HR 5034, Contact your Senator and Congressman

[Ralph at Tuthilltown]

H.R 5034 was introduced into the House of Representatives on April 15, 2010. Written and supported by the National Beer Wholesalers Association with support from the Wine and Spirit Wholesalers Association, the bill was assigned to the House Judiciary Committee where it awaits a date for a hearing. It is noteworthy that H.R. 5034 was introduced, supported and lobbied for only by alcohol wholesalers and with no support by any other sectors of the American alcohol industry and no state alcohol regulators or their professional associations.

You may learn more about what portends to be a devastating blow to the small distiller trying to introduce new brands. Several articles and major groups oppose the bill including: STOP HR 5034, which website is located at:

http://www.stophr5034.com/

This is an issue that concerns every small distiller. Please visit the site and review the info and then contact your State and Federal representatives to voice your opposition to this blatant attempt to undermine the COMMERCE CLAUSE of the Constitution. This is serious stuff. The site also offers you the opportunity to send off a letter of opposition through the site to your Congressmen and Senators.

Read the info. Voice your opinion here. But more importantly, CONTACT YOUR CONGRESSMAN AND SENATORS.

[Wes Henderson]

Ralph is right on point with this one.

You can find more information at www.discus.org

Here is a good link to start:

http://www.discus.org/media/press/article.asp?NEWS_ID=593

Wes Henderson

[Chris Martin]

IMHO, I thought the Kentucky Bourbon response could have been stronger. After all, this stinker of a bill at least does provide for legal opposition in cases where "the party challenging the state law establishes by clear and convincing evidence that the state law has no effect on the promotion of temperance, the establishment or maintenance of orderly alcoholic beverage taxes, the structure of the state alcoholic beverage distribution system, or the restriction of access to alcoholic beverages by those under the legal drinking age." I see no reason why they couldn't challenge another state establishing their version of the federally protected label "Bourbon." How about a little more passion in favor of the smaller Bourbon producers?

Anyway, for what it's worth, here's my letter to my congressman...

To The Hon. Rep. Howard Berman:

I am writing you to strongly urge your vote against HR 5034.

The Commerce Clause of the Constitution protects us against State economic protectionism and discriminatory actions against interstate commerce. HR 5034 however would weaken the Commerce Clause in favor of the alcohol wholesalers who have written the bill, while severely hurting smaller wine, beer and spirits producers and retailers. These producers rely on the ability to reach consumers without contending with the barrier of a state-sanctioned wholesaler wherever possible. Thus, we see less consumer choice in terms of the products they may buy. If the smaller producer cannot convince the "gatekeeper" wholesaler to even carry their product, let alone promote it, both consumers and producers stand to lose if there is no direct way for the producer to reach the consumer. And when those many smaller producers fail as a result, both the States and the Federal government lose the enormous tax revenues these producers contribute!

I sincerely hope you realize that constituents like me will not stand for YET MORE legislation supporting special interests like the alcohol wholesaler lobby to the detriment of consumers and smaller producers -- all couched in the language of "states rights." After the Big Banks and the Big Oil, it's really time for congress to take a stand in favor of the little guy... and I am one of them. I supported you in your political campaigns. Now I need your support against HR 5034.

Sincerely,

Chris Martin

[Phil]

I've sent an email in opposition to the delegation from Arkansas.

Phil

[JarHead]

Chris, good letter. I hope you dont mind that I heavily plagiarized from it and sent one to my congresswoman.

[Chris Martin]

No problem, JarHead (Ed?)! Glad to help...

[Jonathan Forester]

Ed, what address did you use?

Chris, good letter. I hope you dont mind that I heavily plagiarized from it and sent one to my congresswoman.

[JarHead]

Jonathan, used the corporate headquarters address, but Port Chester is also in Lowey's district.

[Ralph at Tuthilltown]

The following from www.FREETHEGRAPES.COM

HR 5034 PRESENTS TANGIBLE THREAT TO CONSUMERS, AS WELL AS WINEMAKERS, WINE MERCHANTS, BREWERS AND DISTILLERS

Wholesalers Attempting to Dupe Congress

June 8, 2010, Napa, CA – The nation’s winemakers, brewers, and distillers have each issued statements urging Congress not to consider House Resolution 5034. Meanwhile, wine wholesalers cynically claim the bill would have no effect on current laws.

Drawing from producer statements, HR 5034 presents significant, tangible threats to thousands of businesses – most of which are family-owned and operated – and millions of consumers who enjoy wine, beer and spirits. More specifically:

• Winemakers: HR 5034 Will Decrease Consumer Choice, Increase Prices:

States could pass laws that discriminated against interstate wine commerce and, if HR 5034 passed, make it nearly impossible to overturn them in federal courts. This would turn the clock back on consumer choice from the nation’s 6,000+ US wineries. Over the past 12 years, the number of states that allow legal, regulated winery-to-consumer shipments has grown from 17 to 37; these states represent 83% of wine consumption. Additionally, states could pass laws allowing wholesalers to fix prices and, if HR 5034 passed, these laws would be immune from challenge on federal antitrust grounds.

• HR 5034 Will Bankrupt Wineries:

Only 17% of wineries are distributed nationally, and 54% of them were unable to find a wholesaler in states where they actively sought representation, according to a survey by Wine Institute, a public policy trade association representing more than 900 California wineries. As a result, many wineries now rely on direct sales to survive. If a winery cannot secure distribution, but is prohibited from selling to its customers directly, the winery will be locked out of the market.

• Brewers: HR 5034 Intended to “Protect In-State Interests.”

In its May newsletter, the Beer Institute warned of “unintended consequences” of HR 5034 and that, if passed, “…imposes a virtually insurmountable burden on anyone challenging an unfair, anticompetitive or even unconstitutional state law regulating alcohol beverages.” The Brewers Association warned that the bill would allow states to enact new laws to “heighten discriminatory treatment of out-of-state brewers (and beer importers) or to limit or ban commercial activities that wholesalers do not like.”

• Distillers: State-Imposed Price Fixing:

The Distilled Spirits Council of the U.S. wrote Congress that HR 5034 has been misrepresented as “no big deal, but it is in fact a big deal.” States could “set their own labeling requirements,” impose price fixing, give tax advantages and consumer convenience measures such as Sunday sales only to in-state distillers and companies. According to the Kentucky Distillers Association, the bill would allow states to establish their own formulas, labeling and bottling standards for Bourbon, concocting their own whiskey and calling it ‘Bourbon,’ thus overriding uniform federal requirements and 200 years of American heritage.

“Contrary to wholesaler claims of solving a ‘problem,’ HR 5034 is a legal distortion and full-scale attack on the balance of federal and state laws that prevent monopoly protections for wholesalers in each state,” said Jeremy Benson, executive director of Free the Grapes!, a national grassroots coalition of consumers, wineries and wine retailers.

Wineries

Representing wineries across the U.S., a joint statement by Wine Institute and WineAmerica was issued May 17: “Oppose H.R. 5034 – Wholesalers Monopoly Protection Bill.”

Brewers

The Beer Institute’s May newsletter

The Brewers Association statement in opposition to H.R. 5034

Distillers

Separately, the Distilled Spirits Council of the United States, and the Kentucky Distillers’ Association issued statements in May.

Discus: Controversial "State-Based Alcohol Regulation" Bill Will Undermine Longstanding Framework of Alcohol Control (H.R. 5034).

Kentucky Distillers Association: “Bill Could ‘Wipe Out Centuries of Kentucky Craftsmanship, Quality and Heritage.’”

Since April 20, wine lovers have sent more than 35,000 letters through www.freethegrapes.org to Congress in opposition to HR 5034.

For more information on Free the Grapes’ response to HR 5034

[cowdery]

While some of the commentary has been hyperbolic, this is a bad law. I call it the Distributor Monopoly Protection Act. It's hard to see how it benefits anyone else. While some state Attorneys General have endorsed it, no state Alcoholic Beverage Control agency has. It's certainly not needed to protect consumers. In fact, consumers are ill-served by the status-quo, in terms of their access to products, which this will only make worse. There is no question that HR 5034 would be bad for small alcoholic beverage producers of all kinds: vintners, brewers and distillers.

[Ralph at Tuthilltown]

The NEW YORK FARM BUREAU and the NEW YORK GRAPE FOUNDATION have both come out in opposition to HR 5034. Don't forget the Farm aspect of this when speaking with your Legislators. Contact your State Farm Bureau.

[cowdery]

The Wall Street Journal today is reporting that Costco Wholesale is supporting proposed changes to laws in Washington state that would allow retailers to buy alcohol from manufacturers instead of distributors. The warehouse chain doesn't like that it currently cannot buy in bulk, but instead must buy wine and beer for each store separately, through a local distributor.

This is what ultimately will get the law changed and why the distributors want HR 5034. Big manufacturers want to deal directly with big retailers. Is this good or bad for you guys, who are not big anything? I think it's good. The 3-tier system benefits no one but the distributors. Certainly not the consumers.

[Ralph at Tuthilltown]

Thanks Chuck I agree. The debate on the "three tiered system" continues. The wholesalers believe, rightfully, it will eliminate the monopoly they have on moving spirits in and out of States; they would no longer be able to control the spigot. The counter argument is specious, "the three tier system ensures controlled flow of spirits and supports temperance" which is utter bullshit (excuse me). Good wholesalers do their job and deserve their cut. But that does not mean they deserve nearly total control, which is what they have now.

The small producer starting out has time and luxury (some don't consider it a luxury, we do) of going out at the start to personally introduce their products first in their home region. At some point if the producer is successful, there will not be enough time to make the juice, bottle it, pack it, make introductions, take orders and deliver the goods (we know this from personal experience); and so at that point a wholesaler becomes a partner in your biz by taking on all the logistical side while the producer concentrates on production and promotion. A good partner in distribution can make the difference between remaining a local brand, or moving out Statewide, or Nationally.

That said, the "three tiered system" is arcane and unnecessary in the year 2010. When the system was introduced there was no common use of television or even telephones for that matter, no internet, no personal computers or cell phones. There was no overnight delivery of retail goods ordered by phone or internet (as with wine) Regional farms were ubiquitous. And no micro distilleries. All that is changed.

In NY State micro distilling licenses come with the right to acquire a Wholesale license and self-distribute (an example how the system is fatally flawed, in NY State a micro-producer may hold a wholesaler's license, a direct violation of the Federal three tier system, a violation which the Fed totally ignores), it is how Tuthilltown launched its HUDSON brand. It was necessary. At the start, as many small producers quickly learn, we could get no distributors to give us a second look. Self-distribution allowed us to get a solid regional base, including the Metropolitan area; by which we attracted the attention of distributors. The ability of small distillers to sell into other States directly increases the ability of the producer to survive and if their product is good and accepted, prosper. And interstate commerce is a good thing.

Unfortunately it raises the issue of State's rights (in this case a red herring dragged through the debate in an effort to stall it in favor of wholesalers). There are mechanisms can be employed (indeed in place) to give individual States the control over distribution they need and to which they have a Constitutional right. If the system is continued, it should not be a Federally mandated system. If the States have the right to control distribution and sales, that should also include control over the right of retailers to purchase goods legally from the producers who want to bring their goods into that State. It should be a State decision to join and insist the three-tier system in that State if it chooses, or drop the system entirely.

In my opinion the three-tier system has outlived its usefulness and needs be abandoned by the Fed as a national system. The Commerce Clause should control interstate commerce with respect to spirits sales and individual States should be required by the Fed to allow interstate sale of spirits by the producers direct to the on and off premise accounts.

The honest, hardworking Wholesaler will gain as the smaller producers grow and need them. There is a place for Wholesalers in the system, but they have to earn it like the rest of us, rather than have a government guarantee of their place in the world.

Ralph

[cowdery]

What federal law mandates the 3-tier system? Not the 21st amendment. I genuinely don't know. There doesn't seem to be anything in Title 27 about it. I think it may be entirely a creature of state law, which is why states can, and some states have, permitted deviations from the 3-tier system in some circumstances.

[Ralph at Tuthilltown]

That is an interesting observation. The States report a Federal obligation, but regularly ignore it. This information sheds new light on the question of the system nationally. The States, like NY, seem to have the collective opinion the Three Tier System is their bible, the untouchable rule. From the small producer's point of view, this is entirely in favor of the wholesalers. For us, the system is an anti-competition system, no longer the "protection" it was originally supposed to be.

The world is changed. Business has changed. It's time for individual States to change, rewrite alcohol law. The most, correction, the ONLY way this will happen is with the pushing and prodding and lobbying of the small distillers who show their actual faces, the new Face of spirits production (small producers with families employing locally, using local raw materials) get their issues before their State Legislators. Point away from alcohol and to: tax revenue, rural economic development, tourism, tax revenue, jobs creation, agriculture preservation, TAX REVENUE! (Oh, did I say that already?)It is possible to change State laws, total amateur lobbyists that we are (were) we managed to change NY State Law, more than once in favor of the small producer. And if it's possible in NY, it's possible elsewhere.

[Charles@AEppelTreow]

Title 27 sets out a two tier system. Look at the chapters on the '4 Noes', ummm... chapters 6 (Tied House), 8 (Exclusive Outlet), 10 (Commercial Bribery) and 11 (Consignment Sales). All the prohibitions are set out in terms of 'Industry members' and 'retailers' and IMs are defined as producers and wholesalers. (And a unified single proprietor being a special case.)

In Wisconsin, the 4 Noes are embodied in a section of Statutes 125 titled 'Relations with Retailers'. That section pretty much reflects the CFR chapters. But WI goes further and applies Tied House to the producer / wholesaler tier. On the other hand, we (in WI) don't have to deal with franchise law (at least for wine/spirits) - which I view as the inverse of Exclusive Outlet. Interesting system - bar IMs from making exclusive deals with retailers - but mandate it for producers & wholesalers.

WI also mandates a certain path to market. Who can sell to whom. The Feds don't seem to delve into that side at all.

It hadn't occured to me before - but my notes above show two side to the 'three tier system'. Once side deals with money and market influence. The CFR deals with that, and makes it two tiers. The other side deals with physical flow of alcohol - forcing through a specific value (ha) chain. The States seem to have created that system - and it surely has different motives and effects.

[stevenstone]

Young's Market and Southern-Odom are supporting a competing initiative in Washington. As you guess it, they want to leave the the three tier system in place.

It's going to get really interesting here in Washington when the public goes to the voting booth this fall.

The Wall Street Journal today is reporting that Costco Wholesale is supporting proposed changes to laws in Washington state that would allow retailers to buy alcohol from manufacturers instead of distributors. The warehouse chain doesn't like that it currently cannot buy in bulk, but instead must buy wine and beer for each store separately, through a local distributor.

This is what ultimately will get the law changed and why the distributors want HR 5034. Big manufacturers want to deal directly with big retailers. Is this good or bad for you guys, who are not big anything? I think it's good. The 3-tier system benefits no one but the distributors. Certainly not the consumers.

[cowdery]

I wrote about H.R. 5034 yesterday on my blog.

There is a short history of post-Prohibition federal regulation on the TTB web site here.

There was a lot of concern when Prohibition was repealed about preventing what were perceived as abuses pre-Prohibition. The primary concern was "tied houses" and similar measures whereby producers controlled retailers. You can still find on the books federal rules against tied houses, commercial bribery and other forms of coercion, but I can't find anyplace at the federal level where placing a distributor between the producer and the retailer is the federally prescribed solution.

In the official statements of opposition to H.R. 5034 by DISCUS and others, they are always careful to endorse states rights and the three-tier system. If, however, the goal is open competition one certainly can argue that the three-tier system as it currently exists is more of a hindrance to competition than a help. Distributors have become the competitive "choke point."

[delaware_phoenix]

The TTB site says the one of the goals for the various Federal legislation set up post-Prohibition was

open, fair marketplace for the alcohol industry and the American consumer

The current system at the state level doesn't do that.

[Ralph at Tuthilltown]

The SLA in NY refers in many circulars and the SLA representatives and counsel often refer to the "three tier system", deferring it always seems to the Federal mandate to which they must defer. But it seems now this is not the case. The general confusion over the actual existence of a so-called "three tier system" as a codified, so named "thing" has all the appearances of a big misunderstanding at best, or a big lie at worst. Perhaps it is time to call the whole thing into question in a serious way. All evidence is that the only opposition to free market legal alcohol commerce on a National basis is to put the question out there. "Does the Federal Government mandate any such so called 'three tiered system' for the control of alcohol production, sales and distribution in the US?"

The other question: "Does (your State) mandate an actual, so named 'three tiered system' for the sale and distribution of alcoholic beverages in the State?"

My cursory review of NY State ABC Law reveals no legislative mandate mentioning the system. If the phrase even exists in NY State law, I can't find it. It may be an invention of the SLA under it's assigned duty to "promulgate regulations" which describe how the law is to be enforced. But that is not the same as "the Law" enacted by the Legislature and signed by the Governor.

Is the "system" a big hoax, or misinterpretation so long in place and so ubiquitous it goes unquestioned? Or are we just all not seeing it, please if that is so, someone point us all in the right direction.

[grehorst]

...On the other hand, we (in WI) don't have to deal with franchise law (at least for wine/spirits) - which I view as the inverse of Exclusive Outlet. ...

Not true. Wisconsin is a franchise state. Once you contract with a distributor you are obligated to maintain the relationship whether you are happy with their performance or not. Only exception is if it is mutually agreed to make a change. Just another law that protects the wholesaler from us evil producers.

[Charles@AEppelTreow]

Not true. Wisconsin is a franchise state. Once you contract with a distributor you are obligated to maintain the relationship whether you are happy with their performance or not. Only exception is if it is mutually agreed to make a change. Just another law that protects the wholesaler from us evil producers.

I stand corrected. It turns out you have to look beyond the alcohol regs. The beer franchise provisions are in the booze regs, the spirits are elsewhere. And wine might be excluded entirely - but I will grant that not falling under the regs, and proving it in court are two totally different things.

[delaware_phoenix]

Is the "system" a big hoax, or misinterpretation so long in place and so ubiquitous it goes unquestioned? Or are we just all not seeing it, please if that is so, someone point us all in the right direction.

I don't think it's a hoax, but it may be the way the system is set up that creates such a system. At least in the NY spirits law it talks about licenses for producers, licenses for wholesalers, and licenses for the various retailers (bars, restaurants, wine shops, liquor stores, etc). It then stipulates who producers can sell to, wholesalers sell to, etc.

So if you're an out of state producer, you can't sell in the state of NY, so you have to sell to a wholesaler (or rectifier or Class A distillery).

That's my simplified understanding of it.

Interestingly, Taxation and Revenue, the agency that collects taxes of all kinds in NY, has it's own alcohol distributor license system that seems to completely subvert the SLA's wholesaler system. It seems mostly for wineries, but I don't know why an out of state distillery couldn't register and then start to sell direct to license holders in NY.

[Ralph at Tuthilltown]

Fact is that anyone can file for the Farm Distillery or A-1 licenses which also includes ability to acquire a WHOLESALE license at no additional cost and they're in business in NYS. ABC law in NY and Federal alcohol law often contradict one another. Your example is spot on. Another example, Federal law technically prohibits the combination of a tasting room and winery or distillery or brewery; yet there exists a network of wineries and breweries and distilleries across the us in clear violation of this Federal regulation. The "system" is ignored when convenient and invoked to qualify decisions as necessary.

It is not a question if the system is in situ by tradition, practical use. If there is no mention in the Law, the requirement is either by habit or Regulatory. Not suggesting it is an actual "hoax", not a conspiracy theorist. But the promotion and continued invocation of the hallowed "Three Tier System" appears to have all the identifying characteristics of an "urban legend"; "Oh, you can't do that or the Three Tier System under your bed will get you."

The question is: Does a mandated, so-called "three tier system" exist in law at either the Federal or any particular State level? I can find no reference to it in NY Law.

[MikeW]

In Tennessee, there is no "three-tier system" spelled out in the law, but the practical effect of the body of law, creates a three-tier system. My guess is that is the case in a lot of states, and possibly the US Code. Alcohol laws have been written, rewritten and amended so many times that unless you live with your head in the law book they are very hard to understand. At least ours are.

Now, nobody asked me, but, as a 5 term member of a state legislature and now a professional lobbyist (who happens to be in the process of building a distillery) if you really want to change some laws here is some advice:

1) you don't have to have a lobbyist, but you are better off with one. You are in the business of making spirits, a lobbyist is in the business of taking care of your business at the Capitol. Things take a long time to get done at the Capitol, but when they happen they happen fast and not always with a lot of notice. You might not be there when it happens and your opponent's lobbyist will be. By all means, have a professional write your legislation. A friendly legislator will probably have staff do it. If you don't have a lobbyist be prepared to spend a lot of time running to the Capitol. Whether you have a lobbyist or not, the group must give someone permission to sign off on amendments, changes and compromises and that person must be available and show up at all hearings/meetings/discussions. You can't vote on everything.

2) Be prepared for incremental progress and compromise. There is an old saying in lobbying: "the perfect can be the enemy of the good". In other words, refusing to accept any progress until the three tier system is abolished will prevent you from getting improved laws. My guess is that we are going to be waiting along time to get rid of the 3TS, but there are other things that would help us here. If you get less than you want this year, the legislature meets next year. Come back again.

3) If you don't know your State Rep and State Senator you are stupid. Have you invited them to your distillery? Did you go to his open meeting at the courthouse? Did you contribute $100 to his last campaign? And don't give me that stuff about he is a Republican and you're not (or the other way around) This isn't about national healthcare or a Supreme Court nominee. He is IN and is probably going to stay in, and he represents your distillery. Ask and he'll probably help you. If he won't, feel free to oppose him in the next election, but the chances of beating an incumbent are slim. You're better off making friends and taking any help he can give. If he is just opposed to drinking, give him a break and ask him to introduce you to some of his colleagues and to not be against you. There's more than one way to skin a cat and there are different levels of opposition.

4) There is strength in numbers. Get everyone together and go to the Capitol. Go see your personal legislators and then see everyone on the committee that is hearing the legislation. Have written talking points so that everyone is delivering the same message. Have a one page written summary for the legislator. They are busy. Distilleries aren't the only thing they are thinking about. If you give them a book, they won't read it.

Go every year, whether you have a bill to lobby or not. Think about hosting a distiller's reception.

5) Meet the staff person in charge of the legislation. They can be a lot of help, more than the legislator most of the time. Be very nice to the secretary. You want your calls on the call list.

6) Know the lobbying laws inside and out. Generally, as a business person you can't get in much trouble. But be careful. Find out if it is legal for you to give little gifts, like shot glasses, coasters or bottles of your product. DO NOT, ever say, "this is in consideration for your vote." That is a bribe, and people have gone to jail for less. Say, "this is to show our appreciation for your service to our state." If gifts are illegal don't give them.

7) Don't threaten. "We will remember in November" will probably be counter productive. Saying, "if you don't do this we will be against you" will just hack them off.

8) If they tell you yes, but vote no, go back and ask why. Be polite, but don't let them get away with that. "I'll do all I can for you" or "I'll be there" is not a yes. It's a dodge. If they say something like that, ask if that means yes. When they say yes, write it down or mark your sheet so that he can see that you are putting him in the "yes" column. Always remember that "No" is the second best answer. At least you know and can count him. If he says maybe, you have to go back again and again.

You can change state law but you have to be persistent, organized, and prepared for a long frustrating process. And let's not get into a discussion of how the system needs reform. Of course it does, but the system we have is the system we have. Trying to reform the system will just keep you from working on your industry's laws and regulations.

If you ever want to hear the story of how we passed the new Tennessee distillery law, let me know.