Blog: e-Vino Veritas: Archaic Wine Regulation in the Digital Age

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By: Barry Gabay, Notes & Comments Editor

Amazon.com has completely transformed humans’ understanding of book availability. A book that may have eluded our grasp for months or even years can now be readily attained in a matter of seconds. We no longer have travel costs associated with visiting a book retailer, and we no longer experience the disappointment of the retailer being out of stock. There is no more stress or hassle in book shopping in the world of e-Commerce, as the world’s largest library is constantly at our fingertips. Now imagine the same phenomenon with wine.

In November 2012, Amazon, the world’s largest online retailer, launched a wine marketplace with over 1,000 domestic wines available.[1] Today, the portal offers more than 5,000 wines from some 700 merchants, 80 percent of which are from domestic brands.[2] The website facilitates “direct-to-consumer” transactions between wineries and consumers, whereby consumers are delivered bottles and cases of wine packaged and shipped directly from the winery.[3]

The marketplace’s potential is self-evident, as Amazon netted over $61 billion in sales in 2012, up more than 27 percent from the previous year.[4] On top of that, the United States is the world’s largest wine consumer; we drank 856 million gallons of wine in 2012, roughly 2.73 gallons per citizen, and spent nearly $35 billion on wine. [5] Further, of the roughly 7,500 wineries existing in the United States, the vast majority of are boutique wineries who do not market out of state.[6] Thus, with Amazon’s direct-to-consumer shipping, these small wineries will be able to sell to customers across the nation, and consumers across the country will be able to purchase premium wines with the click of a button from any winery who registers…in an ideal world.

Due to highly regulated interstate distribution laws, the Amazon marketplace, at present, only serves customers in 22 states and the District of Columbia.[7] The major impediment is the three-tier system of alcohol distribution, under which wine, distilled spirits, and beer producers (tier one), wholesalers (tier two) and retailers (tier three) are completely separated, and alcohol must pass through all three tiers before it reaches the consumer.[8] The system was adopted by many states after the passing of the Twenty-First Amendment, which effectively gave states absolute authority to control alcohol within their borders. It originally served to halt the future emergence of Prohibition-era criminal syndicates, run by the likes of George Remus and Al Capone who used vertical integration tactics in their control of the liquor industry. The system is now used in nearly every state in hopes of “promoting temperance, ensuring orderly market conditions and raising revenue.”[9]

The three-tier system has, remarkably, survived recent constitutional challenges under the Commerce Clause, notably in the 2005 decision of Granholm v. Heald.[10] But while countless articles and several courts have found the three-tier system to, by its very nature, discriminate against out-of-state producers and consumers and thus in violation of the Dormant Commerce Clause, the current rise in e-Commerce offers a yet another justification for loosening state regulations on alcohol distribution.[11] Wineries, like nearly every other industry, have identified the Internet as a gateway for national distribution and expansion. E-Commerce provides an outlet for small wineries to reach consumers they would otherwise never have access to; the growing popularity of boutique wineries makes this outlet even more valuable.

Today, 44 states and the District of Columbia allow the direct shipment of wine to the consumer in some capacity,[12] though more often than not, there are stiff regulatory issues the winery must comply with.[13] Direct-to-consumer shipments were worth more than $1.46 billion from in 2012, an eight percent increase during that time frame the year prior.[14] Yet, although we are the world’s largest wine consumer, we are well behind Europeans (eight to ten percent of their wine purchased online) and the Chinese (27 percent) in terms of direct-to-consumer wine sales.[15] A decade-old Federal Trade Commission report found that the single biggest factor inhibiting the rise of direct-to-consumer wine sales was the three-tier system.[16] When that report was filed, total American e-Commerce sales were around $58 billion. That number reached $259 billion last year.[17] Thus, the extent to which the three-tier system inhibits wine distribution is self-evident and simply staggering.

With the emergence of Amazon’s wine marketplace, the potential benefits of direct-to-consumer shipment are once again being discussed in state legislatures.[18] Greater market competition benefits consumer costs, as lower online wine prices would induce local wineries to take competitive action. Opening up the market to allow wineries to sell directly to retailers and consumers will benefit boutique wineries and consumers. Boutique wineries will be able to independently expand their distribution out of state, and consumers will have a lifetime of different wine from which to choose without increased wholesale markup. In the current shift toward a universal marketplace, our wine cellar could be infinite.  

 

 

[1] Mark Brohan, Amazon Sales Top $61 Billion in 2012, Internet Retailer (Jan. 29, 2013), http://www.internetretailer.com/2013/01/29/amazon-sales-top-61-billion-2012; Andrea Chang, Amazon Launches Online Wine Marketplace, L.A. Times (Nov. 9, 2012), http://articles.latimes.com/2012/nov/09/business/la-fi-amazon-wine-20121109.

[2] Lauren Indvik, Amazon Begins Shipping Wine to New York, Michigan, Mashable (Oct. 17, 2013), http://mashable.com/2013/10/17/amazon-wine-new-york/.

[3] Chang, supra note 1.

[4] Brohan, supra note 1.

[5] Table 6.1: World Wine Consumption, 2008-2011, % Change 2011/2008, and % of World Consumption-2011, The Wine Institute (2011), http://www.wineinstitute.org/files/World_Consumption_by_Country_2011.pdf; 2012 Wine Sales in U.S. Reach New Record: Record California Wine Crop to Meet Surging Demand, The Wine Institute (2013), http://www.wineinstitute.org/resources/pressroom/04082013.

[6] North American Winery Total passes 8,000, Wines & Vines (2013), http://www.winesandvines.com/template.cfm?section=news&content=111242; Devin McIntyre, Is Amazon Closer to Solving the Wine Shipping Puzzle?, The Wash. Post (2013), http://www.washingtonpost.com/lifestyle/food/is-amazon-closer-to-solving-the-wine-shipping-puzzle/2012/10/08/79b5353a-0da2-11e2-bd1a-b868e65d57eb_story.html.

[7] Amazon Wine States, http://www.amazon.com/gp/help/customer/display.html?nodeId=201020560 (last visited Feb. 1, 2014).

[8] Amy Murphy, Discarding the North Dakota Dictum, 110 Mich. L. Rev. 819, 824-25 (2012).

[9] Wine Country Gift Baskets.com v. Steen, 612 F.3d 809, 814 (5th Cir. 2
010) (citing North Dakota v. United States, 495 U.S. 423, 432 (1990) (plurality opinion) (internal citations omitted)).

[10] Granholm v. Heald, 544 U.S. 460, 463 (2005).

[11] See e.g. Murphy, supra note 8; Desireé C. Slaybaugh, A Twisted Vine: The Aftermath of Granholm v. Heald, 17. Tex. Wesleyan L. Rev. 265 (2011); Costco Wholesale Corp. v. Hoen, 407 F. Supp 2d. 1247 (W.D. Wash. 2005); Cherry Hill Vineyards LLC v. Lilly, 553 F.3d 423 (6th Cir. 2008); Family Winemakers of California v. Jenkins, 592 F.3d 1 (1st Cir. 2010).

[12] State Shipping Laws for Wineries (Jan. 24, 2014), http://wineinstitute.shipcompliant.com/Home.aspx; see e.g.

[13] See e.g. Ala. Code § 28-3-5 (1975): (“Any retail dealer of alcoholic beverages … purchasing or receiving such commodities from without the state … shall, within 12 hours of receipt of such alcoholic beverages, mail … a true duplicate invoice of all such purchases or receipts to the board at Montgomery, Alabama, said invoice carrying the name of the person or firm from whom or through whom such purchases or shipments of the alcoholic beverages were received and showing kinds and quantities.”); Ind. Code § 7.1-3-26-9 (2011) (“A direct wine seller’s permit entitles a seller to sell and ship wine to a consumer” provided that the customer purchases the wine “in an initial face-to-face transaction.”).

[14] Jeff Carroll, Pawel Smolarkiewicz & Lynne Skinner, Direct to Consumer Wine Shipping Report 2013, Wines & Vines, 1-2, http://www.winesandvines.com/pdf/2013Direct-to-Consumer-Shipping-Report.pdf.

[15] Rebecca Gibb, Internet Wine Sales Top $5 Billion, Wine-Searcher (June 18, 2013), http://www.wine-searcher.com/m/2013/06/internet-wine-sales-top-5-billion.

[16] Federal Trade Commission, supra note 7, at 3 (Note: The country’s two largest wine wholesalers, Southern Wine & Spirits and Republic National Distribution Company, generate revenues upwards of $13 billion, and the Wine & Spirit Wholesalers of America, the industry’s largest lobbying effort, spent $9.3 million in political action committee funds in the 2008 presidential election.).

[17] Allison Enright, U.S. e-Commerce Sales Could Top $434 billion in 2017, Internet Retailer (Apr. 25, 2013, 4:33 PM), http://www.internetretailer.com/2013/04/25/us-e-commerce-sales-could-top-434-billion-2017; U.S. Census Bureau, Quarterly Retail e-Commerce Sales: 3rd Quarter 2013 (2013), http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf.

[18] See e.g. Steve Annear, Changes to Wine Direct Shipping Laws Are Fermenting on Beacon Hill, Boston Magazine (Nov. 11, 2013), http://www.bostonmagazine.com/news/blog/2013/11/11/massachusetts-wine-delivery-laws-free-the-grapes/.