Kentucky wine shipping law struck down!

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Kentucky wine shipping law struck down!

Postby Robin Garr » Tue Aug 22, 2006 6:44 pm

Just reported on the LouisvilleHotBytes forum!

<B>Kentucky Wine Shipping Law Struck Down</B>

Federal District Court Judge Charles Simpson just issued a ruling in the lawsuit brought by Huber Winery. He found the Kentucky law unconstitutional in that it discriminated against out of state wineries in violation of the Commerce Clause.

Time to order some wine!
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More detail on this story

Postby Robin Garr » Tue Aug 22, 2006 6:50 pm

Here's the story, from the Lexington Herald-Leader. It goes without saying that this is not the end ... the wholesalers have the Kentucky legislature purchased lock, stock and barrel, and neither the state's tiny wine industry nor its relatively small number of wine geeks are likely to prevail in the law-making process.

Judge strikes down Kentucky law prohibiting wine shipments
BRETT BARROUQUERE
Associated Press


LOUISVILLE, Ky. - Kentucky's prohibition on out-of-state wineries shipping their products to the state is unconstitutional because it discriminates against some businesses, a federal judge ruled Tuesday.

The ruling, by U.S. District Judge Charles Simpson, opens the door for wineries in other states that are licensed in Kentucky to ship wine across state lines.

The ruling came in a lawsuit filed by Huber Winery in southern Indiana, which claimed Kentucky's law violated the Commerce Clause of the U.S. Constitution by giving preference to Kentucky businesses over out-of-state merchants.

Until a new law goes into effect in January, Kentucky cannot enforce the criminal statute against out-of-state wineries shipping into Kentucky, Russell said.

A message left at Huber Winery was not immediately returned Tuesday afternoon. Messages left for John Reilly, one of the plaintiffs from Louisville, were not immediately returned.

Chuck Wolfe, a spokesman for Kentucky's Environmental and Public Protection Cabinet, said no decision has been made about whether to appeal Simpson's ruling.

"The ruling is being studied," Wolfe said.

Dan Meyer, executive director of the Wine and Spirits Wholesalers of Kentucky, said the ruling needs to be studied to see how it may impact the new law.

"This is round one," Meyer said. "We'll see where to go from here."

Earlier this year, the Kentucky General Assembly passed a law requiring in-state wineries to sell their wares through wholesalers, just like other producers of beer or spirits.

Because of laws enacted in the 1930s following the repeal of Prohibition, alcoholic beverages are distributed under a three-tiered system in which brewers, winemakers and distillers are required to sell their products to a distributor, who then sells the product to retailers such as bars, restaurants and retail stores.

The new law will eliminate a provision in Kentucky law that allows small wineries to ship their product directly to retailers rather than having to use the services of a distributor.

A small winery is defined by Kentucky law as one producing less than 50,000 gallons of wine a year.

The U.S. Supreme Court last year overturned laws in New York and Michigan that prohibited buying wine directly from out-of-state wineries. The ruling stemmed from lawsuits by a group of wineries alleging that those states violated interstate commerce laws because they allowed in-state wineries to ship directly to consumers but prevented out-of-state wineries from doing so.

Full story online
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Re: Kentucky wine shipping law struck down!

Postby Florida Jim » Tue Aug 22, 2006 7:09 pm

Robin,
Round one, indeed.

You know, it has always struck me odd that these cases are going off on the discrimination issue. Not that I don't see the logic and agree with the reasoning.
But, if I have read my legislative history correctly, the founders left laws about the control of alcohol to the states because of temperance issues. And that argument has yet to appear in the cases nor in any of the articles written on the subject.
I wonder how many places are left in the country where temperance is a viable issue, especially statewide.
Ah well; perhaps, another day.
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Re: Kentucky wine shipping law struck down!

Postby Robin Garr » Tue Aug 22, 2006 7:12 pm

Florida Jim wrote:You know, it has always struck me odd that these cases are going off on the discrimination issue. Not that I don't see the logic and agree with the reasoning.
But, if I have read my legislative history correctly, the founders left laws about the control of alcohol to the states because of temperance issues. And that argument has yet to appear in the cases nor in any of the articles written on the subject.


Good thinking, Jim. Frankly, it strikes me that even a body as devoid of ethics as WSWA might be a little shy about claiming to be "pro-temperance," even while selling the stuff, although I could certainly see Juanita Duggan beating a Salvation Army drum.

I think you're right, though. Temperance has never been an issue in the heavily Catholic and ever-so-"wet" urban Ohio Valley, but rural Kentucky is pretty much the buckle on the Bible Belt; but even there, over the past generation, economic development issues and creeping gentrification have seen an awful lot of rural county seats in formerly teetotal areas turn wet or at least "moist" (restaurant sales).
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Re: Kentucky wine shipping law struck down!

Postby Hoke » Tue Aug 22, 2006 7:27 pm

You know, it has always struck me odd that these cases are going off on the discrimination issue. Not that I don't see the logic and agree with the reasoning.
But, if I have read my legislative history correctly, the founders left laws about the control of alcohol to the states because of temperance issues. And that argument has yet to appear in the cases nor in any of the articles written on the subject.


But that's the point, Jim: It was fairly obvious the protectionary folks were using the "states rights" shield, and tacitly allying with the anti-alcohol folks [As a for instance, the Director of the Oregon Alcohol Control Board made a blatant statement that their first priority was to limit and strictly control access to alcohol beverages, and only secondarily, and grudgingly, make it available to adults who chose to drink. So the state was using the anti-temperance controls allowed in the original legislative compromise to repeal Prohibition, but using it in such a way as to gain commercially themselves, while at the same time encouraging/aiding/abetting the wholesaler/distributor system because it was in their best interests to do so.].

Neither the wholesalers nor the control states were going to give up control on the states rights issues. So the only course of action left was to go after the system on the federal commerce and equal rights issues. Which strategy, apparently, is working.
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Re: Kentucky wine shipping law struck down!

Postby Bob Ross » Tue Aug 22, 2006 10:03 pm

Jim, one reason for the equal protection arguments is that the 21st Amendment is so clearly written -- the Founders really don't have any say on that particular issue.

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Re: Kentucky wine shipping law struck down!

Postby Paul B. » Tue Aug 22, 2006 11:19 pm

What great news. Finally things move in the right direction.

It's going to be a long and slow process for all the non-shipping states to come out of prohibitionist repression, but timely kudos to Kentucky for being the latest state to do so. The time is now for all North Americans, no matter what state/province they live in, to be able to legally purchase any wine from any winery of their choosing and have it legally shipped to them at will. All the issues ranging from states' revenues to preventing under-age individuals from receiving such shipments are solvable - the key thing is to get free trade in wine.

It may be a small step, but it is definitely one in the correct direction.
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Re: Kentucky wine shipping law struck down!

Postby Robin Garr » Tue Aug 22, 2006 11:27 pm

Paul B. wrote:kudos to Kentucky for being the latest state to do so.


State government deserves no praise, Paul. They're totally in thrall to the wholesalers. This was a decision made by an individual federal judge on a very narrow point, and it will stand only until the state can figure a way around it that will continue to block sales without infringing on the law. In any case, if they do nothing else, it will end in January when a horrible law goes into effect that will essentially kill all Kentucky's small-farm wineries.
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Re: Kentucky wine shipping law struck down!

Postby James Roscoe » Tue Aug 22, 2006 11:30 pm

Paul, don't get too excited. As Robin has always warned the distributors are going to fight tooth and nail. I suspect we will see a lot more from MADD and the like in the near future. The wholesalers and distributors will sink to any level to keep their monopolies. It's a pretty sad system.
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Re: Kentucky wine shipping law struck down!

Postby Paul B. » Tue Aug 22, 2006 11:31 pm

Robin Garr wrote:This was a decision made by an individual federal judge on a very narrow point, and it will stand only until the state can figure a way around it that will continue to block sales without infringing on the law. In any case, if they do nothing else, it will end in January when a horrible law goes into effect that will essentially kill all Kentucky's small-farm wineries.


Geez ... I didn't realize that part. And I so wanted this to be the shining victory that we all hope for.

But is it absolutely certain that the law in question will go into effect in January? Has it been passed already?
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Re: Kentucky wine shipping law struck down!

Postby Robin Garr » Tue Aug 22, 2006 11:37 pm

Paul B. wrote:But is it absolutely certain that the law in question will go into effect in January? Has it been passed already?


Yes. It basically holds that all Kentucky wineries must sell their wine through distributors, and may not sell wine in any other way. Since most distributors won't bother to handle tiny wineries, this puts most of them out of business. Even if someone agrees to do it, they'll add their "bite" to the price of every bottle.

Hmm. I wonder if wine geeks could find a way to organize a <i>pro bono</i> distributorship that would work on the bright side. And if they did, I wonder how long it would be before mysterious things started happening to them.
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Re: Kentucky wine shipping law struck down!

Postby James Roscoe » Tue Aug 22, 2006 11:41 pm

Robin Garr wrote:Hmm. I wonder if wine geeks could find a way to organize a <i>pro bono</i> distributorship that would work on the bright side. And if they did, I wonder how long it would be before mysterious things started happening to them.


Probably about the time they started taking business away from the wholesalers.

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Full text of Judge Simpson's ruling (very, very long)

Postby Robin Garr » Tue Aug 22, 2006 11:51 pm

Will this all fit? ... I don't know if this system has a message-length limit. Guess we'll find out!

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY AT LOUISVILLE

HUBER WINERY, et al PLAINTIFFS

v. CIVIL ACTION NO. 3:05CV-289-S LAJUANA S. WILCHER, et al DEFENDANTS and WINE AND SPIRITS WHOLESALERS OF

KENTUCKY, INC. INTERVENING DEFENDANT

MEMORANDUM OPINION

This matter is before the court on the motion for judgment on the pleadings by the plaintiffs. This case involves the plaintiffs’ challenge to certain provisions of Kentucky law, which allegedly discriminate against interstate commerce by prohibiting out-of-state wineries from selling and shipping wine directly to consumers and retailers while allowing in-state wineries to do so on a limited basis.

FACTS

In July of 2005, the plaintiffs filed this motion for judgment on the pleadings, which was followed by a flurry of motions including a motion to dismiss made by the state defendants. The court ruled on five then-pending motions, but reserved its ruling on the motion for judgment on the pleadings, granting the parties’ mutual request for oral argument on that motion. The court

conducted a status conference prior to the scheduling of oral argument.1 The parties informed the court that the Kentucky General Assembly was in the process of amending the challenged statutory scheme and all parties agreed to hold the motion for judgment on the pleadings until the passage of the new legislation.

Once the new legislation was adopted, the parties advised the court that some of the challenged provisions had been changed and that the new law2 would take effect on January 1, 2007. The parties conferred regarding a possible interim order but were unable to reach an agreement. The plaintiffs have now asked the court to consider their original motion for judgment on the pleadings, which argues that the current law is unconstitutional. The court allowed all parties to supplement their briefs on the issues of (1) whether the court should rule on the constitutionality of the current law, which remains in force until January 1, 2007 and (2) if the court finds the current law infirm, what remedy would be appropriate until the new law supercedes it.

STANDARD OF REVIEW

“For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.” Southern Ohio Bank

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 479 F.2d 478, 480 (6th Cir.1973) (citation omitted). “The motion is granted when no material issue of fact exists and the party making the motion is 1In light of the many developments that have occurred since the court’s February 7th, 2005 Order (DN 58), the court will not hold oral argument on the instant motion. The parties have thoroughly briefed the relevant facts and law so that the court is equipped to rule on the motion without further argument from counsel. Therefore, the state defendants’ most recent request for oral argument is denied.

2We will refer to the new law as “SB 82.”

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entitled to judgment as a matter of law.” U.S. v. Moriarty, 8 F.3d 329, 332 (6th Cir.1993) (citations omitted).

I. LaJuana S. Wilcher, Lavoyed Hudgins (hereinafter “state defendants”) and the Wine and Spirits Wholesalers of Kentucky, Inc. (hereinafter “Wine Wholesalers”) contend that the constitutionality of the current law is moot. Both parties cite Kentucky Right to Life v. Terry, 108 F.3d 637 (6th Cir. 1997) to support this proposition. In Terry, the plaintiff challenged the constitutionality of various sections of the Kentucky Campaign Finance Law. While the case was pending, the General Assembly amended those provisions, effectively mooting the plaintiff’s challenge. The instant case is distinguishable, however, because the General Assembly delayed the effective date of SB 82, whereas the amendments to Kentucky’s campaign financing laws were immediately effective. Because the current laws continue to be in force, the plaintiffs challenge remains a live controversy. We must consider whether the current statutory scheme violates the commerce clause; and if it does, we must determine the appropriate remedy.

II. The Supreme Court recently struck down Michigan and New York laws regulating the sale and shipment of wine. See Granholm v. Heald, 544 U.S. 460, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). In essence, the lesson from Granholm is that statutory schemes which prohibit or limit shipment of wine by out-of-state producers while simultaneously authorizing shipment by in-state producers violate the Commerce Clause. Id. at 493. Absent a showing that such discrimination is necessary to serve a legitimate state interest and that there is not another less burdensome alternative

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to achieving that goal, regulations that “disadvantage out-of-state wine producers” cannot stand. See id.

In light of Granholm, the plaintiffs have challenged four Kentucky statutes, arguing that they violate the Commerce Clause by granting preferential access to in-state wineries. The first statute, KRS 244.165, criminalizes the shipment of alcohol by out-of-state sellers to any Kentucky resident who does not hold a valid wholesaler or distributor retailer license. This statute effectively brings out-of-state sellers into Kentucky’s three-tiered system. The second challenged statute is KRS 243.032, which provides that a restaurant making 50% or more of its sales as food may obtain a license to serve wine by the glass for consumption on the premises, but requires the licensee to purchase wine only from wholesalers. The final two challenged statutes are KRS 243.155 and 243.156, which authorize certain activities for small winery licensees and farm winery licensees, respectively.

A. The farm and small winery exceptions to the three-tier system expressly favor in-state economic interests in violation of Granholm. Properly licensed small and farm wineries are permitted to ship up to two cases of wine to a consumer who purchases the wine in-person at the winery. KRS 243.155(1)(f); 243.156(1)(h). Small and farm winery licensees may also sell their wine directly to retailers at wholesale price if the wine has been offered to wholesalers. KRS 243.155(1)(d); 243.156(1)(d). By creating these small and farm winery licenses, the General Assembly has carved out an exception to the three-tiered system, allowing those licensees to bypass the system in limited situations.

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Farm wineries, by definition, must be located in Kentucky.3 Similarly, small wineries, by definition, must make their wine from grapes, fruit or honey grown in Kentucky.4 These definitions effectively preclude out-of-state wineries from eligibility. Thus, while farm and small wineries may ship to consumers in limited circumstances, the out-of-state wineries producing 25,000 or 50,000 gallons or less annually are subject to criminal prosecution for the same behavior. Similarly, small and farm wineries are privileged to sell wine directly to retailers in limited circumstances, but their out-of-state counterparts are subject to criminal prosecution for the same behavior. This disparate treatment violates Granholm.

The state defendants and the Wine Wholesalers argue that invalidating the challenged laws would strike a serious blow to the three-tier system. A similar argument was rejected by the Granholm Court, which acknowledged that the “three-tier system itself is unquestionably legitimate,” but also recognized that “[s]tate polices are protected under the Twenty-first Amendment [only] when they treat liquor produced from out of state the same as its domestic equivalent.” Granholm, 544 U.S. at 489 (internal quotations omitted). We note that the General Assembly created an exception to the three-tier system by allowing properly licensed small and farm wineries to bypass the system. While the General Assembly may adopt exceptions to the general statutory scheme, those exceptions must apply evenhandedly. The current statutory scheme does not; on the contrary, it expressly favors in-state wineries. Accordingly, it is infirm under Granholm.

3KRS 241.010(22) defines a farm winery as “a winery located on a Kentucky farm with a producing vineyard, orchard, or similar growing area, manufacturing and bottling wines in an amount not to exceed twenty-five thousand (25,000) gallons per year.”

4KRS 241.010(45) defines a small winery as “a winery producing wines from grapes, other fruit, or honey produced in Kentucky, . . ., in an amount not to exceed fifty thousand (50,000) gallons in one (1) year.”

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B. The in-state eligibility requirements contained in the small and farm winery exceptions do not survive strict scrutiny. State laws that discriminate against interstate commerce face “a virtually per se rule of invalidity.” Granholm, 544 U.S. at 476 (quoting Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 57 L.Ed.2d 475 (1978)). Our determination that the current laws discriminate against interstate commerce, however, does not end the inquiry. The Granholm court recognized that a discriminatory law is not unconstitutional if it “advances a legitimate local purpose that cannot be served by reasonable non-discriminatory purposes.” Id. at 489 (quoting New Energy Co. v. Limbaugh, 486 U.S. 269, 278 (1988). The state defendants identify “temperance” as the legitimate local purpose, arguing that the current statutory scheme promotes this “core value” of the Twenty-First Amendment. It is undoubtedly true that the Twenty-First Amendment allows the states to “address the moral concerns that underlay Prohibition, freeing them to impose temperance in the consumption of alcoholic beverages.” Beskind v. Easley, 325 F.3d 506, 513 (4th Cir. 2003). There is also no doubt that the General Assembly may “uph[o]ld the desire of local counties to participate in local option elections.” State Defendant’s [First] Supplemental Brief (DN 83), p. 2.

The state defendants, however, have failed to demonstrate that restricting small and farm winery licenses to in-state wineries serves the “core value” of temperance or preserves the integrity of the dry counties or precincts in Kentucky. They merely argue that “temperance is the legitimate local purpose that cannot be served by allowing shipment of wine into dry territories.” State Defendant’s [First] Supplemental Brief (DN 83), p. 3. Allowing in-state wineries to ship directly to consumers in certain circumstances while prohibiting out-of-state wineries from doing the same has no differential effect on the shipment of wine into dry territories because the challenged statutory

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scheme discriminates based upon where the wine originates, not upon where it ends up. The in-state eligibility requirements are not narrowly tailored towards achieving temperance in dry territories.

C. Extending the small and farm winery exception to out-of-state wineries of the same size is the appropriate remedy. As the current laws do not survive strict scrutiny, we turn to the issue of the appropriate remedy. We are faced with the choice between “extension” and “nullification;” that is, we might extend the small and farm winery exception to out-of-state wineries or remove the exception altogether. All parties agree that “ordinarily extension rather than nullification, is the proper course.” Heckler v. Matthews, 465 U.S. 728, 738, fn 5, 104 S.Ct. 1387, 79 L.Ed.2d 646 (1984).

The Wine Wholesalers as well as the Kentucky Beer Wholesalers Association,5 however, urge the court to remove the small and farm winery privileges entirely. They note that the Supreme Court has recognized that nullification may be appropriate in certain circumstances: The “court should not use its remedial powers to circumvent the intent of the legislature, and should therefore measure the intensity of commitment to the residual policy and consider the degree of potential disruption of the statutory scheme that would occur by extension as opposed to abrogation.” Id. The wholesalers suggest that the situation at bar presents just such a case in which nullification is necessary to preserve the intent of the legislature in creating a three-tier distribution system. They argue that extending the privileges at issue here would strike a fatal blow to the three-tier system. We disagree and find that this situation does not warrant invoking the exception to the general preference for choosing extension over nullification.

5This party has filed an amicus brief.

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While Kentucky has a well-established three-tier system in place, the General Assembly has clearly expressed its intent to allow wineries of a certain size to bypass that system. We are not to evaluate the wisdom of such policy decisions; but, under the mandate of Granholm, we must ensure that such exceptions apply evenhandedly. Therefore, we will enjoin only the unconstitutional applications of the small and farm winery statutes in order to preserve as much of the legislative intent as possible. See e.g., Ayotte v. Planned Parenthood of Northern New England, __ U.S. __, 126 S.Ct. 961, 967-68, 163 L.Ed.2d 812 (2006) (quoting Regan v. Time, Inc., 468 U.S. 641, 652, 104 S.Ct. 3262, 82 L.Ed.2d 487 (1984)) (“[W]e try not to nullify more of a legislature’s work than is necessary, for we know that ‘[a] ruling of unconstitutionality frustrates the intent of the elected representatives of the people.’”).

Striking the offensive provisions of the small and farm winery statutes will not destroy the three-tier system, as argued by the wholesalers. Farm and small wineries licenses will only be available to those wineries producing less than 25,000 and 50,000 gallons, respectively. All other wineries and alcohol producers will continue operating under the current, unaltered regulations. We need not strike KRS 244.165, but rather will simply enjoin the state defendants from enforcing it against properly licensed out-of-state farm and small wineries. Accordingly, we will strike the instate eligibility requirements found in KRS 241.010(22), (45), 243.155(2) and 243.156(1)(a),(c), (3).

D. The in-person purchasing requirement discriminates, in practical effect, against interstate commerce. The plaintiffs challenge an additional portion of the remaining statutes; namely the in-person requirement found in KRS 243.155(1)(f)(1) and 243.156(1)(h)(1). While all parties agree that the in-person purchasing requirement is not discriminatory on its face, the plaintiffs argue that it, “in

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practical effect[,] discriminates against out-of-state interests.” See Lenscrafters, Inc. v. Robinson, 403 F.3d 798, 802 (6th Cir. 2005). Specifically, the plaintiffs argue that the in-person sale requirement presents “an economic barrier which clearly benefits in-state wineries while burdening out-of state wineries by making it financially unfeasible to effect direct sales to Kentucky residents.” Plaintiff’s Supplemental Brief Regarding the In-Person Requirement (DN 92), p. 4. The plaintiffs assert that out-of-state wineries will have to incur a substantial cost in order to meaningfully penetrate the Kentucky market. They suggest that out-of-state wineries will have to establish a physical presence in Kentucky or simply wait and hope that Kentucky consumers visit their locations while traveling. They also maintain that the in-person requirement deprives Kentucky residents of “meaningful access to out-of-state wineries.” Id. at 5, fn 4.6

The state defendants, on the other hand, argue that the in-person requirement has nothing more than an “incidental effect” on interstate commerce. State Defendants’ Second Supplemental Brief (DN 94), p. 3. To support this assertion, they point out that Kentucky is bordered by seven other states and that “wineries located in these States are often closer to Kentucky citizens than some distant wineries in Kentucky.” Id. The examples provided by the state defendants, while interesting, fail to examine interstate economic interests as a whole.7 We agree with the plaintiffs’ critique of this argument - that it “fails to consider several important points, [namely], that wineries exist in

6The plaintiffs analogize this situation to one considered by the Granholm Court where the New York statutes required out-of-state wineries to establish a physical presence in New York in order to have the privilege of making direct sale and shipment to consumers. The Supreme Court struck down those laws, noting that “[f]or most wineries, the expense of establishing a bricks-and -mortar distribution operation in 1 State, let alone all 50, is prohibitive.” Granholm, 544 U.S. at 475.

7In fact, elsewhere in their brief, the state defendants point out the Commerce Clause “protects the interstate market, not particular interstate firms, from prohibitive acts or burdensome regulations.” State defendants’ Second Supplemental Brief (DN 94), p. 4 (quoting Brown & Williamson Tobacco Corp. v. Pataki, 320 F.3d 200 (2nd Cir. 2003). It follows that, in order to determine whether the in-person requirement discriminates against interstate commerce, we must examine the effect beyond Kentucky and its neighboring states.

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states other than those neighboring Kentucky, that each winery’s products are distinctive, and that many of the highly desirable wines come not from Tennessee and Indiana, but from California, Oregon and Washington.” Plaintiff’s Response to Defendants’ Supplemental Brief (DN 95), p. 5. The plaintiffs have shown that Kentucky and its seven bordering states account for a mere 0.6% of the nation’s total wine production. Id. at 6. Thus, the state defendants examples fail to take into account the impact on “commerce between Kentucky and those states accounting for more than 99% of the nation’s annual wine production, including 8 of the top 10 producing states.” Id. at 7. We note that wine is a unique product. Accordingly, we agree with the plaintiffs that “it is false to presume that a wine consumer would purchase from the closest winery all things being equal.” Id. Thus, the state defendants’ argument is flawed. We are convinced that the effect on interstate commerce is not de minimus.

In the Brown & Williamson case quoted in footnote 5 above, the Second Circuit Court of Appeals upheld a law that “eliminate[d] all sales of cigarettes to New York consumers that do not involve face-to-face sales or the transportation of fewer than four cartons of cigarettes to any one consumer.” Brown & Williamson, 320 F.3d at 213. Prohibiting “one manner in which cigarettes could otherwise be sold to New York consumers,” according to the opinion, did not offend interstate commerce. See id. The Brown & Williamson court based its decision, inter alia, on the fact that the law did “not restrain the flow of goods into New York.” Id. at 214. In the situation at bar, however, the in-person purchasing requirement does restrain the flow of wines into Kentucky because, as stated above, nearly all wine is produced outside of Kentucky and its neighboring states. Furthermore, there is an important difference between cigarettes and wines. While “no two wines

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are created equal,”8 cigarettes are fungible. Thus, New York consumers’ access to the cigarette market was not affected in the manner in which Kentucky consumers’ access to the wine market is.

It is clear that the in-person requirement amounts to “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). “The mere fact of nonresidence should not foreclose a producer in one State from access to markets in other States.” Granholm, 544 at 472 (citing H.P. Hood & Sons, Inc. v. Du Mond, 336

U.S. 525, 539, 69 S.Ct. 657, 93 L.Ed. 865 (1949)). Accordingly, we evaluate the in-person requirement using strict scrutiny in order to determine whether the laws “advance a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” Id. at 489 (quoting New Energy Co. Of Ind. v. Limbach, 486 U.S. 269, 278, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988)). E. The in-person purchasing requirement does not survive strict scrutiny. The state defendants provide three purported legitimate reasons for the challenged laws, all of which are said to be “core values” of the Twenty-First Amendment. First, the defendants argue that the in-person requirement promotes temperance, indicating that the three-tier system was designed to prevent “an excess of alcohol consumption.” State Defendants’ Reply to Second Supplemental (DN 96), p. 8. As already discussed, we leave the three-tier system undisturbed in any meaningful way. Striking the in-person requirement merely ensures that the legislatively created exception granted to small and farm wineries applies evenhandedly to both in-state and out-of-state producers. The state defendants argue that the in-person requirement promotes temperance

8Plaintiff’s Response to Defendants’ Supplemental Brief (DN 95), p. 7. - 11

in another way, namely by preserving the local option laws currently in place in several territories in Kentucky. Allowing Kentucky residents living in dry territories to order wine via internet, phone or mail order, according to the defendants, would “obviate” the prohibitions under current local option laws. State Defendants’ Reply to Second Supplement Brief (DN 96), p.8. We disagree.

The farm and small winery licenses, as amended by this court, may co-exist with local option laws. Nothing in the farm or small winery licenses provide such licensees with a wholesale exemption to violate the local county ordinances. The in-person purchasing requirement simply does not, and cannot, ensure that dry territories remain alcohol-free. Even if the requirement did further the goal of preserving the integrity of the dry territories, it is not the least burdensome way of doing so. For instance, we accept the plaintiffs’ suggestion that “a less burdensome means of ensuring the continued integrity of dry territories would be for the State Defendants, as part of the process of licensing farm wineries and small wineries, to specifically identify the counties, cities and/or zip codes in Kentucky to which shipments cannot be made.” Plaintiff’s Supplemental Brief (DN 92), p. 9, fn 6.

Second, the state defendants maintain that the in-person requirement increases the risk of underage drinking. A similar argument was rejected in Granholm where the Supreme Court dismissed the concern that internet purchasing by minors would pose a serious problem. The Granholm Court found that minors are less likely to purchase wine than beer or liquor, that they have a more direct means of obtaining the alcohol and that they are unlikely to have wine shipped because they “want instant gratification.” Granholm, 544 U.S. at 490 (citations omitted). Despite that conclusion, the Court assumed arguendo that direct shipping of wine would increase the risk of underage drinking, but found, nonetheless, that there were less burdensome alternatives to

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protecting that interest. For instance, the states could require “an adult signature on delivery and a label so instructing on each package.” Id. at 490. Granholm compels the same conclusion at bar: the in-person requirement is not narrowly tailored to achieving the goal of keeping wine out of the hands of minors.

Lastly, the state defendants argue that the in-person sales requirement is motivated tax by concerns for tax revenue and that removing that requirement may result in a “potential loss of revenue in excise taxes.” State Defendants’ Reply to Plaintiff’s Second Supplemental Brief (DN 96), p. 9. The Wine Wholesalers echo this argument, predicting a heavy loss in sales and use tax if internet wine sales are permitted. Intervening Defendant’s Reply to Plaintiff’s Second Supplemental Brief (DN 97), p. 8. The Wine Wholesalers’ argument, however, seems to assume that internet sales would be permitted with no restrictions. Such is not the case. Only properly licensed small and farm wineries would be permitted to ship directly to consumers. The rest of the three-tier system remains fully intact.

Furthermore, Granholm rejected a similar tax argument, concluding that the defendants had “not shown that tax evasion from out-of-state wineries pose[d] such a unique threat that it justife[d] their discriminatory regimes.” Granholm, 544 U.S. at 492. Even assuming that the defendants had adequately demonstrated a legitimate concern regarding the loss in tax revenue, “their regulatory objectives can be achieved without discriminating against interstate commerce.” See id. For instance, the state defendants could require licensees to “submit regular sales reports and to remit taxes.” See id.

As we find that the in-person requirement is not narrowly tailored to achieving the goals identified by the state defendants, we must strike KRS 243.155(1)(f)(1) and 243.156(1)(h)(1).

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F. The Restaurant Wine Licensing Statute The plaintiffs also challenge KRS 243.032, which provides that restaurants in Kentucky that are licensed to serve wine on the premises “shall purchase wine only from licensed wholesalers.” The plaintiffs note that this “prohibits such restaurants from buying wine directly from out-of-state wineries.” Proposed Order Tendered with Plaintiffs’ Original Motion for Judgment on the Pleadings (DN 12). In fact, it prohibits such restaurants from buying from anyone other than licensed wholesalers. There is no apparent distinction between in-state or out-of-state wineries. Plaintiffs have also noted that KRS 243.155(1)(d) and 243.156(1)(d) allow farm and small wineries to sell directly to retailers (at wholesale price) if the wine has been offered to wholesalers first.

While the argument is not clear from the briefs, to the extent that the plaintiffs suggest KRS 243.155(1)(d) and 243.156(1)(d) may be inconsistent with KRS 243.032, that issue is not before this court. We are evaluating the challenged statutes to ensure that they apply evenhandedly to in-state and out-of-state wineries. KRS 243.032, 243.155(1)(d) and 243.156(1)(d) (as amended by this opinion and order) do not expressly favor in-state wineries at the expense of out-of-state wineries and the plaintiffs have failed to demonstrate any practical effect discrimination with regard to these statutes. Accordingly, we decline to disturb those portions of this statutory scheme.

For the reasons set forth above, the court will grant the plaintiffs’ motion for judgment on the pleadings in part and deny it in part. A separate order will be entered herein this date in accordance with this opinion. Dated: (text) August 21, 2006



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Re: Full text of Judge Simpson's ruling (very, very long)

Postby James Roscoe » Tue Aug 22, 2006 11:55 pm

Well done!
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Judge Simpson's order

Postby Robin Garr » Wed Aug 23, 2006 12:00 am

This is short and probably comprehensible only to lawyers. :)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE


HUBER WINERY, et al PLAINTIFFS

v. CIVIL ACTION NO. 3:05CV-289-S
LAJUANA S. WILCHER, et al DEFENDANTS
and
WINE AND SPIRITS WHOLESALERS OF

KENTUCKY, INC. INTERVENING DEFENDANT

ORDER AND JUDGMENT

Motion having been made by the plaintiffs for judgment on the pleadings and for the reasons set forth in the memorandum opinion entered herein this date, and the court being otherwise sufficiently advised, IT IS HEREBY ORDERED AND ADJUDGED that:

1. Certain provisions of the current regulatory scheme for the sale and shipment of wine are unconstitutional under the authority of Granholm v. Heald, 544 U.S. 460, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005) as they disadvantage out-of-state producers. To the extent that the Kentucky statutory scheme runs afoul of the Commerce Clause, the plaintiff’s motion for judgment on the pleadings (DN 12) is GRANTED; in all other respects it is DENIED. Accordingly, we must strike the offensive provisions.

A. The word “Kentucky” is stricken from KRS 241.010(22) and KRS 243.156(1)(a);

B. The words “from grapes, other fruit, or honey produced in Kentucky, unless exempt under KRS 243.15(2)” are stricken from KRS 241.010(45);

C. The words “and the wine produced by the small winery is made with Kentucky products” are stricken from KRS 243.156(c);

D. KRS 243.155(1)(f)(1), 243.155(2), 243.156(h)(1) and 243.156(3) are stricken in their entirety.

E. The State Defendants are enjoined from enforcing KRS 244.165 against all properly licensed out-of-state small or farm wineries.

2. The State Defendants’ Motion for Reconsideration (DN 61) is DENIED AS MOOT.

3. The Plaintiffs’ Motion to Supplement their Motion for Judgment on the Pleadings (DN 69) is DENIED AS MOOT.

4. The Plaintiffs’ Motion for Leave to File a Surreply (DN 87) is DENIED AS MOOT.

IT IS SO ORDERED this
(text) August 21, 2006
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Re: Full text of Judge Simpson's ruling (very, very long)

Postby Paul B. » Wed Aug 23, 2006 12:05 am

Whoa ... all that gobbledygook ... yet all that needs to happen is for consumers' freedom of choice to win out.

And how the three-tier system could ever be construed as needing protection or being a desirable thing is beyond me.

It seems like such a simple issue, yet it's so convoluted ...
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Re: Judge Simpson's order

Postby James Roscoe » Wed Aug 23, 2006 12:06 am

The second page is the most important part. It's the order that enforces the opinion. Without it the opinion is practically worthless to the plaintiffs. It essentially says that Kentucky can't enforce the law.
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Re: Full text of Judge Simpson's ruling (very, very long)

Postby Robin Garr » Wed Aug 23, 2006 12:09 am

Gotta love PACER and Adobe Reader 7.0. Grab it, save it, convert it to text, paste it in. ;)
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Re: Judge Simpson's order

Postby Robin Garr » Wed Aug 23, 2006 12:12 am

James Roscoe wrote:The second page is the most important part. It's the order that enforces the opinion. Without it the opinion is practically worthless to the plaintiffs. It essentially says that Kentucky can't enforce the law.


Read it carefully, though, James. I'd love your opinion on this, but it appears to me that Simpson is saying that he's ruling now on the current law <i>even though the new law takes effect on Jan. 1</i>.

He's not addressing the new law, but I'm concerned that the wholesalers framed it for the legislature (what a nice labor-saving gesture!) with <i>Granholm</i> very much in mind. Basically, it simply removes the small-wineries-can-ship provision and says NOBODY can ship direct to consumers, EVERYBODY must go through a distributor, no matter where they are, and that's the end of the story.

If I'm reading this right, we Bluegrass wine lovers have a nice four-month window to fill our cellars (if the state doesn't come up with some kind of stopgap administrative relief) and then the door slams shut once and for all, and likely closes a lot of our little wineries.
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Re: Kentucky wine shipping law struck down!

Postby Bob Ross » Wed Aug 23, 2006 12:52 am

Pro bono.

Hey, Robin. This should probably be a private email, but why not?

State by state, we apply and WLP becomes a pass through distributor?

If you are game on the business side, I'll donate a bunch of legal time.

You or WLP has to post bonds and all that legal stuff. But wouldn't wine lovers and small wineries around the country step up?

If they won't, we have a loser.

Otherwise, it's just time -- and if I've analyzed it right, not too much money.

Let me know if this has merit.

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Re: Kentucky wine shipping law struck down!

Postby Robin Garr » Wed Aug 23, 2006 12:57 am

Bob Ross wrote:Pro bono.

Hey, Robin. This should probably be a private email, but why not?

State by state, we apply and WLP becomes a pass through distributor?

If you are game on the business side, I'll donate a bunch of legal time.

You or WLP has to post bonds and all that legal stuff. But wouldn't wine lovers and small wineries around the country step up?

If they won't, we have a loser.

Otherwise, it's just time -- and if I've analyzed it right, not too much money.

Let me know if this has merit.

Regards, Bob


Bob, I'd love to try it in Kentucky, assuming my reading of the law that takes effect Jan. 1, 2007 (in contrast with the law that Judge Simpson threw out today) is correct. I'd love to work with you, and/or a Kentucky lawyer, on this. If it works, then we move on to the other 49, how's that? :twisted:
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Re: Kentucky wine shipping law struck down!

Postby Bob Ross » Wed Aug 23, 2006 4:29 pm

Great. In the meantime, I'll look into New Jersey. I really worry that Kentucky may follow the New Jersey model.

And, if there are folks in other states who are interested maybe we could get something bigger going down. It would be fun for consumers to join forces with smaller wineries, wouldn't it?
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Re: Kentucky wine shipping law struck down!

Postby Gary Barlettano » Wed Aug 23, 2006 5:26 pm

Bob Ross wrote:Great. In the meantime, I'll look into New Jersey. I really worry that Kentucky may follow the New Jersey model.

And, if there are folks in other states who are interested maybe we could get something bigger going down. It would be fun for consumers to join forces with smaller wineries, wouldn't it?


I'd be really curious to see how things work out in New Jersey. It used to take a "physical presence" and Lo Spuntino in Rutherford acted as such. I had wines from Viansa and Goosecross sent to my mother in Nutley as if it were nothing via them. According to the wineries, the system still works even after the '04 N.J. law change, but I think Lo Spuntino is hooked up with WorldShipNet which acts as a distributor for wineries who wish to use their services in (I guess what used to be) non-reciprocal states. I fished around the WorldShipNet site to see if any winery wishing to use their services could participate, but most of the presentations required a login. Weird, but here's a link to their About Us Page. It definitely ain't pro bono.

I don't guess we need to establish anything special for California.
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