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Matthew Mann
 
April 16, 2013 | Matthew Mann

Observations on the New York SLA Marketplace Ruling

Answers…Questions
The declaratory ruling issued by the New York State Liquor Authority (SLA) this week in response to a request by ShipCompliant for approval of their Marketplace Platform has seemingly spawned as many new questions as it has answered.  I have read and re-read both the ShipCompliant petition and the SLA ruling, as well as watching the entire (all 3½ hours of it!) SLA Board Meeting where a discussion about the petition ensued.  Having done so, I have a few observations about the current and future standing of marketplaces in New York and beyond.

As those of you interested in the future of internet wine marketing know, marketplaces are a growing opportunity for licensed wine suppliers to reach significant new audiences by tapping into the existing customer base of established lifestyle retailers and media companies.  They are a recent development and still in their infancy as a marketing model.  As such, the rules surrounding them are also evolving, as the model and the technology enabling it is often ahead of the regulatory curve.

California has been the leader in crafting guidelines for the operation of marketplaces by unlicensed third party marketers, issuing an influential advisory in late 2011 that has served as the regulatory framework for the development of marketplace programs.  The SLA’s ruling will surely join it to play an important role in how those regulations develop.  The initial industry reaction to the ruling appears to be one of no small amount of alarm, and I have read comments suggesting such marketplaces will be shut down.  I believe such comments are an over-reaction in light of the limited scope of what the SLA has done:

Limited Application.  First and foremost, the SLA’s ruling is in response to a single marketplace program, rather than all marketplace programs, although it certainly provides insight into the SLA’s thinking.

Producer Direct Excluded.  Second, the SLA expressly excluded Producer Direct marketplace models, wherein a producer ships directly to a New York consumer under the authority of a New York direct shipper license.  Instead, it focused exclusively on the 3-tier model, considerably more complex involving multiple license holders instead of just one.

Disconnect Between Practice and Design.  Finally, the SLA’s determination was in large part fueled by the fact the Marketplace Platform was not operated as had been represented in the petition, and this disconnect between actual practice and design was an underlying consideration for much of the ruling’s language.

What do we know?
What is clear is under current New York law it is not permissible to operate a marketplace wherein the licensed seller is passive in the process, meaning they have little control over decision-making and assume little risk of loss.  This control extends to the licensed seller being responsible for performing usual retail functions such as product selection, pricing, control of funds, and the amount of profit they will reap.  Also, any unlicensed third party compensation cannot constitute a substantial portion of the proceeds of the sale.  Finally, flat fee compensation models to the license holder are disfavored as an indicator of seller passivity resulting in illegal availing of the seller’s license privileges.

What don’t we know?
What is less clear is the extent to which the SLA intends to enforce the guidance offered by its own Office of Counsel regarding license holder use of third party marketing services.  Counsel opinion allows advertisement on a third party marketer’s website, but not order taking on the site, and requires a flat fee compensation schedule to the marketer not contingent on the number of sales or the amount sold.  While stating license holders can take comfort in relying upon the opinion, meaning they do not risk violations by staying within them, the SLA also expressly did not formally adopt them.  I take this to mean that not following them will not necessarily constitute a violation.

The Big Picture
While the ruling leaves cloudy the details of how Producer Direct marketplaces will operate in New York in the future, I do not believe this model is in danger.  It is a simpler model, with many of the key indicators of availing found in the 3-tier model either absent or more directly in the control of the licensed seller.  Furthermore, the SLA made clear both in its ruling and at the Board Meeting that it is cognizant of, and even receptive to, the changing technology of the internet.  That they excluded the Producer Direct model from the Ruling and intend to hold public meetings to explore issues surrounding marketplaces is further evidence of their intention to accommodate the future of marketplace models, but to do so in a manner that comports with New York’s alcoholic beverage laws.  From that standpoint, this ruling is a positive statement and recognition that such effective marketing solutions have a future in the Empire State and elsewhere.

Time Posted: Apr 16, 2013 at 7:52 AM
Matthew Mann
 
December 27, 2012 | Matthew Mann

Happy New Year! Time to Re-evaluate Your DTC Strategy

The growing DTC market
Most wine industry folks know there has been a continuous increase in per capita consumption over the last decade.  They are also likely aware that direct-to-consumer (DTC) shipments of wine have grown as well, although they may not know by just how much.  DTC shipments topped $222 million for the month of October 2012, a 13% increase over the same period in 2011 (Wines & Vines Wine Industry Metrics, November 15, 2012).  They increased again in November 2012, posting a jump to $224 million, a 12% increase over the same period in 2011.  Overall, the last 12-month period has seen a 9% rise from $1,327 in November 2011 to $1,442 in November 2012.  (Wines & Vine Wine Industry Metrics, December 14, 2012).

What’s your DTC strategy?
These are tremendous increases, reflecting the impact of Granholm and as importantly, the influence of the internet and social media on the DTC sales and marketing channel.  With this dramatic growth occurring all around us, when was the last time you looked at your DTC licensing strategy?  Often, decisions about where to ship are made ad hoc, driven by customer requests rather than an analysis of costs and potential gains a considered DTC licensing strategy demands.

Many states, although certainly not all, require renewal of licenses in January or have licensing periods that mirror the calendar year regardless of when the license application is filed.  This makes the New Year the perfect time to review your DTC program, its goals, and any prospective changes.  When performing this review, stop and ask yourself, “Why am I not shipping to every state that will let me?”  Often, wineries will just assume that shipping “everywhere” is too expensive, too hard, or just plain old too much work.  If for no other reason than simple due diligence, that approach should be reconsidered and an objective look taken at what is required to ship to as many states as possible.

Anywhere, everywhere…legally, of course!
Many wineries might be surprised with the feasibility of taking the “anywhere, everywhere” approach to DTC.  Rather than approaching the DTC strategic analysis from a “least to most” perspective, starting with a few states and selectively increasing them as demands from customers increase; instead take the opposite approach and start with all legal states and adjust down from there, if necessary.

Some may think the “anywhere, everywhere” approach is foolhardy, as the perception is some states offer such low prospects for any type of volume sufficient to justify the cost, but that is not necessarily the case.  Cost of entry should not intimidate a winery without first exploring the “anywhere, everywhere” strategy.  When compared with the cost of accessing traditional distribution channels, it’s actually a pretty good value.

  • Best states for the “Anywhere, Everywhere” winery:  38 total
  • Any and every state allowing online DTC shipments
  • Total cost = approximately $7,908
  • Market size = 88% of U.S. consumption

Don’t let the complexity of filling out the applications overwhelm you.  Most states ask for the same type of information on your winery.  Once you’ve collected it for one state, it will be readily available for all of the others.  And report filing is not as burdensome as some suggest, as many states now permit annual filing for wineries whose sales volume to the state is low.  If you’re filing monthly, it means you’re selling a lot of wine.  A nice problem to have!

Why would I want to do that?
If viewed objectively, an “all-in” strategy may not be a bad idea.  Casting a wide net catches more fish; more consumers equal more potential buyers.  There is less competition from wineries unwilling to access small consumption states, making your wine more desirable to consumers in those states.  Finally, and probably most importantly to the bottom line, many third party marketplace operators require participating wineries to be available in a minimum number of states.  The more states available, the more desirable your winery becomes to such marketplaces.  And the more wine you’ll sell!

Time Posted: Dec 27, 2012 at 9:11 AM
Matthew Mann
 
November 16, 2012 | Matthew Mann

Taking Control in the Unlicensed Marketplace

The Marketplace
A wonderful blog post by Sheri Hebbeln on the WineDirect website this week discussed new marketing models for wine dramatically impacting the wine industry in the coming years.  One particularly exciting model is the marketplace, wherein a collection of wineries offer their products under the banner of a well-known and respected third party marketer.  The marketer can be a licensed wine retailer and operate under their own license or, it can be unlicensed, providing a platform for the licensed winery to market and sell the wine under their own licenses.  

Amazon is probably the most prominent current example of an unlicensed marketer, but there are many others, with more on the way.  Unlicensed marketers can be publishers of magazines, large retailers offering lifestyle products appealing to a demographic with similar traits to the wine industry, or some other media or online business.  The key is the marketer has an established customer base that trusts their brand.  By coming together in a marketplace under the banner of the marketer, participating wineries can access this loyal customer base, ultimately introducing a whole new group of prospective customers to the winery.

You Scared Me at “Unlicensed”
Marketplaces are a great concept and a winning proposition for everyone involved – winery, marketer and consumer.  Still, confusion surrounding marketplaces continues, particularly those operated by unlicensed marketers.  Since unlicensed marketplaces require the privileges offered by the winery's license, many wineries are naturally concerned that they meet regulatory approval.  Years of uncertainty and conflicting messages from regulators has frightened some wineries considering working with an unlicensed marketer.  That’s unfortunate, as the rules for working with an unlicensed marketer are now clearer than ever.  It's a simple matter of knowing the rules and where the regulators draw the lines.

You Hold the Controls!
The underlying consideration for every unlicensed marketplace program is really quite simple:  control.  A license holder is the only party authorized to buy and sell wine to a consumer, so the licensed winery must control the offer and sale of the wine.  The winery holds the controls, so long as they are willing to use them.  Once this is understood, determining when an unlicensed marketing program strays into illegitimate territory becomes much easier.  But what does control mean?  Here are some guiding principles:

  • Product offer and price:  the winery owns the product, therefore, only the winery can determine which of its products to offer in the marketplace and the price at which that product will be sold to the consumer.
  • Offer acceptance:  a basic of contract law is offer and acceptance - the consumer makes an offer to purchase the wine, the winery makes the decision to accept or reject that offer.  No sale is final without it and since only a license holder is authorized to make the sale, only the licensed winery can accept the offer.
  • Transparency:  is it clear to the consumer from whom they are purchasing the wine?  In a crowded marketplace, with licensed and unlicensed players, it is essential the consumer know from whom they are buying.  The marketplace website and sales receipts should clearly indicate the winery is the seller of record to the consumer.
  • Funds management:  the winery is the owner of the wine and the only party authorized to sell it, so any payment received from the consumer must be in the control of the winery.  Admittedly, this can be something of a complex area involving questions regarding –

              - who processes the credit card payment;

              - where the money is deposited once the credit card is settled; and

              - how each of the parties to the transaction ultimately get paid.

The short answer is the unlicensed marketer may collect and process the payment information from the consumer on behalf of the winery however, all of the funds received must be deposited to an account held in the winery’s name and, the winery must provide the instructions for who gets paid and how much.  Any funds remaining after the parties, and all taxes, have been paid belong to the winery.  Those terms can be worked out in advance in the marketplace agreement between the winery and the marketer.

  • Fulfillment:  delivery of the product is another hallmark of a sales transaction.  Only the winery can make decisions on fulfilling the order from the consumer.  Shipments will flow from the winery's designated fulfillment warehouse on instructions from the winery.

Operate with Confidence, Take Control
Even a high-level look at these principles makes clear the common theme of control by the licensed winery runs throughout the offer and sale of the wine in the marketplace.  There is plenty of nuance in how these guidelines operate and it is a good business practice to have competent legal counsel with knowledge of marketplace models review any marketplace agreement before signing, just as you would any other important legal document affecting your license.  Nonetheless, marketplaces will become more and more prevalent as an effective way to market your wines.  Any winery wishing to increase DTC sales and enhance brand awareness would do well to learn more about marketplaces so they can participate in this growing sales channel successfully and with confidence.  Take control!

Time Posted: Nov 16, 2012 at 8:00 AM
Matthew Mann
 
September 20, 2012 | Matthew Mann

Privatization – Oregon Goes Its Own Way

An interesting series of articles recently ran in the online edition of the Oregonian newspaper, www.Oregonlive.com, discussing how the issue of privatization has caught life in Oregon after the recent transition to private sales of distilled spirits in Washington state.

Of particular interest to me are the reader comments that follow the articles, as they give more insight into the concerns, attitudes, and deeply held moral and economic philosophies of the general public driving the debate as the political battle moves forward.  Despite the divergent motivations on which the parties’ positions hinge, in part arising from the historical context surrounding the regulation alcohol after Prohibition, I see some common ground in an area fraught with contention.

Historical Context
I’ll spare you the history lesson on the 21st Amendment.  You already know that stuff.  Suffice it to say, coming out of Prohibition and the real and imagined “evils” of drink that led to it, most states’ laws regulating alcohol were designed to place restraints, of varying restrictiveness, on the production, sale and distribution of the product.  The manner and degree covered a broad range based on local customs, morals, political will, and as reaction to the public health impact alcohol had on local society while legal.  The common thread, and the core of the 21st Amendment, was that the type of regulatory system chosen, whether control or licensed, should be decided at the state and local level based on the desired goals of the local populace.

Uniquely Oregon
Oregon is rightfully proud of its widely-recognized fine wine reputation and its increasingly successful craft brewery and distillery industries.  When reading through the reader comments nearly all agree, either explicitly or implicitly, that how to deal with privatization requires is a distinctly Oregon solution.  It is of little consequence that the privatized market of California to the south, and transition model of Washington to the north, offered distinctly different approaches to modifying the Oregon control system to bring it into the 21st century.  This is a local issue requiring a local response and Oregonians are not interested in emulating the open California model or repeating the perceived mistakes made by Washington.  The articles and comments make clear Oregonian’s view their system as distinguishable from their neighbors.  Simply forcing either model onto the Oregon system will not properly address the unique needs of Oregon.

An example of the unique nature of the issue is the status of workers at state-controlled liquor stores.  It was a primary concern in Washington but seems less so in Oregon due to a significant difference that could dramatically impact the ultimate resolution.  Unlike Washington, Oregon retail liquor stores are privately owned by “state agents”, who operate within narrowly defined rules and purchase spirits directly from the state distribution system.  While Oregon Liquor Control Commission (OLCC) employees are state workers, retail store employees are not, and are not represented by the public employees’ union or participate in the state pension system.  In Washington, a large state employee constituency was highly impacted by the result of privatization and mobilized to fight it.  In Oregon, privatization could potentially affect Oregon liquor store employees, but does not directly impact the state payroll and pension systems.  The result is a diminished employee opposition to privatization in Oregon and the decision-making process will occur in an environment much different than Washington’s.

Archaic, but Effective?
There is also common ground in acknowledging the 80 year old laws governing alcohol are archaic.  Even supporters of the status quo admit times have changed since the end of Prohibition.  Both agree that it’s time to review and modernize the law.

Where the sides come apart is whether the laws are still effective, and the answer for each depends on what the laws are designed to address.  Control supporters argue the laws have, and still do, effectively address issues of criminal infiltration, ameliorated or fraudulent product, public health and drunkenness, and taxation.  Privatization advocates claim such issues, once of importance, are no longer a serious problem.  They argue the laws are based on outdated moral codes, impinge on individual freedom and, particularly regarding taxation, could be better addressed by loosening the restrictions and creating market efficiencies.  They seek broader and deeper reform, directed not just at the laws themselves, but the fundamental purpose and mission of the OLCC.

Control supporters aren’t looking for a full-scale reform of the system, preferring a measured review of each regulation and reforming those clearly out-of-date.  Of note they point to a test program wherein select grocers currently selling only beer & wine could also sell distilled spirits in a segregated area of the store.  Privatization advocates will likely argue the program doesn’t go far enough, as grocers are still required to purchase the spirits from the state-controlled distribution system.

Interesting Viewing
In a world of complex issues of great import, alcoholic beverage regulations are pretty inconsequential.  Still, Oregon will be interesting to watch.  Whether imbiber or teetotaler, access to and use of alcohol touches on personal social perspectives beyond the mere issues themselves.  They are contentious because they reflect on deeply held views on moral, social and economic philosophy. As with all things, change is inevitable.  That both sides recognize this basic truth is the primary common ground necessary for a resolution of the competing ideologies.  Somewhere in between, they will likely find the answer that is the best fit for Oregon.

Time Posted: Sep 20, 2012 at 10:34 PM
Matthew Mann
 
July 5, 2012 | Matthew Mann

Finding Your Way in the .Gov Universe

What I’m about to say will likely seem obvious to many but I’ll say it anyway…if you want to know the rules for selling wine in a particular state, start at the liquor authority website.  Over my years as a lawyer and compliance specialist, I’m frequently asked questions the answer to which is readily available on the state website.  One of the great developments of the internet age is the ease of access to information on a multitude of topics, including the laws on making and selling wine.

The ABCs of ABCs
I’ve explored every state and federal alcohol agency website and I’ll be the first to tell you they are all over the map in terms of the quality.  Most are actually quite good.  They want you to easily find what you’re looking for so you don’t bother them with a phone call.  The Texas ABC site is a great example.  Informative and easy to navigate with answers to just about anything you’d want to know.  California’s ABC site is pretty user friendly as well.  Others leave something to be desired.  Often this is the result of these agencies being divisions within a larger department and getting buried within the larger website, whereas Texas and California are departments in and of themselves.

Navigation can vary.  Most states use simple panel or tab navigation with headers such as “Forms”, “Taxes”, or “Regulations”.  They are intuitive and take you right to where you want to be.  The worst seem to view visitor access as some kind of game.  For these sites finding what you need is something like “hide and seek”, with the hider often winning.  When all else fails most sites have “Search” boxes to look for key terms.  I’ve had modest success using this method and sometimes you get lucky.

At the best sites you can find answers to questions ranging from getting started and licensing to advertising and trade practices, often available with just a few targeted clicks.  Best of all, and maybe most importantly, you can find forms.  Pretty much anything you need to stay current with the state.

  • License and permit applications forms
  • Reporting and taxes
  • Changes to your business

You can also find meaningful information on your license privileges; not only through the governing statutes and regulations, but through bulletins and agency advisories providing interpretations and policy positions.

Getting There From Here
Finding agency sites is as easy as a web search, but for one-stop shopping you can’t beat the Wine Institute site.  Not only will you find links to every state liquor agency, but also links to most state revenue departments.  This is extremely helpful as many of the state tax forms are located with the revenue department rather than the liquor agency.  A great resource for tax sites and rates is the Federation of Tax Administrators.

Don’t forget federal law.  For whatever other complaints you may have about the TTB, its website shouldn’t be one of them.  Whether you’re an importer, wholesaler, or winery, you can find answers to almost any question.  They have a specialized Wine section, including information on labeling, permitting, taxes, trade practices and advertising.  They even address questions about alternating proprietorships and custom crush.

DIY
If you need help, there are many professionals with practical experience dealing with regulatory agencies.  Wine Compliance Alliance provides not only compliance services, but will train and educate your staff to professionally handle your compliance needs.  Still, “do-it-yourself” is always a good way to get started.  There is a wealth of information on the internet, you’ll be surprised just how much you can discover and learn just by looking.
 

Time Posted: Jul 5, 2012 at 10:03 PM
Matthew Mann
 
June 19, 2012 | Matthew Mann

Is Privatization Coming to a State Near You?

There's been a lot of buzz in the alcoholic beverage industry this year about privatization; the movement of the sale and distribution of wine, beer and distilled spirits, in varying combinations, from the ownership of the state government to the hands of private enterprise.  The buzz started last November when Washington state voters passed an initiative to privatize the state's monopoly on the sale of spirits through state-owned stores to private ownership.  It effectively removed the last vestiges of the state’s participation in the sale and distribution of spirits, although state ownership or not, alcohol will continue to be a heavily regulated, and taxed, product in the Evergreen state.

Complete or Partial Control
With the transition of Washington state, there are currently 18 states exercising some form of state "control".  As is the entire system of alcohol distribution in this country, these "control" states are a product of the 21st Amendment, wherein the state regulatory agency is an active participant in the wholesale and/or retail tiers for the sale and distribution of alcohol.  The degree of control can vary from total control over both tiers and all classes of alcohol to partial control over a single tier or select classes.

States such as Pennsylvania, New Hampshire, and Utah are examples of states exercising complete control of distribution of all forms of alcohol.  Oregon, Virginia, and Idaho are just a few of the states exercising partial control, controlling only certain classes of alcohol such as spirits, or only certain segments of the market such as retail sales.

The “Control” Conversation
Regardless of the amount of control exercised, the results of the Washington election caused significant conversation in many of the control states about the future of state control:

  • Is it an appropriate exercise of state power in a capitalist society,
  • Would privatizing the system benefit the state and the public, and
  • Revenue, tax and public health implications.

Champions of the Washington initiative, including private distributors and retailers, argue it will bring more variety, accessibility, and ultimately, lower prices through competition and market efficiencies.  Proponents in Pennsylvania and other states will likely make similar arguments.  In the past six months Pennsylvania, one of the largest consumption states as well as one of the most tightly controlled, has been debating a bill for the privatization of their system.  This follows long-held complaints about state inefficiency and disregard for the demands of the buying public.  Furthermore, attempts by the state to modernize and make the system more responsive have shown only mixed success.  The governor supports the privatization effort but the prospects for passage remain uncertain, as powerful opponents of privatization work to stymie the bill.

Opponents in Pennsylvania express the belief the state is the best vehicle to control distribution for public health and revenue reasons by combating alcohol abuse, preventing access by minors and profit from state sales.  They point out the state derives substantial revenue from the sale of alcohol and are concerned about its loss in tight budgetary times (the state website cites revenue of over $1.9 billion in FY 2010-11).  Finally, they are worried about the loss of thousands of state worker's jobs, pushed no doubt by the state employees groups seeking to protect their ranks.  The arguments were similar in Washington and probably will be heard in most control states debating the issue.

What will be the result of this conversation about privatization?
Time will tell as the competitive nature of market dynamics takes place over the next few years.  As with any private industry, some areas will benefit and others will not.  Variety can be squeezed by supplier's market clout, accessibility will in large part be determined by location, with high population-density having greater access, while low population areas could be left without access at all if no private company chooses to service the area.  Prices, well, they can be driven by supply and demand, but also by taxes, which remains under the control of the state.  As part of the privatization push, Washington state taxes and surtaxes amount to about 30% of the price, so don't expect prices to come down soon.

Privatization is the current buzz, but it seems unlikely to me that it will sweep the nation.  Alcohol control is an emotionally-charged, highly localized issue that defies national trends.  Still, it is a conversation that needs to take place.  A system not predicated on a dynamic market is subject to becoming stale, entrenched and moribund.  Many of the current complaints about state control claim the system is locked in the past, non-responsive to cultural and technological changes that have transformed the country since the end of Prohibition.  Whether the choice is to privatize or continue state control, the conversation forces the state to re-examine its practices, and respond to the needs of the consumer or face diminishing support from its constituency.  It's hard to see the downside in that.

Time Posted: Jun 19, 2012 at 7:56 AM
Matthew Mann
 
February 16, 2012 | Matthew Mann

Expand Your Domain: Protecting your company from those who want to use, or abuse, your good name

Your Space
The word “domain” has several definitions depending upon the context of its use. The common thread is however, it represents a range of territory or scope of characteristics over which one maintains ownership. In the internet world, the space your company occupies is your domain, your cyberspace territory. It represents that space on the web you own where you can present your company message and products. Whatever you name this space is your domain name.

Most companies give their domain a name that represents what they do or identifies them to the public. The most obvious is to give the domain the same name as the company; WineDirect.com being a perfect example.  It says who we are and what we do. If the preferred name is unavailable, the company may invent variations using hyphens, abbreviations, similar terms or creative spellings. “Vin” is a common alternative to “Wine”, for example. Necessity is the mother of invention, after all.

In addition to the name selected, domain names consist of the top-level domain; familiar as suffixes such as .com, .gov, .org, .biz and so on. Between the variations in the name selected and the variety of top-level domains, a multitude of combinations of potential domain names is available, as well as many opportunities for others to exploit or trade upon it.

Threats to Your Space
So what happens when a company acquires its preferred name? Or even its second choice? Often they stop there. They feel comfortable they’ve secured their domain space on the web. They’ve got their own registered .com and no one else can use it. However, this sense of security is really an illusion. And it’s a mistake.

A recent presentation by David P. Branfman, Esq., "HOT Trademark & Copyright Issues For Non-IP Lawyers", discussed threats to domain names and the most expedient and inexpensive way to protect your space. He points out that with the explosion of the internet many companies spend significant dollars securing the rights to that one domain name they covet most, yet leave themselves vulnerable to “cybersquatters” who trade off their good name or worse, disparage it.

Mr. Branfman notes that if you own only the one domain name associated with your business you are leaving yourself exposed to other parties who acquire the rights to any or all of the domain name variations still available. A competitor could acquire a variation on the spelling of your name, or an alternative top-level domain with your exact name, creating confusion for your customers and potentially stealing away some of your business. Worse still, an unhappy customer, a disgruntled former employee or just someone with an axe to grind could snap up a similar name strictly for the purpose of attacking your reputation online. They could even create a “nasty” variation of your domain name for such purposes.

Defending Your Space
Branfman’s solution is easy and inexpensive. Domain name registrations are cheap, usually in the $10-$15 range per domain through a registration service. Once you’ve landed on a name you like, protect yourself by spending a little extra money by buying up the rights to the most common variations, including the possible “nasty” names that make you look bad or confuse your customer. Although you won’t be actively using these domain names, no one else will either. It’s inexpensive insurance against someone exploiting or sullying your good name and reputation. Expand, and thereby protect, your domain. It’s cheaper than a lawyer!

The information conveyed in this blog post is made available for general informational purposes only and none of the information provided should be considered to constitute legal advice.
 

Matthew Mann
 
February 4, 2011 | Matthew Mann

North Dakota, Self-Distribution and Granholm

At first glance it looks good. The North Dakota House passes HB 1340, which amends section 5-01-17 of the North Dakota Century Code to read "A domestic winery may sell to a wholesaler or directly to a retail licensee." Previously this section expressly prevented a domestic winery from "engaging in wholesaling activities". North Dakota is opting in to self-distribution by wineries, allowing them to bypass wholesalers and sell directly to retailers and restaurants.

What’s less obvious is that the domestic winery license is only available to wineries located in North Dakota and that a minimum percentage of grapes used to produce the wine, beginning with 10% and rising over time, must be grown in the state. The license is clearly only available to wineries that are resident to the state of North Dakota, and as such, the privilege to self-distribute is also limited to resident North Dakota wineries. A similar situation was present in the New York law in question in Granholm. That law required a physical presence in the state for wineries to avail themselves of direct shipping privileges to consumers.

The Granholm decision clearly elucidated the doctrine that, while the states retained substantial authority under the 21st Amendment to regulate alcoholic beverages within their borders, laws that discriminate on their face against nonresident wine producers in favor of resident wine producers were an unconstitutional violation of the dormant Commerce Clause and thereby invalid unless the state “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”

North Dakota legislators, either consciously or otherwise, have clearly decided to pass a law that discriminates against nonresident wineries on its face, since nonresident wineries are not eligible for the license based solely on their residence. They are denied access to the trade market in the same manner available to North Dakota winery, much the same way nonresident wineries were denied access to the New York consumer market.

Some might argue that Granholm was a narrowly decided case, focused only on winery direct shipments to consumers, and would not apply here. But the rationale of Granholm is based on access to the marketplace and the state preventing such access on a discriminatory basis. This is unlike cases involving Granholm's applicability to access by other tiers of the 3-tier system, such as the right of nonresident retailers to access out-of-state markets due to discriminatory laws currently being litigated in Wine Country Gift Baskets v. Steen. The North Dakota law is focused exclusively on wineries, the production tier of the 3-tier system and as such, that end of any argument is inapposite.

The real question is "what distinguishes retailers from consumers such that Granholm does not apply?"

One key distinction is that retailers are required to be licensed by the state in order to buy and sell alcoholic beverages. They are readily accountable to the state to collect and remit taxes, file reports of sales activity, and generally obey the laws and regulations against performing prohibited acts in the conduct of their business.

Consumers, on the other hand, are generally unregulated. They are not required to be licensed to purchase alcoholic beverages nor are they required to pay taxes or file reports with the state regarding their purchase of alcoholic beverages. It is true that consumers must also obey certain prohibitions in their use of alcoholic beverages, but these prohibitions are directed at their behavior in their use and consumption of alcoholic beverages, rather than tax collection or the behavior of others.

It is difficult to see distinctions between retailer and consumers that would make analogy to Granholm inapplicable.

Also, it is difficult to see how any legitimate local purpose is served that cannot be served by less discriminatory means. The proponents of the discriminatory laws that were the subject of Granholm presented "two primary justifications for restricting direct shipments from out-of-state wineries: keeping alcohol out of the hands of minors and facilitating tax collection", both of which were ultimately rejected by the Court as insufficient to sustain the discriminatory nature of the laws.

Indeed, in light of the distinguishing characteristics of the two, it appears that the very nature of retailers and consumers weighs considerably in favor of a determination that the legitimate local purpose concerns are lesser, rather than greater, in the sales to retailer context.

North Dakota is to be commended for providing alternative routes to market for struggling wineries shut out of the distribution chain, but Granholm makes clear they must make access to the market fair for both instate and out-of-state producers. This law appears to be a prime opportunity to extend Granholm to fairness in self-distribution privileges.
 

Time Posted: Feb 4, 2011 at 8:58 AM
Matthew Mann
 
August 27, 2010 | Matthew Mann

So, To How Many States Can You Ship?

Much has been written about the benefits of direct shipments to consumers since Granholm opened up many states to legal interstate shipping. There is much worthy conversation about the growth in consumer shipments, the growing dependence of smaller boutique wineries and specialty retailers on direct to consumer sales in markets otherwise unavailable to them, and the greater margins to be realized by selling directly to the ultimate consumer rather than through the wholesale tier.

Despite this conversation and the current debate over the possible impact of HR 5034 on the future of direct shipments, many wineries remain unsure as to which states they can ship. Additionally, many other licensees, specifically retailers and importers, are unaware that they are also able to ship to consumers in a number of states. All of this begs the question…to how many states can you ship? And what are they?

Winery Direct
The actual number can be a topic of some debate because it can vary depending on your approach. It also will depend on how you are licensed, as direct-to-consumer reach is greater for wineries than it is for retailers. Another issue is whether to include only direct-to-consumer states or also states that can be reached through an established 3-tier network. Some resources like to include any state that has a permit system in place, whether feasible or not, as well as states allowing onsite-only shipments or through consumer-obtained permits.

Under the broadest approach, a licensed winery can ship to 45 states including all permit and open states, onsite-only states (DE,NJ,OK,RI,SD), consumer permit states (AL,MT), and 3-tier (MA,NJ). This broad approach has its issues however. Onsite restrictions and consumer permit systems aren’t workable for online sales. Even some of the permit states have restrictions that may be problematic from a practical perspective.

Indiana would be such a state. The Hoosier state’s permit includes a “face-to-face” requirement, meaning the purchaser must make an initial visit to the winery (ostensibly so that identification can be confirmed) before any future shipments can be made to the consumer under the permit.

The only states completely off limits to direct shipments are AR,KY,MD,MA,MS,PA,UT, which are primarily control or partial control states with no practical permit system in place. In fact, it’s a FELONY to ship to either KY or MD without a permit, which isn’t generally available in either state.

Practically speaking, consumer direct shipments by wineries are available to 36 states: AK,AZ,CA,CO,CT,DC,FL,GA,HI,ID,IA,IL,KS,LA,ME,MI,MN,MO,NE,NV,NH,NY,NC,ND,NM, OH,OR,SC,TN,TX,VT,VA,WA,WV,WI,WY.

Retailer Direct
The options for retailers and imported brands are less broad but still available for some very desirable states. There are as many as 15 states (AK,CA,DC,ID,LA,ND,NE,NH,NM,NV, MO,OR,VA,WV,WY) that permit retailers to ship directly to consumers, either with or without a permit, although with some restrictions.

The 3-Tier Alternative
There is a 3-tier alternative to shipping to consumers, even to some states that do not have direct shipment permit systems. Through IBG’s Fulfillment Center, we offer a 3-tier network allowing wineries, retailers, and importers to reach up to 23 states, including MA and NJ, which are otherwise unavailable. Through our network of licensed wholesalers and retailers, licensees can reach consumers in CO,DC,CT,FL,IL,MA,NJ,NY,NC,VA, and WI by shipping within the 3-tier system. Combined with our partner’s direct shipment capabilities to most of the retailer direct states shown above, fully 23 states are available without the need for the licensee to acquire direct shipment permits.

We all know the wine industry has been hit as hard as any by the tough economic times. Maximizing potential market access can be a key to growth and continued viability for many wineries and retailers. The decision to ship to some states is easy because of the size of the market and ease of access. Others may be more difficult. Either way, be aware of your options and keep in mind alternative methods are available. I’ll have more to say on accessing consumer direct markets in future posts.
 

Matthew Mann
 
August 10, 2010 | Matthew Mann

Texas Two-Step: Siesta Village Market Back for a Second Look

It looks like the Texas retailer case of Siesta Village Market is headed back to court for a second look. The plaintiff’s announced they are petitioning for a rehearing of the panel’s decision a few weeks back to refuse to rehear the case en banc before of the entire 5th Circuit Court of Appeals. The plaintiffs understand it is necessary to exhaust their options before the full Court of Appeals before proceeding to the Supreme Court, should it come to that. The plaintiffs cited the following in their petition:

“The panel opinion errs in two areas of exceptional importance. First, the panel opinion contradicts substantive holdings of the Fifth Circuit and the Supreme Court by permitting the State of Texas to discriminate between in-state and out-of-state participants in interstate commerce. Second, the panel opinion applies an analytical method contrary to the method mandated by both Fifth Circuit and Supreme Court precedent in Commerce Clause cases such as this one.”

This case is tremendously important to opening up Texas to DTC for retailers and imported brands as well as setting precedents for retailer direct in other states. It is unclear at this point when the petition will be decided and I’ll continue to track. My guess is, regardless of who wins, if the case is decided by the full 5th Circuit the losing side will appeal. This one looks to be going the distance.