Winery’s Use of Fulfillment Houses Is Illegal?
Wineries’ use of fulfillment houses to store, pack, label boxes and prepare wines for shipment to consumers is illegal.
Who knew??
Try to imagine the logistic of wine shipping if producers were required by destination states to store, pack and arrange shipments of wine to consumers from their own bonded facilities, instead of contracting with fulfillment houses. How much more expensive would this make DTC shipping? How much more space would wineries and bonded facilities require to undertake shipments?
Sound enticing?
A few days ago I wrote about the regulatory overreach behind the effort of states and the Uniform Law Commission to require out-of-state fulfillment houses to register with and submit to the legal and regulatory jurisdiction of each state their winery clients ship into using common carriers. The claim that was being made proposed that fulfillment houses, which did no business in those states and did not sell anything to anyone in other states, nonetheless could be licensed by those states.
Well, now another claim has been made, this time by the Uniform Law Commission—the folks attempting to create a draft law that the Commission hopes to see passed in all states that allow DTC shipments of wine to consumers. That claim is that wineries’ use of fulfillment houses is illegal.
Here is what was claimed at the annual meeting of the Uniform Law Commission when those leading the effort to draft fulfillment house legislation presented their most current iteration of the fulfillment house draft law:
In some states it’s a very grey area…It’s not clear that wineries can ship to consumers using a third party. So, in many states that’s a grey area…So to assume that the logistics shippers can operate as they are doing and that it is perfectly legal and allowable is actually a big assumption….Basically, we are talking about an exception to the three-tier system. We are talking about a 4th distribution channel. There are industry segments that obviously favor that and there are industry segments that oppose it. But the legality of it is a little bit unclear in a lot of places. One thing the act would do, by registering logistic shippers the act would clarify the use of a logistics shipper is permissible and it would provide the state information about what’s being shipped and the quid pro quo for the privilege of shipping into the state is that the logistics shipper provide information as to what they are doing.”
See statement at 2:38:17
This kind of claim, that a winery using a fulfillment house to store their wine, pick it for orders, place it in boxes and ready it for placement on a common carrier’s truck is illegal unless authorized by each state into which wineries ship, has not been claimed by anyone in the decades that fulfillment houses have been used by wineries to facilitate delivery of wine to consumers.
A certain amount of desperation is required by those who would make this claim. In this case, the claimant is Aaron Gary, senior attorney at the Wisconsin Legislative Reference Bureau and the official “Reporter” for the Uniform Law Commission committee attempting to craft the fulfillment house law it hopes will be adopted by every state.
Gary, a competent and informed attorney, has suggested that the Granhom v Heald Supreme Court decision overturning discriminatory wine shipping laws was decided on thin evidence. Moreover, Gary has written that he does not believe state alcohol regulatory officials can effectively or efficiently regulate out-of-state retailers to determine that they comply with state laws concerning “sales to underage or intoxicated persons, hours of operation, supervision by an authorized individual, and ensuring the seller has a valid retail license.”
Gary, along with many others, is able to conclude both that states can’t regulate out-of-state retailer shipping and that fulfillment houses are operating illegally only by misunderstanding the appropriate powers and regulatory reach of states. Gary thinks that in order to regulate out-of-state retailer shipping, those out-of-state retailers must abide by the same rules and regulations as in-state licensed retailers, despite the fact that the sales are occurring in the retailers’ home states and outside remote states’ three-tier systems. And he ignores the fact that states easily regulate out-of-state winery shippers without subjecting them to the same regulations to which in-state wineries are subject. Similarly, he believes that out-of-state fulfillment houses must be licensed by remote states in order to do business in their home state.
What you have here is an inflated sense of state regulatory power that is neither sanctioned by common sense nor the law. Yet this inflated understanding of how business and the law work does not mean that fulfillment houses are safe from unfair and overly burdensome regulation by each and every state in the union.
As I’ve mentioned in an earlier post, most fulfillment houses have not engaged in any meaningful way to address the threats to their business from state lawmakers passing bills to regulate them, nor have they seriously pushed back against the Uniform Law Commission’s effort to give states cover to extend their regulatory reach beyond their right to do so.
Just as there are serious constitutional arguments against discriminatory state bans on retailer shipping, there are very serious constitutional arguments against a state’s ability to reach beyond its borders and regulate a fulfillment house that neither sells wine nor does business in the state that wants to haul them into their regulatory orbit.
It may be time for those fulfillment houses to formally organize and fight back against this kind of regulatory overreach and the claim that they are operating illegally. Absurd claims like this have gained traction before. And it almost always happens when those targeted don’t fight back.
This is classic. The wholesale tier is increasingly large player dominated, and state regulators always want more authority and its concomitant larger budget, as economists have observed. But the fulfillment houses are atomized and dispersed. Perfect for regulatory capture.
It’s about money, plain and simple. If the fulfillment houses had to pay based on the wineries they contract to ship into a certain state, no one would care (other than the parochial states). When the states looked up in 2014/15 to see that only around 50 licensees in Oregon were shipping wines, they realized that a few of them were shipping hundreds of brands. If wineries have to get a permit at $100/year, why wouldn’t a fulfillment house have to pay that winery brand etc? I think the underlying rules are absurd, don’t get me wrong, but to allow fulfillment houses to get away with scraping money from those states, meaning wineries would, is just as absurd.