Big Tobacco vs little e-cigs

Last month, the FDA closed its comment period for its proposed regulations on e-cigarettes, cigars, and other tobacco products. The three Big Tobacco companies are among the parties submitted comment. The submission from Reynolds was particularly self-serving:

Reynolds American Inc. has fired an expected shot across the bow of small vapor cigarette manufacturers.

A Reynolds division recommended to the Food and Drug Administration in a 119-page submission that the agency ban the use of vapor electronic cigarettes.

Traditional e-cigs are battery-powered devices that heat a liquid nicotine solution in a self-contained disposable cartridge and create a vapor that is inhaled. The manufacturers have provided few flavor choices, in part in expectations that the FDA would limit flavorings as they do with combustible cigarettes.

By comparison, vapor products can feature a liquid capsule that is inserted into a cartridge, known as an open-system format. Vapors offer consumers a wider variety of flavors, included fruits and candy.

The Big Tobacco companies have invested heavily in disposable cartridge e-cigs. These compete with the more customizable, DIY devices favored by many vapers and sold by small producers. But why try to win consumers over when you can persuade the government to ban the competition instead? The FDA’s new regulations give Big Tobacco the opportunity to try that, so of course they’re taking it.

This kind of regulatory capture has been baked into the FDA’s handling of tobacco from the beginning. The initial legislation was backed and negotiated by Philip Morris, owner of Marlboro; it benefited from new marketing restrictions and barriers to entry that protect its brands from competition. The market for cigarettes has been essentially frozen in its favor since the FDA’s extremely burdensome review process went into effect in 2009.

Reynolds is trying to repeat the same trick with e-cigarettes, stoking fears of an unregulated market to protect big brands from competition. They might succeed. Meanwhile the public benefits of FDA tobacco regulation remain extremely dubious.

Previously: My own comments to the FDA are here, and more detail on the FDA’s anti-competitive tobacco regulation is in my article for Reason.

Comment on the FDA’s cigar regulations

If you’ve been following my writing on the subject, you know that FDA regulation has the potential to devastate the market for cigars, pipes, and e-cigarettes. Tomorrow is the final day to submit public comments on the agency’s proposal to extend their authority to these products. Comments can be submitted here. Helpful suggestions for commenting can be found here from the site Halfwheel. My own comment, limited to cigars, is below.

Comments submitted for FDA regulations regarding premium cigars, Docket No. FDA-2014-N-0189:

As an avid, though only occasional consumer of premium cigars, I have been following closely the FDA’s regulation of tobacco products. The Tobacco Control Act empowered the FDA to review all new tobacco products before they come to market, with the aim of ensuring that these products are, at minimum, no more harmful to the health of society as a whole than the products already being sold in 2007. While this is arguably a laudable goal, in practice the implementation of pre-market review has been hampered by infeasible standards that render the market for tobacco less competitive without corresponding benefits to public health.

Though this consequence is unintended, it was not unforeseen. Testifying to Congress in 2007, then commissioner of the FDA Andrew C. von Eschenbach predicted that the law would not allow enough sufficient time for the agency to develop science-based rules regarding tobacco and would “unduly and unfairly raise the public’s expectations about what the Agency could accomplish.”

The agency’s record so far has shown that Eschenbach was correct. Since taking over regulation of cigarettes, the FDA has received nearly 4,000 applications for substantial equivalence. Only a tiny percentage of these have been approved, and these have mostly involved either very basic products (i.e. rolling papers) or very minor changes to existing products (i.e. substituting one type of cigarette paper for another). The vast majority of applications remain stuck in regulatory limbo.

The experience of companies trying to bring new products to market suggests that doing so is nearly impossible. Lorillard, one of the largest tobacco companies, was able to do so only after extensive delays going well beyond the 90 or 180 day deadlines implied by the Tobacco Control Act. The smaller startup Hestia has found itself mired in insurmountable bureaucracy. Documents provided by Hestia show that more than two years into the review of its substantial equivalence application, the FDA has not even begun to examine the physical characteristics of its cigarettes, focusing instead on marketing materials relating to identification of the predicate product. These details are irrelevant to the health impact of Hestia’s cigarettes and call into question the scientific basis of pre-market review. (Since pending applications are not made public, the experience of the vast majority of applicants remains unknown.)

The unintended consequence of this lengthy review process has been to freeze the market for cigarettes as it was in 2009, protecting the brands that dominated then from competition. The health benefits of restricting the entrance of competitors are unclear, especially when reviews do not reach the stage of evaluating the actual physical characteristics of new products.

Given that the market for premium cigars is much more dynamic than the market for cigarettes, with potentially thousands of new products being introduced each year, applying the FDA’s current rules and procedures to cigars would be devastating both to producers and to cigar smokers who value variety. It would also overwhelm the agency with applications, assuming producers bother attempting to navigate the review process.

This raises the question of how the FDA can regulate cigars without unduly burdening manufacturers. One possibility is to simply not apply the deeming regulation to cigars. This is my preferred course of action, though it is obviously unlikely that the FDA will accept it.

A second option is that proposed by the agency to exempt premium cigars from many of the regulations that apply to cigarettes (“Option 2” in the FDA’s proposal). This requires the creation of a legal distinction between premium and non-premium cigars. The agency’s proposal suggests eight factors that would distinguish premium cigars. They would be wrapped in whole tobacco leaf, contain 100% leaf tobacco binder and primarily long filler tobacco, be made by hand, lack any filter or mouthpiece, have no characterizing flavor other than tobacco, weigh no more than six pounds per 1,000 units, and retail for no less than $10 per cigar.

This definition shares many similarities with that in proposed legislation to exempt premium cigars from FDA regulation. The most glaring difference is the retail price requirement, which would set an effective price floor of $10 for all new cigars. This would be a very large price increase for consumers; one industry analysis finds that only about 15% of premium cigars currently sell for $10 or more.

The price of a cigar obviously has nothing to do with its objective characteristics that could affect a smoker’s health. A $5 cigar is no less or no more healthy than a $25 cigar. A $10 price floor would rightly be seen as politically expedient rather than scientifically justified, a means of keeping wealthy cigar smokers happy.

Another likely consequence of instituting a $10 price floor would be to incentivize black market sales. If all new premium cigars in the United States are required to retail for at least $10, consumers will be attracted to the greater variety and lower prices of cigars sold abroad (including those from Cuba, which are already illegal in the United States). Internet sales and in-person smuggling of foreign cigars would certainly increase. These black market cigars would not be regulated by the FDA at all, undermining the goals of regulation.

Nonetheless, the agency may conclude that some price floor is necessary to separate premium cigars from the cheap that allegedly draw in youth smokers. In that case, a compromise implementing a much lower price floor would better reflect the reality of the market.

A second objection to the proposed definition is the ban on all characterizing flavors other than tobacco. It is unclear what this would entail. Some flavors in cigars arise from ageing them in various woods. Many flavors such as whiskey or rum are not the kind one thinks of as being aimed at teenagers and are marketed to adults. A blanket ban on all flavors would be overly broad. Instead, the agency should work with the industry to identify types of flavoring that are of particular concern and evaluate them on a case-by-case basis.

A third objection is to the requirement that all premium cigars be produced entirely by hand. This also is unrelated to the health impact of cigars and would advantage producers in places with low labor costs. It would likely end some cigar production in the United States, which is often assisted by machine. This, too, is an area in which the agency could consult with the industry to refine its definition of premium cigars.

Finally, I would like to suggest broader changes to the way the FDA handles substantial equivalence applications. In current practice, applicants must identify a specific predicate product and provide detailed empirical analysis showing that their proposed new product is substantially identical to it, raising no new questions of public health. This is unduly burdensome on new producers and unfairly advantages existing players, who possess information about their own products and the funding to analyze them. Even when proposed new products raise no new questions of health, applicants may not have access to information about predicate products that would allow them to reach the empirical stage of FDA review. For example, applicants are expected to provide documents such as bills of lading from more than a decade ago to prove that their selected predicate product was marketed in 2007. If the owner of the predicate product is a potential competitor, they obviously have no incentive to assist in the provision of such materials.

To make the substantial equivalence application process more equitable, the agency should establish objective guidelines for new products that would allow them to be considered substantially equivalent to products already on the market. Current applicants do not know how much variation from predicate products is acceptable and often cannot access information about predicate products in the first place. Clear guidelines established by the FDA would give smaller producers a chance at navigating the process without sacrificing public health. The current substantial equivalence pathway would also remain open to those who prefer it.

Regardless of whether the substantial equivalence pathway is streamlined, I hope that the FDA will adopt some variation of Option 2, exempting premium cigars from most of the requirements of the Tobacco Control Act. The market for premium cigars is akin to those for craft beer, wine, or coffee, defined by skilled producers and specific origins of product, and completely unlike the relatively commodified market for cigarettes. It is incompatible with the expensive and time-consuming review currently required of new tobacco products. And as the FDA itself has noted in its proposal, requiring such review would likely accomplish little for public health, given that premium cigars are consumed and marketed to adults and that their use is less likely to lead to addiction. Existing research also suggests that moderate use of cigars is much less harmful to health than use of cigarettes.

The differences in the impact on population-level public health among individual cigars would be so small as to be impossible to ascertain. Given that the FDA’s Center for Tobacco Products has limited resources, its employees’ time can be put to much better use than the review of countless substantial equivalence applications for premium cigars.

– Jacob Grier
Portland, Oregon
August 7, 2014

Cigars at The Daily Beast

My first contribution to The Daily Beast explains what’s at stake in the proposed FDA cigar regulations:

Ever since the FDA was given authority over cigarettes in 2009, cigar makers have been pushing a bill in Congress to keep stogies out of the agency’s purview. That an industry would try to protect itself from FDA regulation is not surprising. That the FDA might agree with them is. And given the agency’s record on cigarettes, keeping its hands off of premium cigars is the right idea.

Read the whole thing here.

Good news for wine growlers

Last month I noted that the Tax and Trade Bureau had issued a new ruling that would have made the increasingly popular practice of filling growlers with for wine for off-premise consumption a lot more complicated. Among other things, the rules would have required retailers to receive permission from the TTB to act as a bottling house and to keep up with various records and labeling requirements. Fortunately, the wine industry spoke up and the TTB has changed its mind [pdf]:

TTB recognizes that our existing regulations were intended to cover traditional taxpaid wine bottling activities, rather than the filling of wine growlers.

Accordingly, TTB has determined that it would be appropriate to engage in rulemaking on this issue so that we can modernize our regulations to specifically address the filling of growlers with taxpaid wine. This will allow TTB to evaluate what regulations are necessary in order to protect the revenue without unduly burdening businesses that wish to engage in this activity. This will also enable us to evaluate comments from all interested parties, including consumers, industry members, and State regulatory agencies.

In the interim, we are suspending TTB Ruling 2014-3 pending rulemaking on the filling of growlers.

Hat tip to Cole Danehower on Twitter.

What proposed FDA regulations mean for e-cigarettes and cigars

I had a relaxing morning planned until the FDA announced its proposed regulations extending its authority to more tobacco products, including e-cigarettes and cigars. Predictably most of the press is focusing on the former, but the proposals over cigars are also very interesting. The long PDF detailing the proposal is here. Since you probably don’t want to read that, read this post instead.

First, a little background on how the existing law works with regard to cigarettes. The most important power that the Tobacco Control Act gave the FDA was pre-market review. Before releasing a new cigarette, producers must now get explicit approval from the FDA. This created three classes of products:

1. Products that were already on the market as of February 2007 are grandfathered in and allowed to be sold without review, although the FDA could hypothetically order them off the market.

2. Products introduced between February 2007 and March 2011 are allowed on the market while under provisional review. Producers have had to submit applications, but they are allowed to continue selling while the FDA reviews them.

3. Since March 2011, all new products must receive FDA approval before being sold.

This has resulted in a freeze of the cigarette market since 2011. In the three years since then, only two new cigarettes have been approved for sale. The anti-competitive effect this has had on the cigarette market has been my primary criticism of the FDA’s handling of tobacco. It has been reviewing applications for four years, currently has more than 150 employees working on reviews, has received approximately 4,000 applications, and has managed to rule on only 34 of them. For more detailed information on this, see my coverage in The Atlantic and Reason. (Keep in mind, too, that the Tobacco Control Act was fully backed and negotiated by Philip Morris. They knew what they were doing.)

It’s also helpful to know what the FDA is looking for in new product applications. The law establishes two routes to approval. One is for completely new products (premarket tobacco applications) and requires extremely burdensome amounts of data; this is basically uncharted territory at this point. The other is “substantial equivalence.” To get approval by this route, a new product must demonstrate that it is substantially equivalent to a predicate product that was already on the market as of February 2007 or has since been approved by the FDA. “Substantially equivalent” is defined to mean having the same characteristics (materials, ingredients, design, composition, heating source, or other features) or raising no new questions of health. (To see why this is a huge obstacle to new producers, see my articles above.)

It’s been known for a long time that the FDA planned to extend its authority beyond cigarettes. The biggest concern is how the agency’s sluggish review process will affect these new products, especially e-cigarettes and cigars. These are both dynamic sectors of the market and applying the same standards that the agency uses for relatively commodified cigarettes is extremely problematic.

Impact on e-cigarettes: As mentioned above, substantial equivalence applications must specify a predicate product by which to compare the new product. That predicate product must have been on the market by February 2007. You can see the problem here. The market for e-cigarettes barely existed then. Thus the review process as it exists now is essentially a death sentence for e-cigarettes. As the agency notes in its proposal today, its hands are tied: “Because this date is written into the statute, we do not believe that we have the authority to amend it with respect to e-cigarettes or other products.”

Because of this, the FDA’s proposal gives e-cigarette companies two years after the date the rule goes into effect to submit a premarket tobacco application (PMTA). What happens after that is anybody’s guess. But unless the law changes, it looks like the substantial equivalence option is off the table for e-cigarettes and the variety of products that remain for sale will be extremely restricted. If any products successfully navigate the PMTA process, they will likely be those with lots of financial backing and perhaps the right connections.

Impact on cigars: The FDA’s proposals regarding cigars are intriguing. The agency offered two options. Option 1 is to treat cigars just like other tobacco products, subjecting them to all the same burdens of review. Option 2 is to carve out an exemption for premium cigars.

The first option, as I’ve been warning for a long time, would be disastrous. Hundreds of new cigars come out every year in distinct blends, shapes, and ages. Forcing them into a review process that has managed to approve only two cigarettes in four years would destroy the market as we know it. It would also require all cigars to be substantially equivalent to those already on the market in 2007, making the sector considerably more boring.

The fact that Option 2 is even being considered shows that the FDA is aware of this. Under this option, exemptions would be made for premium cigars. A cigar would be exempt if it:

(1) Is wrapped in whole tobacco leaf

(2) contains a 100 percent leaf tobacco binder

(3) contains primarily long filler tobacco

(4) is made by combining manually the wrapper, filler, and binder

(5) has no filter, tip, or non-tobacco mouthpiece and is capped by
hand

(6) has a retail price (after any discounts or coupons) of no less than $10 per cigar

(7) does not have a characterizing flavor other than tobacco**

(8) weighs more than 6 pounds per 1000 units.

This is not a perfect definition, but it’s a start. The biggest drawback is that it would create a price floor of $10 per stick and this price would be adjusted (i.e. increased) every two years. It’s still possible to get pretty nice cigars for under $10, especially if one buys them a box at a time, so this would be a substantial imposition on cigar smokers. At this point, however, I’m just glad that the option to exempt premium cigars from the FDA’s pre-market approval process exists at all.

Impact on pipes: Pipe smokers, now few and far between, did not put a substantial lobbying effort into influencing the FDA’s new regulations. As a result, pipes get very little discussion in the proposal. However pipe tobacco will be subject to the full authority of the FDA and, if I am reading it correctly, pipes themselves would be subject to pre-market review as well. That seems potentially problematic for unique, handmade briar and meerschaum pipes. Pipe smokers, stock up now or prepare to order from overseas!

What’s next: There are seventy-five days to comment on the proposed regulations. The biggest fight will be over e-cigarettes, which are the hottest topic in the press. In my view it’s a mistake for the FDA to wade into this until it gets its review process under control or can provide a workable alternative to the substantial equivalence path. The upside is that it will take at least two years before it takes enforcement action, which will allow more studies on e-cigarette’s effectiveness as a harm reduction tool to be conducted.

(Note also that the law requires the FDA to examine health impacts on the population level, not on the individual user, so it could order e-cigarettes off the market even though they are unambiguously safer than cigarettes. Remember too that the head of the FDA’s Center for Tobacco Products, Mitch Zeller, came directly to the job from consulting for GlaxoSmithKline, which makes nicotine replacement therapies that compete directly with e-cigs. Might pharmaceutical companies use the new restrictive review process to develop nicotine vapor devices of their own? I would not be at all surprised.)

Cigars have been almost completely off the radar of press and anti-smoking groups, but expect that to change as the debate over exempting them unfolds. Cigar smokers will have to continue keeping the pressure on lawmakers and the FDA to not destroy the industry. It will be important to show that premium cigars are primarily enjoyed by adults and have different health effects than cigarettes for the typical user. (For a summary of the latter, see here.)

Regardless of which option the FDA takes, I expect black market sales of cigars to increase. If it takes Option 1, the variety of cigars available in the United States will suffer greatly. If it takes Option 2, the price will rise to $10 a stogie.* Cuban cigars are pretty alluring already! If you enjoy the company of your local tobacconist, savor the next few years you have together. Their store may not be around much longer.

* Update to add that cigars could escape the price floor by winning FDA approval, but given the agency’s record so far I would not expect many to achieve that. Cigars that were on the market before 2007 could remain available at a lower price too.

** Additional note: I’ve asked the FDA several times whether ageing tobacco in cedar wood, a traditional practice for many cigars, would run afoul of the rule against characterizing flavors. They have not been willing to clarify this.

Tennessee whiskey, Tennessee Fire

Unless you don’t care at all about whiskey, you’ve probably heard by now about the debate in Tennessee. In brief: Last year the state legislature passed a law officially restricting use of the term “Tennessee whiskey” only to products that meet all the requirements of bourbon and undergo charcoal mellowing. This is the traditional definition of Tennessee whiskey and the law was backed by Jack Daniel’s, the brand owned by Brown-Forman.

On the other side is a new effort to relax the law, such as by allowing distillers to skip charcoal mellowing or age their whiskey in used oak barrels. This effort is pushed by Diageo, owner of the George Dickel brand of Tennessee whiskey, which also complies with the traditional definition.

The debate has divided whiskey enthusiasts and libertarians, two groups with substantial overlap on a Venn diagram. Purists like Chuck Cowdery come down in favor of Daniel’s and against Dickel. My libertarian-leaning friend Doug Winship does too, though with a few more caveats. Elizabeth Nolan Brown at Reason notes that the existing law is a wee bit protectionist.

What’s a libertarian whiskey lover to think? I’m a bit conflicted myself. Below is my attempt at working it out, seen through the lens of a much easier case: bourbon.

Unless one holds that the position that there should be no legally defined standards of identity at all, one is probably OK with the standards for bourbon. (Basically, it has to be at made from at least 51% corn, aged in charred new oak barrels, and distilled and aged within certain ranges of proof.) Whether or not these were ideal standards at the time of passage, it would be a tough case to make that they should be changed now. Any distiller lobbying to do so would rightly be seen as trying to water down established standards.

With that in mind, here are five things I think the bourbon standard of identity has going for it:

1. Clearly defined processes within a well-established tradition among multiple producers.

2. Market recognition of the designation.

3. Long-standing law.

4. Broad geographic application (bourbon can me made anywhere in the US, not just Kentucky).

5. Doesn’t restrict competition from other distillers making other kinds of whiskey (they must simply refrain from using the word “bourbon”).

Now let’s compare this to Tennessee whiskey. Historically, this product is identical to bourbon in all but one essential aspect, the use of the Lincoln County process. This is the filtration of unaged spirit through charcoal, a step that mellows the finished whiskey.

Taking the five points above, how does a “Tennessee whiskey” designation compare to that of bourbon?

1. Clearly defined tradition among multiple producers: Tennessee whiskey definitely has the tradition part down. So much so, in fact, that despite my obsession with liquor laws, it’s easy for me to forget that it wasn’t legally defined until last year. Charcoal mellowing is deeply and historically entwined with Tennessee whiskey. The multiple producers part is not as solid. Until recently, there was only Jack Daniel’s and George Dickel (thank you, Prohibition). Now there is also Collier and McKeel and Prichard’s, the latter of which doesn’t use the process. Score: Daniel’s 1, Dickel 0.

2. Market recognition: This one’s more of a judgement call, but my impression is that consumer association of Tennessee whiskey is very strongly associated with Jack Daniel’s, and by extension with the processes used to make it. Moderately informed whiskey drinkers can tell you about the mellowing process that makes it unique. Score: Daniel’s 2, Dickel 0.

3. Long-standing law: There is no federal standard of identity for Tennessee whiskey. The Tennessee law went into effect less than a year ago. However NAFTA defines Tennessee whiskey as a bourbon produced in Tennessee, which does get at the requirement of using new barrels, but omits the charcoal mellowing. There’s a conservative case for not changing established law without good reason, but it’s weak here. I’m calling this a draw. Score: Daniel’s 2, Dickel 0.

4. Broad geographic application: Bourbon can be made anywhere in the United States. Tennessee whiskey, obviously, can only be made in Tennessee. This presents problems. What do you call charcoal-mellowed bourbon made in another state? What do you call a whiskey made in Tennessee that isn’t mellowed or doesn’t use new oak barrels? It would be nice if there was some other word for traditional Tennessee whiskey that didn’t involve a place name. Instead, non-traditional producers will have to use a work around like “whiskey distilled in Tennessee” (and is that really any less confusing for consumers?). Score: Daniel’s 2, Dickel 1.

5. Doesn’t restrict competition: Bourbon regulations apply equally to everyone. The Tennessee law doesn’t. It protects the three producers who follow the traditional recipe. It also protects Prichard’s, which doesn’t use the mellowing step, but was grandfathered in and is allowed to call its product Tennessee whiskey anyway. Any newer producers making a product otherwise identical to Prichard’s have to call theirs something else. This is a legal mess. Score: Daniel’s 2, Dickel 2.

So the final score is a tie. I’m not saying that’s a definitive measure or that all of these considerations should be weighted equally, but after giving this some thought my reluctant conclusion is that I just don’t care that much. There’s a good case to be made that Tennessee whiskey and its associated processes have a long, well-established tradition worthy of legal protection (at least as worthy as many other standards of identity). There’s also a pretty good case that legal protection is unnecessary and that the existing, extremely young law is too muddled to be worth defending. Keep it in place and Jack Daniel’s will continue to be the best-selling Tennessee whiskey by a mile. Repeal and it and Jack Daniel’s will also continue to be the best-selling Tennessee whiskey by a mile.

The upshot is that unless you’re invested in Brown-Forman, Diageo, or another Tennessee producer, this law isn’t going to affect you. On the merits, I lean ever so slightly to keeping the law as is. But if it’s repealed, I’ll be fine with that too.

There are, however, a couple thoughts to take away from this. One is that regardless of how this plays out, other states should not follow suit. As the boom in small distilleries continues there is going to be a temptation in other states to impose new legal standards on their own products. I’ve already heard talk from Oregon distillers about the possibility of creating a standard of identity for “Oregon whiskey.” Given the huge diversity of distillers here — we’re at more than 60 now — I can’t imagine a definition that will work for everyone and reflect established traditions, of which there really aren’t any. Trying to define one would be putting the cart before the horse.

As a bartender and spirits writer, I can deal with a special designation for Tennessee whiskey. But if I find myself having to remember 50 different state designations, regret for this sort of thing is going to set in very quickly. If I wanted to memorize a bunch of arcane place-related trivia I would have become a sommelier. I’d much rather see what individual creative distillers come up with, regardless of where they’re located.

Secondly, neither company strikes me as particularly sincere in their efforts to sway consumers, legislators, and the press. It’s hard to believe that Diageo executives are truly losing sleep over the plight of small Tennessee distillers whose creative impulses are being stifled. They’ve already taken plenty of heat for that stance and I won’t pile on here.

But how about Jack Daniel’s? They are pitching their brand as the stalwart defender of the Tennessee whiskey tradition. From their press release:

“When consumers around the world see ‘Tennessee Whiskey,’ they expect it is a premium product representing a world-class standard and utmost quality,” said Jack Daniel’s Master Distiller Jeff Arnett. “What we have here is nothing more than an effort to allow manufacturers to deviate from that standard, produce a product that’s inferior to bourbon and label it ‘Tennessee Whiskey’ while undermining the process we’ve worked for nearly 150 years to protect.” [...]

“Using quality grains, quality water, quality barrels and other natural ingredients has been the backbone of Tennessee Whiskey and, frankly, the bourbon industry for decades. Why in the world would we want to change that now by inserting artificial ingredients into our processes? And why in Tennessee would we willingly give the bourbon industry the upper hand in quality by cheapening the process we use to make our whiskey,” Arnett said.

And that’s all well and good, but I just looked online and there are six different varieties of Jack Daniel’s barbecue sauce, two steak sauces, and four different EZ Marinaders. EZ what now?

If you like marinating, you’ll love Jack Daniel‘s® EZ Marinader®, the country’s first ready-to-use liquid marinade in a flavor-sealed bag. In three EZ steps and without any mess, you are ready to cook! All the flavor with none of the fuss.

But it’s made with genuine Tennessee whiskey, right?

The product contains no alcohol. We use Jack Daniel’s® Tennessee Whiskey flavoring, which keeps the bold, hearty flavor associated with Jack Daniel’s®.

OK then. Jack Daniel’s also makes a honey liqueur. And this arrived in my mailbox this weekend:

This, to be fair, isn’t labeled Tennessee whiskey. It’s a “finely crafted cinnamon liqueur blended with Jack Daniel’s Tennessee whiskey.” Which is fine. I don’t begrudge anyone the right to make liqueurs with their spirits or to make money, the latter of which is pretty clearly the motive here. Cinnamon whiskey liqueur has become immensely popular and the company wants to get in on that. And though I don’t make a habit of drinking the stuff and haven’t done a side-by-side tasting, I can honestly say that Jack Daniel’s Tennessee Fire is better than the others I’ve tried in the category.

The problem is that Jack Daniel’s case for legally defining Tennessee whiskey is that its brand has worked hard for decades to build that standard and establish it with consumers around the world. To a large extent, they’re right. But they’re also willing to slap that brand onto everything from EZ Marinader® to cinnamon whiskey liqueur. And if you can tell me with a straight face that small distillers ageing whiskey in used bourbon barrels are a bigger threat to the pure image of Tennessee whiskey than these heavily marketed items, then the first shot of Tennessee Fire® is on me.

Say “Grrr…” to new growler regulations

Avid beer drinkers are familiar with the “growler,” a big jug used for transporting beer from a tap to one’s home. Filled and sealed properly, they keep beer fresh and carbonated for short-term consumption. (With caveats!) They’re great for when you want to bring home a beer that’s only available on tap or want to entertain guests. Living in Portland, one of the best beer cities in the world, I’ve taken advantage of this convenience many times.

In recent years, wineries have also begun selling their wine in kegs. In some situations — properly equipped restaurants, for example — this can more cost-effective and less wasteful than dealing with bottles. And, naturally, some places with wine on tap have also begun filling growlers. Oregon and Texas have both legalized wine growler sales in various venues and Washington is following suit. Here in Oregon, licensed wineries, restaurants, bars, and retailers are all free to fill growlers with wine.

Last week, however, the Tax and Trade Bureau weighed in on the practice. First the good news: selling wine in growlers is legal under federal law. Although states had gone ahead with wine growler fills, this was apparently ambiguous. It’s good to have it clarified.

Then there’s the bad news: Selling wine in growlers is going to involve a lot more red tape than selling beer. Under federal regulations, filling a growler with beer is considered filling a large glass and doesn’t impose additional burdens. (State laws, of course, may vary.) The TTB’s new ruling [pdf] clarifies that it’s not going to be so simple for wine. Specifically, the agency has determined that filling growlers with wine for off-premise consumption is considered bottling or packing for tax purposes, and that any person engaging in the activity must first qualify as a bottling house of taxpaid wine.

This means that before they can sell wine in growlers, businesses will have to apply to and receive permission from the TTB. And once qualified as a taxpaid wine bottling house, additional regulations will come into effect for wine growlers that don’t arise with beer:

1. Proprietors will have to “keep records of taxpaid wine received, bottled or packed, and removed.”

2. Proprietors will be responsible for measuring customers’ containers and ensuring accurate fill level and alcohol content.

3. Proprietors will have to label each container with “the name and address of the premises where bottled or packed; the brand name [...]; the alcohol content; the kind of wine and the net contents of the container.” They will also be required to remove or cover any preexisting labels on containers that don’t accurately describe the new contents.

It’s not clear to me yet exactly how burdensome these regulations are going to be, but the decision does seem to put the kibosh on dreams of making wine growler fills as ubiquitous and easy as they are for beer. With more restaurants and urban wineries offering wine on tap, growler fills were poised to be a new and convenient option. Here in Portland, for example, the forthcoming Coopers Hall announced plans to open with forty different wines on tap for on-premise consumption or take-away.

Assuming they stick with the plan, they’ll have to comply with these new regulations. I’m guessing that large retailers like Whole Foods will also find it worthwhile to qualify. But depending on how much of a hassle it is to do this, I expect many other restaurants with wine on tap may not bother.

The TTB notes that the Internal Revenue Code has different provisions for wine and beer and that this is the justification for the differential treatment with regard to growlers. Absent a change in the law, their hands may be tied. But from a policy perspective, it will be disappointing if this turns out to be an effective obstacle to the further adoption of wine kegs and reusable containers.

[Hat tip to Cole Danehower on Twitter, a great source for northwest wine news. Photo used under Creative Commons license courtesy of Kaitlyn Tierney.]

New at Reason

After a long absence (my previous article was in 2008!), I’m back in the pages of one of my favorite publications today. Over at Reason I take a look at the FDA’s latest actions against tobacco, explain why they accomplish nothing for public health, and spell out what they imply for the future of cigars and e-cigarettes.

The article also updates the case of Hestia Tobacco, whose regulatory tribulations I profiled at The Atlantic one year ago. Unfortunately, they are no closer to coming to market than they were before. See that article for a more in-depth explanation of the laws that allow the FDA to keep new tobacco products in regulatory limbo.

Finally, be sure to check in at Michael Siegel’s blog, where he has been tearing apart the FDA’s action this week from a slightly different perspective.

Nicotine and regulatory capture

horsebrass 021

The FDA is expected to announce very soon new regulations governing chewing tobacco, cigars, and likely electronic cigarettes. If you’ve followed my writing on this, you know I don’t think this bodes well for the quality side of the tobacco market. The law giving the agency authority over tobacco products was brokered by an alliance of Philip Morris and anti-smoking groups, and the new head of the FDA’s tobacco division, Mitch Zeller, came to the job straight from consulting for GlaxoSmithKline on nicotine replacement therapies. The agency’s record so far has been distinguished much more by its anti-competitive effects than by any actual achievement improving public health.

The Boston Globe recently interviewed Zeller to get some indication of where the agency may be headed. As expected, it appears likely that Zeller will pursue mandating the removal of nearly all nicotine from cigarettes:

1. Create a non-addictive cigarette. We have the authority given to us by Congress to reduce nicotine in cigarettes down to nearly zero,” Zeller said. Since nicotine is the addictive chemical in cigarettes, teens who start smoking products that are almost nicotine-free could, in theory, never get hooked in the first place. Researchers now have access to 9 million cigarettes with varying amounts of nicotine to start testing whether products with lower amounts will lead to less addiction among new smokers. But don’t expect an ultra-low-nicotine product for at least a few years, Zeller added, since the studies are just beginning.

A few notes on this:

1) This would obviously be good news for Zeller’s former client in the pharmaceutical industry. Removal of nicotine from cigarettes would leave smokers craving nicotine and many of them would likely turn to patches, gums, and the like. Zeller indicates in the same interview that the agency should perhaps remove warning labels from nicotine replacement therapies that discourage consumers from using them long-term, noting that using these products for life is healthier than smoking.

Even if this is good policy, Zeller’s previous job casts doubt on the FDA’s ability to consider the issue impartially. As many warned at the time of his appointment, his role as lead regulator of tobacco creates a blatant conflict of interest at the agency.

2) Mandated removal of nicotine could be good news for makers of electronic cigarettes, which now include the Big Tobacco companies. But it’s not clear that the FDA will turn a favorable eye to those, either. If the agency’s performance on cigarettes is any indication, e-cigarettes could be caught in a bureaucratic morass that keeps new products off the market with scant scientific justification.

3) Rather than turn to pharmaceuticals or e-cigarettes, at least some smokers will likely switch to cheap, low-quality cigars. Even if the FDA does not initially regulate nicotine levels in cigars, this will provide the impetus to extend the regulation. We’ve seen this before with bans on flavors or changes to tax policy when producers and consumers respond with products that technically qualify as cigars or pipe tobacco. Lawmakers and regulators then attempt to close the “loophole.” Makers of high-quality, traditional cigars would be caught in the crossfire. Whether or not one has any personal interest in cigarettes, if you enjoy an occasional pipe or cigar, then the FDA’s path should have you worried. There may be no way to produce a traditional cigar and comply with the FDA’s demands. This is the road that could lead to the complete destruction of the industry.

For more on how the FDA is getting tobacco regulation wrong, see my articles from the past year:
Who’s killing the electronic cigarette?
How the FDA is keeping new cigarettes off the market
The case against a smoke-free America

GMO labeling: Bad science, good politics

Rally to Support GMO Food Labeling

Over at The Umlaut, I have an essay up today about why mandatory GMO labeling is probably inevitable in the United States, and why that may not be a good thing:

I would be more sympathetic to the cause of GMO labeling if its advocates were not so intent on stigmatizing genetic engineering. Instead, whether for reasons of political expediency, profit, or simply poor judgment, they too often associate with any idea that could bolster their cause, regardless of its scientific merits. Thus we end up with labeling advocates on stage in front of a Whole Foods banner, sowing fear among foodies that exposure to genetically modified crops may cause autism in their children.

Read the whole thing here.

[Photo via CT Senate Democrats.]

The costs of convenience

Abandoned liquor store

Over at Blue Oregon, politico and former pub owner Jesse Cornett argues against liquor privatization, satisfied with the system the way it is:

Bar and tavern owners obtain their liquor almost the same way that anyone in Oregon does: they buy it from a liquor store. It comes with a small discount and can include delivery. When I called in my order, they would ask when I wanted it. Right away? Sure. See you in 30 minutes. At a certain time? Great, we’ll see you then. Run out of a particular product late in their hours? Just pop by. Call on your way and it’s sitting at the counter waiting for you. The system works exceptionally well for Oregon’s pub, bar and restaurant owners. Obtaining liquor was much more convenient than any other product.

Jesse is absolutely right about this. Oregon’s system makes buying liquor simple. To stock the bar I manage, I make one phone call, receive one delivery, and write one check. Easy! In contrast, our wine buyer deals with more than a dozen distributors, taking separate deliveries and writing individual checks for each of them. Pain in the ass!

So yes, the current system is convenient for bar managers. But that’s a terrible reason to keep it in place. It leaves unaddressed, for starters, the cost to the bars. Licensees in Oregon receive only a very small (about 5%) discount off retail. The set price means we don’t spend time bargaining or making deals, or what is known in less regulated states as “doing your damn job.” It also means we pay more for our liquor, making it harder to put quality spirits in our menu cocktails.

The situation is even worse when we want to bring in relatively esoteric spirits from other states. Oregon distilleries benefit from the fact that the state’s monopoly buyer, the OLCC, gives them de facto favorable treatment. The agency is very likely to “list” their products, meaning it will purchase them in bulk and sell them at a lower price. That’s good for local distillers, but not so good for out-of-state producers and the consumers who want to buy their spirits.

As an example, I requested aquavits made in the Midwest as special order items this year. To the OLCC’s credit, they both eventually arrived, but our system renders the prices exceedingly high. The Gamle Ode Dill Aquavit sells in Oregon for $42.45 a bottle. In its home state of Wisconsin, I see it selling for $29.99. The North Shore Aquavit from Illinois? $47.25 in Oregon, $27.99 at Binny’s in Chicago. Shipping costs account for a portion of the difference, but not nearly all of it.

Advantaging local distillers over out-of-state producers shouldn’t be the goal of our distribution laws. It may even be unconstitutional. I have no doubt that skilled local producers will continue to thrive in a private market, just as they do in the privatized beer and wine system. And if there are some producers who cannot survive without the government buying their product in bulk, then maybe they shouldn’t be in the business.

(As a point of contrast, Matt Yglesias notes at Slate today that Washington, DC’s unique openness to importing spirits is part of what has made the city’s bar scene so fantastic. Oregon would do well to follow its lead.)

If Jesse’s argument were correct, there would be no reason not to extend it to restaurants’ other inputs. If a state monopoly on liquor is so great, why not monopolies on beer and wine too? Or on meat and cheese and fish and bread and vegetables? It would be so much easier on the chefs! But no one would take these ideas seriously, because we’ve long since figured out that essentially free markets are the best way to distribute normal goods. Liquor is a mostly normal good – and to the extent that isn’t because of negative externalities, taxes are a far better way of addressing that than inefficient distribution is.

As I never tire of reminding people when it comes to questions of distribution, markets are for consumers. Not only consumers who want local products, but all consumers – even the ones who just want stuff that’s basic and cheap. They would very much like to pick up a bottle for a few dollars less than they pay now and not have to visit a special store to get it. This is why privatization is likely to happen eventually, regardless of how it affects bar managers and local distilleries. Consumers are tired of dealing with a distribution system designed for the 1930s.

And this is where Jesse has a good point: There are going to be winners and losers with privatization, and distributors and large retailers are going to exert their influence to ensure that they get an advantage. This is one reason that Washington state’s privatization measure bars entry to new, smaller stores. If Oregon privatizes via ballot initiative, as appears increasingly likely, then we may end up with similar problems.

The solution to this is acknowledge that getting privatization right is difficult, but doable, and to demand that the legislature write a bill that learns from Washington’s mistakes and puts consumers first. The alternative is to wait for ballot initiatives written by retailers, one of which will inevitably pass.

[Photo by Joseph Novak used under Creative Commons license.]

[Disclosures: In addition to working as a bartender, I consult for several spirits brands and beverage-related products. I have not worked for retailers or distributors.]

Two new cigarettes, now authorized for sale

This week the FDA sent out a press release boasting that its Center for Tobacco Products has finally issued a few decisions on new tobacco products:

For the first time since the Family Smoking Prevention and Tobacco Control Act of 2009 gave the U.S. Food and Drug Administration the authority to regulate tobacco products, the agency has authorized the marketing of two new tobacco products and denied the marketing of four others through the substantial equivalence (SE) pathway. [...]

“Today’s historic announcement marks an important step toward the FDA’s goal of reducing preventable disease and death caused by tobacco,” said FDA Commissioner Margaret A. Hamburg, M.D. “The FDA has unprecedented responsibility to protect public health by not allowing new tobacco products under FDA’s authority to come to market without FDA review.”

To put this into context, when I wrote about the FDA in March the agency had received about 3,500 new product applications. The most reasonable interpretation of the law giving the agency authority over tobacco implies that these reviews should take only 90 days, and certainly no more than 180, yet some of these have languished in a bureaucratic quagmire for years. Issuing only six decisions since 2009, with more than 100 employees at work reviewing them, is hardly an accomplishment worthy of praise.

(If you’re wondering, Hestia Tobacco, the brand I profiled for The Atlantic, remains tied up in the review process with no end in sight.)

It’s also worth emphasizing what these approvals don’t mean. They don’t mean that these two new cigarettes are any safer than products already on the market, only that they don’t raise any new questions of health. In other words, they’re just as lethal — though no more so, we are told to believe — as other cigarettes. New cigarettes like Hestia, which by any sensible standard also raise no new questions of public health, continue to be blocked. It’s difficult to see what good is accomplished by requiring them to go through this lengthy approval process.

And in the midst of this, the future of e-cigarettes remains unclear. As I explained at The Umlaut this week, this product that is indisputably safer than real cigarettes may soon fall under the same heavy-handed regulation that has brought the tobacco industry to a standstill. If that happens, the FDA will have even less to brag about that it does today.

Who’s killing the electronic cigarette?

That’s the topic of my article for The Ümlaut, a new website published by Jerry Brito and Eli Dourado:

Since no one seriously disputes that using e-cigarettes is far safer than habitually inhaling cigarette smoke, allowing them to compete should be a no-brainer. Unfortunately, the law allows the FDA to ban new tobacco products even when they are irrefutably safer than what is already for sale. The agency evaluates applications based not only on the risk to individual users, but also on how they impact smoking cessation and initiation in the population as a whole. If the FDA decides that these effects outweigh the health benefits, it could ban e-cigarettes not because they are dangerous, but rather in spite of their safety.

I feel obliged to make one update to the story. In it I say that the nadir of fear-mongering about e-cigarettes is a doctor from the Mayo Clinic telling journalist Eli Lake that the propylene glycol used in some brands is “similar to antifreeze.” He was recently outdone by a North Carolina doctor who appeared on a local news segment to warn viewers that e-cigarette vapor could be “several thousand degrees” when it hits your lungs. The physics of this would be rather remarkable, as would e-cigarette users’ ability to endure the product if it were true. Michael Siegel has the details and you can watch the segment here.

Don’t be quite like Washington

Today’s Oregonian editorial urges Oregon to make like Washington and privatize liquor:

It’s possible, even probable, that Oregonians will vote on same-sex marriage and marijuana legalization in November 2014, leaving the state one measure short of a following-Washington’s-footsteps trifecta. That spot may — and should — be filled by an initiative privatizing liquor sales. It’s time to drag booze regulation out of the 1930s.

I’m with them on this, but they oversell the case a bit in using Washington as a model. This paragraph in particular seems disingenuous:

Despite the initial price shock, Washingtonians bought more booze than they did the year before. It’s simply far more convenient to buy liquor at Safeway or Costco, as Washingtonians now can, than to make a separate trip to a state liquor store. And consumer choices have increased thanks to the appearance of popular store brands, says Gilliam.

I think it’s fair to say that the appeal of these “popular store brands” lies more in price than in quality. And that’s fine. I’ve said before that we shouldn’t force mainstream consumers to pay higher prices so that booze nerds can buy esoteric spirits. But let’s not pretend there’s no potential trade-off here. The OLCC, to its credit, has become quite good at placing special orders compared to other control states. (Trust me, I used to live in Virginia.) It’s also acted as an incubator for Oregon distillers. This seems at least partly because the agency is not a pure maximizer of profits. Depending on how retail licenses are structured in a successful privatization plan, the state may end up with a less responsive supply side.

The benefit of watching Washington privatize liquor first is that we can learn from its mistakes. So here are two to keep in mind:

Keep taxes reasonable — Washington gave privatization a bad name by packaging it with extremely high taxes, the highest in the nation. As a result, consumers associate privatization with price hikes instead of the lower costs they anticipated.

Allow small retailers — Washington’s initiative generally limits new retail licenses to stores that are at least 10,000 square feet in area. This is a classic “bootleggers and Baptists” dynamic: Temperance-minded voters didn’t want proliferation of liquor licenses, and large grocers didn’t mind restricting competition. This makes it difficult to open boutique stores appealing to consumers that Costco may ignore.

Both of these concerns will be a factor in Oregon’s eventual privatization, which may be broadly popular but will be driven by particular interests. The state will want to retain its revenue. Retailers and distributors will want to shape the law to their benefit. To get this right, voters and legislators will need to keep in mind that privatization is a means to the end of competition, not an end in itself.

Defining “craft” distilleries

Eastern Washington Wheat Fields

Following up on last week’s post about Oregon’s new craft distillery law that potentially violates the Commerce Clause, it’s worth mentioning that Washington may not be doing any better. But first, a couple articles that have come up recently about definitions of “craft” distilleries.

At The Atlantic, Wayne Curtis notes that right now anyone can call themselves a craft distiller, regardless of whether there is much craft to what they do:

It’s a little-known fact, but you don’t actually need a still to call yourself a distiller. The vodka makers I visited had adopted a simple and surprisingly common business model: buy a large quantity of potable alcohol from an industrial supplier (one vendor of neutral spirits offers it “in drum, truckload and railcar quantities”), run it through a tall charcoal filter to remove any trace impurities, cut it with water, decant it into bottles, and then slap on a label touting it as a local craft product worthy of its premium price.

At his excellent whiskey blog, Chuck Cowdery examines the so-called “problem” of non-distiller producers (NDPs), brands that simply repackage spirits under a new label with varying degrees of transparency. His suggested solution is a voluntary certification program:

Hence this modest proposal. The industry has several voluntary trade associations: the Distilled Spirits Council of the U.S. (DISCUS), the Kentucky Distillers’ Association (KDA), the American Distilling Institute (ADI), and the newly formed American Craft Distillers Association (ACDA), to name a few. Several universities, such as Michigan State, have distilling programs. One of those entities, or a new one established for this purpose, could create a certification program. It would establish criteria, and a monitoring and enforcement system, and award certifications to producers who apply and meet the requirements. It would all be voluntary and funded by the participants. Then it is up to the participants to promote and support it, to imbue it with sufficient credibility so that concerned consumers will learn to look for and trust that designation.

I’m glad to see that both articles express some skepticism about using government regulations to address the issue. Washington is one state that has tried, and not surprisingly the state gets it wrong.

Washington law designates a special license for craft distillers. Qualified applicants pay a reduced fee, $100 per year instead of $2000. They’re also allowed to offer on-premise tastings to consumers. But there’s a catch: They cannot produce more than 60,000 gallons of spirits per year, and at least half of the raw materials used in producing their spirits must be grown in Washington. (Details on Washington’s various license types can be downloaded here.)

Like Oregon’s new law, the requirement that craft distillers use locally grown ingredients raises obvious Commerce Clause issues. It’s also an exceedingly narrow definition of craft. It practically* excludes the NDPs and instant vodka brands, which is at least arguably desirable. But it also excludes producers that most people would consider worthy. For makers of gin, aquavit, absinthe, or various liqueurs, the origin of the base spirits is often far less important than the distiller’s skill selecting and incorporating botanicals. And if a distiller wants to specialize in rum, forget about it: The banks of the Puget Sound are not known for their fields of sugar cane. (Washington absinthe distiller Gwydion Stone argues the same case.)

Craft distillers in Washington are making interesting, quality spirits from local ingredients, like Washington wheat whiskey or gins and vodkas distilled from local grains. But I wouldn’t say that they’re more deserving of the craft designation than an Oregon producer making quality gin from neutral grain spirits. How to source one’s base ingredient is a creative decision that should be left to the distiller, not codified into law to promote local agricultural interests.

Fortunately the advantages provided by Washington’s craft distiller license are not overwhelming, allowing distilleries that don’t meet the definition to still go into production. But it demonstrates the perils of letting regulators and legislators define craft instead of leaving it to the rapidly evolving market for spirits.

If the beer market, which has had more time to mature, is any guide in the matter, maintaining a meaningful definition of craft is going to get increasingly difficult anyway. Volume of output can be objectively measured. “Craft” means different things to different people. Beer writer Jeff Alworth offers a different list of brewery classifications that he finds useful, with no place for the c-word: “There’s really no use for the term and I am going on a personal campaign to eliminate it from my own vocabulary.” Legally speaking, at least, that may be the best advice going forward.

*Edit: Added the word “practically” to be more precise. As Gwydion notes, it may be possible to buy NGS or other spirits that comply with the local requirements. I’m not sure how this would be addressed.

[Photo: Field of Washington wheat, by Jimmy Emerson on Flickr, used under Creative Commons license.]

Craft distilleries and the Commerce Clause

A new law in Oregon will allow the state’s distilleries to open additional tasting rooms and retail sales centers:

The bill allows distillers to offer tastings and sell their products at their distillery and five other locations. Current law allows distillers to perform tastings and sell their spirits one other location in addition to the distillery.

Distillers still must purchase their liquor from the Oregon Liquor Control Commission, the same way liquor store owners do now. And distillers must enter into a contract with the OLCC to sell bottles of their craft spirits.

The goal is to help the increasing number of craft distilleries continue to grow, though as it currently stands only two of them (McMenamin’s and Rogue) have enough locations to take advantage of the new opportunities. Spirits produced in Oregon now account for about 12% of the state’s liquor sales. That’s really impressive, and some of the spirits made in Oregon are fantastic. I hope this trend continues.

However this new law might not be the best way to help craft distillers. It may be nice in the short-run, but is it constitutional? I think that it’s vulnerable to legal challenge by out-of-state producers as a violation of the Commerce Clause, following the arguments that allowed wine producers to strike down discriminatory direct shipping laws in Granholm v. Heald. (I have no formal legal training, so take this as a layman’s reading. The case isn’t too complicated.)

Granholm explicitly addressed the balancing of the Twenty-first Amendment, which gives states broad authority to regulate alcohol, and the Commerce Clause, which generally forbids states from discriminating against out-of-state producers.

The Twenty-first Amendment reads in part:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

This has been interpreted to allow states great flexibility in deciding how to regulate alcohol, including the power of outright prohibition. The Court’s ruling in Granholm made clear, however, that these regulations must treat in-state and out-of-state producers evenly, not giving undue favor to the former. As Justice Kennedy wrote in his majority opinion:

The mere fact of nonresidence should not foreclose a producer in one State from access to markets in other States. [...] States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.

The Twenty-first Amendment does not exempt states from this requirement:

The aim of the Twenty-first Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time.

In Granholm, the question at issue was whether states could allow their own wineries to ship directly to consumers while denying the privilege to wineries from other states. The Court ruled that they cannot. States can choose whether to ban or to allow direct shipping of wine, but they must treat in- and out-of-state wineries consistently.

The case doesn’t address liquor directly, but it’s easy to extend to the logic. Oregon’s new law allows in-state distilleries to open up to five retail stores, a privilege denied completely to distilleries from anywhere else. The law’s supporters say explicitly that its purpose is to promote local businesses:

“It takes advantage of Oregon agricultural products, it promotes tourism and it promotes small business development,” said Sen. Elizabeth Steiner Hayward, D-Beaverton, who is one of the bill’s sponsors.

The law clearly discriminates in favor of Oregon distilleries. For this to be permissible under the Commerce Clause, the discrimination must be necessary to achieve some other legitimate purpose. In Granholm, the states argued unsuccessfully that their laws were necessary for the collection of taxes and to keep alcohol out of the hands of minors.

It’s difficult to imagine either of these arguments faring any better for Oregon. All of the spirits sold in Oregon, including those in the new tasting rooms, retail at a set price through the Oregon Liquor Control Commission (OLCC). The state has no sales tax. Collection of revenue, then, is not a concern.

As for sales to minors, it would be hard to argue with a straight face that local distilleries are uniquely qualified to sell only to adults.

So if Oregon distilleries can open tasting rooms and retail centers anywhere in the state, why not distilleries from across the river in Washington? Or from Kentucky? Or anywhere else, for that matter? It’s easy to imagine an out-of-state distillery suing for access to Oregon’s market on equal terms,

This hypothetical case may be strengthened by the fact that through its monopoly on liquor distribution, the OLCC can grant de facto preferential treatment to Oregon producers. Though the agency doesn’t explicitly do this, there’s good reason to believe that it has this effect. From a recent article about the state’s craft distillery boom:

OLCC officials stopped short of saying the agency shows a preference for stocking Oregon-made products at its warehouse — but it hasn’t created many obstacles for start-up distilleries.

“We make it easy. They get a listing,” said Brian Flemming, director of retail services for the OLCC.

The makeup of the Court seems favorable to extending the Granholm interpretation. As Garrett Peck notes in his book The Prohibition Hangover, dissent in the case was associated with age, with all of the justices who were alive during Prohibition siding with the states. Dissenters Rehnquist, O’Connor, and Stevens have all since retired. If a new case involving distillers does reach the Court, they may get a sympathetic hearing.

That’s a big “if.” Even if a case is brought, it may never go that far. And lower courts may decide that since Oregon’s law presents a different set of facts, the ruling in Granholm doesn’t apply.

Nonetheless, promoting craft distilleries through laws that discriminate in favor of local producers is a risky strategy that may backfire when and if they are challenged in court. There are other ways to open up the market for craft distillers that would rest on more secure legal footing.

[Photo: Still at Grand Traverse Distillery in Michigan, 2008.]

[Disclosure: I do contract work in the spirits industry, often with brands not based in Oregon.]

Liberating Libations

The other podcast I recorded in DC is now up, “Liberating Libations” on the American Enterprise Institute’s “Banter” podcast. Dan Rothschild, Brandon Arnold, Stu James, and I discuss three-tier distribution, beer purity, homebrewing, and other drink related topics. Listen here.