Friday, February 22, 2008

Inside the Liquor Industry: Distributors and the Supreme Court

Usually I write about cocktail topics. Today I’ve got my lawyer hat on, and I’m writing about a liquor industry topic instead. It all stems from an email I got this morning, one of my alcoholic beverage industry updates. The first article in the update was a press release from the Wine and Spirit Wholesalers of America about a decision handed down by the U.S. Supreme Court yesterday.

A Bit of History

Before I get into all of that, here’s a brief background that may help those who aren’t familiar with how the U.S. alcoholic beverage industry works. Liquor sales in the United States are regulated in most states under a three-tier system. The manufacturer of the spirit is the first tier, the distributor is the second, and the retailer is the third. For the most part, a business is only allowed to exist in one of the tiers - I can make the stuff, but I can't sell it directly to consumers, or I can buy it from the manufacturer and distribute it, but I can't run a retail shop, etc. There are some exceptions, such as in the control states where the state government acts as both the distributor and the retailer, and for microbreweries and wineries in some states, where they are allowed to sell direct to consumers.

The bulk of these rules have been in place pretty much since Prohibition ended, and were intended to prevent much of the corruption that existed in the alcoholic beverage industry at that time. Unfortunately, the rules have certain other effects that may or may not have been intended. The reality today is that distributors (both individually and collectively) yield a considerable amount of power in the marketplace. They decide which products will make it to market, and they have a tremendous impact on the success or failure of a brand in their market (the supplier can only do so much, if the distributor fails to make timely deliveries or keep a relatively intact sales staff, etc.). They often have strong (and lucrative) relationships with the major spirit houses, and significant sway with local government.

The Decision
Yesterday, the Supreme Court struck down a Maine law that attempted to require shipping companies to check the ID of recipients of tobacco products (summary here, decision here) and imposed liability on them for failing to properly handle shipments of tobacco products. This case is of concern because the same issue could arise with the shipping of alcohol (and affect your ability to buy that bottle of whatever-it-is on the internet, or participate in a wine club, etc.).

The heart of the issue in the Maine case was one of preemption - whether federal law preempted the State of Maine's ability to adopt and enforce such a law. The Supreme Court agreed with two lower courts, and found that the Federal Aviation Administration Authorization Act of 1994 (FAAAA) preempts an individual state's ability to interfere with the operations of interstate shipping companies by adopting these rules. One purpose of the FAAAA was to protect interstate shipping companies from onerous and potentially conflicting state laws, which could happen if the Federal government didn't prevent it.

Okay, so that makes sense to me - interstate shipping should be regulated at the federal level. The logical outcome from that (which Justice Ginsburg writes about in her concurrence) seems to be that Congress needs to pass a law that would apply across the country in regard to the issue of shipping tobacco (and perhaps also to alcohol).

Wine and Spirit Wholesalers of America Response
You may have already figured out that the wholesaler industry is not too fond of alcohol shipping, especially when it is sent directly from the producer of the product (which many wineries do now, if their states permit it). They always argue that they are protecting the public interest and preventing shipments to minors (in fact, they argue they are in the best position to do so, which just seems odd to me), but they are also very much protecting their interest and their cut of the pie.

The President and CEO of the WSWA responded to the Supreme Court’s decision by saying that “The Supreme Court’s decision is clear: age verification is not a responsibility which can be delegated to common carriers,” and that “States now need to reassess the wisdom of laws permitting direct shipping in light of this Supreme Court ruling. The licensed system in this country is based upon accountability, and if states are powerless to hold carriers accountable, there is no way to ensure that alcohol will not end up in the hands of minors.”

I’ve got a Problem with That
I read the Supreme Court's decision, and I don't think that's what they're saying at all. The Court is saying that only the federal government (i.e., Congress) may regulate this issue - an individual state does not have the authority to do so. They most definitely do not say that carriers cannot be held responsible; they merely say that an individual state cannot adopt a law to make it so.

Much as the WSWA would like all states to ban the shipment of alcohol and internet sales (and they might actually convince some of them to pursue that path), that's just not a realistic goal. We live in the internet age, where virtually anything can be bought and sold online, and there will always be people who are buying and selling alcohol (and tobacco).

It is important to keep alcohol (and tobacco) away from underage consumers. However, just because the states cannot achieve that objective through direct regulation of transportation companies, does not mean that shipping should not be allowed at all. It would make far more sense for Congress to discuss this issue and adopt standards for both tobacco and alcohol that would apply to all common carriers, than for us to walk back in time as the WSWA would prefer.
Note: pictures in this post are from


Anonymous said...

What a great post!! Well done!

Tom Wark...

GCBerg said...

I appreciate the info and very well put.