[NOTE: THE LAWSUIT REFERRED TO IN THIS ARTICLE HAS BEEN DROPPED due to legislation passed in 2006 – Thanks to MD wine lovers' support.]

Long known for having some of the most restrictive, prohibition-harkening alcohol laws in the U.S., consumers and out-of-state wineries have begun an assault on the State’s alcohol laws.
The end of 2005 brought a lawsuit against the State in U.S. District Court claiming it unfairly favors in-state wineries by allowing its wineries to sell direct to consumers in tasting rooms – and to retail stores and restaurants without requiring them to go through a wholesaler.

The suit, filed by Maryland resident Rob Bushnell and Pennsylvania winery owners Karen and Stephen Wright, claims that because Maryland wineries have the right to access consumers and retailers, the State should allow out-of-state wineries to ship wine direct to Maryland consumers and to Maryland retailers and restaurants. To resolve the conflict, the suit asks for an injunction against the State’s prohibition of the interstate shipment of wine.

In layman’s terms, the suit is taking a Maryland winery’s right to physically deliver wine to a consumer in a tasting room – or to a retail store via a winery representative – and comparing it to an out-of-state winery (or Maryland winery, for that matter) being able to ship wine via common carrier directly to a consumer or retail store. Apples and oranges. It’s important to note that direct-to-consumer shipping of wine by any alcohol manufacturer or other licensee is currently prohibited in Maryland.

History Lesson
Since history is key, a quick lesson is in order. Maryland’s winery law is based on a national concept of “farm winery” – a series of laws passed in the 1980s designed to preserve land and encourage the promotion of agriculture through the planting of vineyards and operations of small wineries. The law makes operating a small winery financially feasible by providing farm wineries with the abilities to sell wine on-site at the winery and to self-distribute their wine to restaurants and retail stores. Small wineries’ abilities to sell direct to consumer, retailers and restaurants are vital to their survival.

On the first page of the Granholm vs. Heald (the Supreme Court’s wine shipping case) decision, the justices noted that “influenced by an increasing number of small wineries and a decreasing number of wine wholesalers, direct sales have grown because small wineries may not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products.

“Not so fast,” says the State
Back to the Supreme Court case, which notes that no state can allow their in-state wineries to ship wine while prohibiting out-of-state wineries from doing so. Because Maryland prohibits all shipments of wine direct to consumer and retailer, the State is not in breach of the Commerce Clause on that count. But the abilities given to Maryland’s wineries via the farm winery law can be construed to provide an advantage over similar, small wineries outside of the State.
Then there’s the issue of direct-to-consumer sales. Since most every winery in the country is able to sell to consumers at their own winery, Maryland wineries’ tasting room sales are not at issue.

One, two, three
Maryland’s alcohol market is bound by the three-tier system, as is the case in many other states. It’s important to recognize that while there are over 3,000 wineries in this country alone, distributors have consolidated from over 1,200 in the 1980s down to about 400 nationally. This puts obvious pressures on wholesalers to pick the brands with the best chance of survival in the marketplace. This typically means choosing to work with wineries who are able to provide substantial quantities of product, and marketing budgets, to boot. David Sloane, past president of WineAmerica summarized this point in his testimony before a House subcommittee reviewing wine sales and shipments in 2003:

“The three-tier system is simply not a viable method for distributing their products. Indeed, with the exception of the highly branded products of the 100 largest wineries, most wine is "hand sold." Advertising, or mass brand identification, is unheard of in this market… As such, outside of their own immediate markets, small wineries simply do not have the volume, brand clout or financial wherewithal to secure wholesaler representation – and wholesalers are not inclined, as a rule, to work with small wineries.”

Since farm wineries are typically so small – and Maryland’s wineries are no different – they rely on the ability to hand-sell wines to consumers, retailers and restaurants. Many would not survive without these abilities.

Until a winery grows in size or marketability, there is no mandate for a wholesaler to carry its product (even though it’s mandated that wine flows through a wholesaler) – it’s at the wholesaler’s discretion – a decision based strictly on market forces. Once wineries do grow in size and marketability, they are finally able to attract a wholesaler. Plus, contracting with a wholesaler becomes virtually necessary when a winery reaches a certain commercial size.

Costco vs. Washington State
Wineries’ ability to self-distribute is at the center of the Costco vs. Washington State suit. Costco, a large discount warehouse chain, wants to purchase wines direct from producers in other states, like it is able to from its local Washington wineries. In her ruling U.S. District Judge Marsha Pecham insisted that the State must either level up – allowing any and all wineries the ability to deliver wines direct to retailers – or level down – prohibiting all from doing so. She stayed her judgement until April 14, by when she hopes the legislature will have resolved the issue.

The Possibilities
As for the lawsuit at hand, there are three possible outcomes. First, the State could “level-down,” in essence, remove wineries abilities to sell direct to consumer and retailers. Secondly, small, farm wineries from outside of the State could be given the same ability to sell to retail stores (in limited quantities). And finally, the State could open its alcohol markets to direct shipping of wine to consumers and retail stores.

The first option is not only unrealistic, but it would mark the end of the Maryland wine industry. Small wineries rely on their ability to sell directly to customers – be they consumers at the winery, or to restaurants and retail stores.

Option #2 is being considered by Virginia’s legislature, and has been vetted and implemented in other states facing the same predicament.

And direct shipping? To overturn Maryland’s shipping laws, the General Assembly would have to grapple with the larger issue of the way the State regulates alcohol – and face the probable opposition of wholesale and retail groups within the Maryland alcohol industry, groups who benefit from the three-tier-system and have a great interest in maintaining the status-quo.

On the other hand, wine producers in all 50 states support the concept of direct shipping. To allow wine to be ordered, packaged and sent directly to consumers opens up vast new markets for small wineries. Consumers – at a time when wine awareness and consumption is rising significantly ever year – are coming to demand it. It’s modern commerce. That said – it’s a difficult conversation to undertake for any legislature anywhere.

The nationwide trend shows States moving in the direction of open trade, free commerce and the encouragement and support of local agriculture, tourism and rural economies.

The Result
Farm wineries throughout the U.S. have played a key role in the development of vibrant rural economies through tourism, agricultural development and land preservation. Maryland’s burgeoning wine industry is following the same path.

Just this week, Kansas’ legislature submitted legislation that would remove wineries ability to sell wine to consumers and to retailers – essentially eliminating the Kansas wine industry altogether. Indiana is grappling with the same issues, as well.

If small wineries around the country begin losing their ability to deliver wines direct to consumers, retail stores and restaurants, they will vanish – and in Maryland, the industry stands to disappear. This issue is a matter of survival for Maryland’s farm wineries.

Stay tuned to www.MarylandWine.com for the latest information.

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Dr. Kevin Atticks is the executive director of the Maryland Wineries Association. This article was previously published by the Maryland Daily Record.