Courts are changing direction regarding the three-tier system, Liza B. Zimmerman reports.
© iStock | Court rulings could have a lasting effect on the three-tier system.
A wave of surprising court rulings has unfolded in recent months regarding America’s three-tier wine sales system.
The Supreme Court agreed to grant Tennessee v. Byrd a writ of certiorari — meaning it is willing to review the case — in late September for a petition filed earlier this year. This case – often considered the most important since the passage of Granholm vs. Heald in 2005 – is only the second major case to reevaluate post-Prohibition interstate shipping laws and is considered one of the most important of the last 85 years since the repeal of Prohibition. .
The case was brought by the Total Wine & More chain as part of a process aimed at opening stores in Tennessee where there are residency requirements for retailers before they can open a store. Claytonyrd is the executive director of the Tennessee Alcoholic Beverage Commission. Neither Total nor Byrd wanted to comment on this story.
Also in late September, Judge Arthur Turnow of the U.S. District Court for the Eastern District of Michigan questioned whether it was fair to allow Michigan retailers to ship wines out of state, while retailers in other states were prohibited from shipping their wines to Michigan residents. Judge Turnow declined to comment for this story.
Future implications
The three-tier system requires, with few exceptions, that wine and spirits sales entities can operate at only one level of sales as a retailer, importer or distributor. This issue has rarely been the subject of formal legal debate – but has been constantly brought up – since it was imposed with the repeal of Prohibition in the United States in 1933.
Graholm v. Heald in 2005 was one of the first cases to comprehensively examine nationally whether previous laws governing the sale of alcoholic beverages in the United States were fair. This case effectively allowed most wineries to deliver their wines to the majority of American consumers, but a minor flaw – discovered later – has since prevented most retailers from doing the same in 36 states that make up the bulk of the Union.
Generally speaking, industry insiders believe it was pressure from large wholesalers that caused UPS and Fedex to shop around for interstate transportation of wine in 36 states. Representatives for both companies, in recent interviews, simply say they are following the letter of the law.
Legal and industry commentary
Most of the beverage lawyers and retail advocates I spoke with were in favor of challenging Michigan’s current ban on interstate transportation and thought it was important to reevaluate it for the future of the industry.
For John Hinman, a beverage attorney and partner at the San Francisco-based law firm Hinman & Carmichael, the decision is more than fair. “This requires Michigan to treat in-state and out-of-state retailers the same. This is the epitome of fairness. If Michigan wanted to charge out-of-state retailers the privilege to serve Michigan customers, it would also be fair. It would be the retail equivalent of the DTC (direct-to-consumer) winery licensing system, now present in 45 states,” he says.
He adds that allowing other retailers to continue shipping their products to Michigan is not likely to harm Michigan’s wine and spirits retail market. “Their customer base will not change or be affected,” he concludes.
“Judge Tarnow’s decision is absolutely fair and correct,” agrees Tom Wark, president of the Sacramento-based National Association of Wine Retailers (NAWR), which has long supported a free market for interstate wine transportation. He adds that since current Michigan law allows both out-of-state wineries, Michigan wineries and Michigan retailers to ship wine directly to consumers other states, “it is quite clear that the reason for the ban in the first priority is to protect domestic companies from competition. »
© iStock | Judges across the country hear complex cases involving interstate shipping. 
He added that “if the ruling stands and Michigan changes its law to allow shipments of wine from out-of-state retailers, it would mean considerable tax revenue for the state and allow the State of no longer spending hundreds of thousands of dollars. defend yourself against legal proceedings. »
According to a report commissioned by the Michigan Beer and Wine Wholesalers Association, nearly 500,000 bottles of alcohol were shipped to Michigan between April and June of this year. As a result, according to a press release, “the state of Michigan lost up to $25,000 in unpaid taxes due to illegal shipments.”
“An estimated 60 to 70 percent of alcohol purchased online is wine, meaning more than 150,000 bottles of wine were shipped illegally to Michigan over a three-month period, forcing the state to losing much-needed tax revenue.” said Spencer Nevins, president of the association.
Additionally, it notes that “this data shows that even with the (current) law in place, out-of-state retailers are circumventing state law and illegally shipping wine to Michigan residents.” He added in a recent interview: “If the decision stands, it will subject Michigan retailers to unregulated competition from out-of-state retailers, many of whom have consistently demonstrated that they will not comply not Michigan laws. »
He added that the Hill Group “conducted a study in 2015 that found Michigan retailers lose approximately $64 million in retail sales each year to illegal wine shipments entering the state.” This figure was also estimated to increase by around 10%. per year.”
For out-of-state retailers, the ability to ship wines to Michigan presents a lucrative opportunity. Jim Kahn, owner of the Indianapolis-based company Kahn’s Fine Wine & Spirits says out-of-state shipping has long been a significant part of its business, and Michigan was just one of the markets it previously shipped to.
While emphasizing that he is retiring, he shares that he is also the plaintiff in the same case against the State of Florida. “The lawyer who beat the state of Michigan is from Indianapolis and we are working together on Florida. It will be interesting to see if Michigan’s decision has any impact on Florida.” Several Michigan retailers declined to comment on the matter.
What is the case and what can happen
The outcome of the Michigan case will depend on how the Supreme Court rules on Tennessee v. Byrd. Hinman notes: “If Byrd is confirmed, the Michigan decision will stand and similar decisions will spread across the United States. If Byrd is overturned, Michigan’s ruling will be overturned, interstate retail DTC will be banned, and there will be many cases of consumers being convicted. for illegal interstate shipping of wine.
In the long term, according to John Trinidad, partner at Napalaw firm Dickenson Peatman & Fogarty, notes that if the case moves forward, Michigan would either have to allow all retailers, both in-state and out-of-state, to ship wine directly to consumers of Michigan, or ban all retailers from shipping wine into the state. Ultimately, he shared his belief that “consumers would benefit from greater choice and the wine retail space would become more competitive.”
The Michigan case is likely to be important regardless, particularly if the Supreme Court supports Total Wine in striking down the residency requirement for Tennessee retailers. This would allow other chains and independent stores to legitimately open wine shops and potentially offer a greater selection of wines at competitive prices and perhaps also put some mom-and-pop shops out of business.
If the Michigan case – as well as the Tennessee v. Byrd case – is accepted – the two in tandem should help resolve a key legal dispute over whether wineries should be able to ship their products within most states where retailers are not permitted to do so. Whether the inconsistent laws for wineries and retailers discriminate against retailers will need to be concluded at this time, Trinidad notes.
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