Two small wineries and some prominent lawyers have launched a new front in the wine direct shipping wars, and this one is targeting a law in America’s biggest wine state. They’re asking, should alcohol producers outside of California be able to sell directly to Golden State businesses?

Under current law, California is one of many states that allows out-of-state wineries to ship directly to individual consumers. It is also one of 12 states where consumers can receive shipments from out-of-state retailers (though, in California’s case, only from states that also accept shipments from out-of-state retailers).

What’s less common is that licensed California wineries can ship wines directly to California retailers and restaurants without working through a wholesaler or distributor. This avoids additional logistic costs for wineries and helps them keep prices lower for consumers.

This past November, two wine producers—Dwinell Country Wines (aka Dwinell Country Ales) in Washington state and Buckel Family Wine in Colorado—filed a lawsuit challenging California’s law banning out-of-state producers from selling wines directly to retailers and restaurants. The suit was filed with the U.S. District Court for the Central District of California (Western Division), and, combined with similar cases across the country, it could make significant waves in the wine industry.

“Since most of these cases are still pending, it is hard to predict what their ultimate significance will be—how much any laws will actually change,” Alex Koral, regulatory general counsel for shipping compliance company Sovos ShipCompliant, told Wine Spectator via email. “But they certainly have the potential to dramatically reform how alcohol is sold in the U.S.”

A Constitutional Question

The plaintiffs claim California’s law violates the Constitution’s Dormant Commerce Clause, which prohibits states from discriminating against interstate commerce. (This is an argument used regularly in wine distribution and shipping cases.)

“From a legal perspective, these state laws permitting in-state producers’ certain rights while denying the same rights to out-of-state producers [are] a clear Commerce Clause violation under Granholm,” attorney Sean O’Leary—not affiliated with this suit—told Wine Spectator via email, referencing the U.S. Supreme Court’s watershed decision Granholm v. Heald, which overturned Michigan and New York state laws banning shipments to consumers from out-of-state wineries while permitting shipments from in-state wineries.

As we’ve seen in other legal battles in New Jersey, Ohio and elsewhere, state governments have argued that other shipping restrictions, such as bans on shipping by out-of-state retailers, are needed for alcohol regulation. The 21st Amendment has guaranteed state control of alcohol sales since the repeal of prohibition. But the Supreme Court has repeatedly said laws restricting alcohol sales must be for either maintaining orderly markets or promoting temperance, not for benefiting local businesses.

Koral pointed out that state arguments may not hold up after the Supreme Court’s decisions on Granholm and, in 2019, Tennessee Wine and Spirits Retailers Association v. Russell F. Thomas. In Tennessee, seven Justices ruled against Tennessee’s residency requirement for alcohol retailers on the grounds it violated the Commerce Clause. Since then, some courts have demanded harder evidence that state alcohol shipping and distribution laws are actually essential for maintaining public health and safety.

[article-img-container][src=2023-11/ns_california-lawsuit-capitol-122723_1600.jpg] [credit= (Slobo/Getty Images)] [alt= California State Capitol in Sacramento.][end: article-img-container]

The wineries in this latest case argue that California’s restriction isn’t necessary, which makes it unconstitutional. In their view, the primary purpose of this law is “is to protect in-state business interests.” (Notably, California produces more wine per year than any other state.) The plaintiffs are seeking a permanent injunction to prevent California and its Alcoholic Beverage Control (ABC) from enforcing the ban; this would also require the state government to issue licenses to wineries in other states.

California faced a somewhat similar challenge a couple of years ago, when a Florida-based importer filed a suit to distribute directly to Golden State retailers. The U.S. 9th Circuit Court of Appeals dismissed the case, arguing the importer could hypothetically set up shop in California, as in-state wholesalers do.

“That is different from the current case,” said Koral, adding it would be challenging for most out-of-state wineries to receive wholesaler licenses in the first place. “California wineries are granted an explicit right that is denied to out-of-state wineries simply because of where they are located.”

How Could The Case Impact Consumers?

The lawsuit argues that the ban may directly affect wine fans in California: Because out-of-state producers cannot receive a license to ship directly to retailers and restaurants, they must distribute wine through a wholesaler or importer, which adds to overhead. And wineries can only offset that cost by discounting the wholesale price (which reduces profit) or by increasing the price for consumers. Either choice puts them at a financial disadvantage to California wineries.

Additionally, the plaintiffs state that wineries would have better control over prices and delivery logistics if they were able to self-distribute in California. That’s not to mention that some wineries may not find a wholesaler in the first place, under the current law.

“These lawsuits are paramount to providing access to the marketplace for small wineries [and] producers,” O’Leary explained. “Oftentimes it does not make sense for a wholesaler to carry small brands. Going through the wholesale network for small producers is a near impossible barrier to entry in the marketplace.” This is a potentially significant business opportunity for those producers to miss out on, as California consumes more wine each year than any other state.

O’Leary also argues that the current law may be reducing wine options for California retailers, who may not be able to feature all wines they would otherwise want to, as a number of bottlings are currently not carried by distributors.

If successful, it’s possible the suit may lead to change for consumers and businesses beyond California. Earlier this summer, plaintiffs filed suits against similar restrictions in Idaho, Iowa and New York. If the Dwinell case does overturn California’s ban, Koral suggests that this might lead to similar results in other states, and the effect might be more significant: Those states don’t produce nearly as much wine as California, so they might gain considerably more variety by bringing in wine from farther afield. “We could see real change nationwide,” Koral added. “Consumers and retailers across the country could benefit significantly from more open self-distribution laws.”

Who Are the Players in the Case?

The defendants in this case are Joseph McCullough, director California’s ABC, and Rob Bonta, California’s Attorney General. Dwinell is a producer of wine, beer and cider with a tasting room in Washington’s Columbia Valley. Buckel is a winery with a tasting room in Gunnison, Colo., led by Joe and Shamai Buckel. Attorneys Robert Epstein and James Tanford, frequent figures in wine shipping cases across the United States, are representing the plaintiffs. They were lawyers on Granholm and they also represent plaintiffs in similar cases in Idaho, Iowa and New York.

What Do California Winemakers and Retailers Think?

The National Association of Wine Retailers (NAWR) trade organization—which generally opposes restrictions on interstate wine shipping—has come out in favor of the lawsuit, maintaining that retailers and consumers stand to benefit if California drops the law.

“The discriminatory ban on out-of-state wineries selling directly to California retailers without going through the state’s middlemen wholesalers should have been eliminated the day after the Granholm v. Heald Supreme Court decision 18 years ago,” NAWR executive director Tom Wark told Wine Spectator. “This lawsuit will help the state’s retailers, it will open new distribution avenues for out-of-state wineries and it will give California consumers more choices.”

But could the case lead to even stricter regulations for wineries, including those in California? What if leaders decide the best solution is to make all wineries go through wholesalers?

In the view of winemaker Adam Lee—the proprietor of California’s Clarice Wine Co., as well as a winemaking consultant and the former co-owner of Siduri—that seems like an unlikely outcome given the economic significance of California’s wine producers and their ability to self-distribute. Lee feels that California should regulate out-of-state and in-state wineries with the same laws. “If we’re going to allow California wineries to sell directly to retailers, then we should let out-of-state wineries do the same thing,” he said. He points out that neighboring Oregon is open to self-distribution from out-of-state wineries.

However, in Lee’s view, the Golden State wine market may not see significant change even if the lawsuit is successful, based partly on how few California wineries he has seen selling directly to Oregon businesses. “The kind of sad thing about it is, I don’t think it really opens doors—while it does even the playing field,” Lee said. “They could change the law and say, ‘Yes, wineries from Virginia and Washington and Oregon and all of these places could sell direct,’ and I don’t think there are going to be that many cases [in which] it’s going to happen.”

Indeed, as Lee explained, even if California drops the restriction, it’s possible many out-of-state wineries just don’t have the resources to offer their wines in California without a distributor, which would leave things largely unchanged.

But there isn’t zero risk of stricter regulation. “There is some potential risk of [regulators] deciding to go down that route,” said Koral. “If the courts find that California is unfairly discriminating in favor of in-state wineries over out-of-state wineries, one of the readiest solutions would be to remove the discriminatorily favorable law.”

Koral believes a more likely scenario is that the state drops the ban. “I think the industry would also agree that opening up a little to some outside competition is well worth the bargain.” Whatever the potential outcome, it seems the lawsuit might open a new discussion within the wider debate over wine distribution and shipping in the U.S.

Where can you order wine from? Check out Wine Spectator’s comprehensive guide to state shipping laws.