Wholesale Deception


Beer wholesalers contend that alcohol legislation they are pushing on Capitol Hill would safeguard state and local rights – but in reality, it is designed to simply serve the wholesalers’ special interests.

Wholesalers crafted the text of the Community Alcohol Regulatory Effectiveness Act (H.R. 1161, aka, the CARE Act) to appear very similar to language in a 2005 Supreme Court case, Graholm v. Heald, which addressed direct shipping of wine from wineries to consumers and retailers. Wholesalers would like lawmakers to believe that means the bill upholds that legal precedent.

In reality, the CARE Act promises substantial change that could reverse market-based – and consumer-friendly – policy trends produced by Granholm. This case addressed laws in Michigan and New York that applied differential treatment to in-state and out-of-state wineries seeking to ship to state residents, which the Supreme Court ruled unconstitutional.

The court explained: “State laws violate the Commerce Clause if they mandate ‘differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’ … States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.”

James Madison and other constitutional Framers included the Commerce Clause to prohibit special interests from advancing protectionist state policies. In Granholm, the court ruled that the 21st Amendment, which includes a provision affirming state’s right to regulate alcohol, did not override the Commerce Clause or other provisions of the Constitution.

The Granholm decision caused many states to open their doors to direct wine shipping, which alcohol wholesalers fear will break the government-enforced three-tier system for distributing alcoholic beverages. This system, present in nearly all states, requires alcohol producers – wineries, distillers and 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.

Granholm is a direct challenge to this system because it allows wineries to skip over wholesalers and sell directly to consumers. Wholesalers might be willing to tolerate such sales as long as they remain relatively low, but that may not remain the case. For example, if California retailers can buy their inventory directly from wineries and ship nationally, wholesalers could lose substantial business.

In addition, retailers in other states are waging battles in court for the right to ship into certain states where restrictive laws only allow in-state retailer shipping. The nation’s largest wine retailer, Costco Wholesale Corp., is waging a battle in Washington state via a voter initiative for 2012 that would facilitate its ability to skip wholesalers there. The retailer shipping issue could eventually reach the Supreme Court, something wholesalers want to prevent.

Perhaps even more frightful for wholesalers is the development of a market-based industry structure that allows major producers to self-distribute. For example, Anheuser-Busch Inc. has been battling in Illinois for self-distribution rights, and many small brewers are fighting for exemptions to the three-tier system so that they can self-distribute as well.

Wholesalers want to empower state governments to lock in rigid, anti-competitive three-tier mandates. Since the Commerce Clause grants Congress the power to regulate commerce – including the power to grant states certain authorities – Congress can pass legislation allowing states to impose protectionist regulations. And that is what the CARE Act would do.

Specifically, the bill 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.” This anti-discrimination standard reads an awful lot like the standard applied in Granholm, with a major exception: It only applies to producers – wineries, distilleries and breweries.

In other words, states would be allowed to discriminate against any other alcohol-related business entity. Once passed, wholesalers would begin lobbying at the state level for a host of discriminatory laws and regulations to block competition.

Retailers, importers and even distributors would have no protection from even the most blatantly discriminatory state laws. Producers also will suffer as retail channels for their products shrink. At the end of the chain, consumers would lose access to many specialty products they now find online or receive via wine clubs through the mail.

The misguided belief that the CARE Act promotes constitutional principles explains why it has gained some momentum. But lawmakers should not be fooled by the language in the bill. The wholesaler campaign for the CARE Act is an investment for which they expect a big return.