Tuesday, February 1, 2011

Decision Threatens Winery Privileges

The following article appears in the February 2011 issue of Wines and Vines


by Cary M. Greene
 
 
The Third Circuit Court of Appeals in Philadelphia recently issued a decision, Freeman v. Corzine, which represents a substantial threat to the status quo for state winery tasting room, self-distribution, event, festival, restaurant, farmers market and other local winery privileges. As a representative of wineries in 48 states, and knowing how central these privileges are to thousands of successful businesses, I find Freeman more than a little disappointing. Whether the decision ultimately proves the law of the land will depend largely on the industry’s ability to articulate why the decision is wrong.

The decision addresses New Jersey wine laws and directly threatens the rights of wineries to have satellite tasting rooms and self-distribute their wines—or it could allow out-of-state wineries to have those privileges.

Unlike direct-to-consumer shipping, the privileges at play are not particularly discrete and don’t lend themselves to easy remedy. It’s true that tasting room, event and festival privileges are usually offered exclusively to local winery licensees, but in the vast majority of cases, this has little to do with protectionism. Mostly, it’s because the privileges aren’t functionally the same in the hands of in-state and out-of-state businesses.

When dealing with local privileges like tasting rooms, we are dealing with the raw components of agri-tourism and the buy-local movement. Satellite tasting outlets, winery events, farmers market sales and winery festivals aren’t merely offered to local wineries to sell wine. They promote local agriculture, a state’s agricultural potential and heritage, and the preservation of rural landscapes. States are right to try to keep their rural areas vital and flourishing.

The 
Freeman decision ignores these underlying purposes entirely. Instead it takes a cursory look at New Jersey’s law and finds that in-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.” While strictly true, Freeman’s analysis is flawed because it fails to wrestle with the practical realities of how tasting room, event and festival privileges function in the real world.

It’s axiomatic in Commerce Clause jurisprudence that state laws advancing a “legitimate local interest” that cannot “be served as well by available non-discriminatory means” are Constitutional. In other words, while states must attempt to level the commercial playing field for local and out-of-state wineries, the Constitution cuts them slack if the alternative would give out-of-state wineries a competitive advantage.

When operated by local wineries, tasting rooms are more or less farm stands with a more sophisticated image. 
Freeman’s characterization that tasting rooms allow wineries “to skip the first two tiers” is a gross simplification since agriculture is central to the operation of a tasting room.

On the other hand, “tasting rooms” operated by out-of-state wineries are wine bars with on- and off-premise sales privileges. Their natural competition is other local pubs and liquor stores. In other words, offering out-of-state wineries tasting room privileges—the available non-discriminatory alternative—does nothing to rectify the apparent discrimination identified by 
Freeman. It creates a market advantage for local retailers that happen to be out-of-state wineries.

The context of winery direct-to-consumer shipping is different than the context for tasting room and other local winery privileges. Unlike direct shipping, tasting room privileges are functionally different in the hands of in-state and out-of-state businesses. By following
Freeman, courts would be encouraging retailers to produce a few gallons of wine somewhere. Those few gallons would become a retailer’s ticket to lower costs of entry, broader sales privileges and mobility—without the related cultural benefits those privileges offer in the hands of local wineries.

While 
Freeman is important, the decision doesn’t justify rethinking long-held beliefs about the state of alcoholic beverage regulation. As a dynamic and growing industry, we need to advocate for thoughtful state policy approaches that better allow us to reach consumers. The existing distribution system doesn’t accommodate many of our products all that well. We need state legislatures to understand that adding flexibility to the three-tier and control systems is wise policy when deployed carefully.
Freeman doesn’t change everything, but it requires us to better defend the hard-fought privileges wineries have sought and won during the past four decades.
Cary M. Greene
 is the chief operating officer and general counsel of WineAmerica, the National Association of American Wineries. Learn more about WineAmerica atwineamerica.org.

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