Hearing Of The Subcommittee On Courts And Competition Policy Of The House Committee On The Judiciary - Legal Issues Concerning State Alcohol Regulation

Statement

Thank you Mr. Chairman, Ranking Member Coble and Members of the Subcommittee
for allowing me to make remarks today. As you know, I am a co-founder of the
Congressional Wine Caucus, and a member of the Energy and Commerce Committee,
which has jurisdiction over interstate commerce. I have also been the owner of a
California winery, both of which are the bases for my testimony today.
Introduction:
I know when consumers visited my winery, they thought I had the ideal job and
wondered why I ever went into public service. I was outside a lot, made a good product
associated with fine living and good food, and my office had a great view. But the
business of wine is far from the bucolic splendor of the vineyards. It is difficult to sell
wine, perhaps more difficult than selling most other products or services in the United
States, and much of that is due to the level and diversity of regulation and control of all
aspects of the business.
The Regulatory Reality:
Wine is a highly taxed and highly regulated business, with 50 sets of state laws as well as
federal oversight from the Tax and Trade Bureau, the Federal Trade Commission, the
EPA, among others. In such an environment, there are great costs involved not only in
making wine, but also in getting wine to market. Tax rates differ; some states require
licenses or permits; and still others will require that I pay a fee to register my labels. One
state will require that I buy a license and hire a wholesaler to distribute my wine and that
I designate a sales territory for that wholesaler, while a second state will prohibit me from
doing that very thing and prohibit me from assigning exclusive sales territories. One state
will make it impossible for me to fire my assigned wholesaler, even though the
wholesaler has not performed as represented. In most of the states we tried to ship into,
every bottle of our wine had to pass through a wholesaler, which adds to costs and delay.
For new wineries, as it was for me, it is always a shock to realize how difficult it is to
acquire distribution in other states. Even for long-established wineries, there are a lot of
human resources that are dedicated to complying with divergent state laws so that they
can attempt to realize a profit. In many cases, compliance with certain state laws
discouraged my winery from selling in some states. I'm sure that's common among many
wineries. The cost to introduce a wine in a market can far outweigh the potential profits
to be realized.
Federal Government Plays an Important Role in Alcohol Beverage Regulation:
The US Department of Treasury's Tax and Trade Bureau's production regulations
establish uniform baseline standards of identity and allow wineries from any state to
know how their product is categorized on the federal level. TTB's permit system for
wineries and distilleries, their antitrust-based trade practice laws, and their label approval
processes, all provide a uniform framework from which state laws build. Despite the
current diversity in state control, I truly believe that the inconsistencies among state
control systems would be much greater without this important federal framework.
Self-Distribution:
People in the wine business hear a lot about three-tier distribution, but all know that a
pure three-tier distribution system does not exist in the United States. Instead, over the
years since prohibition was repealed, states have chosen to exercise their powers under
the 21st Amendment to create hybrid distribution systems that use three-tier principles as
a framework. In at least 39 states, for example, state laws allow in-state wineries to self-
distribute. Self-distribution laws permit the in-state winery to act as its own distributor,
allowing sales by the winery directly to retail on- and off-sale licensees. In California, the
number of wineries could not proliferate without self-distribution. But self-distribution
stops at the state line, and the privilege is only available for in-state wineries.
Direct-to-Consumer:
What is also not three-tier is a winery's ability in some states to sell wine directly to a
consumer either at their tasting room or over the internet. In my home state, I'm allowed
to sell wine directly to a consumer. I can operate a winetasting room at my winery and at
one other retail location where I can conduct educational winetastings and sell my wine
directly to consumers. Without this manner of distribution, most small wineries would
find it difficult to survive. Many wineries are surviving in today's economy solely on the
strength of their direct-to-consumer wine clubs. I remember when some states would
punish such sales as felonies. States like Kentucky would equate wine sales with serious
crimes against the person.
Self-distribution and winery direct sales are not three-tier concepts. They are methods of
distribution that would not be categorized as three-tier. In California as well as in some
other states, these methods of distribution exist in addition to three-tier distribution
methods, and wineries can choose to exercise any combination of methods in California
to sell their wine. Even in the Granholm state of Michigan, laws have been changed to
allow out-of-state wineries to sell wine direct to retailers.
The Plea of the Disintermediated:
There is draft legislation floating around the House that is associated with this hearing
today. It is. It is believed to be promoted by the beer wholesalers, and they present this
committee today with a very long, broad and quite frankly, outrageous wish list.
They want Congress to grant the States an antitrust exemption.
They want state laws to override federal and Constitutional mandates.
They want Congress to overturn a long line of judicial decisions that have
consistently recognized state rights to regulate alcoholic beverages as long as they
don't discriminate.
They want states to be relieved from having to prove that their own statutes and
regulations are constitutional.
As a member of the Energy and Commerce Committee, I urge this committee to listen
carefully and respectfully to today's testimony, especially to see if what is being
proposed here is innovation or monopoly protection; whether the marketplace or the
government is to decide winners and losers; and whether a free market economy or one
that is controlled by promoting discriminatory legislation to state legislatures will
determine how a legal product is marketed to legal consumers.
Listen carefully to hear whether certain market segments are intent on maintaining the
status quo in the face of judicial decisions that threaten that status quo. Wholesalers are
the market participants that have been the most successful in a three-tier distribution
system. Their loud voices, and those of their allies, are not the voice for change and
innovation. They are not sitting idly, but are here because they want to exhaust all the
judicial, regulatory, and legislative means at their disposal to thwart the natural evolution
of distribution change in the alcohol beverage industry that is measured by the
Constitutional yardstick.
I ask you to be on the side of state rights, but state rights that are measured by the
principles of our country's Constitution and antitrust laws. It is right that they have
access to Congress to make their request, and it is right to allow them a forum to express
their fears about the holdings in the current series of judicial decisions. They ask a lot, but
what they ask for is not justified. What they fear is nothing less than the US Constitution
and antitrust laws. There must be extraordinary reasons why States should get a free pass
from the Constitution or antitrust laws, and I predict that you will not hear such reasons
today.

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