The repeal of Prohibition in 1933 by the 21st Amendment of the United States Constitution not only reinstated the legality of alcohol beverage consumption, but also introduced a new system for alcohol beverage distribution: the three-tier system. The three-tier system creates a platform between alcohol beverage producers, distributors, and retailers. The underlying purpose of this system is to divide the legal responsibilities of the three tiers on the basis of state (and, in some cases, federal) regulation. Specifically, the three-tier system allows only producers to sell to distributors and only distributors to sell to retailers (who can then sell to consumers). Under this system, there are no direct sales between the producers and retailers (or the producers and consumers).
Not all states within the United States embrace the three-tier system of distribution. In fact, several states are called alcohol beverage control states and their state governments maintain a legal monopoly over the distribution tier. Several more states even monopolize both the distribution and retail tiers. These alternative systems are still, essentially, a three-tier system and the difference is simple: a state-operated distributor as opposed to one that is privately operated.
Notwithstanding the above, the majority of states within the United States outlaw the direct sale of alcohol beverages from the producer directly to the retailer (or even the consumer). Wine producers must sell directly to wholesalers who, in turn, sell to restaurants. The results of this system for consumers can be dismaying: higher prices and a limited selection.
Irrespective of the system’s ramifications on restaurant patrons and retail customers, wineries often face an even greater chilling effect: competition. The three-tier system creates and especially competitive environment to those wine producers seeking to sell their products to large-scale wholesalers and distributors; large distributors are prone to larger producers with broader inventories because it is cheaper (and hence more profitable) and more practical for said distributors to market large volume wines than to promote a collection of smaller quantities. In addition, many distributors are faced with external pressures by restaurants, who prefer to purchase wines from distributors with more expansive selections. Essentially, this current model damages the small-scale wine producer, as well as heightens prices for the customer.
Recently, alternatives to the three-tier system of alcohol beverage distribution have been suggested. Some support opening the market to allow wine and other alcohol beverage producers to sell directly to retailers, thus inflicting a free movement of wine, while still allowing wholesalers to capitalize on bulk wine sales from large-scale producers. This proposal would not only lower the cost to consumers, but also expand the variety of wines available in retail sale. Wineries would also be able to market to out-of-state consumers, allowing an expansion of not only market territory but also consumer tastes in wines. (Currently most wines, with some exceptions of course, produced in a state are marketed to the state in which they are produced; the only way in which an individual of one state can experience wine produced in another state is to visit said state.)
However, advocating such change does not come without legal examinations; if the three-tier system is to become antiquated, new federal and state regulations must be imposed. The regulation of wine sales across state lines from producers to retailers or consumers must be considered. More so, the regulation of international sales must also be contemplated.
Recently, the United States House of Representative introduced H.R. 5034 (the Comprehensive Alcohol Regulatory Effectiveness Act (“CARE”)), relative to the regulation of the three-tier alcohol beverage distribution system and reflective of the Supreme Court decision Granholm v. Heald, 544 U.S. 460 (2005). This bill, along with its (currently) precedent case, will be discussed at a later date at On Reserve.
For more information on wine or alcohol law, direct shipping, or three-tier distribution, please contact Lindsey Zahn.
DISCLAIMER: This blog post is for general information purposes only, is not intended to constitute legal advice, and no attorney-client relationship results. Please consult your own attorney for legal advice.