The Care Act Hotly Debated
Rabid Protectionism or Last Great Hope for 3-Tier?

FILED JUNE 23, 2010

Dear Client:

Discriminatory tax and distribution laws, unmonitored price fixing, 50 different state labeling laws, witholding licenses for political reasons, banning advertising, keeping women from drinking in bars, dogs and cats living together in relative harmony. These are but a few of the horrors we can expect if HR 5034 (the Care Act) is passed. On the other hand, failure to pass the Care Act will make us awash in unregulated alcohol due to an activist federal court bent on plying our children with counterfeit whiskey.

I'm only slightly exaggerating the level of intense debate as passions ran high at the normally sleepy NCSLA regulators conference in New Orleans yesterday. Audience members yelling comments out, heated back-and-forth on the panel, lively moderators, one regulator when pressed on an issue, ducked out of the room. It was, in a word, fantastic. It won't reproduce as well on the page I'm sorry to say, but here's a general synopsis of the panel:

Moderated by former Texas ABC general council Lou Bright (a cad with a pony tail and a sharp tongue) and former Iowa regulator Lynn Walding (a good humored former regulator with a loud phone), the stage was set with Wine & Spirits Wholesalers Association chief Craig Wolf and NBWA counsel Paul Pisano on one side favoring the Care Act, and Steve Gross of the Wine Institute and Marc Sorini of McDermott, Will & Emery (who represents craft brewers and Diageo on occasion) on the other side. Not only that, several regulators weighed in from the crowd, as well as DISCUS (who slyly put their position paper excoriating the Care Act on everybody's chair). Yes, it was a Wild West atmosphere.

WSWA's Craig Wolf started off, "Who cares about the Care Act? Everybody in this room should care about the Care Act. If we continue to let this litigation go on, there won't be any regulations left." Craig pointed out the steady march toward deregulation and the fact that the courts are still in conflict. "Granholm came out in 2005. That was supposed to be a bright line in the sand. But lawyers being lawyers -- and I apologize that I'm one -- they keep pushing the envelope."

Craig continues: "The myth is there's some kind of equilibrium here. There's no equilibrium. In the last 77 years there's been no equilibrium." Craig asks, "Who should be making the rules? The legislators?....or it is a federal judge who comes in and thinks he knows what's best for the people of the state?" The Care Act can stop this by "drawing that bright line in the sand" so that states can "know what the law is." "It's the courts that have overturned the standards and changed the balance. This just turns it back where it should be."

The Wine Institute's Steve Gross disagrees. "The Care Act goes far beyond what Craig talks about. The results go far beyond the Commerce Clause," says Steve, quoting from the bill, "and other Act of Congress." Steve says that could conceivably allow states to enact laws that violate all other federal laws, like the First Amendment, Civil Rights Act, Sherman Act, etc.. "But if you look at the level of litigation [18 states], ...this isn't something that needs such a sweeping solution," says Steve.

Marc Sorini agrees. "Everybody in this industry believes that states are the primary regulators of alcohol. I've got my police powers and I've got my 21st Amendment powers. They are quite broad and never been challenged by the court..... You folks do have a lot of power.... the Care Act turns the clock back very far.....This is very troubling in my mind." Among other things, Marc says that the Care Act would give states the ability to pass discriminatory laws as they've tried to do in the past. Not only that, Marc says we could see laws again with protectionist tax schemes, unmonitored price posting, state regulation of duty-free sales, and even discrimination by gender.

Paul Pisano of the NBWA jumped in, saying that the Care Act is specifically narrow in its scope, and actually does not allow states to pass laws which are facially discriminatory. And besides that, the ligitation isn't stopping. We could end up in the Supreme Court again, and even then, that may create another "wave of litigation." How can states afford this, asks Paul, particularly when the courts require states to pay attorneys fees even if they win the majority of the case (like what happened in Costco)?

Craig added that HR 5034 will not even reverse Granholm. In fact, it is "designed to incorporate and enshrine Granholm.....but when it comes to cases that go beyond Granholm....we want to draw a line." All this litigation is creating a "balkanization......a patchwork of decisions that nobody can abide by. Let them set the line and let the line be known to everybody so that everybody can live by them. We're trying to create that line."

One reason that wineries disapprove of the bill is because of the negative financial consequences it could cause them, admits Steve. But wholesalers, he says, haven't been forthright about their financial motivations for the bill. "I think you have an economic issue that hasn't been brought up." Craig responded, saying the bill wasn't about wholesalers or about three-tier, but about restoring the power to regulate alcohol to the states.

A regulator said that while he hasn't formed an opinion on the bill, he questions why the bill wasn't hashed out between industry tiers before it was dropped in Congress. Paul noted that brewers and distributors have had dialoge on its language for a long time, but that now the bill is dropped and when they've asked the Wine Institute, the Beer Institute, and Discus for input to change the bill, "we've gotten crickets." "From an NBWA perspective, we've been talking about this bill and sharing language for years. This was not a surprise." Paul also pointed out that when the Stop Act was proposed, many in the industry opposed it as well, but it ended up passing with a coalition of support. "This is a process."

Craig agreed: "We understand this is a process. A bill gets introduced, it gets cut up 155 times. But that's the way it works.... The people who oppose this legislation may have ideas to make it better, so let's hear them.....We have not seen cooperative efforts....It's incumbent upon us to try to fix [the litigation issue]."

Steve jumped in. "We are not in negotiations. We are opposing this legislation." And later, "As it stands, the entire supplier tier is united in opposition.....We are looking at this with great concern.... It's our job to be opposed and it's not our job to rewrite your legislation to pass...."

Then the conversation took a turn toward the Massachusetts First Circuit case (Family Winemakers of California v. Jenkins) which involves gallonage caps. Lots of folks present were involved in the case, so it took on I would say a personal note.

Craig used this case as an example of a law that is not facially discriminatory (Mass allows all wineries under 30k gallons a year, regardless of location, to ship direct) but yet still got struck down. "Enough is enough." He said that the Mass. legislature had passed the law in order to make it flush with Granholm, and yet that still wasn't enough. One audience member from the Wine Institute from the commonwealth of Mass said that the legislators were just trying to protect their in-state wineries. "They tried to make it look and smell like a non-discriminatory bill ....but while bending over backwards for their in-state interests." That got the room quiet. Craig admitted that one legislator made a publicly "stupid statement" about the bill being discriminatory, but the fact remained that the law is not facially discriminatory, regardless, because it levels the playing field for all wineries regardless of location. Steve quipped that since 90% of wine bought in Massachussetts would be above the gallonage limit, he "we consider it discriminatory."

Oh, that's not all. Then Lynne Omlie of DISCUS got up and gave an impromptu speech. "There is united opposition in the supplier tier.....We fervently support states rights and the three tier system, as Craig well knows.....[But] this bill does exempt alcohol laws from any other acts of Congress..... You've got the FAA act which is the gateway.....If this is about direct shipping, I'm scratching my head as to why it's needed. It's the law of the land....There is not a lack of state regulation. There's a plethora of regulation on the state level."

Then Lynn Walding's phone then went off, creating a needed diversion. Then an audience member yelled from his seat: "Do the states feel like they're out of control? Anybody?" There was general rumbling that seemed to indicate that some winery/distillery folks thought so, but not others. I know, isn't it great?

Craig Wolf: "There comes a time when you have to make a choice. Either you understand that these assaults are undermining your existence and you want to do something about it, or you don't. It's your choice."

Then came the quiet voice of Curtis Coleburn, the respected equivocal chief of the Virginia Dept. of ABC, who said, "My position on the Care Act is prone. I don't have one. We take a position on legislation .... when the Governor has developed a view on the situation. I think it's regrettable when I'm between two sets of my friends who are diametrically opposed to a piece of legislation. It's become a football between the tiers.... I don't know a regulator who doesn't feel he should have more flexibility" when regulation "and who doesn't hate being sued and paying attorney's fees for something he didn't do to begin with. We agree with the Attorneys General..... whether this bill gets us there in a way that we can all live together and be happy, I don't know."

"Wow, that was hot and heavy. What a brawl," said one regulator as he left the hall. Indeed. It was a lively discussion.

COSTCO, DISTRIBS UP MONEY FOR WASHINGTON BALLOT MEASURES

Costco's latest filing with the Public Disclosure Commission in Washington shows that it's donated another $200,000 in cash to Modernize Washington, the group backing I-1100 to privatize the state. That sets cash ($735,000) and indirect contributions ($107,000) at a total of about $842,000.

Distribs aren't being left behind. Together, Young's Market and Odom-Southern Holdings have already donated $400,000. Then on June 16 Young's donated another $230,000 and Odom-Southern donated another $234,000. The grand total of their donations comes out to $864,000.

Meanwhile, the anti-privatization group, Keep Our Kids Safe, received another $5,200. You'll recall that the unions are their biggest supporter. The United Food and Commercial Workers Union had already donated $38,000. That brings total contributions to $43,200.

Here's a rundown of the two measures:

I-1100: Costco wants all retailers in the state to have the option to purchase alcohol directly from manufacturers. Critics say this would give Costco undue influence over the system because of its size. It also wants to allow volume discounts but ban state mandated price mark-ups. It would close all state-owned liquor stores and allow all beer and wine retail licenses to start selling spirits, which includes c-stores and grocery outlets. New establishments can apply for a license to sell beer, wine and spirits. The annual fee would be $1,000 and a one-time application would be $2,000, reports the Seattle Pi. Private retail sales would begin June 1, 2011, while state-run stores would have to close by December 31, 2011. And finally, I-1100 would keep the current tax on spirits and leave it up to the legislature to change if they deem necessary.

I-1105: Meanwhile, the Young's and Odom-Southern backed I-1105 would privatize Washington's alcohol system, but would require retailers to purchase spirits from distributors. It would also give the state a degree of price control. But it would allow quantity discounts for spirits. The measure directs the Liquor Control Board to set a "reasonable annual license fee" and also tells the agency to recommend a new tax rate to the legislature by January 1, 2011. Private businesses could begin selling spirits on November 1, 2011, and all state-owned stores would have to close by 2012.


IMPORTERS OPPOSE CARE ACT

Meanwhile, and not surprisingly, the National Association of Beverage Importers came out against HR 5034 as it says states "could intentionally discriminate against out-of-state producers" as long as it connected "to the broad purposes of alcohol regulation contained in the proposed Care Act. As a result, importers would have little effective means to seek fair treatment in the courts."

Until tomorrow, Harry

"Ability is a poor man's wealth."
-John Wooden

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