Monday, January 3, 2011

Why Freeman v. Corzine Is Important, and Why Your Tasting Room, Event and Festival Privileges Are Constitutional

By Cary Greene

Wines & Vines recently posted a somewhat confusing piece about the Third Circuit’s recent Freeman v. Corzine decision and we wanted to clear up why WineAmerica believes this decision is important and how we think wineries should respond.

The Freeman decision doesn’t justify rewriting existing state winery laws, or rethinking long-held beliefs about the state of alcohol beverage regulation.  As wineries, we still need to advocate for thoughtful state policy approaches that better allow us to reach consumers since the existing distribution system doesn’t accommodate many of our products all that well.  We also need state legislatures to understand that adding flexibility to the three-tier and control systems is wise policy when deployed carefully.  At the same time, Freeman will require us to better defend the hard-fought privileges wineries have sought and won throughout the past three decades.

In the run up and aftermath of Granholm v. Heald, our industry’s state legislative focus has been mainly directed toward direct-to-consumer shipping.  While we still have our work cut out for us making sure that direct shipping laws work effectively, we have much to be proud of with respect to our achievements on shipping.  But direct-to-consumer shipping is a discrete policy issue and the constitutional defenses are relatively straightforward—evenhanded interstate shipping for all wineries promotes consumer choice and gives small wineries a profitable method for selling in interstate commerce.  When dealing with the privileges threatened by Freeman, we have to contend with a much broader set of policy choices and a far more technical constitutional defense.

Without question, Freeman represents a substantial threat to the status quo with respect to winery tasting room, self-distribution, event and festival privileges, among others.  The decision puts at risk a menu of winery privileges that are principally offered to local winery licensees, but not out-of-state producers.  These privileges also tend to be crucial to winery profitability in a way that even direct-to-consumer shipping is not.  While many wineries choose to make interstate shipping part of their business model, nearly all wineries rely on their tasting rooms, winery events, farmers market sales and state wine festivals—the raw components of agritourism—for their continued existence.

These privileges can and must be preserved in their current form. 

If the current equilibrium is suddenly thrown into disarray, as the Freeman decision has done in New Jersey, the headwinds are likely to be severe.  Not because states don’t want to see their local wine industries continue to thrive: most if not all do.  But if the menu of local winery privileges is suddenly revisited whole-cloth—tasting room, and self-distribution, and restaurant, and event, and festival, and farmers market, and other local privileges—and the state is told they must offer these privileges to both in-state and out-of-state wineries, the process of picking and choosing and horse-trading with local wholesalers and retailers will be agonizing.  Maybe local wineries will keep their tasting rooms, but lose their ability to host concerts and weddings.  Whole categories of choices that wineries currently use effectively to keep their businesses afloat could disappear if the logic of Freeman goes unopposed.  Wineries must take the threat posed by Freeman seriously and develop a sense of the countervailing arguments that justify and constitutionalize their tasting rooms and other local winery privileges.

The Freeman court found it unconstitutional to offer tasting outlet and self-distribution privileges to local wineries exclusively because “[i]n-state wineries are…allowed to skip the first two tiers—wholesalers and retailers—while out-of-state wineries must involve both of these tiers in order for their wine to reach consumers.”  In other words, Freeman concludes that in-state winery tasting room outlet and self-distribution laws are intended to insulate local wineries from competition.

So why is Freeman’s ‘paint-by-numbers’ approach to constitutional law wrong?  Why are tasting room privileges offered on an un-evenhanded basis so different from direct-to-consumer shipping privileges that the Supreme Court has found must be offered evenhandedly?

The problem begins with Freeman’s faulty premise that tasting room outlets are protectionist.  As Freeman itself acknowledges, there are occasions where state laws serve “a legitimate local interest” that cannot “be served as well by available non-discriminatory means.”  That is exactly the situation here.

Unlike direct shipping, tasting room privileges are functionally different in the hands of in-state and out-of-state businesses:

When operated by local wineries, tasting rooms are essentially farm stands—they promote of local agriculture; they promote the regions agricultural potential; they promote the preservation of local rural landscapes.  These are their “legitimate local purposes.”

On the other hand, when operated by out-of-state producers, tasting rooms are in reality wine bars with on- and off-premise sales.  Their natural competition isn’t local wineries.  It’s local retailers.  For this reason, offering out-of-state wineries tasting room privileges—the available non-discriminatory alternative—doesn’t rectify the apparent discrimination identified by Freeman, it creates a market advantage for local retailers that happen to be out-of-state wineries.

This approach to constitutionality may require a bit more texture than that acknowledged by the Third Circuit in Freeman, but we believe it more accurately reflects how local winery privileges play out in the real world.  The context of winery direct-to-consumer shipping is different than the context for tasting room and other local winery privileges.  Wineries must learn to articulate that difference or else face the risk of losing the privileges that allow them to maintain their viability.

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