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Third Party Providers and the Future of Wine Laws in America

This summer I had the absolute pleasure of working with the legal and regulatory compliance department of Lot18, a dynamic and rising flash sale site for premium wines and epicurean products. Lot18 is a budding company stationed in New York City and embraces an enthusiastic—and highly admirable—dedication to customer service and the finest level of hospitality for its members. With this incredible opportunity came a true taste for wine law: I researched and perused all of the federal statutes relating to alcohol beverages—not just wine—and even learned a good portion of state regulations. But aside from reviewing regulations like the F.A.A., the I.R.C., and the 27 C.F.R., I was again met with a pattern that echos throughout the heart of the American wine industry: the antiquated laws regulating alcohol beverages in the States.

Lot18 Sign outside the Lot18 Office in midtown Manhattan.

The business structure of companies like Lot18—companies that do not formally sell alcohol beverages to customers, or ever obtain title to said alcohol beverages, but instead offer wineries and distilleries marketing services through access to their highly-defined customer basis via virtual mediums—is completely twenty-first century. Lot18 is considered a Third Party Provider (TPP) meaning that the company never sells, ships, owns, or obtains title to any of the products it sells; all products are shipped directly from the producer or manufacturer of the product to customers through legally-compliant, third-party shippers. Some alcohol products cannot even be shipped to particular states, as said states do not allow consumers to receive alcohol beverages directly from producers (and the Lot18 site reflects this). This type of business model is innovative and indicative of how quickly the Internet and virtual sales sites have emerged and flourished over the last decade; it is absolutely brilliant and an impressive way to connect a very specific and discerning customer profile with highly-esteemed producers.

The laws in this area, however, are not twenty-first century. State and federal laws do not outline the powers and the restrictions of TPPs—at least, not directly. These laws consider a more, arguably, twentieth-century (or perhaps even more backdated) business model of a traditional three-tier system sans TPP. The laws regulate businesses with licenses or permits, i.e. retailers, wholesalers, and producers. At no point are Internet sales, or providers of professional services via virtual means, considered.

It seems that with the rise of Internet flash sale sites, along with what is yet to come, the laws must eventually change to accommodate this alteration. The question is, however, when will this occur? And, until then, what are the legal rights and obligations of TPPs? There are numerous legal professionals examining this issue right now, but there is yet to be a definite answer. Hopefully, within time, the permissions and restrictions of TPPs will be more distinct and, perhaps, even legislated.

Thank you everyone at Lot18 for a fantastic professional journey this summer; I could not possibly be more grateful to your assistance, time, questions, and energy. Special thanks is owed to Ed Lynch and Ed Brown for their continued guidance. Congratulations on the sprouting of what is truly a commendable venture and one that I am certain will continue to grow remarkably over time.

For more information on wine or alcohol law, third party providers, or direct shipping, 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.

Lindsey A. Zahn

About 

Lindsey is the founder and author of On Reserve: A Wine Law Blog. She is an alcohol beverage and food attorney and is admitted to the New York State Bar.

{ 7 comments… add one }
  • Bob Davis August 22, 2011, 12:07 PM

    The only way that these laws will ever be updated to the 2st (or even 20th) century is for consumers to start dropping $$ in state politicians’ pockets. How do you think we get the laws we already have? The other side pays for them.

  • Lindsey A. Zahn Lindsey A. Zahn August 22, 2011, 1:09 PM

    Bob,

    Yes, I understand this; I am not suggesting otherwise.

  • Tom Wark August 22, 2011, 5:35 PM

    What I’m interested in exploring is if the various states have any police power over companies like Lot 18 considering they do not have a license and they do not sell wine. Further, I wonder what 44 LiquorMart decision might have to do with the issue of various state govt. regulating sites like Lot 18.

  • Bill Earle August 22, 2011, 5:42 PM

    The headwinds confronting TPP are already being felt. States are viewing TPPs as agents who must be brought into the three tier system. This would require that they be licensed and pay fees, keep records, open for inspection, etc. The rationale for this state attitude is that teenagers are using their mom’s visa to buy $50 wine and wait two weeks for it to arrive. Though that’s not logical it is the legislator’s mindset that you have to come to grips with. If consumers want a different system they will need to be engaged. TPPs fill a niche but they will have to get in synch with state laws to legally survive or end up as an idea that couldn’t survive the political heat……..is it getting hotter in here???

  • Cary Greene August 22, 2011, 5:44 PM

    Lindsey,

    Lot 18 is a definite innovator, and I’m glad to hear you had such a great summer working with the team there.

    The wine market certainly has needs that the underlying alcohol beverage regulatory system does not consider. It’s one of our goals at WineAmerica to bring the law closer to the market, but it’s no easy task. Successful grassroots lobbying efforts require buy-in from thousands of wineries and related businesses. It’s a long slow battle, and I hope you can continue to help us in the effort.

    As you’ve astutely noted in your post, the fight over direct shipping has been raging for more than two decades, and there’s still a lot to be done. Simpler, more straightforward state rules, that recognize what the market actually looks like would help thousands of small businesses.

    By the way, here’s a link to a posting from our blog looking at how wineries can work with TPPs within the existing legal framework: http://wineamerica.blogspot.com/2011/08/protecting-your-business-in-evolving.html.

  • Tom Wark August 22, 2011, 7:18 PM

    Bill,

    I’ve yet to see any evidence that legislators have gotten involved much at all with Third Party Marketers.

    Nor have I seen an argument that overcomes the idea that third party marketers are much more than advertising mediums.

    Tom…

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