FTC Paper Says Wine Wholesaler Protection Laws Harm Consumers

Anyone familiar with "Franchise Laws" within the alcohol beverage industry will not be surprised to learn that in a working paper prepared by an attorney and economist for the Federal Trade Commission, such laws were determined to hurt consumers. Or, to put it as the authors of the Working Paper put it, such Franchise Protection Laws:

“are associated with harming consumers in the form of higher prices and reduced out-put”

Let me translate: protectionist legislation sought and obtained by wine wholesalers harms consumers. Who'd Have Thunk It?

First, let's understand what a Franchise law is. The FTC Working page has an excellent description of what a state Franchise Law does. Franchise Laws…

"make it extraordinarily difficult for suppliers to terminate their contractual relationships with wholesalers. These laws typically prohibit the termination of wholesaler except for  “just cause,” and set up elaborate administrative processes for proving “just cause.” Franchise protection laws may require that a demonstration of “good cause” include  revocation of a wholesaler’s license; bankruptcy or receivership of the wholesaler;  assignment for the benefit of creditors of the wholesaler’s assets; or failure of the  wholesaler “to substantially comply” with a “reasonable and material requirement imposed upon him in writing.”

In other words, if you own Chateau Joe and you contract with a wholesaler in a state that has a "Franchise Law" it is virtually impossible for you to leave your wholesaler for another if your wholesaler isn't selling your wine (yes, it happens).  In fact, the wholesaler practically has to go out of business in order for you to find another wholesaler. Now, it's not uncommon for contracts between two companies to set up such termination conditions. But in the case of Franchise Laws, it is the state that is protecting the wholesaler from having to perform. Not bad!…if you are a Wholesaler.

The FTC Working paper deals primarily with the issue of Post & Hold laws, which were determined to be unconstitutional in the Costco v. Hoen case in the 9th Circuit Court of Appeals. However, in the course of looking at the impact of Post and Hold laws, which require wholesales to post their price on a product for usually 30 days, the paper determined that this practice as well as others such as Franchise Laws harm consumers. They also determined that passage of H.R. 5034 would allow Post and Hold laws, despite the earlier determination by the Court that they were unconstitutional.

The FTC Working Paper, entitled "State Regulation of Alcohol Distribution: The Effects of Post & Hold Laws on Consumption and Social Harms", can be found HERE


10 Responses

  1. Mark's Wine Clubs - September 1, 2010

    It’s an interesting take and one of the best arguments against the protectionist nature of the law that I’ve seen. Surely, the FTC can’t be seen as biased for wineries against distributors can it? I am sure we’ll hear that at some point in the future.

  2. Napa Consultant - September 2, 2010

    Tom –
    Great post. Georgia has to be the nastiest franchise state in the country. I’m working with a client now who hasn’t received an order from his GA distributor for 2.5 years but the distributor refuses to give him a release letter. His choices are to pay $5K in legal fees to get a hearing that hopefully results in his release – or continue to be absent from the market until the required 4-year period ends. Both are very expensive and its obvious the distributor has no intention of fulfilling its obligation to represent the brand and inflict as much damage as possible to the winery’s business in the State. I’d like to think these laws will change soon but the wholesale lobby is very strong and their financial backing is huge.

  3. James McCann - September 2, 2010

    Very interesting stuff. While these laws certainly hurt consumers by artificially inflating prices, they help the small retailer stay competitive by limiting or emliminating discounting to larger stores.

  4. Tom Wark - September 2, 2010

    It’s an interesting idea: that the government is tasked with keeping smaller retailers competitive.
    However, I don’t see how franchise laws accomplish this. But I think you were talking about Post and Hold.

  5. James McCann - September 2, 2010

    Yes, I was talking about Post and Hold, which was the focus of the study. I agree, the government should not be involved in protecting small retailers, just pointing out that the changes that come about with deregulation of our industry could result in some unintended consequences.

  6. Randy - September 2, 2010

    Someone (Kramer?) needs to shed some light on the fact that most of our supermarkets have core lists of terrible wines that are mandated by out of state ownership. 90+% of the wines are pre-chosen, thus giving local wine stewards no power to bring in quality small production wines from locally owned distributors.
    This model gives wine a bad name.
    Locally owned stores like Thriftway, Market of Choice, Food Front & all the bottle shops deserve some serious praise for offering real choices & not selling out to corporations at the expense of their customers.
    The public needs to know.
    Beginning in 2011 QFC Wine Stewards will have zero choice on the wines they can bring in. They will simply push mass produced wines that are chosen at the corporate level by people who don’t even drink wine.
    The biggest culprits are Safeway, Albertson’s, Fred Meyer, QFC, Whole Foods & even New Seasons…
    Someone needs to expose these so called wine departments to the public.
    Who’s it going to be.

  7. Ianthecorkdork.blogspot.com - September 4, 2010

    I have worked in the industry in GA and yes! it is horribly difficult for suppliers to end relationships with distributors. Now, as a wine retailer, we have no ability to work with great brands when they are being neglected by their wholesalers. I would love to see a little deregulation in our industry!

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