Last year, the war in Iraq forced the cancellation of the annual National Beer Wholesalers/Brewers Joint Legislative Conference in Washington, DC. As this year’s gathering approaches, National Beer Wholesalers Association president David Rehr has plenty of forest fires to put out.
High on his list of priorities are legal challenges to the three-tier system that has existed since Repeal.
In 2000, wine writers Ray and Eleanor Heald sued the State of Michigan to overturn the state’s ban on direct shipments from out-of-state wineries. The status of their case has flip-flopped once already: a federal judge upheld the state’s law, but the 6th US Court of Appeals threw out Michigan’s ban as unconstitutional.
On January 30, Michigan attorney general Mike Cox filed an appeal with the highest arbiter in the land, the Supreme Court. What that court decides will be binding not only on Michigan but on all 49 other states. It will affect not just wine but all alcoholic beverages.
At the heart of the issue is an apparent contradiction in the US Constitution. The 21st Amendment, which repealed Prohibition, gives states broad powers with regard to alcohol. It reads in part: “The transportation or importation into any state…of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”
That’s why, for instance, in Maryland, if an out-of-state brewer (or an in-state one, for that matter) ships a few bottles directly to your doorstep, the state can charge you both with a felony.
Section 8 of the Constitution, however, grants Congress the exclusive right “to regulate Commerce…among the several States.” That’s why Virginia, for example, can’t slap an embargo on sweaters knitted in Pennsylvania.
So which section trumps the other?
The NBWA has weighed in on Michigan’s side, supporting the right of states to regulate alcohol. “Beer is unlike other commodities,” commented Rehr. “We have a controlled system, orderly markets, and we need to respect the fact that different people in different states have different views on alcohol.”
“You can never anticipate what the Supreme Court will do,” admits Rehr. Nevertheless, he thinks it unlikely that the court would trash the entire system, although it might strike down individual state laws.
The 21st Amendment does not specifically require a three-tier system, whereby a wholesaler or distributor acts as a middleman between the company that manufactures the alcohol and the retailer who sells it to you or me. But all states adopted some form of this system back in 1933, partly to curb the power of the large breweries. Otherwise, they could buy up chains of pubs and operate them as “tied houses,” creating a monopoly for their products. In this respect, the three-tier system protects small breweries’ access to market.
However, mergers have reduced the number of wholesalers, and the surviving entities are often uninterested in low-volume products. In many states, small brewers are effectively locked out of the market if they can’t find a wholesaler. Or they’re bound to a wholesaler by contracts that are difficult to break, even if they think the wholesaler is doing a poor job.
At least one large retailer has been chafing under the three-tier system. Costco, a “big box” retail chain based in Issaquah, WA, has sued that state’s liquor control board, claiming it violates antitrust laws and artificially inflates prices for consumers. Specifically, Costco wants the ability to buy alcohol directly from the manufacturer, and be eligible for discounts and favorable credit terms.
The NBWA is afraid that if Costco is successful, it could lead to similar suits by chain stores in other states. This would not only deprive wholesalers of their share of the pie, but also give the big chains a significant pricing advantage over smaller “mom-and-pop” outlets. The result could be “crushing” for small breweries, argues the NBWA’s Rehr. Stores like Costco “define consumer choice as the lowest possible price,” he says. “They have minimal beer selection for the connoisseur.”
Indeed, scanning the beer selection in chains like 7-11 or Safeway or CVS, you might find Sam Adams or Sierra Nevada, but you’re not likely to find offbeat, low-volume products like those of Hair of the Dog or New Glarus or Belgium’s Trappist breweries.
The Brewers’ Association of America, which represents the nation’s smaller beer makers, hasn’t taken an official stand in either case.
Its president, Daniel Bradford, agrees that the present system needs some tweaking. “A lot of laws were designed to protect small wholesalers from big brewers. Now we have big wholesalers and small brewers.”
But he asserts, “For small brewers, having an independent network of wholesalers is important for our success.”
Greg Kitsock is the editor of Mid-Atlantic Brewing News, a long-time resident of Washington, DC, and a frequent contributor to beer-related publications.