and shipping were concerned and the
discriminatory bans on out-of-state shipping were overturned.
This led to a number of states passing “Permit Laws” that
allowed out of state wineries to obtain permits to ship wine into the state
with the provision that they pay state sales tax, report shipments to the
states and assure that all deliveries were signed for by an adult. In every
case these laws were opposed by wholesalers who, though they claimed they were
concerned minors would use the direct sales channel and states would not be
able to collect taxes and the three tier systems would come crashing down,
pretty clearly were just trying to protect their long held monopoly on wine
Though legislators were nearly always persuaded by
Wholesaler campaign contributions, they were unable to vote against their
small, family owned in-state wineries who themselves would have to be banned
from selling direct to their state’s residents if a ban against out-of-state
wineries was to be viewed as non-discriminatory and constitutional.
Following the Granholm decision, some states attempted to
erect direct shipping laws that only allowed very small wineries to ship wine,
assuring wholesalers biggest clients could not do so. Others passed winery
shipping permit legislation while banning out of state wine stores from
shipping wine. This set off a new wave of litigation to knock down these
In addition, the 9th Circuit Court of appeals
used the Granholm legal reasoning to declare in Washington State that since
Washington wineries were allowed to sell wine directly to retailers and
restaurants (“Self Distribution”), bypassing wholesalers, out of state wineries
must be allowed to do so also. This development struck at the heart of the
alcohol wholesalers’ monopoly and represented the kind of reform the three-tier
system that not only demonstrated one logistics and the wine market had
changed, but also that wholesalers could, in many cases, be dismissed as
unnecessary. This did not sit well with wholesalers.
For five years following the Granholm decisions, wholesalers
seemed to be loosing more and more of their state-mandated protection. Though
they continued to fight all openings of the wine market, they tended to lose
This is not to say they have not been successful at all. For
example, there is still no clear judicial backing for retailers, as opposed to
wineries, being able to ship wine across state lines using the same legal
justification that was laid out in Granholm. That issue remains in litigation
with wholesalers leading the fight.
ENTER H.R. 5034
In April 2010, The National Beer Wholesalers Association
used their enormous political power to have H.R. 5034 introduced into Congress.
If it becomes law, it will effectively overturn the principles set down in the
Granholm decision and give states the ability to pass discriminatory wine
shipping bans that would effectively be unchallengeable in Federal Court. The
Beer Wholesalers, supported by the Wine & Spirit Wholesalers Association,
are swinging for the fences by trying to change the rules in the middle of the
game because they don’t like the umpire’s calls.
HOW H.R. 5034 WORKS
The Granholm court provided a simple and fair test for
analyzing state laws that appeared to violate the Commerce Clause: For a
state’s discriminatory ban on wine shipping to be upheld, the state must show
that the goals if its ban cannot be achieved by any other less discriminatory
means. The goals of all state alcohol regulations and of their bans on shipping
always amounted to the same thing: 1) Maintain an orderly market in alcohol
sales, 2) Promote Temperance, 3) The efficient collection of state alcohol
The Granholm court found that state could easily achieve
these goals without resorting to banning the direct shipment of wine. So, those
shipping bans were overturned as unconstitutional.
H.R. 5034 would modify these rules for analyzing state
alcohol laws in significant ways. In amending the Webb-Kenyon Act, which
describes the way Congress intends the states to wield their 21st
Amendment powers to regulate alcohol, H.R. 5034 states the following:
State or territorial
regulations may not facially discriminate, without justification, against
out-of-state producers of alcoholic beverages in favor of in-state producers.
The key to this legislation is the use of the term “without
justification”. Further down in the bill, that phrase is explained:
the State or territorial law may burden interstate commerce or may be
inconsistent with an Act of the Congress, the State law shall be upheld unless
the party challenging the State or territorial law establishes by clear and
convincing evidence that the law has no effect on the promotion of temperance,
the establishment or maintenance of orderly alcoholic beverage markets, the
collection of alcoholic beverage taxes, the structure of the state alcoholic
beverage distribution system, or the restriction of access to alcoholic
beverages by those under the legal drinking age.
“…shall be upheld unless the party challenging the state…law
establishes by clear and convincing evidence that the law has no effect on the
promotion of temperance…”
The burden of proving that a ban on shipping has NO EFFECT
on the promotion of temperance or any other legitimate state goal is INSURMOUNTABLE.
H.R. 5034 means states may pass bans on direct shipping
that, if challenged in court, would have no chance of being overturned—no matter how discriminatory, no matter how much they violate the principle fo the Commerce Clause. State
alcohol laws are being taken outside the orbit of the Commerce Clause and the
THE EFFECT OF H.R.
Numerous states across the country enacted direct shipping
legislation grudgingly. The power of the wholesalers in certain states is
enormous. And certain states continue to fight direct shipment on behalf of
wholesalers despite an outspoken consumer base that wants the ability to have wine
shipped to them.
Unquestionably, upon passage of H.R. 5034 a number of state
legislatures will follow the directive of their wholesaler benefactors and
rescind their direct shipping laws and impose bans against out-of-state
wineries shipping into the state.
Furthermore, given the enormous power wielded by wholesalers
at the state level, H.R. 5034 will make it near impossible to push for any
reform to the three tier system, a state mandated set of laws put into place to
govern a 1930s market for wine.
Consumers in states that ban shipments of wines will see
their choices in wine diminished severely.
Many wineries will lose significant revenue, leading to
Retailers will find it impossible to operate efficient, 21st
century business that serve the growing national market for fine imported and
Wholesalers claim that states are threatened with
deregulation and the inability to control the flow of alcohol as a result of too
many lawsuits. They claim that alcohol laws ought to be made in the state
legislatures and not by judges.
The fact is, since Granholm, enormous amounts of new state
alcohol regulations have been put in place and now successfully govern and
control direct shipment of wine and assure the collection of taxes.
It should be noted too that wholesalers are not so opposed
to the courts making the laws when the law favors them. No wholesaler was upset
when Southern Wine & Spirits, the largest wholesaler in America, sued the
state of Texas to overturn a ban on granting licenses to non-residents. Furthermore,
Southern used the Court’s reasoning in Granholm to defeat the state of Texas in
H.R. 5034 is anti-free trade, anti-consumer, special
interest legislation of the worst sort. It is a job killer that will diminish
the vibrancy of the American wine industry, dissuade entrepreneurs from getting
in to the wine industry, and stifle competition.