Results from Federal District Court in Kentucky

Lee Pender | December 27, 2006

It was pretty good, though it could have been better.

Yesterday, Judge Charles R. Simpson III reaffirmed his analysis of last August in the Cherry Hill case, finding that on-site only requirements in the direct shipment law effective on January 1 are unenforceable because they unduly burden interstate commerce relative to in-state direct shipments. The ruling, which has direct effect only in Kentucky, deprives anti-commerce elements of a frequently employed rear guard tactic against Granholm –the introduction of illusory equality by requiring both in-state and out-of-state wineries to sell only from orders placed by the buyer in person at the winery site.

Other aspects of the new law remain in place, including the right of out-of-state wineries to hold “small farm winery” licenses. The winery and consumer plaintiffs had also challenged two restrictions on small farm winery licensees, (1) that the license is available only to wineries producing no more than 50,000 gallons annually [~21,000 cases], and (2) that wineries may ship no more than two cases in a single order. While there is no doubt that many out-of-state wineries and no Kentucky wineries are affected by the volume cap, or that small order requirements are more onerous for longer distance deliveries, the court decided both restrictions were constitutionally permissible because the inequities arose from “mere geographic happenstance.” Where one draws the line between geographic happenstance and an impermissibly protectionist system remains to be decided another day. (The same opinion also upholds a peculiar part of the new law that creates state funding for zero-markup distribution of small farm wines by distributors, if any, who choose to participate, on the grounds that it will be available to all farm wineries, wherever located.)

The pro-commerce part of the opinion rests on the court’s finding “that each winery’s products are distinctive,” a principle of potentially far-reaching significance. If wholesalers and their governmental allies cannot impose on-site requirements, they are left with either accepting direct shipment or achieving the politically challenging objective of cutting it off for their own state’s wineries. As Judge Simpson put it,

“The principal problem faced by the defendants herein is that the legislature chose to permit direct shipment of alcohol. The choice to do so has thus taken us down the current road.”

Where the current road leads will be the subject of appeals in the 6th Circuit. The state’s and wholesalers’ appeal from the August ruling has been parked in the Court of Appeals, pending today’s judgment. Their appeal from both will doubtless now go forward. At this point, it is unknown whether the plaintiffs will cross-appeal on the volume cap and maximum order quantity issues.

Update: An unanswered practical question is how the two-case limit will be applied in the absence of an on-site requirement. Unless the Court of Appeals stays it, the December 26th order simply snips the in-person ordering requirement out of the statute. It makes no change in the two parts of the statute that provide, “The amount of wine shipped is limited to two (2) cases per customer per visit.” Even if the state must substitute “order” for “visit” in practice, the opinion seems to leave room for banning cost-saving measures like consolidating orders for shipment.