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.

Achievement unlocked: One decade of blogging

I realized late this afternoon that my blog turns ten today. That’s like retirement age in blog years. Blogging isn’t quite as much fun as it was when I first started, back when bloggers would gather for happy hours based solely on sharing a publication format, subject matter inconsequential. Because we were bloggers! And that was reason enough. Much of what I used to post is now better suited to Twitter and Facebook, and the professionalization of the web makes it more sensible to submit longer content to existing publications than post it here. Nonetheless I’m grateful for those of you who do read this blog and continue to find value in posting, even if SEO has become a bigger consideration than trying to build a daily readership.

I could go on, but in adherence this site’s rules for good blogging…

Rule #1: Be meaningful.

Rule #2: If meaning is elusive, be amusing.

Rule #3: If meaning and amusement are both out of reach, be brief.

… I should probably shut up and post a cocktail recipe.

The Plantain Pisco Sour is exactly what it sounds like, a Pisco Sour sweetened with the spiced plantain syrup I like so much. This is an updated version of a drink I made for competition a few years, minus the foam. Use a good pisco like Campo de Encanto, the kind of pisco that actually tastes like it was distilled from grapes, for best results.

2 oz pisco
3/4 oz spiced plantain syrup
3/4 oz lime juice
1/2 oz Dimmi
1 egg white
bitters, for garnish

Shake everything without ice to aerate the egg white, then shake hard again with ice. Strain into a cocktail glass and garnish with drops of aromatic bitters. Etch them into tiny hearts for that extra special mixologist touch. (I use Novo Fogo Cherribiscus Bitters that my friend Evan Martin made, but any colorful and aromatic bitter will do.)

And if you’re looking for more drinks to try, remember there’s a whole section of the site devoted to cocktails now.

[Photo by Will Ray.]

Cato podcast on FDA tobacco regulation

While in DC this week I recorded a couple podcasts. Here’s the first, with the Cato Institute’s Caleb Brown. In it we cover FDA regulation of cigarettes, e-cigarettes, and cigars.

One minor correction: We were only discussing these inhalable products, so I misspoke when saying that current FDA regulations only cover cigarettes. The agency regulates smokeless tobacco too.

Update 5/30/13: Or if you prefer video…

Links for 5/10/13

Cleared for Departure is one of our most popular cocktails at Metrovino, but I’ve been remiss in dedicating a post to it. The recipe is now up at the cocktail section of the site.

Italy meets Texas with Pecaño, a pecan liqueur that appears to be inspired by the bittersweet liqueurs of Italy. As a native Texas, this sounds very interesting to me. They launched a Kickstarter today to bring it into full scale production.

More than thirty years after federal legalization, homebrewing is now legal in all fifty states thanks to Alabama finally coming on board. Now on to home distillation!

Want to be a street performer in St. Louis? You’ll have to audition for the city first.

Culture of Competition at AEI

I’m excited to head back to Washington, DC this month to be on a a panel discussion hosted by Tim Carney as part of the American Enterprise Institute’s Culture of Competition project. The details:

Free beer: Liberating libations from ‘Bootleggers and Baptists’

For centuries, the manufacture and sale of beer, wine, and spirits has been a highly profitable and highly regulated enterprise. And where profit and regulation meet, cronyism and rent-seeking frequently follow.

From moonshiners buying off politicians during the Prohibition era to liquor stores trying to ban supermarkets from selling beer today, regulation has been used to keep start-up brewers, winemakers, and distillers from manufacturing alcohol; to preserve inefficient distribution systems; and to restrict choices available to consumers. Frequently, this regulation has been used for “noble social goals” — hence the famous public choice example of “Bootleggers and Baptists.”

Can markets and consumers win? Join us for a discussion of the history and future of federal and state alcohol regulation and competition, followed by a reception with beer, wine, and spirits.

The event takes place at 5:00 pm on Tuesday, May 21. Drinks will follow. Check the site for all the necessary information.

And since I know a lot people in the industry read this site, I’d love to get your feedback as well. How do existing regulations help or hinder competition? What laws would you most like to see changed? Feel free to leave a comment or send me an email.