The Effect of Mass. Decision on Small Brewers


Dear Client:

Stay with me on this one, folks. It's an important one. The recent decision by the 1st Circuit Court of Appeals in the Massachusetts winery direct shipping case could end up having significant ramifications for many in the beer industry. As you'll recall, the Court ruled that the Massachusetts law -- which gives different shipping options for wineries of different sizes, both in-state and out-of-state -- is in violation of the U.S. Constitution's Commerce Clause " because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors." Soon afterward the NBWA issued a statement expressing disappointment in the decision as it would undoubtedly "invite more litigation." Indeed it will. And not only that, it could affect litigation that is currently in motion.

Within hours of the ruling shooting down volume cap exemptions to three-tier, BBD has learned that direct shipping litigator Prof. Alex Tanford ran directly to Arizona to debrief that US court, which is hearing a case on similar volume cap exemptions, on the Massachusetts decision and advising them to rule in the same way. We expect a ruling in that court any day now, so already the Massachusetts case ruling is spreading like wildfire to other courts. But wait, there's more.

SMALL BREWERS BEWARE. Forget for a moment the issue of states setting volume cap exemptions for wineries who can forgo the three-tier system. The Massachusetts ruling could easily extend to many other state laws which use volume caps to apply various facets of their alcohol code, like: allowing brewpubs to sell beer on-premise, allowing brewpubs to sell limited amounts off-premise, allowing small brewers under a certain barrelage to self-distribute, allowing small brewers under a certain barrelage or percent of a wholesaler's business an exemption to the state's franchise law, and tax breaks to brewers based on barrelage. As you can see, volume cap legislation could come under fire from the courts on a variety of important issues facing craft brewers.

Which is absurd. As the NBWA wrote in their amicus brief in the Arizona case: "Both the Federal Government and most States regulate, tax, and assess fees on liquor manufactures differently based upon their size.....This is no different than the myriad other laws which impose more stringent standards on large businesses than smaller businesses." Is it fair to strike down laws which help small brewers? Of course not. It's an important reason why we have such a wide variety of brewers in this country. This is a case where the small wineries have possibly shot themselves and their brewery brethren in the foot: forgive them, they know not what they do. Where would Jim Koch be today if he wasn't allowed to peddle Sam Adams from the trunk of his car?

Think it won't happen? Deregulators aren't just after winery direct shipping folks. They are after the whole deregulation enchilada. And while the big brewers have so far lent important support for small brewer carve-outs so far, the courts remain the weak link in preserving this important right of states to allow volume exemptions.

For example, there's a quantity cap tax case in Puerto Rico. In that case, Coors Brewing Co. is suing to overturn their small brewer tax differential. In 2002, Puerto Rico amended its tax law to give brewers producing less than 31 million gallons a year a tax break. No local Puerto Rican brewers produce that much, so local brewers naturally got the break while big brewers on the mainland have to pay the tax. In their complaint, Coors says that Puerto Rican tax law "discriminates against beer produced outside Puerto Rico, in violation of both the United States Constitution and federal law, by creating a tax differential of as much as $1.90 per gallon..." While Puerto Rico isn't a state, this case could produce a US precedent.

But wait, there's even more. The Massachusetts case ruling could have an effect on states which haven't expunged their in-state exemptions and/or reciprocity exemptions to winery direct shipping yet, in a post-Granholm world. Just last week BBD reported that the state of Iowa is being sued on this issue, where Iowa currently allows in-state direct shipping but not from out-of-state. The Iowa legislature, at the behest of the Iowa liquor control authority, had already been looking into fixing their untenable direct shipping law. It's conceivable that they may have considered volume caps as an alternative. But with the Massachusetts ruling, that may be off the table. Indeed, the Des Moines Register notes that Iowa is looking to allow out-of-state wineries to ship direct and pay a license fee.

NO SMALL BEER. This is a big deal, folks. There are small brewer tax provisions in many states, including, AK, IA, KY, MI, MN,MT, NM, OH, NY, PA, TX, RI,WI, according to the Beer Institute's Brewers' Almanac. Also, there are about ten states which allow self-distribution based on volume caps, according to the Brewers' Association.

OUR TAKE. Finally, for those us non-lawyers wondering what all this mumbo jumbo means, bottom line is that states routinely pass laws, not just in the alcohol beverage industry but in many industries, which favor different size companies, regardless of location. If your state is going to pass a law to let a truly small brewer do something, that doesn't mean the state has to let the big brewers play by the same rules. If you let Bob's local corner liquor store do something, do you have to let Walmart or Costco or a virtual on-line retailer in another state do the same thing? According to the 1st Circuit Court of Appeals, yes. I shake my head at this grotesque travesty, at all human perfidy.


A BILL IN INDIANA would allow microbreweries to sell beer for takeout on Sundays is now before the statehouse. The Indiana Senate has already approved the bill, reports the Trib. The bill would limit the amount of Sunday carryout sales from microbreweries to about three cases per transaction. Wait, isn't that a volume cap? Yes, Indiana microbreweries have limits on how much beer they can make each year. There are 32 of them in the state. Read the lead story above to see how the Massachussettes case could affect this.

MILLERCOORS is running a :30 spot TV ad in major markets on the Super Bowl for High Life. The spot will feature the owners of Del's Barber Shop in Escondido, Calif.; Tim's Baseball Card Shop in Chicago; Loretta's Authentic Pralines in New Orleans; and Bizarre Guitar & Drum in Phoenix.

LABOR UNIONS LOST 10% of their members in the private sector last year, the largest decline in more than 25 years. Now, only 7.2% of the private-sector workforce are represented by unions, down from 7.6%. The total share of union membership is 12.3% when you include the government.

WAL-MART IS cutting more than 10,000 jobs at Sam's Club. They are outsourcing their product demonstration (where you can try food or see how a product works) to an independent marketing firm. The employees can apply for a job with the marketing firm.

CORRECTION: In Friday's issue regarding the pending merger of the Connecticut A-B/HUSA distributor and the Sam Adams distributor, we had suggested that Rogo Distributors was only a MillerCoors distributor. In fact Rogo also carries several other suppliers including Crown, DGUSA, Pabst and several others. We apologize for the error.

WE STILL HAVE 14 seats left for the Beer Summit, and it's just over one month away. But they're going fast, and we sell out every year. We have added Bruce Jacobson, evp sales of Crown Imports to our distinguished lineup. I honestly think this is the best lineup in our Summit's 7 year history. More info here:

Until tomorrow, Harry

"All men who have achieved great things have been great dreamers."

-Orison Marden

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