A Case of Wine in the Supreme Court

Several AARP-age men and women in robes are all sitting in a room talking about wine. No, this is not the start of a bad joke. This is the scene at the US Supreme Court on December 7, 2004.

Juanita Swedenburg, a former member of the Foreign Service and a Daughter of the American Revolution, owns a micro-winery in the rolling hills of Virginia horse country. Her case, Swedenburg v. Kelly, has now arrived at the highest court in the land. She and her lawyers successfully argued before an Appeals court that wine consumers in New York were disserved because they were legally barred from purchasing her Burgundy-style whites and reds directly from the winery. The same could be said of consumers in Texas, Ohio, Florida and Pennsylvania since almost three dozen states restrict the direct shipping of wine from wineries to consumers.

Forget Bordeaux 2000, this wine case has become the most essential case for wine consumers in decades. At stake is whether consumers living in the long list of states that limit direct wine sales can start to purchase wines directly from wineries out of state. Yes, America may be one big market when it comes to buying books or DVDs, but when it comes to wine, it is more like 50 sovereign states, each with its own rules.

usmapwinelawssmall As most American wine consumers eventually discover, the way that we get our wine involves not just a producer and retailer but also a middleman known as a distributor or a wholesaler. These intermediaries can play a useful or helpful role in bringing wine to the consumer. The only exception is that if they don’t play a helpful role, they can still exploit their position since it is legally protected.

That means that American consumers generally pay more for wine than they would without the intervention of a distributor. For a striking example of this, consider the example of the celebrated “Two Buck Chuck,” aka Charles Shaw. The producer, Bronco Wine Co. arranged an exclusive retail agreement with Trader Joe’s grocery stores with a retail price of $2 within California where no distributor is needed. But every other state requires distributor intervention even though this arrangement is between a large producer and a large retailer. The result for consumers is often Three Buck Chuck. A distributor gets a near 50% mark-up (allowing something for transport) for simply having a license. That is disservice to the consumer.

Further, as consolidation has occurred among the distributors, they have gotten bigger and as a result often don’t have room for the small producer. That means that the range of choices for a given consumer may be limited to only those wineries with large productions and diverse portfolios. The wines of niche producers may not appear at all in many states.

Hence buying directly from the producer is important. For consumers residing in the three dozen states where shipments are not legal, it means a greater range and perhaps lower prices for wine. And for the small wineries like Swedenburg’s, now numbering over 2000 in all 50 states, it expands their market and their margins considerably.

Why is it so hard to ship a bottle of wine in the US? Consumers can ironically blame the 21st Amendment of the Constitution, the one that repealed Prohibition in 1933. At the time of repeal, economic arguments were strong to help reinvigorate the economy in the depths of the Great Depression. But the political strength of the Dry movement had not been completely eroded despite the blatant failure of the Prohibition itself. Thus the 21st Amendment emerged as a compromise: Prohibition would be repealed at the federal level but states could maintain control of the production and distribution and sale of alcohol within their borders. As a result, the last state-level Prohibition persisted into the 1960s.

Yet the legacy of Prohibition still lingers and Swedenburg v. Kelly could go a good distance toward removing this residue. Framed in the terms of removing—or not—the legacy of Prohibition, it is not surprising that this battle is playing out largely on the political right.

This battle over interstate shipping has thus become a battle royale for conservatives, pitting the free traders against the social conservatives. The stakes (and the fees!) are high with Kenneth Starr (he’s baaack) and Robert Bork leading prestigious legal teams for both sides in the Constitutional struggle over the Interstate Commerce Clause versus the 21st Amendment. However, to call the opponents of free trade social conservatives is to ascribe to them the moral legacy of Prohibition, which by now is a mere fig leaf.

Those opposed to free trade represent a coalition of strange bedfellows that could qualify as “Baptists and bootleggers” given that those two groups supported Prohibition. The “Baptists,” shorthand for religious conservatives who thought alcohol of any kind to be a demon spirit, sought to keep alcohol out of their county or state. They allied with local producers of alcohol, “bootleggers,” who also wanted to limit alcohol imports but only to in the name of preventing competition and protecting their market.

In today’s alliance, the goal of those against direct shipments is entirely financial with some window dressing about underage drinking. (The Federal Trade Commission argued in a report last year that that the economic gain from direct shipping is great for consumers and states can protect minors in other ways than an outright ban.) The Wine and Spirits Wholesalers Association is decanting vast sums of money into the defense. But several Nobel Prize winning economists including George Akerlof have filed an amicus brief arguing that these distributors are simply fighting to protect their monopolistic (or, actually, oligopolistic) position. The other party protecting a monopoly is the set of 35 states fighting against potential loss in tax revenue. These are powerful adversaries with entrenched interests in maintaining the status quo.

Because the actual question before the Court is relatively narrow, claims that the three tier system (producer-distributor-retailer) will be shattered are overblown. The question before the Court in December is: “Does a state’s regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of Section Two of the 21st Amendment.” This is the key aspect of the New York law, which allows in-state wineries to ship to consumers while out of state ones are not permitted.

If the Court does rule in favor of greater free trade, it will be an important step toward eroding Prohibition’s legacy. If the case fails, the free trade advocates, notably the Institute for Justice and the Coalition for Free Trade, will try to chaperon more cases with broader implications through the system.

How the Court will rule (before its term is up in June) is hard to predict given that the traditional right-left dichotomy does not apply. We can but hope that the men and women in the black robes are also fans of fruits of the vine—and maybe even want to be on some winery mailing lists!

Resources on direct shipping:

Institute for Justice
Coalition for Free Trade
Free the Grapes
Wine Institute background

NYTimes op/ed

NYTimes story
Detroit Free Press story
MSN story
MSN: flouting the rules
CNN story

photo credit: IFJ.
Follow-up articles:
Arguments portend legal blessing, NYTimes
Winemakers got a sympathetic hearing, Washington Post

Justices grill attorneys on 2 states’ shipping restrictions for vintners, SFChronicle

In vino gravitas, Slate

State wineries are hoping to toast a major windfall, Seattle PI
Supreme Court Weighs Restrictions on Interstate Wine Sales , NPR‘s Nina Totenberg

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