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A CARE-less Rush to Regulate Alcohol
A CARE-less Rush to Regulate Alcohol
Wholesalers Attempt to Secure Regulatory Fiefdoms
July 25, 2011
As Constitution framer James Madison warned, special-interest politics never cease. “The latent causes of factions,” he said, are “sown in the nature of man.” Without measures to control them, overbearing majorities or politically connected minorities would trample the rights of everyone else—taking property and destroying prosperity. The key was to set up a system of checks and balances to keep factions—today known as special interests—under control. Recent efforts by beer, wine, and spirit wholesalers show that Madison’s concerns remain relevant today.
Wholesalers have a long history of leveraging their position within the industry, employing state laws to secure a guaranteed slice of the market. However, recent court cases have challenged some of these anticompetitive state laws. Accordingly, the wholesalers’ Washington, D.C., lobbyists are turning to Congress to pass federal legislation that undermines the free market and constitutional principles in order to serve their narrow special interest. Their effort is embodied in a bill offered by Rep. Jason Chaffetz (R-UT), the Community Alcohol Regulatory Effectiveness (CARE) Act (H.R. 1161).
At the heart of this debate is wholesalers’ desire to maintain a government-enforced three-tier system for distributing alcoholic beverages. This system, present in nearly all states, requires alcohol producers—wineries, distillers, brewers—and importers to sell only to wholesalers, who in turn are the only source from which retailers may purchase their inventory. Most states—with notable exceptions such as California and Washington, D.C. — also ban “vertical integration,” preventing any single company from owning and operating businesses in more than one tier.
In many states, franchise laws—which depend on a three-tier system—also play a big role in alcohol distribution. Once a producer selects a wholesaler, it must abide by terms and conditions set in state franchise laws that grant legal and competitive advantages to wholesalers. Most franchise laws are written to make it extremely difficult and expensive for a producer to terminate the agreement. Many also require “brand exclusivity,” which prevents producers from hiring more than one firm within a designated area—either a state or local region—to compete in finding retail buyers for a product. Legally enforced brand monopolies and the inability to terminate contracts for non-performance make it extremely difficult for small-scale wineries, breweries, and distilleries to get their products to retailers, because wholesalers have little desire to market specialty products. These producers must focus on selling their products via their tasting rooms, direct-to-consumer shipping, or both, where it is allowed.
The three-tier system, along with franchise laws, promotes a highly localized, territory-based wine marketing system—which ultimately amounts to a system of fiefdoms. Accordingly, when policy change becomes a threat to the system, wholesalers turn to the government for help. The CARE Act is the wholesalers’ latest attempt to solidify their position.
To that end, H.R. 1161 would allow states to pass laws that impede commerce as long as they do not “intentionally or facially discriminate against out-of-state or out-of-territory producers of alcoholic beverages in favor of in-state or in-territory producers unless the State or territory can demonstrate that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”
Should H.R. 1161 be approved, the courts might allow states to impose discriminatory laws against out-of-state wineries, but only if the state can argue that the impact is not intentionally protectionist. In any case, since the limited protections in H.R. 1161 apply only to producers, the bill would unleash an unbridled number of state-level protectionist policies affecting anyone else in the industry. Such laws will undermine sales of any domestic winery or importer whose brands are marketed via online retailers. It also might prevent direct shipping from producers who rent winemaking facilities because many states classify them as either retailers or distributors rather than producers. This blatantly unfair treatment may destroy many small entrepreneurial businesses, leaving fewer outlets through which wineries can reach consumers.
The wholesalers’ ultimate goal with such legislation is to limit the amount of wine and spirit sales that skip the wholesaler tier and deprive them of profits. For example, states like California allow retailers to buy directly from wineries in-state and even outside the U.S. If California retailers are free to ship these wines to consumers around the nation, wholesalers do not earn profits from those sales. By tying the hands of retailers and importers to ship interstate, wholesalers can block such competition. But the desire to avoid competition does not make a compelling political argument, which is why wholesalers claim to be guardians of the Constitution and states’ rights.
The wholesalers’ use of constitutional arguments is particularly ironic because James Madison specifically designed the Constitution to ward off such special-interest politics. In Federalist Number 10, Madison explained that the “principal task” of government is to control “factions” such as special-interest groups from trampling the rights of others.
Accordingly, Madison and the other framers advocated a form of government that would balance powers and employ checks and balances to limit opportunities for overbearing special interests to undermine liberty. The federal commerce power—which wholesalers want to overcome—is one of the many checks in the system. The debate over the CARE Act epitomizes the concerns that Madison had about the unwieldy and dangerous threat that special interests would always pose toward liberty. It is nothing more than a special-interest attempt to game the system to advantage one segment of the alcohol industry at the expense of everyone else.