Wineries Should Enjoy the Fruits of Freedom

April 2000

Wineries Should Enjoy the Fruits of Freedom

By Deborah Simpson

Building on our recent free speech and economic liberty legal victories (defending commodity publishers and African hairbraiders, respectively), the Institute for Justice recently launched a lawsuit that combines the defense of these two rights.

The suit, filed in New York federal district court on February 3, seeks to repeal New York’s ban on the direct shipment of wine to consumers by out-of-state wineries. The suit also challenges a ban on all advertising in the State of New York-including Internet advertising-by out-of-state wine sellers. We filed the lawsuit on behalf of two small, family-owned wineries in Virginia and California and three New York wine consumers.

As highlighted in IJ’s last newsletter and expanded more fully in this issue (see page 4), this case is part of a new effort to broaden the base for protection of economic liberty. Instead of relying on the Fourteenth Amendment, this case relies on protections for economic liberty found in the Commerce Clause and Article IV’s Privileges and Immunities clause.

New York, like most other states since Prohibition’s repeal, controls alcohol sales through a “three-tier” system: out-of-state producers can sell only to wholesalers, who sell to retailers, who sell to consumers. Out-of-state wineries seeking to sell their vintage within the Empire State must do so through a New York wholesaler (who charge up to 25 percent of the cost of the bottle for their “service”); otherwise, they are prohibited. In-state wineries, however, face no similar restriction on direct sales to consumers. Similar direct shipping prohibitions exist in 29 other states.

Because the vast majority of America’s nearly 1,600 wineries are small operations that do not produce enough wine to interest a wholesaler in carrying their label, their clientele in New York is either severely limited or nonexist because of the State’s laws. New York is the nation’s second largest wine market, preceded only by California.

Laws in most of the 30 “prohibition” states even forbid tourists who visit wineries to ship a bottle or a case of wine home to themselves. Seven states classify such shipments as a felony. In some states, like Maryland, a consumer may not even carry wine back home from a visit across the Potomac to Virginia’s wine country. They are limited to purchasing wine from one of the 50 wineries typically sold in the average wine shop or liquor store, a miniscule percentage of the 4,500 labels produced in California alone.

With such oppressive laws, you may well have to wait until your next vacation to enjoy once more that lovely California Pinot Noir.

Those restrictions are not only maddening to small wineries, which, like any business, depend on finding and keeping new customers, they are profoundly anti-consumer given the Internet’s ability to match producers to virtually every interested consumer. Websites could help California or Virginia wineries locate potential customers in New York and advertise their latest-release wine to that interested audience. But under New York’s laws, if a winery owner posts any wine list or order form on a website or sells wine directly to that New York consumer, he is an outlaw.

Unlike other lawsuits challenging interstate wine sale prohibitions, IJ’s suit is the first to raise a First Amendment challenge and to argue that these laws violate the Privileges and Immunities Clause of Article IV.

All of the lawsuits challenge the laws as a violation of a doctrine known as the dormant commerce clause (see Defending Economic Liberty: Part Two).

Recent developments demonstrate that the wholesalers and their political allies view IJ’s suit as the decisive battle over protectionist legislation that allows states to discriminate in favor of in-state businesses. High profile legal guns, like C. Boyden Gray, former White House counsel to President Bush, who also serves on the boards of several libertarian and conservative organizations, have already been hired by the Wine and Spirits Wholesalers of America to defend these laws. IJ now stands alone facing eight separate teams of lawyers who are representing the state and intervenors opposing our suit.

The national wholesalers’ vigorous defense of these anti-competitive laws belies their stated concerns for teen temperance and taxes. The only reported instance of a minor gaining access to wine through direct sales in New York was when the State perpetrated a sting operation. There are simply far easier ways for teenagers to find alcohol than to order a $20 bottle of wine, wait a week until it arrives, and hope that when it does, his parents aren’t home. Besides, this perceived problem is easily remedied by requiring proper ID for anyone signing for a wine delivery. A number of shipping companies have already agreed to do this.

Moreover, this argument falls completely flat in New York, where in-state wineries can freely ship to consumers while out-of-state wineries are prohibited. Certainly there is no greater risk of a minor buying wine from an out-of-state versus an in-state winery.

The other argument cited in defense of these laws is that the state will lose valuable tax revenue if direct shipment is permitted. First, Congress has enacted a tax moratorium on products shipped across state lines. This applies to interstate sales of all products, not just wine, and not just e-commerce. Second, this argument is just a red herring because wineries have agreed to submit to state tax collection requirements. So the states are actually foregoing tax revenues they could be receiving if they permitted direct sales.

While the defenders of these protectionist laws trot out these specious arguments, IJ will be fiercely defending the rights of small businesspeople to engage in interstate commerce free from discriminatory state legislation, to earn an honest living in other states under the same terms and conditions as the residents of those states, and to freely engage in commercial speech.

Deborah Simpson is a staff attorney for the Institute for Justice.