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