Ruling Hits State Wine Shippers

A federal appeals court dealt a blow to California’s wine industry Thursday, ruling that New York may ban out-of-state vintners from selling directly to residents of the Empire State.

The ruling reversed a lower court decision and blocked the most direct avenue for California, the nation’s largest wine producer, to tap into the second-biggest U.S. wine market.

“It is a big disappointment,” said Jeremy Benson, executive director of Free the Grapes, a wine industry and consumer coalition advocating direct shipping.

Laws in 24 states force out-of-state wineries to sell their products through distributors.

The laws are an outgrowth of the 21st Amendment, which repealed Prohibition. The amendment gives states the right to regulate the sale of alcoholic beverages.

In Thursday’s ruling, the U.S. Court of Appeals for the 2nd Circuit said that New York could require that wineries have a physical presence, such as a store, in the state before being allowed to ship wine to consumers.

“New York’s regulatory scheme allows licensed wineries, whether in-state or out-of-state, direct access to a market of sophisticated oenophiles,” U.S. Circuit Judge Richard S. Wesley wrote in the 28-page ruling, referring to wineries’ right to open stores in the state. “The scheme does so in a nondiscriminatory manner.”

Wine and Spirits Wholesalers of America lauded the decision, saying in a statement that it was a defeat for a wine industry lobby intent on “alcohol anarchy.”

However, the ruling was in conflict with other appeals court decisions in similar suits in other states, setting up a battle that legal experts say could be decided by the U.S. Supreme Court.

Direct shipping has become an important issue for the about 900 wineries in California. Benson said they still may get their chance, because New York Gov. George E. Pataki has proposed legalizing out-of-state direct wine shipments.

A consolidation in the distribution business has made it harder for smaller wineries to place their bottles on retail shelves and restaurant wine lists.

The top 10 distributors now control 60% of the market, up from 33% just a decade ago, said Vic Motto, who heads consulting firm MKF Group in St. Helena, Calif.

“There are fewer than half the number of distributors that there were 10 years ago and there are only two or three now in each major market,” Motto said. “At the same time the number of wineries in the U.S. has increased from 2,000 to 3,000.”

Motto said that has created an odd situation where a growing number of wineries are trying to reach a growing number of consumers through a shrinking pool of distributors.

Wine industry executives say that the ability to directly ship wine to consumers is becoming an increasingly important tool to get through that bottleneck, especially for the smaller wineries that make up just a small fraction of a distributor’s business.

Moreover, direct shipment allows the smaller wineries to bypass the multi-tier distribution system and hold on to profits that otherwise would have been made by the wholesalers.

Hundreds of California wineries have made sales through direct shipping an important part of their business strategy through wine clubs and websites.

Bloomberg News was used in compiling this report.