[Senate Hearing 106-141]
[From the U.S. Government Publishing Office]
S. Hrg. 106-141
INTERSTATE ALCOHOL SALES AND THE 21ST AMENDMENT
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
EXAMINING ISSUES RELATING TO INTERSTATE ALCOHOL SALES, INCLUDING
LABELING, QUALITY CONTROL STANDARDS, CONSUMER FRAUD, AND ACCESS OF
ALCOHOL BY MINORS AS WELL AS PROPOSED LEGISLATION THAT WILL PERMIT THE
ATTORNEY GENERAL OF A STATE TO FILE AN ACTION IN FEDERAL COURT FOR AN
INJUNCTION TO STOP ILLEGAL SHIPMENT OF ALCOHOL
__________
MARCH 9, 1999
__________
Serial No. J-106-6
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
58-610 CC WASHINGTON : 1999
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
(ii)
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........ 1
Feinstein, Hon. Dianne, U.S. Senator from the State of California 3
DeWine, Hon. Mike, U.S. Senator from the State of Ohio........... 5
CHRONOLOGICAL LIST OF WITNESSES
Statement of Hon. Robert L. Ehrlich, Jr., U.S. Representative in
Congress from the State of Maryland............................ 7
Statement of Hon. Juanita Millender-McDonald, U.S. Representative
in Congress from the State of California....................... 9
Statement of Hon. George Radanovich, U.S. Representative in
Congress from the State of California.......................... 12
Statement of Hon. Mike Thompson, U.S. Representative in Congress
from the State of California................................... 18
Panel consisting of Wayne Klein, Assistant Attorney General,
State of Utah, Salt Lake City, UT; Stephen Diamond, professor
of law, University of Miami School of Law, Coral Gables, FL;
Brendan Brogan, national board member, Mothers Against Drunk
Driving, Ridgewood, NJ; John A. DeLuca, president and chief
executive officer, Wine Institute, San Francisco, CA; and
Michael Ballard, president, Savannah-Chanel Vineyards,
Saratoga, CA................................................... 23
ALPHABETICAL LIST AND MATERIALS SUBMITTED
Ballard, Michael:
Testimony.................................................... 54
Articles:....................................................
The Wall Street Journal, ``Booze Busters,'' dated Sept.
26, 1997............................................... 61
USA Today, ``Wine by mail? Why not?'' dated Aug. 26, 1997 62
Brogan, Brendan:
Testimony.................................................... 39
Prepared statement........................................... 41
DeLuca, John A.:
Testimony.................................................... 44
Prepared statement........................................... 46
Memorandum to DHL Airways, Inc. from Jerry Mead, wine
trader, dated Sept. 18, 1998........................... 50
Diamond, Stephen:
Testimony.................................................... 33
Prepared statement........................................... 34
Ehrlich, Representative Robert L., Jr.:
Testimony.................................................... 7
Prepared statement........................................... 8
Klein, Wayne:
Testimony.................................................... 23
Prepared statement........................................... 25
Millender-McDonald, Representative Juanita:
Testimony.................................................... 9
Prepared statement........................................... 10
Radanovich, Representative George:
Testimony.................................................... 12
Letter to Senator Hatch from Representative Doc Hastings,
dated Mar. 8, 1999......................................... 12
Prepared statement........................................... 14
Letters to:..............................................
Representatives Mike Thompson and George Radanovich
from Manuel R. Espinoza, chief deputy director,
State of California, Department of Alcoholic
Beverages Control, dated Mar. 3, 1999.............. 16
Senator Hatch from Jesse Choper, dated Mar. 4, 1999.. 17
Thompson, Representative Mike:
Testimony.................................................... 18
Prepared statement........................................... 20
APPENDIX
Questions and Answers
Responses of Wayne Klein to questions from Senators:
Hatch........................................................ 65
Grassley..................................................... 67
Industry Circular--Department of the Treasury, Bureau of
Alcohol, Tobacco and Firearms--No. 96-3, dated Feb. 11,
1997................................................... 70
Responses of Stephen Diamond to questions from Senators:
Hatch........................................................ 71
Grassley..................................................... 72
Additional Submissions for the Record
Letters to:
Senator Hatch from Jeremy Benson, executive director,
American Vintners Association, dated Mar. 5, 1999.......... 73
Senators Hatch and Leahy from Jesse H. Choper, Earl Warren
professor of public law, University of California, dated
Mar. 5, 1999............................................... 74
Senators Hatch and Leahy from Jesse H. Choper, an addendum to
the letter of Mar. 5, 199, dated Mar. 9, 1999.............. 75
Senator Leahy from Jess S. Jackson, president, Kendall-
Jackson, dated Mar. 2, 1999................................ 75
M. Craig Wolf, counsel, Senate Judiciary Committee, from John
A. Lynch, Jr., professor of law, University of Baltimore,
School of Law, dated Mar. 8, 1999.......................... 78
Prepared statements of:
Ron. Sarasin, president, National Beer Wholesalers
Association................................................ 82
Simon Siegl, president, American Vintners Association........ 83
INTERSTATE ALCOHOL SALES AND THE 21ST AMENDMENT
----------
TUESDAY, MARCH 9, 1999
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
SD-226, Dirksen Senate Office Building, Hon. Orrin G. Hatch
(chairman of the committee) presiding.
Also present: Senators Grassley, Specter, Kyl, DeWine, and
Feinstein.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
The Chairman. Good morning. Today, the Judiciary Committee
will hear testimony concerning the growing business of
interstate shipments of alcohol. Unfortunately, along with that
growing business, problems associated with that trade are also
growing. While I certainly believe that interstate commerce
should be encouraged, and I do not want small businesses
stifled by unnecessary or overly burdensome and complex
regulations, I do not subscribe to the notion that purveyors of
alcohol are free to avoid State laws which are consistent with
the power bestowed upon them by the 21st amendment.
All States, including the State of Utah, need to be sure
that the liquor that is brought into their State is labeled
properly and subject to certain quality control standards.
States need to protect their citizens from consumer fraud and
have a claim to the tax revenue generated by the sale of such
goods. And of the utmost importance, States need to ensure that
minors are not provided with unfettered access to alcohol.
Unfortunately, indiscriminate direct sales of alcohol have
opened a sophisticated generation of minors to the perils of
alcohol abuse.
I can tell you that my own home State of Utah, which has
some of the strictest controls in the Nation on the
distribution of alcohol, is not immune from the dangers of
direct sales. Take a look at this story which ran on KUTV in
Salt Lake City last Tuesday. If we can take time, we will put
this story on.
[Videotape shown.]
The Chairman. If that story doesn't bother you, it should.
If a 13-year-old is capable of ordering beer and having it
delivered merely by, ``borrowing,'' a credit card and making a
few clicks with their mouse, there is something wrong with the
level of control that is being exercised over these sales. Of
course, the Utah case is not just an isolated example. Stings
set up by authorities in New York and Maryland have also shown
how easy it is for minors to obtain alcohol.
The 21st amendment was ratified in 1933. That amendment
ceded to the States the right to regulate the importation and
transportation of alcoholic beverages across their respective
borders. By virtue of that grant of authority, each State
created its own unique regulatory scheme to control the flow of
alcohol. Some set up, ``State stores,'' to effectuate control
of the shipment into and dissemination of alcohol within their
States. Others refrained from direct control of the product,
but set up other systems designed to monitor the shipments and
ensure compliance with their laws. But whatever the type of
State system enacted, the purpose was much the same, and that
is to protect its citizens and ensure that its laws were
obeyed.
Although not perfect, the systems set up by the States
worked reasonably well for many years. However, it is apparent
that modern technology has opened the door for abuse and
created the need for further governmental action to address
those abuses. No longer must a State prosecute just an errant
neighborhood retailer for selling to a minor. Now, the ones
selling to minors and others, in violation of a State's
regulatory laws, are a continent away.
A small winery can create its own web page and accept
orders over the Internet. A large retailer can advertise
nationally in the New York Times and accept orders over the
phone. An ad can be placed in a magazine with a national
circulation offering sales through an 800 number. Let me
emphasize that there are many companies engaged in the direct
interstate shipment of alcohol who do not violate State laws,
and that needs to be emphasized. In fact, many of these
concerns look beyond their own interests and make diligent
efforts to disseminate information to others to ensure that
State laws are understood and complied with by all within the
interstate industry.
I should note that I am certainly sympathetic to the small
wineries and the specialty micro-breweries who feel that the
requirement that they operate through a three-tier system--that
is, producer-wholesaler-retailer--which does not embrace them
may, in effect, shut them out of the marketplace. They make the
argument that if wholesalers do not carry their product, they
have no other avenue to the consumer other than through direct
sales. However, if there is a problem with the system, we need
to fix the system, not break the laws.
Later today, I will introduce a bill entitled the Twenty-
First Amendment Enforcement Act. Federal law already prohibits
the interstate shipment of alcohol in violation of State law.
Unfortunately, that general prohibition lacks any enforcement
mechanism. The bill I am introducing simply provides that
mechanism by permitting the attorney general of a State, who
believes that his or her State laws regulating the importation
and transportation of alcohol are being violated, to file an
action in Federal court for an injunction to stop these illegal
shipments. The bill is balanced to ensure due process and
fairness to both the State bringing the action and the company
or individual alleged to have violated the State's laws.
The bill, No. 1, permits the chief law enforcement officer
of a State to seek an injunction in Federal court to prevent
the violation of its laws regulating the importation or
transportation of alcohol. No. 2, it allows for venue for the
suit where the defendant resides and where the violations
occur.
No. 3, it does not permit an injunction without notice to
the opposing party. No. 4, it requires that any injunction be
specific as to the parties, the conduct, and the rationale
underlying that injunction.
No. 5, it allows for quick consideration of the application
for an injunction and conserves court resources by avoiding
redundant proceedings. No. 6, it mandates a bench trial. And,
No. 7, it does not preclude other remedies allowed by law.
Now, some will make the argument that State courts are
capable of handling this issue. Unfortunately, States have had
mixed success in enforcing their laws through State court
actions. Companies and individuals have raised jurisdictional,
procedural and legal defenses that have stalled these efforts,
and that continue to hamper effective law enforcement. It is,
in part, because of those inconsistent rulings that Federal
leadership is needed in this area.
Moreover, the scope and limitations of a State's ability to
effectively enact laws under the 21st amendment are essentially
Federal questions that need to be decided by a Federal court,
and perhaps ultimately by the Supreme Court. Only through such
rulings can both the States and companies seeking to conduct
interstate shipments be assured of consistency in
interpretation and enforcement of the laws.
Of course, the hearing today will help us understand the
issues involved, and I am sure the individuals providing
testimony will greatly enlighten us and give us guidance in
passing effective legislation to deal with these problems. It
is my hope that at the end of the day we can reach an agreement
on how best to balance legitimate commercial interests with the
constitutional rights of the States as ceded to them by the
21st amendment.
So with that, let me just say that Senator Leahy regrets
that he cannot be here to help open this hearing. He is at an
Appropriations hearing with the Attorney General, where
certainly I would want him to be, and he asks that the hearing
proceed so as not to inconvenience the witnesses who traveled
here to testify this morning, and, of course, our
Representatives who are here with us today who we appreciate
taking time from their busy schedules to come over and be with
us.
So we will begin today.
Senator Feinstein. Mr. Chairman, may I enter a statement
into the record, being the one who represents California, which
has 90 percent of the winemaking business in America?
The Chairman. We will enter all statements in the record,
certainly yours.
[The prepared statement of Senator Feinstein follows:]
Prepared Statement of Hon. Dianne Feinstein, a U.S. Senator From the
State of California
I share the concerns of members of this committee regarding
underage drinking. However, we must be careful to address this problem
directly, and not by legislation which purports to target underage
drinking, but instead would do little to address that problem and much
to harm legitimate businesses in the wine industry, stifle the growth
of electronic commerce, and diminish consumer choice.
I am proud to say that California is the home of more than 800
wineries, which produce over 90 percent of our nation's wine. The vast
majority of these wineries are small, family farms. The wine industry
is a vital sector of California's economy. Winegrapes are grown in 45
of California's 58 counties. The industry accounts for 112,000
permanent jobs and another 40-50,000 seasonal jobs in my state, and
generates an estimated $10.9 billion in economic activity in
California. This results in more than $335 million annually in state
and local tax revenues in California. More than 10 million citizens
from across the country visit California's wineries each year.
I'd like to welcome two representatives of California's wine
industry to the committee today. John DeLuca has been the President and
Chief Executive Officer of the Wine Institute for more than 20 years.
Before, that, he served for seven years as Deputy Mayor of San
Francisco, to Mayor Joseph Alioto. In addition to his service to
California's wine industry, John also serves as Co-Chairman of
California's Advocating Responsible Education.
Michael Ballard is the owner of one of California's small, family
wineries, Savannah-Chanel Vineyards in Saratoga, California, and a
leader in the high-tech industry in California. It's a pleasure to
welcome both of you to the committee today.
Nationally, there are over 1,600 wineries in the U.S. Indeed, wine
is America's third-largest horticultural export. Most of these wineries
produce several different varieties--cabernet, chardonnay, etc. Sheer
arithmetic tells you that a retail store cannot possibly have even the
shelf space to offer more than a mere sample of this multitude of
American wines.
Direct shipment of wine, therefore, is vital to the hundreds of
small wineries who cannot fit on the shelf of the local store. By the
same token, consumers and wine connoisseurs who appreciate hard-to-find
wines also rely on direct shipment of wine, whether over the phone, by
mail or through the Internet.
Indeed, the Internet presents a tremendous opportunity for small
wineries to grow their business and for wine consumers to dramatically
increase the wine selection to which they have ready access. Congress
should be working to promote and encourage electronic commerce, not
taking steps which could stifle and chill its growth.
At the same time, the growth of electronic commerce presents an
economic threat to those who profit from the existing commercial
structure. in many states, alcohol sales are controlled through a very
limited number of wholesalers and distributors, who, of course, take a
profit on every wine sale made through them, through the so-called
``three tier system.'' Direct shipments threaten their business, and
many winery owners believe that it is these middlemen who are behind
this legislation, and who are funding organizations who promote its
passage. I also note that a coalition supporting this legislation
contains national alcohol wholesalers and retailer organizations.
While there is a risk that youths can use the Internet to obtain
alcohol, I am not convinced that the magnitude of the danger is
sufficient to justify stifling small wineries and electronic commerce.
Virtually all the examples of youths using the Internet to obtain
alcohol involve youths who were prompted to do so, usually by a local
news organization. I have seen precious few examples of youths on their
own initiative deciding to obtain their alcohol by ordering it over the
Internet, waiting days or weeks for shipment, and managing to be home
without their parents at just the crucial time when it arrives. Indeed,
it seems quite unlikely that youths will be ordering thirty dollar
bottles of wine over the Internet in sufficient scale to present a
national problem.
In contrast, an operation by Virginia's Alcoholic Beverage Control
found 37 percent of retailers sold alcohol illegally to minors--in half
the cases even after checking IDs. This would seem to be where the real
problem is.
Indeed, it is important to take real-world experience into account.
Congressman Mike Thompson, who I am pleased to have here today along
with my other Golden State colleagues George Radanovich and Juanita
Millender-McDonald, will testify in greater detail about this, but I
hope he will not mind if I preview this testimony by mentioning that
California allowed direct shipments of wine in-state for more than 30
years, and California's Alcoholic Beverage Control Department has
stated that, quote, ``the sale-to-minor issue is overblown,'' end
quote, and that, with more than 10,000 complaints investigated
annually, they have received but one complaint about minors obtaining
alcohol by direct shipment--the minor son of a Kentucky package store
owner who ordered beer from California, and whose mother signed for the
package when it was delivered.
One justification offered for this legislation was a Utah court
decision that Utah could not enforce its alcoholic beverage control
laws against an out-of-state beer-of-the-month club, which shipped
directly into Utah. However, this decision turns out to have been
wrong, at least according to the Utah Court of Appeals. In a decision
announced after this hearing was noticed, just last Thursday, the Utah
Court of Appeals reversed the lower court's decision, and reinstated
the state's case. This obviously raises questions about the necessity
for federal legislation on the subject.
Others argue that federal legislation is needed to enforce state
tax laws. However, the annual sales of Dell Computers, which relies
entirely upon shipment, are greater than those of the entire California
wine industry, which relies primarily upon retail sales. And yet I
don't hear anybody offering federal legislation for states to use
federal courts to enforce their tax laws against interstate computer
shipments.
Indeed, the entire subject of laws governing the taxation of
electronic commerce is slated to be studied by the Advisory Commission
on Electronic Commerce, which was established under the Internet Tax
Freedom Act which the Congress passed--by an overwhelming majority--
just last year. Prudence would dictate that we give the commission the
opportunity to study and report on this issue before singling out one
industry for special treatment.
There also is concern that states could use this legislation to
enforce in federal court state laws whose intent is to discriminate
against out-of-state commerce. In Bacchus Imports v. Dias, the Supreme
Court struck down a Hawaii alcohol tax for just this reason, holding
that the 21st Amendment did not justify discriminating against
interstate commerce to provide a commercial advantage to local
business. I would like to ask unanimous consent that a letter from the
noted constitutional scholar, Professor Jesse Choper, former Dean of
Boalt Hall School of Law, raising this concern, be placed in the
record.
Professor Choper states in his letter that this bill:
goes far beyond simply providing a remedy for a violation of
Webb-Kenyon. Instead it makes fundamental changes in current
law and in doing so affects serious constitutional and public
policy issues * * * Most significantly, it would run counter to
the spirit of Bacchus and remove the protection that the
Commerce Clause grants the alcoholic beverage industry, along
with all others, from state erection of barriers to free trade.
So I think it is important that we proceed cautiously, Mr.
Chairman, and not enhance the economic interests of some industry
sectors against small family farms, while chilling electronic commerce.
Senator Kyl. Mr. Chairman, I would like to do the same, and
also just note the fact that while the Internet is just
exploding new opportunities for commerce, including those of
the wine industry and many others, the problem you identify is
very similar to the problem we identified last year with
Internet gambling.
The same kind of click-on technology that you displayed in
that TV story was enough for all 50 State attorneys general to
come to the Congress and actually ask us to pass a Federal law
creating the same kind of injunctive, or similar injunctive
relief that you have in your legislation to permit them to stop
that kind of illegal activity. And I will certainly be looking
forward to working with you on this legislation to achieve the
same kind of objective. Incidentally, we are going to be
reintroducing that Internet gambling bill next week.
The Chairman. Well, thank you, Senator, and we will move
ahead on that basis.
At this point, I would like to enter into the record a
statement submitted by Senator DeWine.
[The prepared statement of Senator DeWine follows:]
Prepared Statement of Hon. Mike DeWine, a U.S. Senator From the State
of Ohio
I would like to commend Chairman Hatch for holding this hearing
today on interstate alcohol sales. This is a very important topic, and
it will become increasingly important in the future, as the Internet
becomes a conduit for more and more alcohol sales. Today's hearing will
be a good opportunity to explore some of the issues raised by this
popular form of interstate commerce.
I am especially concerned about one particular aspect of this
industry--sales of alcohol to minors. Often minors are able to order
alcohol from out-of-state suppliers, without providing proof of age,
and have alcohol delivered right to their doorsteps. This practice is a
threat to the safety and welfare of our children, and we need to find a
way to eliminate it. I look forward to working with the other members
of this Committee to address this very important issue.
The Chairman. The first panel today is comprised of four
distinguished Representatives from the House.
Congressman Robert Ehrlich is a third-term Congressman from
the Second District of Maryland. He serves on the Budget and
Banking Committees in the House. Congressman Ehrlich is as
concerned as I am with the ability of States to be able to
enforce their laws regulating the importation and shipment of
alcohol. And in the 105th Congress, Congressman Ehrlich
sponsored a measure similar to the one I have now introduced in
the Senate.
Congresswoman Juanita Millender-McDonald is now in her
second term from California's 37th District in the U.S. House
of Representatives. As I recall, you serve on the Committee on
Transportation and Infrastructure and the Committee on Small
Business, where you are the ranking member of the Subcommittee
on Tax, Finance, and Exports.
Congressman George Radanovich is now in his third term from
California's 19th District. He serves on the House Budget and
Resources Committees. Before coming to Congress, his public
service included elective office as a county supervisor, as
well as being a member and chairing the Mariposa County
Planning Commission.
However, Congressman Radanovich is first and foremost a
farmer. In fact, Congressman Radanovich is the first full-time
winemaker to serve in Congress. The Radanovich Winery produces
some 4,000 cases annually and, as I understand, pretty high-
quality wine, at that.
Representative Radanovich. Thank you.
The Chairman. Of course, how would I know? [Laughter.]
I wouldn't.
Finally, on the first panel we have with us first-term
Congressman Mike Thompson, from the First District of
California, which is one of the premier wine-growing regions of
this country. We are really honored to have you with us as
well. In the House, Congressman Thompson serves on the
Agriculture and Armed Services Committees. He is a decorated
Vietnam veteran, and I might add that Congressman Thompson is
also a former small vineyard owner.
So I think we have a pretty balanced panel here and I am
really looking forward to hearing what you have to say. We
would like you to keep your remarks short, if you can, because
we have a rather long hearing. We will start with you,
Representative Ehrlich, and then we will go on right across the
table.
STATEMENT OF HON. ROBERT L. EHRLICH, JR., A U.S. REPRESENTATIVE
IN CONGRESS FROM THE STATE OF MARYLAND
Representative Ehrlich. Thank you, Mr. Chairman. In the
interest of time, I have a statement I would like to submit for
the record.
The Chairman. Without objection, we will put all statements
of all witnesses in the record as though fully delivered. And,
of course, we hope you can summarize.
Representative Ehrlich. Thank you. It is great to be here
with you in this great committee, as well as with my friends
here. Congresswoman Millender-McDonald has been a leader on
this issue and I really appreciate her cosponsorship of the
bill that you are sponsoring on the Senate side and I am
sponsoring on the House side.
I welcome Congressman Thompson to the debate. Congressman
Radanovich is one of my best friends in the Congress, and we
have had many, many discussions on this issue and he has worked
with me in a very cooperative manner and I appreciate that from
the bottom of my heart. And I am sure he will say nice things
about me today, too, I hope.
Representative Radanovich. Yes, sir.
Representative Ehrlich. Mr. Chairman, real briefly, this
issue was originally brought to me by a group of State
comptrollers with respect to the tax issue, which I know you
are very familiar with. The problem concerns the direct
shipments that bypass the three-tier system set up in this
country since Prohibition.
Under present law, as the chairman eloquently stated,
States do not have an adequate remedy. They are simply unable
to enforce their State statutes in the Federal court. They are
unable to go to Federal court to secure the type of remedy they
need. As a result, the States lose a legitimate source of tax
revenue.
Second, and of equal importance, is the clip you ran today.
It is interesting, Mr. Chairman. Last year, Parkville High
School, in Baltimore County--I attended a rally where one of
the students at Parkville went online and did the same thing as
you just saw in the clip you ran from Utah TV. Yesterday, in
Maryland, in fact, we had testimony along similar lines in the
Maryland General Assembly. Mr. Chairman, the law is the law and
it is pretty clear.
Because of my friendship with Congressman Radanovich and
because of the access issue, I have attempted over the last
year-and-a-half to work with him and various groups involved in
the industry to remedy what I see as a legitimate problem, the
problem you alluded to in your statement, the problem of market
access. I will continue to do that.
We have made great strides with respect to an 800 number
and we are going to hear more about, an Internet solution. The
WSWA, the wholesalers, and all groups involved in the stream of
commerce have been quite cooperative with George and myself
over the past year-and-a-half in trying to come to a resolution
of that collateral and legitimate issue that certainly impacts
the political viability of our bills. So I will let Mr.
Radanovich talk more about that issue.
I thank you for the time today. This is an important issue.
This is happening everyday in our towns and cities across this
country, and I appreciate the opportunity this committee is
giving me and all of our cosponsors in trying to get the bill
passed, the same bill that we submitted in the 105th Congress,
and signed into law in the 106th Congress.
I thank you very much.
The Chairman. Thank you, Congressman Ehrlich.
[The prepared statement of Representative Ehrlich follows:]
Prepared Statement of Hon. Robert L. Ehrlich, Jr.
Good morning, Mr. Chairman and members of the Committee. Thank you
for the opportunity to speak in support of legislation that will help
all states interested in preventing underage access to alcohol and in
enforcing their laws regarding the shipment of wine, beer, and liquor
within their borders.
Alcohol products have an unique place in American history; they are
specifically identified in the U.S. Constitution in the form of the
Twenty-First Amendment. Section 2 of the Twenty-First Amendment states
specifically: ``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 Amendment and related federal laws regulating
the interstate shipment of alcohol beverages result from a bygone era
of ``bootlegging'' and prohibition. A key-statute, the Webb-Kenyon Act,
was enacted in 1935 (for the second time) and prohibits the interstate
shipment of alcohol beverages in violation of applicable state law. The
Twenty-First Amendment and the Webb-Kenyon Act clearly give states the
right to pass laws restricting or prohibiting the importation of
alcohol beverages.
Unfortunately, recent interpretations of federal law do not protect
states nor provide states an adequate judicial remedy in the
enforcement of their laws. Furthermore, the Bureau of Alcohol, Tobacco,
and Firearms (BATF), the federal agency charged with protecting against
illegal alcohol shipments, has cited statutory ambiguity and to date
has failed to aid states in the enforcement of these laws.
State laws vary widely with respect to interstate shipment of
alcohol beverages. Approximately twenty states prohibit direct
shipment. In some of these states (Florida, Kentucky and Georgia), it
is a felony for anyone other than a licensed distributor to import
alcohol beverages. In approximately twenty other states, direct
shipments of alcohol are limited, under controlled conditions. The
remaining states allow direct shipments of limited quantities of
alcohol provided the states involved have reciprocal laws in effect.
Regardless of any particular law regulating shipment of alcohol
into a state, and adequate enforcement mechanism must be made available
to all states. This mechanism would allow states to address two common
elements of state law: the assessment of taxes on the manufacture,
shipment, and sale of alcohol; and the public interest in prohibiting
underage drinking.
Unfortunately, what began as occasional sales of light alcohol
beverages over the Internet has become a billion-dollar-a-year market
in illegal liquor, wine, and beer sales that affects many states.
Illegal interstate shipping of alcohol not only violates a state's
ability to regulate incoming alcohol beverages, it also deprives states
of excise and sales tax revenue. It is estimated that revenue lost due
to illegal shipments is between $200 and $600 million a year.
Further, unlike the checks and balances in the current excise tax
collection system, made possible by requiring all liquor to be shipped
through licensed parties, any effort to tax a shipment that takes place
outside the licensed three-tier system--distributor, wholesaler, and
retailer--results in a ``trust me'' situation. The shipper simply tells
the state what taxes he owes, leaving the state with no independent way
to verify that amount.
The rapid development and popularity of the Internet and mail-order
catalogs have given consumers easier access to a wide variety of beers
and wines. At a time when many of us are concerned about the rise in
drinking, smoking, and drug use among teenagers, illegal shippers are
asking us to treat a shipment of beer or wine like the purchase of an
L.L. Bean sweater or a book from ``Amazon.com.'' Further, some will
have us believe that state laws are to be disregarded or ignored.
We are here today to simply provide a forum for states who have not
been able to enforce their laws prohibiting the direct shipment of
alcohol beverages. For example, on October 24, 1997, the U.S. Court of
Appeals for the 11th Circuit upheld the Northern District of Florida's
decision to dismiss Florida's attempt to enjoin four out-of-state
direct shippers, holding that neither the 21st Amendment nor the Webb-
Kenyon Act supplied a federal right of action for failure to comply
with state liquor laws. Florida Department of Business Regulation v.
Zachy's Wine and Liquor, Inc. et al.
States, with no other recourse, are doing their best to combat
these illegal sales. In the last two years, seven state legislatures
have passed laws making illegal direct shipments punishable as a
felony. Five more states expect to toughen their laws this year.
Efforts to stop illegal shipping, however, will remain severely
hampered until state attorneys general receive the necessary support
from Congress.
The practice of illegal direct shipping has generated much press
across the country, fueled in part by the debate during the 105th
Congress over my bill, HR 1063. Industry groups have shown good faith
in resolving the issue of market access for small wineries by creating
both a telecommunication and Internet solution to product location and
sales. Some, however, will continue to avoid state tax and regulatory
laws. Accordingly, I plan to introduce this legislation again, and I am
encouraged to know that you, Mr. Chairman, share my interest in this
issue and intend to introduce similar legislation.
With your permission, Mr. Chairman, I would like to show you a
short news segment from KUTV, a television station located in your
state of Utah.
Additionally, I would like to enter into the record a series of
newscasts which capture 29 deliveries to minors in 21 states, including
California and Utah. Most states have laws against such shipments, but
these efforts carry little weight unless states gain access to the
federal courts. I will leave the tape with the committee.
In conclusion, I want to emphasize that this issue is not about
restricting or regulating the Internet, nor is it about interfering
with legitimate, legal shipments of alcohol. It is about enforcing
current law, protecting state's rights, and restoring peace of mind to
parents of today's high-tech teens. In my view, adult consumers in
Maryland and elsewhere should be able to take advantage of the
convenience of ordering of wine, liquor, and beer over the Internet.
The delivery of any alcohol beverages, however, must be made in
compliance with state law. If not, the states must be given an
enforcement mechanism to protect themselves against such illegal
interstate shipments.
The Chairman. Representative Millender-McDonald.
STATEMENT OF HON. JUANITA MILLENDER-McDONALD, A U.S.
REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Representative Millender-McDonald. Good morning, Chairman
Hatch, and to all of the other members of this committee,
especially our very own Senator Dianne Feinstein. I would like
to thank you, Mr. Chairman, for holding this hearing and
commend you for bringing this very important subject before
this committee.
The issue of Internet alcohol sales to minors is an
important issue worthy of discussion on its face. One would say
such a direct delivery would never happen, as we are restricted
from selling alcoholic beverages to minors. But direct shipment
of alcohol is impacting our most vulnerable constituents, our
children, who are surfing the Internet and getting direct
access to alcohol.
Currently, an estimated 10 million of our Nation's children
have access to the Internet, a 444-percent increase from 1995.
As the new millennium approaches, with more computers in the
classroom and more children using the Internet at progressively
younger ages, teenagers and adolescents will have significantly
more access to beer and wine sold over the Internet made more
available to them.
The 21st amendment to the Constitution grants States
jurisdiction over the shipment and delivery of alcoholic
beverages, and the direct shipment of alcohol ordered through
the Internet is illegal in more than 30 States. Alcoholic
beverages are held to a regulatory system that distinguishes
them from other products, such as food or clothing. Yet,
everyday alcoholic beverages are delivered to consumers who
have ordered them through the Internet, telephone, or a catalog
from direct shippers who operate outside of regular shipping
companies.
These packages are shipped not only in violation of the
laws in more than 30 States, but also through a system that
circumvents the Nation's tax structure. Because there is no way
to determine the age or identity of the consumer ordering over
the Internet, anyone, regardless of age, with access to a major
credit card can order these products and have them delivered to
his or her home, as we saw in your clip. This opens the door to
what I call cyber booze for minors, the direct shipment of
alcoholic beverages to adolescents who often do not understand
the dangers involved in consuming excessive alcoholic
beverages.
According to the Centers for Disease Control, 80.4 percent
of the Nation's high school students have had at least one
drink in their lifetime. 51.6 percent have had at least one
drink in a 30-day period, and 32.6 percent qualify as a binge
drinker, having had 5 or more drinks on at least one occasion
during a 30-day period.
A recent survey of 4,390 high school seniors and dropouts
found that within the preceding year approximately 80 percent
reported either getting drunk, binge drinking, or drinking and
driving. More than half say drinking has caused them to feel
sick, miss school or work, get arrested, or have a car
accident. In addition, an estimated 88 percent of college
students, including those between the ages of 17 and 20, have
used alcohol or engaged in binge drinking.
Despite the 21 minimum drinking age and laws prohibiting
underage drinkers from driving to another State to pursue
alcohol, this is not enough to curb the disturbing trend I have
just mentioned. The direct shipment of alcohol through the
Internet, telephone, or catalog creates a new means of underage
drinkers to avoid all law enforcement barriers. America's
children and teenagers need our help in preventing the harmful
and often destructive use of alcohol when they are at such
young ages.
Stopping the purchase over the Internet and delivery of
alcoholic beverages to their homes is a powerful step in this
effort to prevent teenagers from driving under the influence,
missing school and work, experiencing health problems, getting
arrested, or becoming another DUI fatality.
Mr. Chairman, I thank you so much for bringing this very
important issue to this committee and for my having the
opportunity to testify in its regard.
The Chairman. Thank you so much.
[The prepared statement of Hon. Millender-McDonald
follows:]
Prepared Statement of Hon. Juanita Millender-McDonald
Good morning Chairman Hatch, Senator Biden, Senator Feinstein, and
Members of the Judiciary Committee. I would like to thank you Mr.
Chairman for holding this hearing and commend you for bringing this
very important subject before the Committee. This issue of Internet
alcohol sales to minors is an important issue worthy of discussion on
its face. One would say such a direct delivery would never happen as we
are restricted to selling alcoholic beverages to minors. But direct
shipment of alcohol is impacting our most vulnerable constituents--our
children, who are surfing the Internet and getting direct access to
alcohol.
This hearing comes at a time when American families need it most.
Currently, an estimated 10 million of our nation's children have access
to the Internet--a 444 percent increase from 1995. As the new
millennium approaches with more computers in the classrooms and more
children using the Internet at progressively younger ages, teenagers
and adolescents will have significantly more access to beer and wine
sold over the Internet than ever before.
The 21st Amendment to the Constitution grants States jurisdiction
over the shipment and delivery of alcoholic beverages and the direct
shipment of alcohol ordered through the Internet is illegal in more
than 30 states. Since Prohibition, Congress has recognized the unique
nature of alcoholic beverages and the ramifications for the abuse of
this product. Thus, alcoholic beverages are held to a regulatory system
that distinguishes them from other products, such as food or clothing
directly to consumers. Yet, every day packages filled with beer, wine,
liquor or other vinous or malted products are delivered to consumers
who have ordered them through the Internet, telephone or mail order
catalog from direct shippers, who operate outside of regular shipping
companies. These packages are shipped not only in violation of the laws
of more than 30 states, but also through a system that circumvents the
nation's tax structure. Because there is no way to determine the age or
identity of the consumer ordering over the Internet, anyone, regardless
of age, with access to a major credit card can order these products and
have them delivered to his or her home. This opens the door to what I
call ``cyberbooze for minors'', the direct shipment of alcoholic
beverages to adolescents, who often do not understand the dangers
involved in consuming excessive alcoholic beverages.
According to the Center for Disease Control, 80.4 percent of the
nation's high school students have had at least one drink in their
lifetime; 51.6 percent have had at least one drink in a 30-day period;
and 32.6 percent qualify as a binge drinker, having had five or more
drinks on at least one occasion during a 30-day period.
A recent survey focusing on the alcohol-related problems
experienced by 4,390 high school seniors and dropouts found that within
the preceding year, approximately 80 percent reported either getting
``drunk,'' binge drinking, or drinking and driving. More than half said
that drinking had caused them to feel sick, miss school or work, get
arrested, or have a car accident.
This problem does not end when students matriculate from high
school to college. In fact, the access to alcohol by underage drinkers
increases once they arrive on college campuses, where the Internet
serves a stronger role in their education. An estimated 88 percent of
college students, including those freshmen and sophomores between the
ages of 17 and 20, have used alcohol or engaged in binge drinking. In
1994, 67.5 percent of college students had used alcohol within the past
30 days. By comparison, 61.7 percent of young people not in college
reported monthly alcohol use in 1994.
Despite the fact that every state has set 21 as the minimum
drinking age to prohibit teenagers from purchasing alcoholic beverages,
this is not enough to curb the disturbing trend I have just mentioned.
With additional laws prohibiting underage drinkers from driving to
another state to purchase alcohol, the direct shipment of alcohol
through the Internet, telephone or catalog creates a new means for
underage drinkers to avoid all law enforcement barriers and have it
delivered right to their home.
You may recall the story that aired on Friday, December 12, 1997,
by an NBC affiliate in which an underage youth in New York ordered
alcohol from a direct shipper in my state of Claifornia via the
Internet and accepted delivery from a commercial freight carrier. Since
then several television stations including KEYT, an ABC affiliate in
Santa Barbara, California and WSPA, a CBS affiliate in Spartanburg,
South Carolina, have aired stories on the problems associated with the
direct shipment of alcoholic beverages. Recently, WUSA, another CBS
affiliate in our nation's capitol aired a story shedding light on this
growing problem.
Alcohol is the number one drug of choice by minors and alcohol-
related accidents are the biggest killers of our nation's teenagers. If
we fail to implement a stricter system for limiting the accessibility
of alcohol to our nation's youth, we will ultimately reverse all of the
progress we have made over the past decade in highway safety and
alcohol awareness. Further, we will allow yet another venue for the
illegal distribution of alcoholic beverages to minors accelerate the
binge drinking, driving under the influence, missing school and work,
causing both long and short-term health problems, getting arrested or
becoming another DUI fatality.
Currently, law enforcement officers bust vendors who sell alcohol
to minors, as well as those underage persons who are caught purchasing
alcohol. However, we currently have no means by which to police the
Internet or regulate the direct shipment of alcohol. Direct shippers
operate outside of the licensed distribution system. The licensed
beverage disribution system is an essential part of the alcohol control
process and contributes billions in federal and state taxes each year.
Direct shipments circumvent these laws and rob states of tax revenues.
Florida, Tennessee, Kentucky, Georgia and North Carolina have recently
upgraded their laws to make ``direct shipment'' a felony. At least 26
other states have sent ``cease and desist'' letters to wineries and
retailers urging them to stop illegal direct shipments of alcohol. With
direct shipments there is no regulatory system to guard against
underage access or to collect alcohol beverage taxes.
Over the past decade, the proliferation of micro-breweries and
small wineries, and the aggressive marketing techniques used by them
via the Internet, have resulted in a dramatic increase in the number of
direct shipments of alcoholic beverages to homes across this country.
What started many years ago as a cottage industry to sell rare wines
and micro brewed beer to connoisseurs has burgeoned into a billion
dollar business.
Mr. Chairman, what was once considered a ``boutique'' issue is
finding its way into the mainstream, which is raising the eyebrows and
concerns of many American families. In fact, a recent poll conducted by
Americans for Responsible Alcohol Access found that 69 percent of
Americans oppose the direct shipment of alcohol to minors; 85 percent
agree that the sale of alcoholic beverages over the Internet would give
minors easier access to alcohol and could result in more abuse; and 70
percent of Americans don't trust delivery to ensure that the recipient
of alcoholic beverages via common carrier is at least 21 years of age.
These facts demonstrate the need to enact legislation that
prohibits the direct shipment of alcoholic beverages and related
products to our nation's children. I am sure that my colleague from
Maryland, Congressman Ehrlich, will agree with me as I urge you to join
us in the fight to eliminate this problem. The enactment of legislation
in this area will provide states the ability to better enforce the laws
that prohibit the sale of alcoholic beverages to minors as well as
properly collect sales and excise taxes. More important, it will help
us keep our children safe from the scourge od underage drinking.
As a mother, grandmother, and former teacher, protecting our
nation's children and working to produce a generation of educated,
capable, responsible adults is one of my top priorities in Congress.
America's children and teenagers need our help in preventing the
harmful and often destructive use of alcohol when they are at such
young ages. Stopping the purchase over the Internet and delivery of
alcoholic beverages to their homes is a powerful step in this effort.
Mr. Chairman, thank you for the opportunity to testify before this
distinguished Committee and address this critical issue. As you know, I
have introduced legislation in the past to close the door to cyberbooze
and will re-introduce legislation in the 106th Congress. o look forward
to working with you and my colleagues in the House in a bipartisan
effort to regulate the sale and direct shipment of alcohol to minors.
Thank you.
The Chairman. Representative Radanovich.
STATEMENT OF HON. GEORGE RADANOVICH, A U.S. REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Representative Radanovich. Thank you, Mr. Hatch, and thank
you for the introduction and the opportunity to be here. I am
somewhat encouraged by the fact that another member of your
committee has the name ``DeWine,'' so I feel that there is some
good representation up on the committee. [Laughter.]
But I also want to ask that my full fellow Congressman, Doc
Hastings, comments that he sent over with me would also be
submitted into the record.
The Chairman. Without objection, we will put them in the
record.
[The letter of Mr. Hastings follows:]
Congress of the United States,
House of Representatives,
March 8, 1999.
The Hon. Orrin G. Hatch,
Committee on the Judiciary,
Dirksen Office Building, Washington, DC.
Dear Mr. Chairman: I represent Washington State's 4th Congressional
District, which includes the tremendously productive agricultural area
of the Cascade Mountains. Within my district are the Yakima Valley and
much of the Columbia Valley Viticultural Areas, recognized by the
federal government as distinct, high quality wine grape growing
regions.
There are more than 15,000 acres of vineyards in my district, with
more being planted each season. There are over 50 wineries in the
district, including the state's largest and oldest wineries as well as
some of the youngest and smallest.
In addition to producing some of the finest vintages in the world,
these wineries also serve as a tourism magnet for eastern Washington.
Because of the unique experiences visitors enjoy at our wineries, they
generate many repeat requests for wines once they return to their home
states. While Washington has ``reciprocal'' legislation that allows our
wines to be shipped to consumers in twelve other states, it is
impossible for consumers who live in non-reciprocal states to obtain
Washington state wines not distributed through conventional outlets in
their local markets. The conventional distribution outlets typically
favor high volume producers. Most wineries in my district are
relatively small-producing less than 10,000 cases per year--and
therefore do not have distribution in many states. Washington State
wineries need an opportunity to respond to their customers who are
ready, willing, but unfortunately unable to buy these quality wines
other than traveling great distances to the wineries themselves.
The bill being considered by the Senate Judiciary Committee, to
enforce the Webb-Kenyon Act more aggressively, will do serious damage
to the state by state effort to open avenues for consumers to purchase
hard-to-find wines such as those produced in my district. I urge the
Committee to reject this legislation.
Sincerely,
Doc Hastings,
Member of Congress.
Representative Radanovich. Thank you, sir, and I do
appreciate being here with my Senator from California and also
the members of this committee, and especially my good friend,
Bob Ehrlich.
Mr. Chairman, in 1982 I established a small vineyard and
winery in the Sierra foothills community of Mariposa, my
hometown. The Radanovich Winery produces about 4,000 cases
annually, and we are located at the boundary of Yosemite
National Park, which receives about 3.4 million visitors
throughout the world every year. We have the opportunity to
present our wines to these tourists, who in many cases don't
want to carry wine home with them and ask that we send it to
them, or wish to purchase wines. They come from every State in
the Union, and frankly all over the world. So this issue is
near and dear to my heart.
Like most wineries, mine is small. Of the 1,600 wineries in
this country, only 50 are available in a typical retail
marketplace. Sales of regional or limited availability wine, of
which there are perhaps over 10,000 labels, have grown
dramatically in recent years. Unfortunately, traditional
distribution avenues are insufficient for the shipment and
delivery of wines from these numerous small producers. Direct
mail, the Internet, and other alternative forms of distribution
have helped these small wineries stay afloat, while at the same
time helping to satisfy the growing consumer demand for small
or lesser wines.
And let me say right off the bat, too, I want to reiterate
that as a member of the wine industry the last thing that we
want is minors purchasing alcohol. That is not the intent or
the purpose of being in business and making and growing and
producing and selling wines.
And, second, the other issue is that in many cases the
argument is brought forward in this that the wine industry is
avoiding paying taxes within the States that they are selling
wines. And that is not the issue here. The wine industry is
perfectly willing to pay a tax in any sales, anywhere across
the country. However, small wineries are at a disadvantage in
what my friend, Bob, had mentioned in the three-tier system
that was created after Prohibition. It is an antiquated system
that shuts out small wineries from being able to sell their
fine wines and good products all across the country.
And I think that the real issue is the fear that the
national wholesalers have in increased demand--or it is about
national wholesalers concerned about increased competition
brought on by new Internet technology and the desire for market
access for small wineries. This is the concern that I think the
wineries have in this country, is that we have access under the
Commerce Clause, due access, as would anybody else. And I would
hope that during the discussions on these bills that access by
small wineries in States would not be shut out.
Again, I reiterate that the advent of Internet technology
could bring problems in the future, but California has been
operating under mail order, direct mail, for many, many years,
and it has not been a problem ordering wine through
distribution channels such as UPS or anybody else.
I would like to draw attention to the progress the States
have been experiencing in reciprocal agreements in Louisiana
and New Hampshire, where they are allowed under their State
laws the ability to ship wine into those States, pay the taxes,
and guarantee that those wines do not go to minors by the
willingness of transportation companies to obtain adult
signatures and even adult proof of I.D. when it is delivered at
the door.
These are issues that should be decided by the State. I
think each State ought to be given the opportunity to regulate
commerce without limiting access by small wineries. They are
proving to do it and they need the encouragement from the
Federal Government to make sure that those agreements are, in
fact, implemented within their own States.
So I look forward to working with this issue, and hope that
we might, out of all of this thing, solve the access for small
wineries because it is critical to--as Mrs. Feinstein pointed
out, 90 percent of the wine production in the United States is
in our State of California and it is very important to small
business there.
Thank you very much.
[The prepared statement of Representative Radanovich
follows:]
Prepared Statement of Hon. George Radanovich
I am a California farmer. In 1982, I established a small vineyard
and winery in the Sierra foothill community of Mariposa, my hometown.
The Radanovich Winery, which produces Sauvignon blanc, Chardonnay,
Merlot, Zinfandel and Cabernet Sauvignon, has grown to over 4,000 cases
annually.
Like most wineries, mine is small. Of the 1,600 wineries in this
country, only 50 are available in a typical retail marketplace. More
specifically, about 20 wineries produce 90 percent of all the wine
produced. Despite this, sales of regional or limited availability
wine--of which there are perhaps over ten thousand labels--have grown.
Unfortunately, traditional distribution avenues are insufficient for
the shipment and delivery of wines from these numerous small producers.
Direct mail, the Internet and other alternative forms of distribution
have helped these small wineries stay afloat, while at the same time
helping to satisfy the growing consumer demand for smaller, lesser
known wines produced in this country.
Grape growing is a very important agricultural crop, the largest
crop in California and the sixth largest crop in the nation. Over 60
percent of the grape crop is used in the production of wine. The
resulting wine industry in total annually contributes over $45 billion
to the American economy; provides 556,000 jobs, accounting for $12.8
billion in wages; and pays $3.3 billion in state and local tax
revenues. In addition, wine is our third largest horticultural export.
Wine is commercially produced in 47 states.
Consumers in every state should be able to obtain access to a wide
variety of wines, especially the wines of small producers who lack the
distribution channels of the major wine producers in this nation. To
meet these consumer needs, I point to the 12 states which have chosen
to enact variations of a ``reciprocal shipment'' law, waiving local
taxes and allowing consumers to directly order a limited number of
cases of wine. I also direct your attention to recently passed
``shipper permit'' legislation in New Hampshire and Louisiana and to
the special order system developed and implemented by the Pennsylvania
state liquor monopoly. I am concerned that passage of the proposed
legislation would have a chilling effect on efforts underway to craft
creative state-by-state solutions such as these.
Legislation to allow states to bring to Federal court an action to
enjoin shipment or transportation of liquor in violation of the laws of
a particular state would have the unintended consequence of crippling
small wineries in this country. The proposed legislation does much more
than simply providing a remedy for a violation of the Webb-Kenyon
statute which governs interstate shipments. I fear that it will
authorize a state to erect discriminatory barriers to interstate
commerce which will be used to favored in-state commercial interests to
the detriment of out-of-state wine producers. The Commerce Clause
protects against state imposed barriers to free trade. That protection
should apply to wineries as well as all other businesses.
Further, existing remedies are available for violations of liquor
laws. In the case of wine (as with harder liquors) there is an
underlying federal permit which is required to operate a winery. That
permit is subject to oversight by the Bureau of Alcohol, Tobacco and
Firearms, and requires conformance to applicable laws. There have been
successful compliance actions through this mechanism. An additional
mechanism is not necessary.
Professor Jesse H. Choper, a distinguished scholar in the field of
constitutional law from University of California has written the
Committee to express his concerns about the possible consequences of
Federal legislation in this arena and I ask that this letter be
included in the record of this hearing. Professor Choper concludes that
the proposed legislation would violate the Commerce Clause protection
against barriers to free trade among the states, by allowing states,
rather than the Congress, to establish those barriers.
I am also concerned that the thrust of this legislation is to allow
states to use the Federal courts to obtain direct jurisdiction over
small businesses located in other states in a manner which invites
abuse of the court system and a trampling of the rights of out-of-state
citizens in order to satisfy the demands of politically powerful local
interests. Allowing the federal courts to be used as enforcement
machinery for state actions seems to me a huge expansion of federalism
and a very dangerous precedent.
Proponents of this legislation claim it is necessary to curb the
delivery of alcohol product to underage purchasers. I believe that
there are few more important causes than to stem the tide of underage
drinking in this country. A Health and Human Services survey reflects
that more than half of 18-20 year olds were drinking alcohol in the
past month and an astonishing quarter of that age group have engaged in
binge drinking during the same period. However, I am convinced that
direct shipment of wine, beer or spirits does not significantly
contribute to the problem. The two states with the highest consumption
of wines--California and New York--have long permitted intrastate
shipments ordered by phone or mail. Surely, if such mechanisms were
inherently open to abuse the authorities in those states would have
discovered that by now. But they have not. Manuel Espinoza, Chief
Deputy Director of the California Alcoholic Beverage Control agency has
written to Congressman Thompson and myself that as a result of remote
sales of alcohol in California, a practice which has been legal for
almost fifty years, the state has experienced no enforcement problems
or impediments in its ability to enforce laws related to sales to
minors. California has only received one complaint about the delivery
of alcohol to underage recipients via interstate mail orders. That
complaint originated from a privately organized ``sting'' and
investigation ascertained that the actual delivery, though left at the
door, was accepted by the minor's mother. I have included Mr.
Espinoza's letter as an attachment to my remarks.
Another concern raised by proponents is the avoidance of state
excise taxes by interstate shippers. There is no indication that taxes
avoided by shippers constitute a significant loss of revenue to any
state. It is estimated that interstate direct shipments consist
primarily of ultra premium wine and never constitute more than one-half
of one percent of a state's total wine volume. For the entire country,
a tax loss of that magnitude would be $2 million annually. For the
State of Maryland, even if it was to allow direct shipment of wine,
annual tax losses at full volume would be less than $20,000 per year.
For New York only $50,000. Other states: Missouri $13,000, Arizona
$40,000, Iowa $20,000, Ohio $30,000 and Michigan $40,000.
To address even this minuscule problem, forty-three members of
California's Congressional delegation have written to the Advisory
Commission on Electronic Commerce requesting that the Commission
address this problem when it examines means to ensure the fair
imposition of consumption, sales and use taxes arising from remote
sales of all products, a far more significant revenue problem estimated
to involve many billions of dollars in lost revenue. Legislation which
preempts the Advisory Commission on Electronic Commerce regarding wine
will have the affect of setting a precedent in regulation of the
Internet before the Commission has done its' work. We are moving into
an arena that all of us have not had the opportunity to think through,
and our narrow attempts with wine may end up with far-reaching impacts
on the sale of anything through the Internet.
Mr. Chairman, I am not convinced there is an urgent national
problem which needs to be solved by allowing virtually unprecedented
use of federal courts to solve state problems which can be addressed by
state legislative and judicial means. States can make it a crime for an
person under 21 to attempt to purchase alcohol. What fool in such a
state would dare to leave an evidentiary trail of credit card and
delivery records?
Rather than the proposed legislation, alternatives include
legislation which would encourage the development of open markets so
that consumers can have access to the products which they wish to
purchase.
I close by quoting for you a letter by Florida Attorney General
Robert Butterworth urging the veto of a bill making direct interstate
shipment of wine to a Florida consumer a felony: ``[The bill] is the
perfect tool for the vested interests who seek additional control over
the marketplace, at the expense of competition and consumer choice.''
The federal government should not empower states to engage in
anticompetitive actions favoring their in-state businesses. The federal
government should not use the power of the courts to suppress
competition. The federal government should not expand its reach into
the private purchases of consumers, or the activities of the small
businesses which make up the largest part of the wine business.
Thank you for the opportunity to address this distinguished
Committee.
______
State of California,
Department of Alcoholic Beverages Control,
Sacramento, CA, March 3, 1999.
The Hon. Mike Thompson,
The Hon. George Radanovich,
U.S. House of Representatives,
Cannon Building, Washington, DC.
Dear Representatives: This is in reply to your letter of March 1,
1999, requesting information about the Department's experience with
direct shipments of wine or other alcoholic beverages to California
consumers via the Internet, telephone or mail. We have responded to
your questions in the same order as they are presented in your letter.
Question 1. Have direct shipments of wine or other alcohol
beverages to California consumers resulted in an enforcement problem
for your department?
Answer. No. California has permitted direct wine shipments to
consumers since 1963. From 1963 to 1995 California law permitted an
adult resident to receive a case of wine per month from a source
outside of California but within the United States. The statute
established a no cost permit process administered by the Department. In
addition to requiring the name and address of the sender as well as the
California recipient, the permit process required that the shipment be
transported into California via common carrier (no guarantee a paper
trail) and an affirmation under penalty of perjury that the person
requesting permission to receive delivery was an adult. The statute in
question, Section 23661.2 of the California Business and Professions
Code, was repealed in 1995 and replaced with the current wine
reciprocity statute.
During those thirty-five years the Department authorized thousands
of those permits. At no time was a complaint received indicating the
wine was used for illegal purposes, i.e., re-sale by a retailer or
purchase and consumption by an underage person.
The Legislature has not extended the shipping privilege to beer or
distilled spirits. Consequently, our experience relates only to wine
products.
Question 2. Do remote sales of wine or other alcohol beverages in
California jeopardize the department's ability to enforce laws relating
to sales to minors?
Answer. While we have no data indicating just how widespread mail
order alcohol sales are in California, we have none the less
experienced no enforcement problems or impediments to our ability to
enforce laws relating to sales to minors as a result of this practice.
Question 3. What experience if any has the department had with
intrastate and interstate remote sales of wine or other alcohol
beverages to minors via the Internet telephone or mail?
Answer. While the subject of interstate sales of alcoholic
beverages has been the subject of considerable debate throughout the
country including California, we have to date witnessed no measurable
adverse effects on public welfare or safety that could be attributable
to interstate mail order alcohol sales.
Intrastate sales of alcoholic beverages from California retailers
to California consumers has been authorized by statute for almost fifty
years.
The number of complaints received by the Department involving
purchases by underage persons via this method have been minimal when
compared to all other complaints involving minors and alcohol. of the
more than ten thousand complaint investigations conducted by the
Department each year, we estimate that less than one half of one
percent have involved illegal sales to minors via home delivery.
Question 4. Have there been any complaints about the delivery of
wine or other alcohol beverages to minors which have been investigated
by your department? How many complaints? What was the outcome of the
investigation(s)?
Answer. To date we have received one complaint about the delivery
of alcohol to minors via interstate mail order. The complaint was from
a package store owner in Kentucky whose underage son placed an order
for beer with a California retailer and received delivery in Kentucky.
The son placed the order using the father's credit card with the
father's permission.
After conducting an investigation, it was ascertained that the
son's mother accepted delivery of the package that had been left at the
door by the parcel service who transported the shipment.
The Department took no disciplinary action against the California
retail licensee.
We trust this has been responsive to your request. If you have any
questions, please feel free to call on us.
Sincerely,
Manuel R. Espinoza,
Chief Deputy Director.
______
March 4, 1999.
The Hon. Orrin G. Hatch, Chairman,
Senate Judiciary Committee, U.S. Senate, Washington, DC.
Dear Senator Hatch: I write about Senator Hatch's Bill, currently
before the Judiciary Committee, that has been said to ``add
enforcement'' to the Webb-Kenyon Act passed by Congress in 1913. I am a
Professor specializing in Constitutional Law (and the former Dean) at
the School of Law of the University of California at Berkeley (Boalt
Hall) I attach a copy of my curriculum vitae.
I believe it is most important to underline that the Bill goes far
beyond simply providing a remedy for a violation of Webb-Kenyon.
Instead, it makes fundamental changes in current law and in doing so
affects serious constitutional and public policy issues. Webb-Kenyon
prohibits the importation of alcoholic beverages into a state in
violation of that state's laws. It is generally understood that
Congress' intent in passing the statute in 1913 was to give federal
sanction to a state's decision to ``go dry,'' an authority that had
been denied to the states by the Supreme Court in Leisy v. Hardin, 135
U.S. 100 (1890).
Webb-Kenyon does not authorize a state to erect discriminatory
barriers to interstate commerce. Indeed, in the absence of an express
federal enactment, any attempt by a state to do so--by conferring
different rights on in-state and out-of-state producers of alcoholic
beverages--would violate the core principle underlying the Commerce
Clause of the U.S. Constitution that forbids state discrimination
against interstate commerce. Only Congress can so regulate trade
between the states.
Nor does the 21st Amendment, which confers special powers on the
states regarding alcoholic beverages, affect that conclusion. In
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Supreme court
held that the 21st Amendment did not permit state regulations of the
local sale or use of liquor to discriminate against interstate
commerce. To do so, the Court reasoned, would be inconsistent with a
central tenet of the Commerce Clause: forbidding economic
protectionism.
I believe that the Bill, rather than simply creating a federal
remedy for a violation of Webb-Kenyon in its current form, would
dramatically expand the powers of the states to regulate alcoholic
beverages. Most significantly, it would run counter to the spirit of
Bacchus and remove the protection that the Commerce Clause grants the
alcoholic beverage industry, along with all others, from state erection
of barriers to free trade.
I would be happy to provide any further information you may find
helpful.
Sincerely,
Jesse Choper.
The Chairman. I don't want to get on the wrong side of
Senator Feinstein is all I can say.
Senator Feinstein. That is a good spirit, Mr. Chairman.
The Chairman. A good spirit.
Congressman Thompson.
STATEMENT OF HON. MIKE THOMPSON, A U.S. REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Representative Thompson. Thank you, Mr. Chairman and
Senators. It is a pleasure to be before you this morning and I
appreciate the opportunity to be here. I represent the north
coast and the northern portion of California. In my district,
we have about 350 wineries. I think it is the largest
concentration anyplace, in any region of the United States. And
I represent the premier wine-growing region--or one of the
premier wine-growing regions of the United States----
Representative Radanovich. Watch it. [Laughter.]
Representative Thompson [continuing]. Which would be Napa,
Sonoma, Lake and Mendocino counties. And I just want to
emphasize the importance of the industry. This industry brings
about tremendous economic benefit not only to my district, but
to the entire United States. The industry is directly
responsible for over 200,000 jobs, and they pay about $3.2
billion in wages and $1.6 billion in State and local taxes. And
they contribute $12.4 billion to the gross domestic product. If
you take into account normal multipliers, this increases
markedly.
Notwithstanding those impressive numbers, it is important
to note, as has already been said today, that the majority of
the wineries are small wineries, small, family-owned mom-and-
pop-type wineries. And there are less than 100 wineries of the
1,800 across the Nation that produce 95 percent of the wine. So
as was pointed out, most of the wine in our country is produced
by the larger wineries. The small wineries produce a very small
part. Yet, they contribute a tremendous amount to our economy
and to our society.
But through some of the problems in this three-tiered
system that has been referenced today, specifically the
consolidation of distributors, these small wineries are at a
very distinct disadvantage in being able to get the product
that they produce to consumers across these United States that
want to buy this product.
I have one vintner in my district who told me this week
that he loses, they figure, $32,000 per month on tourist-
generated orders. These are people who come to California,
visit the winery, and say this is great wine, will you send a
case to my home. And they can't; they can't do that, nor can
the consumer do that. So they lose $32,000 per month, and for a
small business that is a tremendous amount of money.
I also want to point out that winery owners and vintners
are responsible citizens. They don't want wine or any other
alcoholic beverage to be sold or to be distributed to minors,
nor do they want to avoid paying their fair share of taxes. And
I want to suggest that there are, in fact, ample safeguards
either in place or the opportunity to put ample safeguards in
place that would make it impossible to either avoid taxes or to
sell to minors or to sell within dry jurisdictions. I think any
examples to the contrary are orchestrated.
Even in the video we saw today, we saw a young woman, with
adult supervision, accessing her computer and using someone
else's credit card. So not only in a situation like this is the
minor in violation of State liquor laws, but also in violation
of credit card laws as well.
Manuel Espinoza is deputy director of the California
Department of Alcoholic Beverage Control, and in a letter that
he sent to Mr. Radanovich and myself--and I would like, Mr.
Chairman, to ask that this be entered into the record.
The Chairman. Without objection, we will do that.
[The letter referred to is attached to the prepared
statement of Representative Radanovich.]
Representative Thompson. He stated that he does not believe
that this is, in fact, a problem. Last year, when I was in the
State legislature, I held hearings on this very issue and Mr.
Espinoza came forward and stated the same thing, and he stated
it based on 20 years of experience in California. In
California, for the last 20 years we have been able to sell
alcoholic beverages direct within our State jurisdiction and
there has been no problem.
And I would like to read from his statement to that
committee. He said, ``I do believe the sale to minor issue is
overblown, and I say that because we have got experience here
in California with a piece of legislation that was on the books
for at least 20 years. It would allow a person to receive a
case of wine a month from any part or from any State,
regardless of the source. And it was a very simple permit
process. There was no charge. The consumer who wanted to
purchase or wanted to receive a case of wine a month could
merely send in a form. They would name the shipper, they would
describe the contents of the shipment, and it would have the
name and address of the person that was going to receive the
shipment. We would review the form and sign it and send it
back, and the form was permission for the shipper to bring it
in. Our experience with that--you know, like I said, for the
last 20 years there was never a problem.''
I believe, Mr. Chairman, that passage of this legislation,
absent any Federal allowance for direct marketing or for entry
and access into the direct market, would, in fact, set back our
efforts that Mr. Radanovich had outlined earlier in regard to
working on this issue in a State-by-State manner.
I thank you very much for the time to present.
[The prepared statement of Representative Thompson
follows:]
Prepared Statement of Hon. Mike Thompson
Mr. Chairman, Members of the Committee, thank you for allowing me
the opportunity to discuss the important matter of direct interstate
shipments of wine and the issue of underage access to alcohol.
I represent the north coast of California from the top of the San
Francisco Bay to the Oregon border, a district which includes America's
premier winegrowing region: the Napa Valley, Sonoma, Mendocino and Lake
Counties. I represent over 350 wineries and can safely say that all of
them would like to be able to service their customers, all want to pay
their fair share of taxes, and none wants minors to purchase their
product.
This is an important industry to our national economy. It directly
creates 207,000 jobs, accounting for $3.2 billion in wages. In 1997,
the industry directly added $12.4 billion to the gross domestic product
and paid $1.6 billion in taxes to state and local economies. The total
net contribution is larger when economic multipliers are used to
calculate the indirect effects of industry activity. When direct and
indirect figures are totaled, the industry provides 556,000 jobs that
pay $12.8 billion in wages, generate $45.6 billion to the U.S. economy,
and pay $3.3 billion in state and local taxes.
Many of America's wineries are small, mom-and-pop businesses that
make between a few hundred to a few thousand cases of wine per year.
The economic lifeblood of the typical family winery combines the
selling of wine to tourists and limited off-site wine sales. Like most
small businesses, the winery hopes to be able to compete on a level
playing field and to sell wine to customers who request it.
In many states, however, the only means to sell wine is through a
distributor and many wineries depend upon distributors to get their
product to the market. Unfortunately, for the majority of wineries,
that option is unavailable and direct shipping is the only viable means
to fill customer orders.
The reason is that the distributorship industry has experienced
considerable consolidation over the past decade. There are fewer wine
distributors and fewer people to adequately market the 7,000-10,000
American wines currently for sale. In addition, many distributors have
no financial incentive to represent the small, family-owned and
operated wineries.
And it's these businesses, the wineries which need to satisfy
tourism-generated demand for small production wines, that suffer the
most. Since these wineries can't get their product to customers using
the normal distribution network, their only alternative is to sell to
the consumer by direct mail or the Internet.
Such sales are a considerable source of revenue for these small
businesses. States enacting anti-direct shipping laws restricting this
market can significantly affect a winery's business. One Sonoma winery
estimates it loses $32,000 a month in revenues because it is not
permitted to fill orders requested by out of state tourists and wine
consumers.
Opponents of direct shipping raise two patently false arguments
that must be dismissed. Some claim that wineries are unwilling to live
up to their tax obligations and that wineries want to ship to dry
counties and to minors. Please know that nothing could be further from
the truth.
Despite the rhetoric from direct shipping opponents, winery owners
are responsible citizens and generous members of our communities.
American wineries all want to pay their fair share of taxes and no
winery in any state wants to send wine into dry counties or supply
minors with wine.
Despite a very few orchestrated incidents, there is no evidence to
support the claim that minors are purchasing wine over the Internet or
through the mail. As a California state Senator, I conducted a 1997
committee hearing specifically on the subject of direct shipping. At
that hearing, California Alcoholic Beverage Control Deputy Director
Manuel Mendoza testified as follows:
I do believe the sale-to-minor issue is overblown, and I say
that because we've got experience here in California with a
piece of legislation that was on the books for at least 20
years * * *
* * * * *
Our experience with that * * * for at least 20 years there
was never a problem that was brought to our attention with
regard to sales to minors or the importation of a product that
was harmful.
* * * * *
* * * we've got studies that show that 87 percent of our high
school seniors have reported that they consume alcohol. About
67 percent of those say that they can buy it. So as to the
issue of minors purchasing these products and having it shipped
in, I don't think that's going to happen in California because
the kids, unfortunately, can find ways to buy it here far, far
to easy.
In his recent letter to Mr. Radanovich and me, Mr. Espinoza
reiterated the fact that the Department of Alcoholic Beverage Control
in California has not experienced an enforcement problem or impediments
to its ability to enforce laws relating to direct shipping sales to
minors. He said that there are ``no measurable adverse effects on
public welfare or safety that could be attributable to interstate mail
order alcohol sales.''
Moreover, shipping companies such as DHL Worldwide Express have
implemented effective safeguards to prevent the delivery of alcohol to
minors and intoxicated persons:
DHL's protocol requires every recipient's ID to be visually checked;
The ID information is logged on a DHL tracking document;
Every package containing wine must be labeled on the outside as
containing alcohol, delivery to minors prohibited; identification
required.
Over the past 20 years, at least 15 states including California
have adopted legislation allowing consumers to purchase a limited
amount of wine from their homes. These are balanced statutes which
place a cap on the quantity of wine sold to an individual addressee and
which prohibit wine sales to minors.
As such, I question the reasons some states are using to enact
anti-direct shipping laws--laws which in my view are unreasonable
barriers to competition erected to favor local liquor industries and
distributors. In fact, the U.S. Supreme Court has said:
State laws that constitute mere economic protectionism are
therefore not entitled to the same deference as laws enacted to
combat the perceived evils of an unrestricted traffic in
liquor.
(Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 [1984].)
There is no legal justification for states to be granted access to
federal court. The legislative proposal before you would dramatically
expand the powers of the states to regulate alcoholic beverages and
would run counter to the Supreme Court's decision that the 21st
Amendment does not permit states to discriminate against interstate
commerce.
Furthermore, the proposal is unnecessary and unduly burdensome
since there is already a remedy at law to address this problem. The
Bureau of Alcohol, Tobacco and Firearms can currently revoke a winery's
basic permit to operate if they violate state law restrictions on sales
to minors.
Finally, this proposal will hamper efforts by the interested
parties to resolve this issue at the state level.
America's family wineries simply wish to be able to respond to
requests from adult customers wanting to purchase premium wine. I
strongly urge this Committee to carefully consider the legitimate needs
of consumers and the companies that sell to those customers. Any
legislation should be balanced to ensure that both consumers and
wineries are able to transact a legal business in a reasonable manner
and on grounds no more stringent than those that apply to in-state
manufacturers and distributors.
Mr. Chairman, again, thank you for the opportunity to present our
views. I am pleased to respond to any question you might have.
The Chairman. Well, I want to thank each of you for coming
and for taking time from what I know are busy schedules to come
over here and help this committee to at least look at this in
the best possible way we can, and we will try to do that,
taking into consideration everybody's needs. I just want to
thank you for coming. We appreciate it.
Representative Millender-McDonald. Thank you, Mr. Chairman.
Representative Thompson. Thank you, Mr. Chairman.
The Chairman. Leading off the second panel today is Utah
Assistant General Wayne Klein. Mr. Klein is currently leading
the battle in the Utah Office of Attorney General to prosecute
companies and individuals who are alleged to be illegally
shipping alcohol into that State. Although an important case he
is prosecuting was initially dismissed on procedural and
constitutional grounds, he recently persuaded the Utah Court of
Appeals to reinstate that case and allow him to bring the
charges before a jury. However, as I believe he will testify,
further appeals are expected. Prior to his current position,
Mr. Klein was the Idaho Securities Bureau Chief and an adjunct
professor at Boise State University. We are happy to have you
here, Wayne.
Our second witness on panel two is Prof. Stephen Diamond,
from the University of Miami School of Law. Professor Diamond
specializes in American legal history and teaches courses in
that subject, as well as in State and local government law,
tort law, property law, and most importantly for our purposes,
liquor law.
Now, how a person who has devoted his life to a study of
liquor law ever managed to pass the bar is beyond me.
[Laughter.]
Professor Diamond is a member of the Committee on Beverage
Alcohol of the American Bar Association, and is also a member
of the International Wine Lawyers Association. He received his
B.A. from Swarthmore College, a certificate in social
anthropology from Cambridge University, and an A.M., a Ph.D. in
history and a J.D. from Harvard University. Prior to his
current position at the University of Miami, Professor Diamond
was a professor of law on the faculty at the Cardozo School of
Law of Yeshiva University. So we are pleased to have you here,
Mr. Diamond.
I am very pleased to have with us today Brendan Brogan. At
18 years of age, Brendan is already quite an accomplished young
man. He is the first youth member of Mothers Against Drunk
Driving's National Board of Directors. He was selected for that
position after serving in 1998 as a New Jersey delegate to
MADD's National Youth Summit to Prevent Underage Drinking in
Washington. Brendan is also a member of a MADD Youth in Action
Team, a community group dedicated to changing a societal
environment which condones underage drinking. He is also
president of a DEA, Drug Enforcement Administration-sponsored
Boy Scout explorer post, a group whose purpose is to organize
and enjoy high adventure in a drug-free environment. Brendan
became an Eagle Scout at age 13, one of the youngest ever to
receive that honor. So we are proud to have you here, Brendan.
The fourth member of the panel is John DeLuca, president of
the Wine Institute. The Wine Institute is the public policy
advocacy association of California wineries. It brings together
the resources of 450 wineries and affiliated businesses to
support legislative and regulatory advocacy, international
market development, media relations, scientific research, and
education programs that benefit the California wine industry.
It is great to have you here, Mr. DeLuca.
Finally, filling out the panel is Mike Ballard, the
President of Savannah-Chanel Vineyards, located in California's
Santa Cruz Mountains. Established by a French immigrant in
1892, Savannah-Chanel Vineyards still makes wines from some of
the original plantings.
So we are honored to have all of you here. Each of you
brings a special expertise to this committee today and we will
look forward to hearing each of your testimonies. Now, we are
going to limit you to 5 minutes each. We hope that you will
abide by that and then we will have some questions for you.
Mr. Klein.
PANEL CONSISTING OF WAYNE KLEIN, ASSISTANT ATTORNEY GENERAL,
STATE OF UTAH, SALT LAKE CITY, UT; STEPHEN DIAMOND, PROFESSOR
OF LAW, UNIVERSITY OF MIAMI SCHOOL OF LAW, CORAL GABLES, FL;
BRENDAN BROGAN, NATIONAL BOARD MEMBER, MOTHERS AGAINST DRUNK
DRIVING, RIDGEWOOD, NJ; JOHN A. DeLUCA, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, WINE INSTITUTE, SAN FRANCISCO, CA; AND
MICHAEL BALLARD, PRESIDENT, SAVANNAH-CHANEL VINEYARDS,
SARATOGA, CA
STATEMENT OF WAYNE KLEIN
Mr. Klein. Thank you, Mr. Chairman, members of the
committee. As assistant attorney general for the State of Utah,
one of my responsibilities is white collar crime, including a
case that I am prosecuting against an Illinois-based company,
Beer Across America, which was shipping alcohol into Utah in
violation of Utah criminal laws.
I appreciate the opportunity to appear in support of
legislation that would empower State enforcement officials to
use the Federal courts in limited instances to halt illegal
shipments of alcohol when the State enforcers otherwise would
be unable to prevent the shipments. I confess to being somewhat
surprised that events are necessitating new legislation and
this hearing. States have always been permitted to exercise
their police powers in ways that would protect their citizens.
Beyond the significant police powers granted to States by
the 10th amendment, alcohol long has held a special status. The
21st amendment endowed the States with constitutionally-based
authority to determine the conditions under which alcohol is
sold in a State. The constitutional amendment process that
repealed Prohibition guaranteed this control to the States. The
Webb-Kenyon Act has long served as a legislative reaffirmation
of this special status. My surprise derives from the depth and
boldness by which alcohol marketers are contesting this special
status.
Beer Across America was warned that its shipments of
alcohol to Utah were illegal. It responded by promising to halt
any further shipments. Six months later, Utah investigators
were seizing over 100 cases per month. These invoices from
seized shipments demonstrate not only the defiant continuation
of sales, but that in many cases customers were encouraged to
list an out-of-State address for billing purposes, in the hopes
that regulators would not find out that the alcohol was
destined for Utah.
The problem is not just beer. An estimated 5 million cases
of wine are shipped to consumers illegally every year. And it
is not just adults who are buying the alcohol. You saw the
video piece about a 13-year-old Utah girl being able to order
beer through the Internet. In our prosecution, we had a minor
who purchased and was sent alcohol. A study cited in my written
remarks indicates that up to 10 percent of alcohol being
acquired by minors comes via delivery services. And of alcohol
being sent to consumers, an estimated 59 percent is left out on
porches or in car ports rather than being physically delivered
to an adult.
I spent much of my earlier career bringing civil and
criminal enforcement actions against those committing
securities fraud. I have filed suit and obtained literally
hundreds of injunctions against fraud promoters located in
other States. Just last summer, I obtained two felony
convictions against a New York brokerage firm for fraudulently
soliciting a Utah resident. In all of those cases, no one ever
challenged the State's authority to obtain a civil injunction
or a criminal conviction against an out-of-State defendant. No
one claimed the State could not prosecute a crook engaged in
interstate fraud via the telephone or mail. Everyone recognized
it was beyond dispute that a New York firm had to comply with
Utah law if it wanted to sell securities to Utah residents.
It is paradoxical that the States with no special
constitutional authority over investment transactions seem to
have more authority over securities violators than shippers of
alcohol. This result is truly unfortunate. There are very good
reasons for States to decide to control the sale of alcohol in
their States. These reasons range from preventing sales to
minors, to quality control, to public safety.
I am happy to report some good news. Last Thursday, the
Utah Court of Appeals reversed the trial court's 1997 decision
to dismiss our criminal charges against Beer Across America.
That criminal trial now can proceed. It is a good first step,
but it is still a long way from solving the national problem or
from eliminating barriers to civil cases. Many States like
Florida have been subject to a legal catch-22. The State courts
may think they lack subject matter jurisdiction or personal
jurisdiction over the out-of-State defendants. But the Federal
courts, which may more easily assert jurisdiction, have denied
the States a remedy because the Webb-Kenyon Act provides no
Federal cause of action.
We need legislation to solve this legal catch-22. The
States need some artificial barriers removed, barriers that are
being used to hide illegal activities of hundreds of companies
shipping alcohol directly to consumers. I respectfully
recommend this committee seriously consider the following
three-point plan for giving the States more power to control
their borders.
First, Congress should move immediately to pass amendments
to the Webb-Kenyon Act that will empower the States to use
Federal courts to halt illegal shipments. This authority must
be sufficient to grant effective relief to the States in, A,
stopping the violations; B, punishing the perpetrators; and, C,
deterring future wrongdoing. Venue and service of process
limitations must not make the Federal court remedy illusory.
Venue needs to be where the violation occurred. If a company
ships its products into a State, it should be answerable in the
location from whence its revenue was derived.
Second, Congress should use the occasion to reaffirm the
principles behind the 10th and 21st amendments that alcohol
distributors must comply with the laws of each State in which
they want to sell their products.
And, third, the committee should consider legislation in
this bill or another requiring that alcohol being shipped
across State lines, whether or not in compliance with the laws
of the receiving State, be clearly labeled as alcohol, identify
the sending company, and require an adult signature before
delivery. Packages of alcohol should not be left on doorsteps.
Minors must be foreclosed from taking advantage of any new
alcohol sources.
Mr. Chairman, members of the committee, doing business in a
State is a privilege. That privilege is fairly conditioned on
compliance with the laws of that State. Alcohol more than any
other product should demand adherence to this fundamental
principle.
Thank you for the opportunity to express my views and I am
happy to answer any questions. Thank you.
The Chairman. Thank you.
[The prepared statement of Mr. Klein follows:]
Prepared Statement of Wayne Klein
Mr. Chairman and Members of the Committee: My name is R. Wayne
Klein. I am an Assistant Attorney General for the State of Utah. I am a
prosecutor with responsibility for cases involving white collar crime,
including a criminal case against an Illinois company that was selling
and then shipping into Utah alcohol in a manner that violated Utah
criminal laws. The Attorney General's office works closely with the
Utah Department of Alcoholic Beverage Control and the Utah Criminal
Investigation Bureau in enforcing Utah's alcohol control laws.
introduction and overview
I am pleased to express strong support for amending the Webb-Kenyon
Act in a way that empowers state enforcement officials to halt
deliberate and blatant violations of state alcohol control laws. States
need to be allowed to prevent out-of-state alcohol vendors from
continuing to ship liquor in to the states in violation of state laws.
An unfortunately high number of alcohol producers and shippers are
defying state laws and challenging their authority to control the sale
of liquor within their borders.
Heretofore unchallenged notions that the Tenth Amendment and the
Twenty-First Amendments vested the states with authority to control the
sale and transportation of liquor within the states' borders are now
under broad and determined attacks. What is unfortunate is that these
violators are masquerading as legitimate businesses.
If alcohol producers wish to be able to ship their products
directly to consumers in other states, the producers must change the
laws. Permitting the continuation of a massive, coordinated effort by
these companies to defy state laws promotes neither the rule of law nor
the sanctity of states rights.
the direct shipping industry is defying state and federal laws
In 1997 the Joint Committee of the States, a committee of state
alcohol regulators, conducted a survey of direct shipping of alcohol in
the United States. The survey identified 154 companies engaged in mail
order and direct shipment of alcohol at that time. Many other companies
have entered the market since then.
This activity is in stark contrast with the laws of those states.
Every state either prohibits or tightly regulates direct shipments of
alcohol to consumers, in varying degrees.\1\ Twelve states are *so-
called* reciprocal states, permitting shipments of wine only (but not
beer or distilled spirits) into their jurisdictions, but only from
other reciprocal states. About nineteen jurisdictions (including the
District of Columbia) permit some limited importation by consumers. In
many cases, the consumer must obtain a permit before placing the order.
It should be noted that the availability of limited importation for a
consumer does not necessarily mean the shipper also is exempt from the
law's requirements. Some twenty states allow no direct shipments. In at
least five of these states direct shipment is expressly made a felony.
---------------------------------------------------------------------------
\1\ The Wine Institute maintains a state by state breakdown of each
state's laws on direct shipping of alcohol. See www.wineinstitute.org/
shipwine/analysis/state--analysis.htm. See also DeConti, New
Legislation Increases Prohibition on Direct Selling, ``The Bar'' (ABA
Committee on Beverage Alcohol Practice), Vol III, No. 3 (Jan. 1998).
---------------------------------------------------------------------------
These alcohol marketers are not located only in ``reciprocal''
states. They are not limiting sales only to consumers in other
reciprocal states. They are shipping directly to consumers in every
state. The direct sales are in blatant violation of state alcohol
control laws. Why?
The reasons for selling and shipping alcohol in violation of state
laws are explained only by greed and opportunism. We can rule out
ignorance of the law as the reason for their conduct. Sales of alcohol
are regulated by the home jurisdiction as well as by the federal Bureau
of Alcohol, Tobacco and Firearms (BATF) at least to some degree. The
existence of state laws and law enforcement efforts against direct
shippers is well known within this industry.\2\ Indeed, when Utah
criminally charged Illinois-based Beer Across America with illegally
shipping beer to customers in Utah, it was only after investigators had
warned the company and its lawyer that the sales were illegal--yet the
sales continued.
---------------------------------------------------------------------------
\2\ In addition to the Wine Institute web page, WFF Distributing in
Healdsburg California publishes an annual Retail Wine Shipping Guide
which clearly and succinctly provides state-by-state information on
whether direct shipping is allowed and, if so, under what conditions.
---------------------------------------------------------------------------
In any other legitimate industry, businesses first would ensure
that laws were changed to permit activity before engaging in massive
marketing and sales of their products. Not so here. There may be
several explanations. It may be that alcohol marketers are (a) hoping
not to get caught (and the large number of sellers certainly assists in
the anonymity), (b) hoping to get the laws overturned (laws that have
withstood challenges for sixty years), or (c) seeking sympathy from the
public and the media, wishing that public pressure will result in
changes in the law (after the violative conduct, rather than before).
Regardless of the motivation, it must be emphasized that this
industry was born--and is thriving--in manifest disregard of the law.
are state alcohol control laws still valid?
There are high stakes in this battle. The existence of the alcohol
direct selling industry is a frontal challenge to the entire concept of
states exercising their police powers. It is a defiance of states'
rights and their ability to control alcohol sales within their states.
By what authority do the states enact laws controlling the sale of
alcohol within their borders?
The Tenth Amendment to the Constitution provides: ``The powers not
delegated to the United States by the Constitution nor prohibited to it
by the States, are reserved to the States respectively, or to the
people.''
The Twenty-First Amendment repealed prohibition. The State of Utah
cast the deciding vote for the repeal, in large part because state
powers were preserved. The operative language of the 21st Amendment
reads: ``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.'' Under this Constitutional provision, alcohol is given a
special status. States have the constitutionally protected ability to
determine the conditions under which alcohol is sold or shipped into
their states.
Congress has reaffirmed this special reservation of powers to the
states. The Webb-Kenyon Act \3\ expressly prohibits the ``shipment or
transportation'' of alcohol ``in violation of any law of [a] State,
Territory, or District * * *.'' Again, the rights of the individual
states to control the sale of alcohol within its borders has been
recognized and preserved.
---------------------------------------------------------------------------
\3\ 27 U.S.C. Sec. 122. The Webb-Kenyon Act and its predecessor the
Wilson Act date back to 1890. This demonstrates long standing
Congressional recognition of state authority in this area.
---------------------------------------------------------------------------
It should not be surprising that lawmakers in most states have made
violations of the alcoholic beverage control laws a predicate offense
for racketeering laws. Utah has done so.\4\ In fact, Utah's charges
against Beer Across America included one count alleging a violation of
state racketeering laws.\5\
---------------------------------------------------------------------------
\4\ Utah Code Ann. Sec. 76-10-1602 (4)(www) (1998).
\5\ State v. Amoroso, Beer Across America, Case No's. 97 1002970 FS
and 97 1002971 FS, First Amended Criminal Information, Utah Third
District Court (Apr. 21, 1997) reversed Case No. 971712-CA (Utah Ct.
App. Mar. 4, 1999).
---------------------------------------------------------------------------
why does alcohol have special status?
The sale--or even transportation--of alcohol is accorded special
status under the constitution, federal law, and state law because of
the unique nature of alcohol. Control over the sale of the alcohol, its
transportation, and its use reflect public policy determinations that
limitations on the sale of alcohol serve the public interest. Examples
are many:
Sales to minors Restricting alcohol sales to minors is one
of the most fundamental justifications for state regulation of
alcohol. It is discussed in the next section.
Restrictions on locations, types of sales States may decide
to prohibit the sales of alcohol on certain days of the week or
after certain hours at night.\6\ Establishments that sell
liquor might be restricted to locations away from schools and
churches.\7\ There may be prohibitions against selling to
intoxicated or interdicted personnel.\8\ Concerns about
restrictions on the availability of certain products are
largely unfounded.\9\
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\6\ Utah Code Ann. Sec. 32A-3-106 (10) (1998). And, in some cases,
on election day. Id.
\7\ Utah Code Ann. Sec. 32A-2-101 (3) (1998).
\8\ Utah Code Ann. Sec. 32A-3-106 (9) (1998).
\9\ While state policies may restrict the availability of certain
products, this problem is largely a myth. The beers shipped to Utah
consumers by Beer Across America were all available in state liquor
stores and at a price lower than charged by Beer Across America. Most
state alcohol regulators make a great effort to provide a wide variety
of products at state stores.
Control consumption Requiring alcohol to be sold at state
liquor stores may reduce the amount of consumption. This
reflects a valid policy choice of the state.\10\ If lawmakers
choose to limit beer sales to products having a low alcoholic
content, it may be endeavoring to reduce some of the ill
effects of consumption.\11\
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\10\ Utah's alcoholic beverage laws are explicit on this point.
``This title is an exercise of the police powers of the state for the
protection of the public health, peace, safety, welfare, and morals and
regulates the sale, service, storage, manufacture, distribution, and
consumption of alcoholic products.'' Utah Code Ann. Sec. 32A-1-103
(1998).
\11\ Utah Code Ann. Sec. 32A-1-105 (4) (1998).
Public safety Alcohol is the largest single cause of
automobile fatalities. Control by the state can ameliorate this
travesty. ``Because of Utah's stringent laws, only 20.6 percent
of all Utah traffic fatalities in 1997 were related to alcohol,
compared to 38.6 nationwide.\12\
---------------------------------------------------------------------------
\12\ Editorial Opinion, Don't Contaminate Liquor Laws, Deseret
News, Feb. 1, 1999.
Product quality State alcohol regulators have responsibility
to ensure the purity of the products being sold for
consumption. The State has a great interest in preventing the
sale of any adulterated alcohol products.\13\
---------------------------------------------------------------------------
\13\ Utah Code Ann.
---------------------------------------------------------------------------
32A-12-219 (1998) (adulteration); Utah Code Ann. Sec. 32A-
13-109 (1998) (inspections).
Labeling The labels and packaging for alcohol products must
be approved prior to use. This prevents untruthful and
misleading statements and reduces the likelihood that labeling
and packaging will overtly entice underage consumers.\14\
---------------------------------------------------------------------------
\14\ See Utah Administrative Code, (DABC Rule) R81-1-3 (3), R81-1-
17(3)(a) (1998)./
Taxation Alcohol is taxed at a heavy rate. This is intended
both as a source of revenue\15\ and as a disincentive to high
consumption. If sales taxes or alcohol-specific taxes are not
paid to the state treasury, all taxpayers suffer and the
policies behind such taxes are unmet. In Utah's criminal case
against Beer Across America, the company collected sales taxes
from Utah residents and claimed to be paying it to another
state. We were unable to verify whether the amounts collected
were remitted to another state. If not, the company
fraudulently collected--and converted to its own use--increased
amounts from its customers. Even if taxes were paid to another
state, Utah residents still are obligated to pay Utah use taxes
for the purchases. In such cases, citizens paid taxes twice. If
the vendor is not licensed to collect sales taxes, how can a
state know whether taxes have been collected or remitted.
Businesses that are obeying the law and pay the required fees
and taxes should be commended.
---------------------------------------------------------------------------
\15\ This revenue is far below the well-known societal costs of
dealing with the effects of alcohol consumption as reflected by
increased rates of domestic abuse, workplace absenteeism, and health
care costs.
Licensing The licensing of producers and vendors of alcohol
gives the state a means of preventing unqualified or
undesirable persons from participating in this business.\16\
Persons with criminal records or with ties to illicit
organizations can be excluded. Insurance coverage may be
required of the licensee.\17\ The licensing process also can
require that licensees be knowledgeable in the law. The threat
of revoking a license is an incentive for the holder to insist
on compliance with the law by his firm. Licensing also gives
states the ability to impose pro-consumer requirements such as
a mandate for all licensees to undergo server training to
prevent sales to minors or to the already intoxicated.
---------------------------------------------------------------------------
\16\ Utah Code Ann. Sec. 32A-4-103 (1) (1998).
\17\ Utah Code Ann. Sec. 32A-4-102 (1) (1998).
---------------------------------------------------------------------------
sales of alcohol to minors
One of the strongest--and most universally accepted--justifications
for controlling the sale of alcohol is to prevent consumption by
minors. The reasons for this paternalism are beyond cavil.
Nationally, 26 percent of 8th graders, 40 percent of 10th graders,
and 51 percent of 12th graders report drinking alcohol in the prior
month.\18\ Although rates are lower in Utah, there are nevertheless
22,000 underage binge drinkers in the state of Utah.\19\
---------------------------------------------------------------------------
\18\ Youth Drinking: Risk Factors and Consequences, Alcohol Alert,
No. 37, July 1997.
\19\ Anne Wilson, Study Links Ads, Teen Drinking, Salt Lake
Tribune, Sep. 11, 1996 at C1.
---------------------------------------------------------------------------
Across the country, about 84 percent of all college students drink,
\20\ and about 44 percent are binge drinkers.\21\ College students
under 21 binge drink at rates equal to or greater than those of legal
drinking age.\22\ Rates of college drinking are lower in Utah. In 1994,
80 percent of Utah college students reported that they did not
drink.\23\ Binge drinking, although not as prevalent in Utah as
elsewhere, is still a major problem. A survey conducted by the Utah
Alcohol Policy Commission indicates that 12 percent of first-year
(underage) Utah college students binge drink. When statistics from
Brigham Young University (a church-sponsored institution) are factored
out, the number jumps to 18 percent.\24\
---------------------------------------------------------------------------
\20\ Henry Weschler et al, Too Many Colleges are Still in Denial
About Alcohol Abuse, The Chronicle of Higher Education, Apr. 14, 1995.
\21\ Henry Weschler et al, Health and Behavioral Consequences of
Binge Drinking in College: A National Survey of Students at 140
Campuses, JAMA, Dec. 7, 1994.
\22\ Ralph W. Hingson, College-Age Drinking Problems, Public Health
Reports, Jan/Feb, 1998, at 52; Donna E. Shalala, Message from Secretary
of Health and Human Services, Alcohol Alert, July 1995.
\23\ Joan O'Brian, More Students Aren't Drinking to Their Health,
Salt Lake Tribune, May 24, 1994, at D1.
\24\ Dan Egan, Study: Binge Drinking Low at Utah Colleges, Salt
Lake Tribune, Nov. 7, 1997 at B1.
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What is clear is that governmental control policies, such as
raising the drinking age and increasing taxation of alcohol, have been
shown to reduce alcohol consumption and alcohol-related problems among
young adults.\25\
---------------------------------------------------------------------------
\25\ Barbara L. Braun et al, Civic Participation by 18- to 20-Year-
Olds as a Predictor of Support for Alcohol Control Policies: The
Communities Mobilizing for Change Project, Contemporary Drug Problems,
Mar. 1, 1997.
---------------------------------------------------------------------------
Firms engaged in direct shipping of alcohol are making it
significantly easier for minors to gain access to alcohol--and in some
ways that may not be anticipated. Unlike the traditional sales
transaction involving alcohol, direct shipping eliminates the face-to-
face contact between the buyer and seller. Whether the traditional
seller is a state liquor store or a private storefront, a cashier is
present to verify the age of the buyer. Not so with direct sales. There
is no means of determining the true identity of the buyer. While the
telephone order takers or the Internet order forms may ask the buyer
whether he or she is over 21, no steps are taken to verify this crucial
piece of information. If a minor is willing to violate the law by
purchasing and consuming alcohol we are deluded if we think the youth
will be dissuaded from doing so by having to lie about his or her age.
Last week, a Salt Lake City television station ran a story about a
13 year old girl who ordered alcohol over the Internet using her
brother's credit card. This is outrageous. No one should condone
business practices that permit this result. Our pending criminal case
involving Beer Across America also included one criminal charge of a
sale to a minor who was shipped beer by the company.
One might think that delivery to minors can be prevented by
requiring package delivery companies to require an adult signature for
the alcohol being delivered. In fact, the Beer Across America home page
states: ``An adult signature is required at time of delivery. Please
make sure that someone will be present to sign for the package during
regular business hours.'' \26\ In reality, this does not occur. Direct
shipping companies rarely disclose on the package that the contents are
alcohol--perhaps out of a fear that the package will be seized by law
enforcement officials. As a result, the packages do not identify the
contents, do not give the full name of the seller (ordinarily using the
initials of the company and its address), and do not say that an adult
signature is required.
---------------------------------------------------------------------------
\26\ See www.beeramerica.com for the home page of this company. The
order form with this language is found under the ``Join Our Club''
button. It also is found at: www.actonet.com/cgi-bin/BAA/
display?TEMPLATE=register.template
---------------------------------------------------------------------------
Indeed, the package delivery companies do not want to have to
obtain an adult signature for their deliveries. The delivery companies
simply do not want to have to make multiple trips to a home hoping to
find an adult present. The alarming truth is that most alcohol sent to
homes via delivery companies are left on porches, in bushes, and behind
fences--often with a note on the door. Our criminal investigation of
Beer Across America revealed that of 558 cases of alcohol delivered to
Utah residents during a three month period, 330 were left where someone
else--including minors--could get access to it. This means that 59
percent of the alcohol sent into my state by direct shippers is left
out for anyone to pick up. Presumably the same is true everywhere. No
signature is required. No adult must accept control of the package. It
is a perfect situation for a minor who knows about the delivery. If he
steals the package, no one may ever know he has the alcohol.
The draft of a study in progress has revealed that: ``Underage
youth use home deliveries as a source of alcohol. Ten percent of 12th
graders and 7 percent of 18- to 20-year-olds in 15 midwestern
communities reported that they obtained alcohol through delivery
services in the last year.\27\
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\27\ Fletcher, L.A., Willenbring, M.L., Wagenaar, A.C., Alcohol
Home Delivery Service: A Source of Alcohol for Underage Drinkers,
Journal of Studies in Alcohol, in print.
---------------------------------------------------------------------------
the world has not changed
Advocates for this new industry argue that the world is different
now; that we cannot apply prohibition-era laws to Internet-era
transactions. This seductive argument is not only wrong, but
pernicious.
While alcohol now can be ordered over the Internet, this new
phenomenon is not much different than the way business was conducted by
toll-free telephone or mail order. While a new method of advertising
and ordering has been devised, it does not signal any fundamental
change in the nature of alcohol regulation such that the laws should be
scrapped. More importantly, it must be emphasized that while orders can
be placed over the Internet, the products are not shipped via the
Internet. Unlike some products that can be purchased and delivered over
the Internet--such as music, software, or pornography--this product
still is delivered the old fashioned way. Whether a product has been
ordered over the Internet has no effect on the final activity: alcohol
is delivered into a state by UPS, FedX, or other delivery companies in
violation of the laws of that state. I see nothing in the creation or
popularity of the Internet to undermine the state policies that led to
regulation of alcohol.
Last summer I took guilty pleas from a New York securities
brokerage firm for two felony counts of securities fraud and sales by
an unlicensed securities broker. The unlicensed broker had called into
Utah pitching stocks to buy and doing so under a false name. In that
case there were no challenges to our authority to require the out-of-
state seller to be licensed. No one doubted that the New York broker
had to comply with Utah law when selling securities to Utah residents
over the telephone. No one said that Utah lacked jurisdiction to
prosecute the violators. And, the same licensing requirements apply
also to the conduct of business by insurance agents, lawyers,
physicians, and the dozens of professions regulated by states.
It is illogical and bad public policy to permit a state to
prosecute violators of securities, insurance, or other professional
licensing laws, but not violators of the alcohol control laws.
The legal arguments being made by defenders of this industry are
troubling. If one accepts that it is within a state's police powers to
determine that certain products are contraband, or at least regulated,
then the state should have the ability to enforce compliance with those
laws. If states cannot enforce their alcohol compliance laws, does this
portend challenges to their ability to enforce securities or insurance
laws--not to mention laws against child pornography or the illicit drug
trade?
A company should not be allowed, with impunity, to sit in one state
and ship a contraband product to a buyer in another state. If a state
is to have power to declare activities illegal, it is untenable to deny
it the ability to enforce those laws. The only change occasioned by the
Internet is to increase the availability of alcohol without changing
the laws regulating its sale and use.
illegal conduct in utah
Utah does not attempt to control what its residents do in other
states. However, Utah must be able to control its borders when
contraband products are destined for delivery into the state.
During October and November 1996, state investigators intercepted
244 cases of beer \28\ shipped to Utah residents by Beer Across
America. We discovered that sales had been ongoing since at least 1992.
This problem is not a recent phenomenon. Considering that Utah has less
than one percent of the U.S. population, by extrapolation the number of
shipments into Utah during those two months means that over 146,000
bottles of beer are being shipped by this one company every month to
citizens all over the country. And this is only one of the hundreds of
companies engaged in this business. As noted below, one estimate is
that five million cases of wine are sold and shipped illegally each
year. This is a massive disregard for the rule of law.
---------------------------------------------------------------------------
\28\ Each case had twelve bottles.
---------------------------------------------------------------------------
It is instructive to note that all of the shipments into Utah by
Beer Across America occurred six months after the company was informed
that it was a violation to ship the product into Utah. These sales--and
the resulting violations--were deliberate. Even more egregious, in 33
of these cases, or 13.5 percent, the company urged the customers to
list an out-of-state address for the sale, then an in-state address for
delivery. A more manifest disregard of the law--by someone pretending
to be legitimate--is hard to imagine.
this problem affects all producers, not just out-of-state shippers
If direct shipping is permitted in disregard of state laws, in-
state producers are harmed. If out-of-state producers do not have to
pay taxes, local producers are placed at a competitive disadvantage. If
out-of-state shippers do not have to be licensed, inspected, or have
quality testing of their products, local producers will be incurring
costs higher than the out-of-state shippers. The natural result of
elimination of restrictions on out-of-state producers is a push to
eliminate restrictions on in-state producers.
Put another way, if regulation of in-state alcoholic producers,
distributors, and vendors is to continue, the same restrictions must
apply to out-of-state sellers. We cannot harm those who have complied
with the law by giving preferential treatment to those who do not
operate under the same constraints. If we did, it would drive all
producers out of our state--and out of the reach of the police powers
of the state. As indicated above, if out-of-state shippers are not
forced to comply with the laws of the states in which their products
are sold, state authority to regulate alcohol will cease. The effect of
the 21st Amendment will cease. The Webb-Kenyon Act will be rendered
meaningless.
policy choices, not legal questions
Proponents of direct shipping make several superficially attractive
arguments in support of their position. They argue that prohibitions on
direct shipping are protecting state-sponsored monopolies. They decry
restrictions on freedom of choice and the limited purchase
opportunities. They accuse states of protecting large manufacturers or
in-state distributors who are guarding their own turf. They even seek
sympathy by pointing out that alcohol control laws are turning ordinary
citizens into criminals.
It is important to see these for what they are: policy arguments,
not legal arguments. Each of these arguments is an expression of an
opinion about what public policy should be. Out of frustration at their
inability to change public policy in other states they are flouting the
law's requirements.
These arguments are being directed at the wrong targets. These
policy choices should not be made to prosecutors or to courts. So long
as the 21st Amendment is in effect, states will have constitutionally
sanctioned authority to assert their police powers in a manner
determined by the state legislature. Proponents of direct shipping
should focus their attention on state legislatures. If they fail there,
they can attempt a repeal of the 21st Amendment. Until that time, it is
my sworn duty to enforce the laws legitimately passed by my
legislature. And I serve notice at this time that the law will be
enforced most aggressively against those who are deliberately violating
the laws of my state.
enforcement problems
State enforcement of alcohol laws are complicated by several
factors:
The number of direct shippers violating the law (and the
volume of shipments),
The perennial shortage of enforcement resources,
Statutes that have not been updated to reflect current
marketing practices through mail order, Internet, and direct
shipments,
The difficulties of obtaining information from out-of-state
violators,
The reluctance of some in-state customers to report the
violations or to cooperate with investigators,
Problems establishing personal jurisdiction over defendants
in another state,
Difficulties inherent in prosecuting an out-of-state
defendant, and
The occasional reluctance of other states to extradite a
defendant for criminal charges. It is particularly regrettable
that some states are reluctant to extradite defendants, as a
means of protecting their domestic alcohol industries. This is
tantamount to aiding in the efforts of businesses that are
violating the law.
The lack of cooperation by delivery services which generally
resist attempts by state investigators to gather information.
In Utah's Beer Across America case, we were thwarted at the trial
court level because the judge accepted the argument that defendants did
not direct their efforts at Utah and that enforcement of state laws
would improperly impair how the company conducted business in Illinois.
We appealed this ruling because the implications of his decision would
have taken the heart out of the legal basis for prosecutors to proceed
against out-of-state defendants in any number of different crimes.
I am happy to report that last Thursday, the Utah Court of Appeals
issued its ruling in the Beer Across America case. The court reversed
the trial court and reinstated the criminal charges. The appeals court
made three significant rulings that apply to our criminal prosecution:
First, the state has personal jurisdiction over a criminal
defendant if that defendant is present in court. Civil concepts
of minimum contacts are not applicable in criminal cases.
Second, Beer Across America is subject to prosecution in
Utah for conduct committed in Illinois because its conduct
caused an unlawful result in Utah.
Third, Utah's prosecution is valid under the 21st Amendment
and does not run afoul of the Constitution's Commerce Clause.
This decision only clarifies Utah law and our criminal
prosecutions. It is a good first step. However, attempts to enforce
civil law and to remedy subject matter jurisdiction problems remain
unsolved. Florida still is being thwarted in bringing a civil
enforcement case. Legislation still is needed. We must also be mindful
that further appeals of Utah's decision are possible. We cannot ask
other states to continue to hold off on enforcement pending any further
appeals in our case--especially since our case involves criminal
proceedings, not civil ones.
Florida alcohol regulators attempted to enforce their laws in a
civil enforcement action. State courts said they lacked personal
jurisdiction over the defendants in Florida and could not proceed.\29\
The state tried to solve this problem by using the Webb-Kenyon Act's
proscriptions against violating state laws and suing in federal court--
where personal jurisdiction was not a problem. The federal court ruled
that, as currently written, the Webb-Kenyon Act does not give the
states a cause of action to file suit in federal court.\30\ Once again
the direct shippers are flouting the law and finding ways to avoid
accountability.
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\29\ State v. Sam's Wine and Liquors, Case No. 97-3828 (Fla 1st DCA
1999). This is not a complete barrier to enforcement. It only means the
state cannot act early to stop shipments and must wait until it has
evidence of sufficient shipments for personal jurisdiction over the
violators to attach.
\30\ Florida Dep't of Business Regulation v. Zachy's Wine and
Liquor, 125 F.3d 1399 (11th Cir. 1997) cert denied 18 S.Ct 1402, 140
L.Ed.2d 660 (1998).
---------------------------------------------------------------------------
If the Webb-Kenyon Act or the 21st Amendment or state laws
regulating the sale of alcohol are to remain viable, there must be a
means for states to enforce those laws. If the states continue to lack
an effective enforcement method, there will be even more massive
disregard of constitutionally permitted restrictions and states rights.
But, the answer is not to federalize the crime or to have federal
agencies prosecute the violators. This is a state law problem where
enforcement actions represent the implementation of legislative policy
decisions regarding state police powers. We are not seeking a
federalization of this problem. We do, however, seek federal assistance
in solving unique problems facing the states.
State enforcers are making great efforts to solve this problem. It
is getting larger by the day. More and more companies are thumbing
their noses at state laws and state enforcement actions. We are asking
Congress to remove the legal technicalities behind which some of these
crooks are hiding. Enforcement must continue unless or until policy
makers in the individual states alter their policies. What these
shippers want is for the courts to overrule the policy decisions of the
statehouses.
While direct shippers may have a pipe dream that the U.S. Supreme
Court may soon eviscerate the powers of states and the validity of the
21st Amendment, they cannot be rewarded for that dream by getting free
passes to violate the laws they now are challenging. They have chosen
to flout the law instead of changing it. This is a law enforcement
problem and it must be solved now.
recommendations
We cannot emphasize enough the seriousness of our concern about the
reprehensible conduct of these direct shippers who are deliberately
violating state laws. They are seeking to be excluded from the ordinary
obligations of businesses: paying taxes, submitting to quality control
inspections of their products, and complying with statutory
restrictions on their operations. Even worse, their conduct is directly
contributing to the increased availability of alcohol to minors.
To help us in solving this problem, I offer the following
recommendations:
Prompt passage of federal legislation with the following
components:
First, grant the states jurisdiction in federal courts to
halt violations of state law by out-of-state violators.
Second, give the states effective relief against violators.
Ideally, the federal court action would halt the conduct,
punish the violator, and deter further violations by defendant
and other companies. At the least, legislation must enable
states to halt the illegal conduct and empower the courts to
impose contempt on recidivists.
Third, make the federal court process effectual and
efficient. Allow venue where the illegal shipments are
received, in addition to general venue provisions. Permit
nationwide service of process. Provide for bench trials, not
jury trials. If the federal court actions will not permit the
state to enforce the full panoply of state enforcement powers,
make sure that the federal action is not the exclusive remedy
for the states.
A Congressional reaffirmation of the powers of states to set their
own alcohol control policies and a call to all liquor producers or
distributors to comply with state laws. This can be done with the
Senate Report to accompany this legislation or testimony before the
Congress. At the same time, we would hope that state alcohol regulators
will recognize the seriousness of this type of violation and use an
injunction issued under this new statute as grounds to suspend or
revoke the licenses of violators.
Consider adopting requirements that any alcohol shipped across
state lines by commercial carriers clearly identify the shipper,
describe the contents of the package as alcohol, and require an adult
signature. Packages containing alcohol should not be permitted to be
left on porches or in bushes--even if a state permits direct shipments.
conclusion
I appreciate the opportunity to present our views on this very
important issue. We commend you for taking steps to assist states in
their efforts to halt this burgeoning illegal practice. We respect the
rights of direct shippers to ship their products in conformance with
the law and respect their rights to petition state lawmakers to adopt
new state alcohol policies.
However, we categorically reject the current practice of violating
the law and adopting a battle strategy of trying to overturn state
control over this product--and in the process eviscerate both the 21st
Amendment and the Webb-Kenyon Act.
The terms of engagement for this battle were aptly described in a
newspaper article in California:
Cushioned from risk by the limited jurisdictions and
enforcement abilities of other states, the absence of any
meaningful punishment such as fines or loss of sales license,
and by their wine shippers--who are the primary target of most
enforcement--local wineries and other direct mail wine
operations have joined an underground industry where each year
an estimated five million cases of wine are sold and shipped
illegally.
* * * * *
I would say it's like being an accessory to the crime,
[industry consultant Sara] Schorske said.
* * * * *
The St. Helena winery owner who wished to remain anonymous
estimates that selling his wines by direct mail brings in upwards of
$150,000 a year. He said that approximately five percent of his direct
wines sales are to reciprocal states.\31\ And, while he said he has
wondered lately if an unusually high volume of out-of-state inquiries
about his wines conceals a sting operation aimed at his business, he
isn't going to stop. ``I said let's look at this from a business point
of view. This business means $150,000 a year to us. We're not going to
walk away from that,'' he said. ``And I'm not a gambler either.'' \32\
(Footnote added).
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\31\ This means that 95 percent of the sales and shipments are to
non-reciprocal states--where the sales are illegal.
\32\ Jeremy Jay, Special Report: On Wings of Wine, St. Helena Star,
Jan. 12, 1995 at 1.
The Chairman. Mr. Diamond, we will turn to you.
STATEMENT OF STEPHEN DIAMOND
Mr. Diamond. Mr. Chairman and Senators, I have submitted a
longer statement which I would like to summarize now. I am here
to suggest that Federal help may well be necessary to preserve
relative State autonomy in alcoholic beverage regulation, and
that such help conforms with the spirit of the 21st amendment
and that the 21st amendment is not and should not be read as a
dead letter.
My remarks will therefore focus on two topics. Are
interstate sales more of a threat to State alcoholic beverage
regulations now than they were in the past, and has the 21st
amendment become so eviscerated that it no longer shields any
significant State regulatory efforts and there is not deserving
of congressional support?
Circumstances have changed drastically in recent years.
Volumes of shipments have unquestionably grown. Shipments of
wine have increasingly come directly from the suppliers, and
thus are asymmetric, with a few States being significant net
exporters, while the other States are larger importers. The
most dramatic difference between contemporary interstate sales
and that of earlier decades is the growth of industry
advertising, which in the past was usually limited or
prohibited. Cheaper out-of-State products could not then be so
easily identified. Now, the Internet is available.
Ambivalence about marketing is revealed in the most
sympathetic argument for interstate shipment, which is the
story of a small winery whose product was tasted and admired by
a tourist who was subsequently frustrated to discover that he
or she could not purchase it back home. The demand was not
stimulated by the seller, it is implied, but preexisted in the
buyer. What was being sought was not price savings, including
possible tax avoidance, but access to otherwise unavailable
products.
Many States are sympathetic to such a story and have passed
regulations to permit such shipments of wine, in particular.
More States are considering them. There must, however, be a way
to prevent shipment into a State on such a scale as to
challenge the State's fiscal system and three-tier regulatory
regime. Both monopoly and license States often derive
significant revenues from markups or excise taxes.
Moreover, wholesalers and retailers need to be assured of
sufficient sales returns to compensate them for the many
regulatory restraints under which they operate, and to make it
unlikely that they become so economically pressed as to turn in
desperation to what used to be termed the classic liquor
evils--pushing sales to the underaged, the intoxicated, selling
after hours, et cetera.
In spite of the recent decision in Utah, State court
prosecutions are still problematic. Personal jurisdiction is
uncertain, perhaps because judges are reluctant to permit
criminal convictions in these matters. The proposed bill is
less onerous in its consequences for shippers, since it only
provides injunctive relief, and more efficient in
administration, since the judgment, if granted, will
automatically be enforceable in all Federal courts.
I believe the State systems are still functioning and
deserve protection from out-of-State challenges to their
integrity. This is not to say that they cannot be improved.
They have in the past, and continue to adjust. Their variety is
the price we pay for federalism, and the price that was
specifically paid to achieve repeal of the 21st amendment and
to provide for a range of alcoholic beverage regulatory regimes
which fairly reflect the fact that even now, as Judge Posner
has observed, there is no consensus within the United States on
how the sale and use of alcoholic beverages should be
regulated.
The 21st amendment has not been critically eroded by
Supreme Court decisions. It is, of course, true that the broad
reach of the amendment enunciated by Justice Brandeis in the
1930's is no longer accepted in its entirety. With regard to
economic regulation, the Court has rejected protectionist State
taxes, price affirmation, fair trade legislation, and State
limitation of factual alcoholic beverage advertising. This does
not lead to the conclusion that the 21st amendment has ceased
to protect State regulations from the challenge that they
violate the dormant Commerce Clause, nor that State regulations
necessarily are preempted by Federal legislation enacted under
the Commerce Clause.
In 324 Yorkshire v. Duffy, the Court did suggest that
mandatory price markups were valid. In 44 Liquor Mart, Justice
Stevens declared that the State could pursue its temperance
aims by taxes or by establishing minimum prices. In Rice v.
Norman Williams, Justice Stevens again concurring, observed
that the State presumably could regulate the wine market by
fixing retail prices itself. Such regulatory programs would be
devastatingly undercut by uncontrolled interstate shipments.
The limits which have been placed by the Supreme Court upon
State action with regard to alcoholic beverages should actually
give Congress greater confidence if it acts to facilitate
enforcement by States of their importation rules. The 21st
amendment does not have any requirement that Congress implement
its terms. Congress has, in the FAA, passed legislation in part
to support State regulation. To do so again would comport with
the spirit, history, and present role of the 21st amendment.
Thank you.
The Chairman. Thank you, Mr. Diamond.
[The prepared statement of Mr. Diamond follows:]
Prepared Statement of Stephen Diamond
My name is Stephen Diamond. I am a Professor of Law at the
University of Miami Law School where I have taught classes on the
evolution of the Twenty-first Amendment and local, state and federal
regulation of alcoholic beverage trade practices. I am also an Adjunct
Professor of History there where I teach a course on the history of
Prohibition and the early Repeal Regime.
I am not here to speak about the specific merits and demerits of
the proposed bill, but to trace how the problem of interstate sales has
arisen and to suggest that Federal help is probably necessary to
achieve a solution.
I do think that federal intervention of some kind is desirable to
preserve the realm of relative state autonomy in alcoholic beverage
regulation and that such an intervention conforms with the spirit of
the Twenty-first Amendment, and that the Twenty-first Amendment is not
and should not be read as a dead letter.
My remarks will therefore focus on two topics:
1. Is there in practice a new set of circumstances with regard to
interstate shipments that has emerged, for which the existing legal
regime is inadequate to protect state authority to define its own
importation and distribution regulations with regard to alcoholic
beverages. The Supreme Court, on several occasions, even when finding
particular state practices to be unconstitutional, has continued to
describe importation and distribution as the ``core'' concerns of the
Twenty-first Amendment.
2. Has the Twenty-first Amendment become so attenuated as a shield
for state autonomy, so ``eviscerated'', in Justice O'Connor's lamenting
phrase in dissent in 324 Yorkshire v. Duffy, that it no longer protects
any significant state regulatory efforts and therefore is not deserving
of Congressional support?
To evaluate the present threat posed by interstate shipment is
problematic. As with any underground activity, figures are hard to come
by and often offered for at least suspect motives. We were told several
years ago, at a meeting in Chicago of the National Conference of State
Liquor Administrators, that the value of such shipments was already one
billion dollars, a figure probably chosen to imply that efforts to
frustrate and impede such trade would be as ineffectual as King Canute
ordering back the tide or the Prohibition Bureau stamping out the
bootlegger.
Conversely, when the State of Florida sued out-of-state shippers in
both state and federal court, the defense suggested that the amount of
shipments was greatly exaggerated--the state's estimate of lost tax
revenues was, I believe, based upon the one billion dollar figure--and
that the violations, if that was how to describe them, were de minimus.
There have long been de minimus defenses--though controversial
ones--to efforts to prohibit interstate shipments. It was on such
grounds that the lower court, in the famous Idlewild case, based its
conclusion that New York's efforts to prohibit sales at the airport
duty free store violated the commerce clause. The low volume of sales,
although not referred to by Justice Stewart in his opinion for the
majority of the Supreme Court, was in effect an answer to Justice
Black, who, in dissent, was concerned that permitting such sales might
endanger the profitability of New York State retail stores.
Interstate shipments by car, usually transported by the purchaser
for importation into his own state, and usually in limited quantities,
had been a topic of discussion at regional NCSLA meetings and a focus
of intermittent enforcement efforts--in the states where they were not
legal--since the early days of Repeal. The volumes involved only became
a significant issue where large cities were located near the state
border. State regulators were under pressure from colleagues in sister
states; they were in effect mutually hostage to the consequences of
price-cutting and tax-lowering wars.
The circumstances, or at least the potential circumstances, of
interstate shipment of alcoholic beverages have changed drastically in
recent years. Volume has unquestionably grown. Techniques of efficient
transportation over long distances have improved. The shipments of wine
have increasingly come directly from the suppliers, and thus are
asymmetric with a few states, California, of course, in particular,
being significant net exporters while other states are largely
importers. The states are not mutually vulnerable, in the sense that
New York and New Jersey were. What is really reciprocal about
California and Illinois agreeing to permit shipments purchased by
residents of each state of the wine produced in the other? It should be
added, however, that if interstate shipments are not re-regulated and
controlled, U.S. wine producers may find themselves in competition with
foreign producers who are presently considering exporting to one state
and undertaking nation-wide internet sales from that site.
The most dramatic difference between contemporary interstate sales
and that of earlier decades is the growth of industry price
advertising, limitations on which were recently prohibited as
violations of the First Amendment in 44 Liquor Mart. In the past, such
advertising was usually prohibited. Cheaper out of state products could
not be so easily identified.
This served to some extent to reduce the amount of interstate
crossing to purchase cheaper goods in the neighboring state. The spirit
of this older regime is still at least in part reflected in the fact
that some states which have entered into reciprocal inter-state wine
shipment agreements with California prohibit direct mail solicitation
by the out-of-state wineries. What this means is the growing world of
Internet marketing is unclear. The ambivalence about marketing is
reflected in the most sympathetic argument for inter-state shipment
outside of traditional channels which is the story of a small winery
whose product was tasted and admired by a tourist to the winery region,
who was subsequently frustrated to discover that he or she could not
purchase more of the product in his or her own state, because
wholesalers would not carry it. (We will leave unexplored the
possibility that its unavailability was because it was an item which
the winery preferred to ship on allocation to those who ordered
directly from it so that it might retain the full retail price for
itself or whether it feared that entering the traditional distribution
system might lock it into a wholesaler who would not support the
brand). The demand was not stimulated by the seller, but pre-existed
with the buyer. What was being sought was not price savings, including
possible tax avoidance, but access to otherwise unavailable products.
Many states are sympathetic to such a story and have passed regulations
to permit such shipments, of wine in particular. While the type,
amount, and circumstances under which importation is permitted vary, a
general pattern emerges: opportunities are being offered to in-state
consumers to purchase unavailable products. I am told that, presumably
responding to such pressures, the Wine and Spirits Wholesalers
Association is supporting a program in all license states in which a
buyer may special order any wine through the system upon payment of the
appropriate state taxes. I am also informed by a National Alcoholic
Beverage Control Association official that all of the states that
wholesale wine also permit special ordering, although the effort is not
always successful either because the state, Utah, for example, is not
on the marketing horizon of the winery, the winery dislikes dealing
with government officials, or it refuses to give up some of the full
retail price to the lower tiers of distribution.
To the extent that consumers simply want to purchase tax avoidance,
the quest should not be facilitated, but indeed it should be
frustrated. To the extent that what they seek is a choice, there will
be pressure for states to respond positively, already indicated in a
number of states which are attempting to permit some importation of
limited quantities of specifically defined products for personal use.
There must, however, be a way to prevent shipment into a state on such
a scale as to challenge the state's fiscal system and three tier
regulatory regime.
The recent history of interstate shipment regulation in Louisiana
is instructive. The legislature which had provided for limited
interstate imports from pre-registered out-of-state sellers has just
narrowed the scope of its permission to wineries which do not use
wholesalers for additional distribution--whose product is therefore
unavailable, as a result either of supplier or wholesaler decisions. In
addition, beer and distilled spirits can no longer be similarly
imported, and the supplier must now provide monthly rather than annual
reports. Regulators in Louisiana have always been concerned about the
capacity to assure tax compliance even with those who registered for
shipment in the state but whose records and product are out of state.
State administrators have talked of performing compliance stings, at
least to establish confidence levels in the reporting. So far as I
know, this has not yet been implemented.
Before turning to a discussion of the Twenty-First Amendment, I
would like briefly to address an issue often raised by supporters of
such shipments; if a state is serious about prohibiting them, should it
not pursue the buyers, the in-state residents? There has long been a
belief in alcohol beverage regulation that it is more effective to
regulate sellers, whose interest is profits, and who therefore can be
constrained by a combination of incentives and fines, that to try to
regulate buyers whose motives are much more complex and volatile, and
who may respond with defiance. This traditional approach is buttressed
by a concern in the state that its own citizens may have been
stimulated by increased marketing efforts. When the importation was by
a Maryland resident driving to Washington, D.C., for example, to
purchase cheaper alcoholic beverages, the buyer was responsible and
enforcement, if undertaken, focussed on him.
While no one knows with any precision the extent of such shipments
now, and while efforts are being made in a number of states to provide
local consumers access to unavailable products, there is a realistic
fear on the part of states, as reflected in NCSLA and NABCA
resolutions, that failure to limit or control shipments, for the
purpose of tax avoidance, for instance, will serve as a very slippery
slope to the destruction of state alcoholic beverage regulation. This
could well be a race to the bottom in which states lower their taxes,
and thus abandon temperance regulation through price, for example, to
discourage out-of-state purchases. The threat to the state regulatory
system is real. Both monopoly states and license states often derive
significant revenues from markups or excise taxes. Moreover, in license
states, and in monopoly states which use private wholesalers to
distribute beer or wine, the wholesalers and retailers need to be
assured of sufficient sales returns to compensate them for the many
regulatory restraints under which they operate and to make it unlikely
that they become so economically pressed as to turn in desperation to
what used to be termed the classic ``liquor evils'': pushing sales to
the underaged, the intoxicated, selling after hours, even purchasing
bootlegged liquor.
In addition, it is not totally far-fetched to fear that the long-
term result of unregulated and unrestricted interstate shipments would
be the rise of a small number of mega stores buying in large volume.
These stores might well be the beneficiaries of state tax exemptions
and subsidies. It is unlikely that consumer welfare in the long run
would be maximized by this process.
This is the problem. Now what are the solutions? Some states have
attempted to prosecute or otherwise deter those engaging in
unauthorized interstate shipments. This has proven difficult. In
Florida, the state court found insufficient contacts to satisfy
personal jurisdiction requirements for civil and injunctive relief. In
Utah, the trial court did likewise in a criminal prosecution and also
held that the restriction unconstitutionally restrained interstate
commerce. That decision was just overturned. But state court
prosecutions are still problematic, personal jurisdiction is uncertain,
perhaps because judges are reluctant to permit criminal convictions in
these matters. The proposed bill is less onerous in its consequences
for shippers, since it only provides injunctive relief, and more
efficient in administration since a judgment if granted will
automatically be enforceable in all federal courts.
The second question is whether the state regulatory system is worth
protecting, or whether it is so old-fashioned and out of date and so
stripped of power by Supreme Court decisions of the last several
decades that it is incapable and undeserving of rescue. I believe the
system is still viable, still functioning, and deserves protection from
out-of-state challenges to its integrity. This is not to say that it
cannot be improved. It is a very positive sign that the State of
Washington, for instance, is undertaking a year-long re-evaluation of
its three tier system regulations. Present laws are hardly perfect, but
this is not a constitutional obligation. Their variety is the price we
pay for federalism, and the price that was specifically paid to achieve
repeal of the Eighteenth Amendment, and to provide for a variety of
alcoholic beverage regulatory regimes which could fairly reflect the
fact that even now, as Judge Posner has observed, there is no consensus
within the United States on how the sale and use of alcoholic beverages
should be regulated.
The Twenty-first Amendment was accepted by Congress with the
addition of the famous paragraph 2. This paraphrases though does not
follow the precise language of the Webb-Kenyon act and was intended to
constitutionalize it. The state was to be permitted to regulate the
importation of alcohol beverages without fear that Congress might
repeal the act and therefore subject state regulation again to the
restrictions of the dormant Commerce Clause. Congressional debate over
the Twenty-first Amendment and debate in the state ratifying
conventions point in several directions. While sometimes it was
suggested simply that the amendment was to protect dry states from
interstate shipments, it was often asserted, and held by the Supreme
Court in the famous Brandeis opinions, that the purpose was to give the
states the authority to fashion their own alcoholic beverage regimes
including monopoly of the wholesale and retail functions and, in the
case of license states, the creation of the customary three tier
system. These were the alternatives discussed in the famous Fosdick and
Scott report commissioned just before repeal by John D. Rockefeller.
Of the many lessons that were drawn from the failure of
Prohibition, one of the most important, often repeated on the floor of
Congress in the Twenty-first Amendment debates, was that the federal
government ought not to attempt to regulate and enforce rules about
alcoholic beverage sales and use. It was for this reason that paragraph
3 of the proposed amendment, which would have given Congress concurrent
power to regulate saloons, was withdrawn. This division between state
and federal authority had been suggested even earlier, during
Prohibition, by Emory Buckner, the U.S. Attorney from New York, who had
proposed a division of enforcement responsibility: local officials to
close down speakeasies; federal officials to deal with producers of
interstate supply. In effect, this formulation was adapted to the
regulation of legalized alcoholic beverages.
States could remain dry, create monopoly systems, or regulate
alcoholic beverages under what is called the license system which
usually has meant the creation and support of a three-tier system in
which supplier, wholesaler, and retailer usually are kept independent.
The critical point is that the retailer is independent of supplier
pressure and domination. The American system since Repeal has been to
temper the pressures on retailers through the regulation of
wholesalers, to give retailers the independence to pursue
respectability and good standing in the neighborhood as well as profit,
to limit sales venues to prevent over-competition, with resulting
failures. The social consequences of aggressive competition in
alcoholic beverages are seen to be deleterious. Those who lose because
the market cannot support all the retailers, a circumstance which would
be aggravated by direct mail shipping, do not necessarily fold up their
tents and quietly disappear. While they struggle for survival, they may
cut corners; state regulators have generally chosen to reduce the risks
of this occurring.
Tied-house evil regulation constitutes a parallel form of anti-
trust law, one which protects small retailers from discriminatory
behavior on the part of those above them in the distribution chain.
The theory of Repeal was one of compromise and moderation.
Moderation in consumption, moderation in the pursuit of profit,
somewhat analogous to the philosophy behind public utilities, and
moderation in lawmaking: no longer would the law demand that which
would not be obeyed and could not be enforced.
Those who argue for free trade in wine ignore not just the
Constitution, and the past history of this country but contemporary
attitudes. Almost no one thinks the sale or use of alcoholic beverages
should be unregulated. Alcoholic beverages provide a source of
pleasure; abused, they create significant social dangers.
Alcoholic beverages need regulation and most of the regulation must
be at the state and local level. That is the intent of the Twenty-first
Amendment. Even if it had the authority, the BATF presently has neither
the interest nor the resources to regulate alcoholic beverages
effectively. The Supreme Court still defines the ``core'' state powers
protected by the Twenty-first Amendment to be the importation and
distribution of alcoholic beverages.
It has been suggested that the Twenty-first Amendment has been
seriously eroded by Supreme Court decisions over the last several
decades and no longer has enough force to justify a call for action by
Congress to protect the states. This is not the case. It is of course
true that the broad reach of the Twenty-first Amendment enunciated by
Justice Brandeis in the 1930's is no longer accepted in its entirety.
It was not accepted by everyone even at the time. Brandeis, for
instance, declared that the Twenty-first Amendment was not limited by
the Fourteenth Amendment, but no one argued for, or attempted to
impose, a formal prohibition upon the sale of liquor to African-
Americans, for instance. His support of retaliatory protectionist
legislation, which he called protective, was criticized but was
probably a factor in persuading states to abandon most overt
protectionist legislation by around 1940.
The Supreme Court has declared that the Twenty-first Amendment does
not shield state alcoholic beverage regulations from due process or
equal protection challenges when regulations are attempting to limit
sale of alcohol beverages to those identified by their families or
public authorities as inebriates or to maintain a lower legal drinking
age for young women than for young men.
With regard to economic regulation, the Court has rejected
protectionist state regulations, specifically an effort by Hawaii to
exempt at least some locally produced alcoholic beverages from state
taxes imposed on all imported products. (In Bacchus.) In Midcal, the
Court rejected as preempted by federal antitrust law, fair trade
legislation, in which the state delegated authority to suppliers who
could fix the price at which their product was to be sold to retailers.
This was not actually much of a restraint. Some states had already
voluntarily withdrawn such laws and the California ABC did not appeal
an adverse lower court decision in Midcal and clearly had abandoned
support of its own rules.
The Court has also prohibited price affirmations statutes--the same
results can apparently still be imposed by contracting monopoly
states--which required that a supplier affirm that the price being
charged to its wholesalers was no higher than that charged to
wholesalers in any other specified state. This was rejected on the
ground of its extra-territorial impact. The Court asserted that extra-
territorial legislation was prohibited by the Commerce Clause, but I
believe that it is better explained, as Professor Regan of Michigan has
argued, as a limitation implicit in the very conception of a federal
system.
The Supreme Court has also rejected, at least in part, a tradition
of state limitation of alcoholic beverage advertising, declaring that
truthful factual advertising is protected by the First Amendment.
This does not lead to the conclusion that the Twenty-first
Amendment has ceased to protect state regulations from the challenge
that they violate the dormant commerce clause, nor even that state
regulations necessarily are preempted by federal legislation enacted
under the Commerce Clause.
In 324 Yorkshire v. Duffy, in which the Court rejected a New York
rule which permitted wholesalers to post prices in such a way as to
determine retailers' profit margins, the Court did suggest that
mandatory price mark-ups were valid. In 44 Liquor Mart, in which a
prohibition upon price advertising was struck down, Justice Stevens
declared that the state could pursue its temperance aims by taxes or by
establishing minimum prices. In Rice v. Norman Williams, upholding a
primary source rule, Justice Stevens again, concurring, observed that
``the State presumably could regulate the wine market by fixing retail
prices itself. * * *'' Such regulatory programs would be devastatingly
undercut by uncontrolled interstate shipments. In Midcal, even as it
found fair trade legislation to be pre-empted, the Court stated: ``The
Twenty-first Amendment grants the States virtually complete control
over whether to permit importation or sale of liquor and how to
structure the liquor distribution system.''
As long ago as Idlewild, in which Justice Stewart insisted that the
Twenty-first Amendment had to be read alongside of other Constitutional
provisions, in a case where the state was found to have no authority to
prohibit duty free sales of alcoholic beverages being shipped out of
the country, Justice Stewart did assert that ``a State is totally
unconfined by traditional Commerce Clause limitations when it restricts
the importation of intoxicants destined for use, distribution, or
consumption within its borders.'' It is worth remembering that the
Twenty-first Amendment speaks of ``transportation and importation''
``for delivery or use.'' Regulation of importation for use is protected
by the Constitutional shield. The state is not to be left with
authority only to regulate sale, and if direct mail shipments continue
to grow, potentially only of drinking on licensed premises.
In spite of the Supreme Court opinions rejecting specific state
laws or regulations, what has never been abandoned is the recognition
that states have authority to establish the terms by which alcoholic
beverages can be imported and distributed within their borders. Indeed,
it is obvious that without control over importation, the state cannot
effectively regulate distribution.
These decisions do not eviscerate the Twenty-first Amendment even
though the Twenty-first Amendment is no longer as broad a shield from
federal preemption as it once was. The core powers of regulating the
conditions of importation and distribution are still largely
unconstrained. States can impose primary source rules that frustrate
gray market sales. The three-tier system and state monopoly still
function as institutions to permit access to yet constrain and regulate
the methods of sale of products which society does not believe should
be available without regulation. The fears that were asserted by some
contemporaries simultaneously with Justice Brandeis's broad reading of
the Twenty-first Amendment, that states might act to protect local
industry and state regulation might be seized by private parties--a
suspicion that of course can arise with regard to almost any
legislation--are now significantly assuaged by the cases earlier
described and by such lower court decisions as
Pete's Brewing v. Whitehead, rejecting a Missouri beer
labeling statute. The limits which have been placed by the Supreme
Court upon state action with regard to alcohol beverages should
actually give Congress greater confidence if it acts to facilitate
enforcement by states of their importation rules.
Even though the state might justify restrictions on importations
simply by a formal reference to the Twenty-first Amendment, states are
not making a formal claim alone. Uncontrolled importation from out of
state without effective restrictions will threaten state tax revenues,
the state fiscal system, and the three-tier system.
While the Twenty-first Amendment does not have any requirement that
Congress implement its terms, Congress has already in the FAA chosen to
pass legislation whose purpose at least in part was to support state
regulation enacted under the Amendment's protection. To do so again
would comport with the spirit and history of the Twenty-first
Amendment.
The Chairman. We will now turn to you, Brendan.
STATEMENT OF BRENDAN BROGAN
Mr. Brogan. Good morning. My name is Brendan Brogan and I
am an 18-year-old senior at Ridgewood High School in Ridgewood,
NJ. I also serve on the National Board of Directors of Mothers
Against Drunk Driving. MADD is an organization that represents
over 3 million Americans, and exists to end the senseless
violent crime of drunk driving, to secure basic rights, to meet
the needs of victims of drunk driving, and to prevent underage
drinking. MADD members and supporters are not just mothers.
They include mothers, fathers, brothers, sisters, victims,
nonvictims, and a growing number of youth just like me.
Although often viewed as an organization singularly focused
on drunk driving, MADD since its inception has also been
dedicated to preventing underage drinking in order to stop
youth drinking and driving. MADD was instrumental in the
passage of the Federal minimum drinking age law in 1984, which
resulted in raising the legal drinking age to 21 across the
Nation.
MADD continues to advocate stringent enforcement of the 21
law because it has proven to be the single most effective
measure in reducing alcohol-related traffic fatalities among
people between the ages of 16 and 20. In fact, minimum drinking
age laws are estimated to have saved more than 17,000 lives
since 1975. Between 1985 and 1995, the proportion of drivers 16
to 20 years of age who are involved in fatal traffic crashes
who were intoxicated dropped 47 percent, the largest decrease
of any age group during this time period.
In addition, MADD was also a strong supporter of, and
played an active role in the passage of zero tolerance Federal
legislation in 1995 that required all States to lower the
illegal blood alcohol limit for drivers under the age of 21 to
.02. Zero tolerance is now the law of the land, and more young
lives are now being saved as a result of this initiative. Many
young people around the country testified in support of these
laws because they were tired of going to class reunions at the
funerals of their classmates who had died in alcohol-related
crashes or as a result of alcohol-related incidents.
While tremendous progress has been made in reducing
alcohol-related traffic fatalities among youth, alcohol
continues to be the most frequently used and abused drug by
high school seniors. Despite the fact that it is illegal to
sell alcohol to underage youth and it is illegal for those
under 21 to purchase alcohol, it remains readily available to
youth and underage drinking still borders on epidemic
proportion.
In 1997, 2,309 young people ages 15 to 20 died in alcohol-
related traffic crashes. In the last 2 years, we have witnessed
a growing number of tragic binge-drinking alcohol-related
deaths of college students on campuses in Massachusetts and
Louisiana. At the age of 14, I was almost one of those
students.
My friends and I had been stockpiling alcohol for weeks,
and on the night in question I sneaked out of my house and went
to a school playground with an assortment of booze and a
backpack. This was not the first time my friends and I had
drank, but I was now a high school freshman and I wanted to
show my friends how I could really drink.
We all proceeded to get drunk, and later that night my
drinking buddies dragged me back to my house and dumped me on
my head through the window. I drifted in and out of
consciousness and was aspirating my vomit when my friend, Dan,
finally woke my father, who rushed me to the ER. When I arrived
at the hospital, I was comatose and had a blood alcohol level
of .20. I was lucky. I could easily have died of alcohol
poisoning just like those college students did.
I am like a lot of high school students than and today who
drink underage. At 14, I knew too well the problems associated
with alcohol abuse and underage drinking. You see, many male
members of my family for generations have died of alcoholism,
and five out of six brothers, including my father, are
recovering alcoholics. Underage drinking almost killed me, and
the experience has brought me to where I am today.
Underage alcohol use contributes to numerous health and
social problems, including risky behavior, such as under-the-
influence driving without a seat belt or a motorcycle helmet or
a bicycle helmet; traumatic injury and death due to motor
vehicle crashes, falls, fires, and drowning; homicide and
suicide; risk of overdose and death by alcohol poisoning; early
onset of alcohol abuse and dependence, as previously stated;
high-risk sexual behavior that may lead to unplanned
pregnancies, HIV infection, or other sexually-transmitted
diseases; other types of violence such as physical and sexual
assault; and involvement in other criminal activities.
Researchers estimate that alcohol use is involved in one to
two-thirds of sexual assault and acquaintance or date rape
cases among teens and college students.
Accessibility and availability of alcohol are the main
contributing factors to underage drinking. Alcohol is easy to
get, and most kids in my school and my community know where to
get alcohol if they want it. Based on a study, nearly 90
percent of 10th graders and 75 percent of 8th graders think it
is either fairly easy or very easy for them to get. These
students ranked alcohol as a close second in perceived
availability behind cigarettes. Almost two-thirds, or 6.9
million, junior and senior high school students who consumed
alcohol in 1991 purchased their own directly. Studies confirm
that anywhere from 30 to 70 percent of retail outlets illegally
sell alcohol to minors. One sweep by a Louisiana Department of
Alcohol and Tobacco Control in 1996 found that 57 out of 60, or
95 percent, illegally sold alcohol to underage youth.
I mentioned earlier that the 21 minimum drinking age law
has been the single most effective measure in reducing traffic-
related deaths in the 16- to 20-year-old age group. However, by
making beer, wine and distilled spirits available to thousands
of junior and senior high school and college students across
the country through web sites and other direct access methods,
these tools have virtually eliminated the 21 drinking age law.
Enforcing the minimum drinking age laws in bars,
restaurants, package stores and other licensed beverage outlets
is difficult, to say the least. Enforcing the law on the
Internet and web sites is virtually impossible. Allowing home,
apartment, or dorm room delivery of alcohol to those under the
age of 21 is turning Federal Express and UPS drivers into
bartenders.
Thank you, Senator.
The Chairman. Well, thank you, Brendan. That was a pretty
dramatic story. We appreciate having you here and appreciate
your willingness to share that with us.
[The prepared statement of Mr. Brogan follows:]
Prepared Statement of Brendan Brogan
Good morning. My name is Brendan Brogan. I am an 18-year-old senior
at Ridgewood High School in Ridgewood, New Jersey. I also serve on the
National Board of Directors of Mothers Against Drunk Driving (MADD).
MADD, is an organization that represents over three million Americans
and exists to end the senseless violent crime of drunk driving, to
secure basic rights and meet the needs of the victims of drunk driving
and to prevent underage drinking. MADD members and supporters are not
just mothers. They include mothers, fathers, brothers, sisters,
victims, non-victims and a growing number of youth just like me.
Although often viewed as an organization singularly focused on
drunk driving, MADD, since its inception, has also been dedicated to
preventing underage drinking in order to stop youth drinking and
driving. MADD was instrumental in the passage of the federal Minimum
Drinking Age Law in 1984, which resulted in raising the legal drinking
age to 21 across the nation. MADD continues to advocate stringent
enforcement of the ``21 law'' because it has proven to be the single
most effective measure in reducing alcohol-related traffic fatalities
among young people between the ages of 16 and 20. In fact, minimum
drinking age laws are estimated to have saved more than 17,000 lives
since 1975. Between 1985 and 1995, the proportion of drivers 16-to-20
years of age who were involved in fatal crashes and were intoxicated
dropped 47 percent--the largest decrease of any age group during this
time period.
In addition, MADD was a strong supporter of and played an active
role in the passage of the ``zero tolerance'' federal legislation in
1995 that required all states to lower the illegal blood alcohol limit
for drivers under the age of 21 to .02 or less. Zero tolerance is now
the law of the land and more young lives are being saved as a result of
this initiative. Many young people around the country testified in
support of these laws because they were tired of going to class
reunions at the funerals of their classmates who had died in alcohol-
related crashes or as a result of other alcohol-related incidents.
While tremendous progress has been made in reducing the alcohol-
related traffic fatalities among youth, alcohol continues to be the
most frequently used and abused drug by high school seniors. Despite
the fact that it is illegal to sell alcohol to underage youth and it is
illegal for those under age 21 to purchase alcohol, it remains readily
available to youth and underage drinking still borders on epidemic
proportion. In 1997, 2,309 young people ages 15-20 died in alcohol-
related traffic crashes. In the last two years we have witnessed a
growing number of tragic binge drinking alcohol-related deaths of
college students on campuses in Massachusetts and Louisiana, just to
mention a few. At the age of 14, I was almost one of those students.
My friends and I had been stockpiling alcohol for weeks and on the
night in question I sneaked out of my house and went to the school
playground with an assortment of booze in a backpack. This was not the
first time my friends and I drank but I was now a freshman in high
school and I wanted to show my friends how I could really drink. We all
proceeded to get drunk and later that night my ``drinking buddies''
dragged me back to my house and dumped me on my head through the
window. I drifted in and out of consciousness and was aspirating on my
vomit when my friend Dan finally awoke my father who rushed me to the
ER. When I arrived at the hospital I was in a coma and had a blood
alcohol level of .20. I was lucky. I could easily have died of alcohol
poisoning just like those college students did. Unlike a lot of high
school students then and today who drink underage, at age 14, I knew
all too well the problems associated with alcohol abuse and underage
drinking. You see, most of the male members of my family for
generations had died of alcoholism and five out of six brothers,
including my father are recovering alcoholics. Underage drinking almost
killed me and that experience brought me to where I am today.
problems associated with underage drinking
Drunk driving deaths and injuries are only part of the problems
associated with underage drinking. Studies reveal that people who start
drinking at age 14 and younger are approximately four times as likely
to become alcohol dependent as are those who begin drinking at age 20
or older. The results of a Harvard School of Public Health College
Alcohol Study published in 1998 revealed the following: Two of five
students were binge drinkers and one in five was a frequent binge
drinker. Four of five residents of fraternities or sororities were
binge drinkers. Student binge drinking is by far the single most
serious public health problem confronting American colleges. Half of
all college students surveyed who drank alcohol were binge drinkers. Of
the students who drank, 20 percent drank on 10 or more occasions in the
past 30 days, 42 percent binge drink when they drink and 52 percent
drink just to get drunk. Thirty-six percent of those who drank admitted
they drove after drinking. A 1996 survey by the American Medical
Association found that 33 percent of 19 and 20 year olds consume at
least four alcoholic beverages on an average night, and 20 percent have
six or more drinks (AMA, 1996). While drinking among college students
is viewed by many as a ``rite of passage,'' this potentially deadly
view also prevails at the high school level. The rate of drinking and
binge drinking among high school and grade school students should serve
as a wake-up call for parents, legislators and the public because a
major determinant of college binge drinking is students who use alcohol
in high school or at younger ages.
Although it is illegal for all secondary students to purchase
alcoholic beverages, 81 percent of twelfth graders have tried them at
least once, along with 71 percent of tenth graders and 55 percent of
eighth graders. (Johnson et al, 1996a) According to the 1995 Youth Risk
Behavior Survey, 39 percent of twelfth graders and 30 percent of tenth
graders reported they had consumed five or more drinks of alcohol on at
least one occasion during the last 30 days. This figure was 33 percent
for all high school students, 36 percent for male high school students,
and 29 percent for female high school students (CDC, 1996). According
to the Monitoring the Future Study, about 30 percent of the nation's
twelfth graders, 24 percent of tenth graders, and 15 percent of eighth
graders reported in 1995 that they had consumed five or more drinks of
alcohol on at least one occasion in the last two weeks. In addition,
about 33 percent of twelfth graders, 21 percent of tenth graders and 8
percent of eighth graders reported that they had been drunk during the
last 30 days (Johnson et al, 1996b).
Underage alcohol use contributes to numerous health and social
problems including:
Risky behavior, such as driving under the influence and
driving without using a seat belt, motorcycle helmet or bicycle
helmet.
Traumatic injury and death due to motor vehicle crashes,
falls, fires, and drowning.
Homicide and suicide.
Risk of overdose and death by alcohol poisoning.
Early onset of alcohol abuse and dependence as previously
stated.
High-risk sexual behavior that may lead to unplanned
pregnancies, HIV infection or other sexually transmitted
diseases.
Other types of violence such as physical and sexual assault.
Involvement in other criminal activities (NIAAA, 1997)
Researchers estimate that alcohol use is involved in one-third to
two-thirds of sexual assault and acquaintance or date rape cases among
teens and college students (OIG. 1992)
The federal and state governments spend billions of dollars each
year in this country to address the problem of illicit drug use by
young people. Sadly, however, they close their eyes and turn a deaf ear
to the most dominant drug problem among young people--alcohol.
As I have testified to, the extent of the underage drinking problem
is evident and the problems associated with underage alcohol
consumption are well documented despite being swept under the social
rug. One of the questions that is the focus of this committee hearing
is why we have this problem if it is illegal to sell alcohol to youth
and illegal for them to purchase it. The answer to the question is
simple;
accessibility and availability of alcohol to youth
Accessibility and availability of alcohol are the main contributing
factors to underage drinking. Alcohol is easy to get. Most of the kids
in my school and in my community know where they can get alcohol, if
they want it. Based on a study, nearly 90 percent of tenth graders and
75 percent of eighth graders think alcohol is either ``fairly easy'' or
``very easy'' for them to get. These students ranked alcohol a close
second in perceived availability behind cigarettes (Johnson et al
1996a). Almost two-thirds or 6.9 million junior and high school
students, who consumed alcohol in 1991, purchased their own directly.
Studies confirm that anywhere from 30 percent to 70 percent of retail
outlets illegally sell alcohol to minors. One sweep by the Louisiana
Department of Alcohol Tobacco Control in 1996 found that 57 out of 60
outlets or 95 percent sold alcohol illegally to underage youth.
In the past, teenagers have primarily had three sources of alcohol:
bars and other licensed establishments that do not check IDs; using a
fake ID to buy alcohol; and alcohol provided by adults. We are now
confronted with a new source for youth access to alcohol and that is
Internet and other direct access venues.
I mentioned earlier that the 21 minimum drinking age law has been
the single most effective measure in reducing alcohol-related traffic
deaths in the 16 to 20 year old age groups. However, by making beer,
wine and distilled spirits available to thousands of junior and senior
high school and college age students across the country through
websites and other direct access methods, these tools have virtually
eliminated the 21 minimum drinking age law. Enforcing the minimum
drinking age law in bars, restaurants, package stores and other
licensed beverage outlets is difficult to say the least. Enforcing the
law on Internet web sites is virtually impossible. Allowing home or
apartment or dorm room delivery of alcohol to those under the age of 21
is turning Federal Express and UPS drivers into bartenders.
A recent study of more than 300 World Wide Web sites finds that 25
major alcohol beverage companies are using the Web to advertise and
promote their products through a variety of marketing techniques-such
as sponsorship of music and sports, interactive games and contests, and
chat and message boards that capitalize on the Web's strong attraction
for young people. Overall, there are now hundreds of Web sites that
promote alcohol, drinking and specific products. Nearly five million
youth ages 2 to 17 used the Internet or an on-line service from school
or home in 1996 and more than nine million college students use the
Internet regularly (Center for Media Education, 1997a1b/c). Over the
last two years, the number of Internet users under the age of 21 has
skyrocketed.
My peers don't know about a society without the Internet. We've
always had computers. Cyberspace is as much a part of our lives as is
the television. In this very real dimension, there is currently no
mechanism in that world to ensure that someone who purchases alcohol is
of the legal drinking age. Enforcement of the 21 minimum drinking age
law is critical to the effectiveness of this law and the local UPS
driver should not have the responsibility for this enforcement. The key
to enforcing laws against selling alcohol to minors is face to face
confrontation between the seller and the buyer. You don't need to check
an ID when the package is left at the doorstep.
Those who oppose restricting sales of alcohol over the Internet or
by other direct shipment means argue that most young people under the
age of 21 don't have a credit card and therefore cannot place an order.
This is simply not the case in today's world. I have had a check/debit
card since I was 16. In addition, as a high school senior I receive
offers for credit cards in the mail almost every week. Later this year
when I enroll in college, I assure you that during the first week of
orientation the credit card companies will be out in full force
offering free T-shirts in exchange for applying for their ``college
student'' credit card.
We need to be finding solutions to the underage drinking epidemic
and not creating new problems. We are spending millions of dollars a
year on a taxpayer funded advertising campaign aimed at reducing
illicit drug use among the youth of this country and not one dime of
that money is being used to address the number one drug problem for
youth and that is alcohol. Local and state agencies must be given the
necessary tools to enforce the underage drinking laws and the federal
government must lead in the fight to protect the future of all of us.
The Internet is a fantastic key to the world. It should provide us
unlimited information and knowledge. It should not however stock the
bar for weekend underage parties.
We are repeatedly told that we as youth represent our nation's
future. If that is true, the time is long overdue for the leaders in
this country to invest in that future and get serious about the war on
drugs. Alcohol may be a legal product for those over the age of 21 but
by ignoring the fact that alcohol is the principal drug abuse problem
for youth, you are fighting that war with one hand tied behind your
back. My father is a Vietnam veteran and the only thing I know about
that war is what I have learned from him, the history books and TV
documentaries. What I have learned is that the so-called war on drugs
we are waging will be another Vietnam unless our leaders recognize that
the real enemy in the drug war is the accessibility and availability of
alcohol to the youth of this country.
I want to thank the Chairman, Senator Hatch and the other members
of the Committee for the opportunity to appear before you today. While
my father was serving in Vietnam he bought a watch that was advertised
as suitable for scuba diving or testifying before Congress. He gave me
that watch a few months ago on my 18th birthday. Little did we know
that the watch would be as advertised. I will be glad to answer any
questions you may have.
The Chairman. Mr. DeLuca, we will turn to you now.
STATEMENT OF JOHN A. DeLUCA
Mr. DeLuca. Thank you, Senator. First of all, I commend you
personally for drawing attention to this very important issue.
We make common cause with you. We perhaps, unfortunately, will
not agree with the remedy that you propose, but certainly the
effort. I want to thank the members of your committee, and
especially our Senator, Senator Dianne Feinstein.
Having just heard Brendan and the others, I am going to
depart from my prepared remarks and take a different course.
But I would like to submit my prepared remarks which I think
are appropriate.
The Chairman. Without objection, we will put them in the
record.
Mr. DeLuca. I am the product of two worlds; culturally,
European. My parents were Italian immigrants. I am a terrible
statistic in this country. When I was 3 years old, I started
drinking wine with my family, a little water. I didn't realize
it at the time, but that was part of the several-thousand-year-
old heritage that came with my ethnic and religious background.
My children were raised the same way, as was my wife,
Josephine, where it was introduced as part of our culture, as
part of our meals.
I would offer to you that over the years I never felt that
this was a forbidden fruit issue for me, I had to prove
anything. There was no rite of passage. There was no need when
I got to high school or college to prove anything. I feel great
empathy for the comments that Brendan just remarked. Can you
imagine what a terrible indictment of what is going on in this
country that children, teenagers, young adults, feel that they
have to prove their adulthood by blasting their brains by
drinking to excess?
We have a lot to learn from other cultures. I spent several
years in the Soviet Union with our Government. They had every
control over distribution, advertising, cost, prices. And yet
there, culturally, the issue of alcohol abuse and alcoholism
was rampant. So, personally, as an individual, I believe we are
talking about issues that go deeply to cultural trends.
On the other hand, I am a product of the United States. I
have served in public policy positions and recognize that our
industry, the wine industry, given the inheritance that we have
in this society, cannot really progress unless it is a great
example of social responsibility. In our State, when this issue
first came to me, which was in 1985, and we talked of
reciprocity and how would we adapt to wineries who didn't have
access, I thought immediately in terms of trade agreements with
our different States.
And so California, in 1986, passed the first reciprocity
law which has now been engaged over the last 15 years, and let
me read the States that are involved in reciprocity
transactions--California, Colorado, Idaho, Illinois, Iowa,
Minnesota, Missouri, New Mexico, Oregon, Washington, West
Virginia, and Wisconsin. Lately, we have entered into very
creative State-by-State crafting with Louisiana and with New
Hampshire to address many of the issues that have been
discussed today.
I think a very compelling argument can be made that we
should support the model legislations and the draft
legislations where you do have unsupervised shipments which
occur in the States where it is illegal, but in the States
where it is legal you have couriers who are trained. You have
these stickers that I would like to enter into the record,
where they are required on all wine shipments sent via Federal
Express, where you must have a signature required and you must
have identification when they are, in fact, delivered.
These safeguards also exist in our State, in California,
and direct shipments, even though we are talking about
interstate commerce, are presently in 30 States intrastate. So
there is a longer history than just the present requirements
that we have.
On the underage issue, it is a very serious question, but
we have law enforcement agencies who are testifying in public
that as far as that issue is concerned, where it is supervised,
where there are these safeguards, where you have couriers that
are trained, where you have official requirements, that, in
fact, is minimal, not that it doesn't exist, but it is minimal.
It is not as serious as it is in the States where we don't have
these safeguards.
So we are trying to craft State-by-State, creative
solutions working with our wholesalers, with our retailers, who
have been wonderful partners. We don't want to depart on that
issue. However, the idea of a felony--and in 6 States this has
now passed in the last few years--a felony that is enacted in a
State for us sending directly to a consumer puts in basic,
immediate jeopardy our permit, and that is--I want to conclude
on that note. That has, in fact, led to a Federal remedy that
doesn't require what you are proposing, and that is that the
Bureau of Alcohol, Tobacco and Firearms which has jurisdiction
over us has announced in a circular, 96-3, which was in
February 1997, that, in fact, any case brought by the State
that shows that there has been a violation of the State laws
will cause that agency to immediately look into the issue, even
to the point--and it is a death sentence for us--of suspending
our basic permit.
So already at the Federal level, without any new laws that
you are contemplating, there is a mechanism in place that can
police this across the country because they have control over
our basic permits. At the same time, Congress last year, as you
recall, passed the Internet Tax Freedom Act and created the
Electronic Commerce Tax Commission. We have legislators who
have asked that this matter be looked into by that particular
commission, including the issue of taxes, including the issue
of revenues, including the issue of discrimination.
So my hope is that you will permit us, State by State, to
work with wholesalers, retailers, as we respond to consumers--
this is a very consumer-driven issue; without the consumers
asking for it, we wouldn't be in this position that we are
talking about; it is consumer-driven--that we work State by
State to craft creative solutions. I fear that what you are
proposing will have a chilling effect on our ability, and there
will not be the incentive to keep working as we are in these
different States.
Thank you very much.
The Chairman. Thank you, Mr. DeLuca.
[The prepared statement of Mr. DeLuca follows:]
Prepared Statement of John A. De Luca
Mr. Chairman: I am John De Luca, President and Chief Executive
Officer of the Wine Institute. Wine Institute is the association of
over 450 California wineries which produce 80 percent of our nation's
wine.
California's wineries and winegrape growers, along with their
counterparts in other states, comprise a significant agricultural
industry that continues in the proud tradition of family-owned farms.
Wine's rich heritage is an asset to our economy, culture and cuisine
which should be supported.
Our traditions, which began centuries ago in Europe, define us as
agriculture, cuisine and tourism. As winemakers, we take great pride in
the growth of our industry and with the fine quality of the wines which
we are growing. These successes have been underscored by the
astonishing growth of the premium wine industry over the past two
decades, a time when nearly 1,000 new wineries have been founded across
the country. With this success has also come media and critical acclaim
for our wines. Yet today, small winery owners are cast as potential
lawbreakers and even felons for simply responding to the requests from
consumers across the country who want our fine products.
i. our goal is to preserve the system while providing reform
Since the repeal of Prohibition, the wine industry has utilized the
``three-tier'' distribution system of producer to wholesaler to
retailer mandated in many states to sell our wines. This is a system
which served our industry well and we continue to value the
partnerships we have developed with our colleagues over the years. When
the number of wine producers was more limited, it was possible for
wholesalers to handle the volume of brands and varietals offered for
sale. However, the exponential growth in the number of wineries during
the last two decades, coupled with the striking consolidation which has
occurred within the wholesale tier, have created an environment which
no longer allows for full service for all winegrowers and consumers.
In 1963 there were 10,900 distributors and 377 wineries. Today,
there are less than 300 distributors and more than 1700 wineries. There
are currently over 800 wineries in California alone, each of which
produces approximately five different labels each year. That, in
itself, is over 4,000 labels per year from California. There is simply
no way that wholesalers and retailers in all cities and states can
carry all of these wines.
Our attempts are directed at preserving the essentials of the
system while providing necessary reforms. When reviewing wine industry
statistics, it was found that the 50 largest wineries in the U.S.
produce 90 percent of the wine. While the three-tier system is well
suited to handle the wines made by these producers, it is not in a
position to offer a similar distribution system for the more typical
small, family-owned winery. Most wineries produce only a few thousand
cases of wine each year (and some varietals in only a few hundred
cases) and, therefore, simply do not have the quantities necessary to
accommodate the needs of wholesalers.
The desire of consumers throughout the states for these specialty
wines has only increased over the years. In the last 20 years, the
attention of the media on the remarkable successes of the American wine
industry has increased dramatically, with the proliferation of wine and
food magazines, wine columns in local and national newspapers, and
programs on television and radio. It is now commonplace for consumers
in other states to learn about and want to purchase wines that are not
available to them in their own states.
Our success has been further enhanced by the fact that the wine
industry, in California and in many other states, has become a prime
tourist attraction. Out-of-state visitors to our tasting rooms, as well
as the tasting rooms in 46 other states, sample these small lots of
wine, and want to purchase limited amounts to ship back to their homes,
or else place phone orders for the wines upon their return home. Such
basic transactions have now been elevated to the level of a felony in
states such as Florida, Georgia, Indiana, Kentucky, North Carolina and
Tennessee, primarily at the urging of the wholesalers in those states
who fear losing possible market share. This year, 11 felony bills have
been introduced in state capitals. Those who oppose direct shipments
have a motto: ``Ship the Wine, Do the Time.''
ii. some states have found ways to accommodate their consumers
During the last ten years, 15 states have passed legislation which
offer solutions allowing their citizens to have the wines they cannot
readily find at home be shipped directly to them. These proposals were
at first based on the concept of ``reciprocity'', which in effect
created trade agreements between states allowing limited direct
shipments between states enacting such legislation. Recently, Louisiana
and New Hampshire enacted new, creative laws establishing a means of
registering out-of-state shippers and collecting all tax revenues.
iii. underage access is limited
The opponents of direct shipments continue to raise the issue of
underage access. Underage drinking is a serious problem. The Department
of Health and Human Services reports that more than one-half of 18-20
year olds consume alcohol every month. However, minors are not
purchasing any significant amounts of wine or alcohol by the relatively
expensive and slow path of direct shipments, which leaves a clear trail
of delivery records and credit card information.
In California, where direct shipment has long been legal, virtually
no complaints of underage/illegal deliveries have been made.
Artificially created ``stings'' that garner media attention can
illustrate that it is possible for underage persons to obtain alcohol
by direct shipment, even in instances when the wholesaler has handled
the product and it is subsequently shipped directly from the retailer
to consumer. Thirty (30) states permit such intrastate shipments yet
the wholesaler funded ``Americans for Responsible Alcohol Access'' does
not emphasize the issue of underage access for this type of delivery.
The fact is, there is no evidence direct shipment to minors,
whether from producer to consumer or retailer to consumer, is a serious
problem. State enforcement authorities that have experience with direct
shipments do not consider this to be a significant part of the underage
drinking problem.
Common Carriers like Federal Express, DHL Worldwide, and United
Parcel Service play a pivotal role in the delivery of wine to consumers
via direct shipments with special handling taking place.
The wine industry has worked with these common carriers to develop
programs that ensure such compliance, and the success rate of these
programs has been excellent. In crafting legislation to permit direct
shipments, we include language to require that all packages be marked:
``Contains Alcohol, Adult Signature (Over 21) Required for Delivery.''
In these states, drivers have been trained as to how to handle
packages that have these special delivery requirements. A good example
of this is provided in the enclosed correspondence from Jon Olin,
Senior Legal Counsel for DHL Airways, Inc. (See attachment #1) This
letter was sent in response to a complaint by wine trade journalist
Jerry Mead, who was upset that his 55 year old associate was made to
show identification before she could sign and take possession of a wine
delivery. (See attachment #2)
To further ensure our own Wine Institute members compliance with
the shipping laws, we have agreed with Federal Express that any member
identified by Federal Express as making an illegal shipment, or who is
not marking packages as containing alcohol as outlined above, will be
removed from our discount program and prohibited from shipping via
Federal Express in the future.
Stings have almost exclusively been done in states where direct
interstate shipment is not legal, and where drivers have not been
trained on how to handle packages containing alcohol, as they have been
in the legal shipping states. In addition, the packages involved in
these deliveries have rarely borne the required warnings about special
handling.
Common carriers have created a good system of checks upon their
systems in the legal shipping states. If direct shipping opponents are
truly concerned about deliveries to minors, they should in fact
encourage the adoption of the direct shipping model we have passed in
the 15 legal shipping states, and thereby ensure that all packages will
be marked in such a way--and drivers trained in such a way--as to
achieve a much greater system of protections than simply further
criminalizing such shipments.
iv. most direct shipments are legal
Opponents of direct shipments cite it as a billion dollar
business--an exaggerated figure that cannot be substantiated. The
entire market of direct shipments is estimated at less than $600
million. Contrary to the impression fostered by wholesalers, virtually
all of these sales are fully legal, made within the 30 states which
permit intrastate shipments and 15 states which additionally permit
limited quantities of wine to be shipped directly to their citizens. No
direct shipment of wine is sold without full payment of both federal
excise tax and state excise tax in the state where legally sold.
As an outgrowth of the Internet Tax Freedom Act, Congress created a
commission to examine the means to ensure the fair imposition of
consumption, sales and use taxes on business including those using the
Internet in remote sales. A group of 35-plus Members from both the
House and Senate has requested the Commission include an investigation
of unreasonable state barriers which do not allow consumers access to
out-of-state wine and remedies for states to collect excise and use
taxes. This is where any legitimate revenue concerns should be
addressed.
v. using the federal court system to regulate wineries is not necessary
The members of Wine Institute respect the need for states to be
able to administer the laws which they have on the books, even as we
work to create legislation that is responsive to consumer needs across
the country. There already exists a federal remedy for states to
enforce their alcohol laws. The Bureau of Alcohol, Tobacco and Firearms
(ATF) has informed the states, in Industry Circular 96-3 dated February
11, 1997, that it has jurisdiction over any holder of a Federal Basic
Permit (FBP)--a winery, distillery, wholesaler or importer--found to be
in violation of a state's laws. ATF, once notified by a state, will
take action. ATF will administer punitive action up to and including
suspension or revocation of a license if a FBP-holder is in violation
of a state's law. During the last two years, there has been one
complaint to ATF which led to the loss of the violator's FBP--and the
violator was a wholesaler.
States have other remedies available if they so choose, including
pursuing citizens for illegal importation and criminalizing underage
solicitation and purchase. And just last week, the Utah Court of
Appeals ruled that Utah may prosecute companies that ship alcohol
across state lines in violation of state law.
Passage of federal legislation in this area would harm efforts to
craft creative state-by-state reforms. It would lock in the status quo
and eliminate the incentive of the middle tier to work to find
solutions.
vi. conclusion
Our member wineries and I will continue to work with the various
states to craft laws so that consumers in all states can have
reasonable access to limited amounts of the wines which currently are
not readily available to them. In the meantime, we recognize that in
order to continue to do business, wineries must comply with the laws of
the various states in order to retain their Federal Basic Permits.
There is no need for states to be granted access to the over-
burdened federal court system as a second federal venue in which to
pursue citizens and small wineries. American consumers want
convenience, access and freedom to make their own purchases. America's
winegrowers want to fulfill those desires. Local state-sanctioned
distributors should not attempt to criminalize practices which in any
other industry would be considered free enterprise.
Interstate commerce and burgeoning E-commerce should not be
hindered by one segment of the industry, which raises false concerns in
order to hamper competition and create barriers to trade. The three-
tier system should be augmented on a state-by-state basis in order for
consumers to have access to hard-to-find wines. Any federal legislation
in this area should be balanced to allow this to happen.
On behalf of the members of Wine Institute, I thank the Committee
for this opportunity to express our views.
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The Chairman. Mr. Ballard, we will turn to you now.
STATEMENT OF MICHAEL BALLARD
Mr. Ballard. Mr. Chairman, my name is Michael Ballard. I am
proud to be a 1978 graduate of the University of Utah, and am
particularly honored by the opportunity to testify before your
committee.
My family owns a small California winery in the Santa Cruz
Mountains, 1,400 feet above Silicon Valley. Prior to the
purchase of the winery, I spent 18 years in Silicon Valley
developing various Internet technologies. The small companies I
helped to build developed many of the data and
telecommunications technologies that led to and today serve as
the primary means by which you and most other individuals gain
access to the Internet.
The Internet has made consumer access to products and
services, and producer access to the broader marketplace,
vastly more efficient. As a result, the Internet has shaken
many established distribution models across all industries.
Wholesalers, who are the distributors or middlemen, have taken
notice, and that is why we are here.
The annual U.S. production of wine in this country exceeds
200 million cases. Only 6 percent of all U.S. wineries produce
95 percent of that total. Our product, like that of many
smaller wineries, is unique and specialized. Handcrafted from
grapes grown on 90-year-old vines, our wines are inherently one
of a kind, available only in small quantities. Consumers from
all 50 United States seek us out with a desire to purchase our
particular product. Our customers are frequently visitors to
our property who seek out the product after returning to their
home States.
Savannah-Chanel Vineyards adheres to all State and Federal
laws in order to retain its Federal basic permit, as issued by
the ATF. Where direct shipment to a consumer is prohibited by a
given State or county, we obey. Today, in 35 United States,
that precludes our customers from receiving our wines.
Prohibiting direct transactions between producers and
consumers only results in paralyzing competition and consumer
choice. At the heart of the American free enterprise system is
the encouragement of small business and affording an even,
competitive playing field. It is no secret that the three-tier
distribution system is largely unchanged in the last 65 years
and provides little value, except to the top 100 wineries.
Some of the objections to direct interstate shipping are
based on concern for State collection and the need to control
underage delivery. Producers will gladly collect State taxes in
accordance with local tax authorities for the freedom to ship
legally. In partnership with the major shippers, delivery
certification services have been instituted, and development of
additional carrier certification programs will continue to
guarantee delivery to legalaged individuals.
Federal legislation in this area should represent a
balanced approach of controlling undesirable commerce while
enabling negotiations on a State-by-State basis to continue in
a manner that permits wineries and their customers to conduct
business. There are already several effective enforcement
techniques that States can utilize. States can prosecute the
citizen making the importation vis-a-vis use tax violations.
States can criminalize underage purchases. Dry-area purchases
and importation can be criminalized. States can criminalize
failure to pay taxes on products imported at a citizen's
request. States can regulate the carriers and require them to
enforce underage delivery laws.
And as John has said, there already exists a Federal
remedy. The Bureau of Alcohol, Tobacco and Firearms has
informed the States that it has jurisdiction over any holder of
a Federal basic permit. ATF, once notified by the State, will
take action, including suspension or revocation of the license,
if a Federal basic permitholder is in violation of State law.
That, ladies and gentlemen, is the death penalty for any winery
owner.
But more importantly, let's open up legal mechanisms. This
will allow the best control of any associated risk and greatly
reduce violations. Administrators in 15 States which today
allow access can testify to the success of these legal
mechanisms. Quite frankly, if States can defer to the Federal
court system to resolve these matters, our ability to
successfully work out intelligent reforms will be severely and
unfairly handicapped.
Help us to establish a fair, competitive marketplace for
our products by directing the States to look inside their own
sandbox for the solution. Protection of the distributors'
monopoly position is not a viable solution to this problem.
Passage of the bill as written will have a chilling effect on
the effort to craft State-by-State solutions to allow consumer
access to hard-to-find wines. Fifteen States, including two
where the State completely controls sales, have already acted
to provide such access. Legal, controlled market access is a
well-known, proven solution that must be an alternative option
to the closed system imposed by mandated three-tier
distribution.
Thank you for your time and consideration of these matters.
The Chairman. Well, thank you, Mr. Ballard.
I appreciate the testimony of all of you. I am concerned
about this issue because I am the last who wants to
overregulate or pick on people, but it is a serious issue.
I notice in Congressmen Radanovich and Thompson's
statements, or at least I heard this, that they have alleged
that Prof. Jesse Choper, from the University of California at
Berkeley, has concluded that, ``The proposed legislation would
violate the Commerce Clause protection against barriers to free
trade among the States by allowing States rather than Congress
to establish those barriers.''
Now, we have a single-page letter from Professor Choper
basically saying that. In this particular letter he first
asserts that neither Webb-Kenyon nor the 21st amendment
authorizes a State to erect discriminatory barriers to
interstate commerce. Now, I certainly would not argue that they
do. But tell me, Mr. Diamond, if you would, where in the draft
bill does it provide that we are conferring upon the States the
authority to enact such barriers.
Mr. Diamond. Well, I am a little uncertain as to what his
objection is. The 21st amendment was clearly, and still is
clearly understood to mean that traditional Commerce Clause
limitations upon State activity--that is, allegations that the
State action violates the dormant Commerce Clause--do not
apply. It is true, as I mentioned, that the Supreme Court has
said that overt protectionist activity, as they found took
place in Hawaii where the State imposed a tax on all alcoholic
beverages except two produced only in Hawaii, was
unconstitutional. But I don't see what the problem is.
The Chairman. Well, the bill merely allows a State to seek
Federal injunctions and forcing compliance with its existing
alcohol control laws. That certainly doesn't seem to erect a
discriminatory barrier to interstate commerce.
Mr. Diamond. No, sir.
The Chairman. OK; well, he next asserts that the bill,
``would dramatically expand the powers of the State to regulate
alcoholic beverages.'' Yet, as I view it, the most powerful
example of the State ability to regulate alcoholic beverages is
to bring criminal actions in State court. Now, how can a lesser
power to civilly enjoin practices which would allow prosecution
under its criminal laws be a dramatic expansion of State
regulatory power?
Mr. Diamond. I agree with you once again. I don't see that.
The Chairman. He cites the Bacchus case for the proposition
that the States may not discriminate against interstate
commerce. But he fails to mention that the Supreme Court also
held in that case that State laws designed to combat the,
``perceived evils of an unrestricted traffic in liquor,'' are
entitled to greater deference by the courts.
Now, isn't any regulation of the State which would tend to
discriminate against interstate commerce subject to the same
challenge in a Federal civil injunctive action as it would be
if used in a State proceeding?
Mr. Diamond. Well, the only thing that was objected to in
Bacchus was overt facial discrimination.
The Chairman. Right.
Mr. Diamond. The fact is that everyone understands that a
State regulatory system is one that interferes with free trade
in the abstract, and as Justice Rehnquist has often said,
either because it is trying to cope with preexisting
distortions in free trade or because, as is obviously the case
with alcoholic beverages, it is pursuing other social good.
Again, I don't see what the problem is.
The Chairman. I don't either.
Mr. Klein, the recent Utah Court of Appeals decision in
your case reinstated the criminal action Utah could bring, or
instituted against Beer Across America. So in the absence of
any further appeals, you can now proceed to trial.
Mr. Klein. Yes; we expect the case will be remanded to the
trial court and that a hearing date will be set for a
preliminary hearing and then trial.
The Chairman. Well, just one thing. Is the Utah opinion
binding on any other State?
Mr. Klein. No, it is not, because it reflects an
interpretation of Utah law.
The Chairman. My time is expiring, but I would like to ask
you, Mr. DeLuca, a question or two. You point to the
legislation that I will introduce as unnecessary, in part you
allege because the ATF, the Alcohol, Tobacco and Firearms
agency, is on the case and can revoke permits when shipments of
alcohol in violation of State laws have occurred.
Now, leaving aside the question of whether the ATF has the
resources to effectively police permitholders, is it not true
that ATF jurisdiction is limited to wineries and that there is
no Federal permit process for retailers and microbreweries who
engage in interstate sale of alcohol?
Mr. DeLuca. The Federal basic permit applies to wineries,
applies to wholesalers, to importers. They do not have the
Federal permit jurisdiction over retailers and brewers. I am
obviously addressing the issue in terms of the fact that the
wineries are the ones that I represent.
The Chairman. That could be hurt here.
Mr. DeLuca. At the same time, there has been a case brought
to the ATF. As I understand it, they investigated and they did
bring action, and in this case it happened to be with a
wholesaler. We are talking about a very big part of this issue,
the wholesaler community and the wine community. But I do
acknowledge what you have just said that the basic permit
jurisdiction of ATF extends to us, but it does not extend to
retailers and brewers.
The Chairman. Well, I am just going to ask one other
question of you before I turn to Senator Feinstein because your
testimony is particularly important here, of course, as is all
the other testimony. I want to give you every opportunity.
You have stated in your testimony that, ``minors are not
purchasing any significant amounts of wine or alcohol by the
relatively expensive and slow path of direct shipments.'' Of
course, the first question that comes to mind is what is a,
``significant amount of wine or alcohol.'' Some would argue
that even one sale to a minor, potentially devastating to that
minor should he or she drink and drive or imbibe to
unconsciousness, is more than enough. We have Brendan's
testimony about what he faced when he overindulged in alcoholic
beverages.
But more importantly, how does the industry know minors are
not purchasing, ``significant amounts?'' Certainly, a
successful sale to a minor is not going to be reported by the
minor.
Mr. DeLuca. May I answer it in two parts?
The Chairman. Sure.
Mr. DeLuca. First, the context that you are discussing is
obviously very important, and the whole issue of what do you do
about underage drinking and binge drinking is clearly of
paramount importance to us. Our code of advertising, how we
promote, how we educate, our emphasis on wine with food--I
mean, these are addressed across larger issues than the narrow
one that we are focusing on now. And as I said, we make common
cause with the whole issue of how to address this with regard
to underage drinking.
With regard to the Internet or direct sales and direct
shipments, I think common sense prevails here. Most of the
wineries are like Mr. Ballard's, hard-to-find wines, wines that
are expensive, wines that are touted in magazines by
journalists across the country. We have witnessed an
extraordinary renaissance in tourism, people who can't find
their products at home. If they were able to find it at home,
they would buy it there; can't, so they write directly to the
winery.
These wines are expensive. Those that are not expensive can
easily be found throughout the distribution system that we have
today, through your normal wholesale-retailers. But we are
talking about products that are either library editions or
literally you cannot find in your own local market. I have been
there at wineries when tourists have said, why aren't you
interested in my business? I like your wine. Why isn't it back
at home? And they find out that it isn't we who don't want to
give it to them; it is just not available in their own
commerce.
You need to have credit cards. Look at the trail that you
leave if you are thinking of breaking the law. You can easily
find on the Internet the order or the credit card that is being
used. It is time-consuming, versus going down and finding it
right there at your corner liquor store. So, in truth, that is
one part of the answer.
The other one is we do have experience in California of
almost 50 years intrastate. We are a big State, cover a lot of
territory. We have been doing this for a long, long time, and
the people who are policing this, as Congressman Radanovich and
Congressman Thompson pointed out, have said in public testimony
that it is a minor issue. It is serious for the people
involved, but when you are looking at the totality of the
underage issue, it is minor.
So focus on underage drinking; we are right there with you.
On that point, we are with you. The moment you start talking
about underage abuses through direct shipments, you are talking
about a relatively smaller issue. But this is not to negate the
question and the sympathy that is obviously there for us on the
question of underage drinking.
The Chairman. Well, thank you.
Senator Feinstein, we will turn to you.
Senator Feinstein. Thank you very much, Mr. Chairman.
First of all, Brendan, congratulations to you and to the
organization you represent. I am a big fan and supporter of
MADD, and it is the first time I have seen a young person
testify, and I just want you to know you did it very well and
you made a very strong point.
Mr. Chairman, I have known the California Wine Institute
well. I have known John DeLuca now for over 30 years, and know
that he speaks the absolute truth. What has happened in
California is you now have 800 wineries. They are in 45 of the
58 counties, and what has developed is a real competition in
the sense of developing wines that are very specialized. If you
have 800 wineries, you don't have room on shelves for 800
different products. So these wineries increasingly have the
Internet as, some of them, their only source of sales. Ten
million people a year visit these wineries, go through wine-
tastings. They make purchases, et cetera.
I have been very proud of this industry because as it has
grown, I think Congressmen Thompson and Radanovich said they
employ 200,000 people on a regular basis. My figures are
112,000 people on a regular basis, and 50,000 parttimers. It
has become a huge industry, but it has an increasingly boutique
kind of nature--specialized wines, if you like an okie wine, if
you like a fruity wine, even differences in chardonnays, and
particularly in the varietal wines. It is, I believe, today the
best wine produced in the world. And the smallness of the
wineries, a part of what is driving this--they are very
concerned that your legislation would have a real chilling
effect on what they are doing.
I guess what I would like to say, rather than ask
questions, is what Brendan pointed out is right. I don't know
that he got what he drank when he went out--I suspect it was
something that was bought at the corner store. And even in
Virginia, our statistics indicate that enforcement along these
lines is where the greatest weak point is; also, very much
aware of the fact that there is a kind of three-tier approach
here, and a lot of the support for the legislation comes from
the very people that don't want to see the growth in Internet-
type sales of this product, the wholesalers, for example. So I
think there is a fine balance here.
I am a cosponsor with Senator Kyl on his legislation on
Internet gambling, and I must tell you that I see some shades
of difference there. So I would just hope that you would work
with the Wine Institute. I am here to vouch for them as one of
the most responsible representatives of an industry that I know
of, and we are just extraordinarily proud of what has been
developing in California.
The Chairman. Well, thank you, Senator Feinstein. I have a
high regard for every Senator on this committee, but certainly
Senator Feinstein fights very strongly for her State. You seem
to know an awful lot about wine. I know absolutely nothing, to
be honest with you.
Mr. DeLuca. Come visit us.
The Chairman. I am afraid to. [Laughter.]
A poor Mormon boy like myself, I would be in real trouble,
I will tell you.
But I do want to be fair to you. We want to solve a problem
without hurting your industry. It is a legitimate industry, and
most people I know take a great deal of pain to understand
their wines and enjoy them very much. So we will be happy to
have your suggestions. We will be happy to listen.
We file these bills so that we can get comments, but if we
can prevent deaths like Brendan almost suffered--and your
testimony is very dramatic here today. I mean, I feel like what
a wonderful young man you are to have gone through those things
and now, having become an Eagle Scout at age 13 and now working
with Mothers Against Drunk Driving and being used as somebody
who can articulate some of their positions. I really think it
is wonderful.
So we will keep an open mind, and we would like you to look
at this and see if there is some better way of solving these
problems because we think the problem is more pervasive, Mr.
DeLuca, than you do. We have some indications that it is; we
will put it that way. And, naturally, we want to protect as
much as we can our young people from these type of----
Mr. DeLuca. Senator, will you permit me an auxiliary
remark?
The Chairman. Sure.
Mr. DeLuca. Mothers Against Drunk Driving was started in
Sacramento, CA, by Candy Leightner.
The Chairman. Right.
Mr. DeLuca. And in the early days when she was getting
started, she came to see me and enlisted our support. And we
were one of the earliest supporters of Mothers Against Drunk
Driving. In fact, I held a wine-tasting at one of the events to
try to promote interest in the subject matter as a way of
showing that there was no ideological or theoretical or any
practical reason for us not to support that effort. It is an
extraordinarily important development, how they have been able
to impact the laws across the country.
And as I said, we will make common cause with anyone who
wants to address the issue societally, and that is where we
part company with you, is only on the specifics of your bill,
but not in terms of the thrust of what you are talking about.
The Chairman. Well, let's talk in terms of how we do this.
I want to be fair to people, certainly to your industry. There
are a lot of decent, wonderful, honorable people in your
industry. And, of course, it is a tremendous part of the
commerce of not only California, but many of the other States
as well.
I think that what we will do is we will keep an open mind
and file the bill, and then you look at it and see how we can
improve it or what we can do to resolve these problems. I will
be happy to listen. I will be happy to do whatever we can to
resolve them in a manner that really is fair to everybody
concerned. But we are concerned about our young people in this
society and there is no doubt in my mind that they are using
credit cards to acquire alcoholic beverages of all kinds.
And we don't mean to center on the wine industry here
today. They are getting beer and they are getting, harder
substances, alcoholic beverages, that they really shouldn't be
getting under these laws, and they shouldn't be abusing. So
help us to know how to do it, and I will be happy to keep an
open door to you and we will see what we can do to get this
done the right way.
Mr. DeLuca. Thank you, Senator.
The Chairman. All right.
Senator Feinstein. Mr. Chairman, may I make a small
suggestion? The key may well rest in tightening verification in
some way of the age of the purchaser through the Internet. Now,
I don't know how that can be done, but it seems to me to be the
logical safeguard there and I would just add that.
Mr. Chairman, may I ask that certain articles be entered
into the record?
The Chairman. Without objection.
[The articles referred to follow:]
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The Chairman. I will enter some statements in the record, a
statement from Jack Lynch, who is with the University of
Baltimore School of Law; Simon Siegl, the president of the
American Vintners Association; a letter from Jesse Choper, who
is from the University of California School of Law; and then
one--let's see; this one is from Jeremy Benson, executive
director of Free the Grapes, an organization to ensure consumer
access to fine wine.
[The statements referred to are located in the appendix.]
The Chairman. Now, let me just also note for the record
that Professor Choper has, in response to my inquiry, informed
us that he has been retained by the American Vintners
Association. Now, this, of course, was not made clear in his
letter to the committee. And in all honesty, I really don't, I
have respect for Mr. Choper, but I don't see his point.
Constitutionally, I think he is way off base. In fact, I don't
think; I know he is way off base.
And I think what we have got to do here is make sure that
we always get the very best constitutional authorities and the
best constitutional opinions that we can. Mr. Diamond, I
certainly agree with you in your interpretations here today,
and in your statement of the law for the record.
But be that as it may, this has been an effective hearing
for me. I have listened very carefully and I certainly want to
be fair to the wine industry, and really to all of the
alcoholic beverage industries. But I also want to be fair to
our children and our young people in this society, who really
should not have access to these things. As you know, the
Internet has opened up all kinds of difficulties for us, and we
have got to approach these difficulties in intelligent ways and
we intend to do so. To the end, I want to thank each of you for
appearing today because I think you have been very helpful to
us. Thanks so much. It is great to see you.
With that, we will recess until further notice.
[Whereupon, at 11:28 a.m., the committee was adjourned.]
A P P E N D I X
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Questions and Answers
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Responses of Wayne Klein to Questions From Senator Hatch
Question 1. Many small wineries have argued that the current three-
tier system shuts them out and their efforts to introduce their product
into potentially lucrative markets are being stifled. They also claim
that the costs of participation in the system would be passed on to the
consumer making their products less affordable, and thus less
marketable. These are certainly valid concerns. But to what extent do
such economic factors justify contravention of State laws regulating
the sale of alcohol as are appropriate under the Twenty-First
Amendment?
Answer. The profit motives of alcohol marketers do not justify
violating state laws. Similarly, desires by alcohol producers to
collect the full markup between the cost of production and retail
prices also do not warrant changing longstanding laws regulating the
sale of alcohol.
Policy Choices/Enforcement. It is important to separate two
distinct concepts implicit in this question; the arguments about what
governmental policy should exist and the question of enforcement of
valid laws that are on the books.
If changes were made to state laws, the availability of alcohol to
consumers in various states might expand (including the availability of
alcohol to minors). The costs of that alcohol to consumers might be
reduced.\1\ If it is the policy goal of government to reduce the costs
and to increase the availability of alcohol to citizens, laws will need
to be changed to accomplish this goal. However, this just begs the
question of what the governmental policy should be and who should set
the policy regarding alcohol access--the federal government or state
governments.
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\1\ As noted below, if distribution costs were lowered for alcohol
producers, such as wineries, it is by no means certain that the savings
would be passed on to consumers.
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The Twenty-First Amendment specifically conditioned repeal of
Prohibition on granting to the states the ability to control the sale
and distribution of alcohol within a state's borders. Pursuant to the
authority of the Twenty-First Amendment and the Tenth Amendment, the
states have exercised their police powers over the sale of alcohol. In
the exercise of these police powers states have chosen to impose high
taxes on alcohol, restrict the availability of alcohol, and limit the
manner of sales. Every state has restrictions of these types.
To change these policy decisions requires that existing police
powers be taken from the states. To do so requires a constitutional
amendment to strip these powers from the states. If that is done,
Congress then would obtain the power to dictate to the states that they
could not restrict or control the sale or transport of alcohol in the
states and could cot impose special taxes on its sale.
Unless policy authority is taken from the states, then state laws
regulating or controlling the sale of alcohol are valid. So long as
those valid laws exist, enforcement officials are permitted--indeed,
obligated--to enforce those laws.
In sum, the complaints asserted by wineries go to policy decisions
of state legislatures, not to law enforcers. The arguments for change
should be addressed either to state lawmakers or in support of a
constitutional change. The language of S. 577, by contrast,
specifically avoids having the federal government express a policy
preference in this area. The bill is narrowly targeted at removing
artificial barriers to efforts by state officials to enforce valid
state laws.
Costs, Availability of Alcohol. The current distribution system for
alcohol does not necessarily increase the retail costs for alcohol or
reduce the availability of products to consumers, beyond what would
exist in a commercial setting. In some control states, including Utah,
the state is not only the wholesalers, but also the retailer. Thus,
Utah is a two-tier state, not a three-tier state. This enables the
states to reduce the costs of a multiple-tier system. As a consequence,
even if state law were usurped, a commercial distribution and retail
system might very well result in retail prices higher than found in the
state system. there are no assurances of lower prices.
Wine clubs or other distribution systems currently being offered to
consumers do not necessarily represent a lower cost structure. A wine
club becomes a distribution tier. Whether the sales are made through
retailers or through a wine club, that level of distribution will incur
costs and markups in price. Distribution systems such as this do not
necessarily reduce costs as compared to the current systems. Wine club
prices generally equal or exceed the shelf prices at Utah state liquor
stores--before the wine club adds its separate shipping fee.
The assertions of increased costs under the state systems or the
claims of limited availability may well be a ``red herring.''
Regulators suspect that even if alcohol producers could sell their
product to consumers at a lower price, they would not do so. The small
wineries or other producers who market and ship directly to consumers
are not selling to those consumers at below market prices. Any savings
from climination of different levels of distribution are not passed on
to consumers. The money saved is retained as extra profits. The
wineries relish the possibility of collecting a retail price for their
products rather than a wholesale price. Faced with the prospect of
collecting a much larger margin on sales than through other
distribution methods, the wineries are charging full retail price, plus
shipping, and keeping the higher margin of profits. If the goal of
shippers were to make their products more available to consumers and at
a lower price than through the retail system, direct sales would be
significantly cheaper than the prices at which the same products are
sold at retail. However, this is not what is occurring.
The availability of alcohol also may not be improved by alternative
systems. The Utah Department of Alcohol Beverage Control (DABC) has a
policy permitting consumers to make special orders. Any product desired
by a consumer will be ordered for that consumer on request.\2\ In these
instances, the prices offered to consumers is almost always less than
the retail price and shipping costs consumers pay through wine or beer
clubs. In such cases, the price is lower and the demand is consumer
driven, not supply driven.
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\2\ The state will special order other products only where the
consumer is willing to purchase the entire amount of any minimum amount
of a special order. If, for example, a winery is willing to sell its
product only in cases of six bottles, the consumer must be willing to
purchase the entire order. The winery must be willing to sell its
product to the state liquor store. In some cases, such as the Stony
Hill Winery, the producer sells products only at retail. There is no
wholesale price. After the state's markup, the final price to consumers
is very high because the winery is unwilling to provide the product at
wholesale.
---------------------------------------------------------------------------
Utah requires no fees whatsoever for a winery to be set up with the
Utah DABC as a vendor/supplier. The DABC does apply a fixed markup and
tax structure to any product supplied for resale. This is what many
mail order suppliers want to keep for themselves.
Another point to be remembered with alcohol availability is that
not all products are readily available for purchase. Some California
wineries already are selling all their output to consumers in
California and to consumers located in reciprocal states. They simply
do not have excess capacity to sell to buyers in other states, whether
or not those states are willing to permit the product to be sold. For
consumers in other states, the product simply is unavailable. This
unavailability should not be the cause of criticism of state regulators
or the state-control system.
Question 2. It has been argued that States can address all their
concerns by simply enacting legislation permitting direct shipments
with certain restrictions. Such legislation would require licensing by
the State and would result in effective State control and ensure the
receipt of appropriate tax revenue for those direct sales. Would the
enactment of State laws permitting direct shipment of alcohol solve all
the state problems and vitiate the need for federal legislation on this
area?
Answer. No. This approach is neither good public policy nor an
effective solution.
False Premise. This question presupposes a false premise. Yes,
states could address the concerns of wineries and alcohol producers--if
the states felt that the approach suggested by alcohol producers was
good policy for the state. The false premise exists because it assumes
that the states have adopted their various regulatory systems out of
ignorance or incompetence rather than as a deliberate policy choice.
Indeed, when states have adopted the industry-recommended approach, the
results have been unsatisfactory.
It is my understanding that all states do have procedures to permit
out-of-state companies to sell alcohol in the state. The complaint
seems to be that the procedures available are not the ones preferred by
alcohol marketers. However, these are the procedures that are being
followed by in-state companies and by out-of-state companies that have
chosen to comply with the law.
It would be unwise for the states to adopt a policy of not
requiring out-of-state companies to comply with laws applicable to in-
state producers. To do so would penalize those companies that are
located in the state, encouraging them to move their operations to
another state. It certainly would not be fair to exempt out-of-state
producers from compliance with state laws, but still impose taxes and
restrictions on in-state companies. No advantage should be given to
out-of-state companies that disadvantages in-state companies or those
who are willing to comply with the law. If some California wineries
satisfy the requirements to sell in a particular state--and demonstrate
that compliance is feasible--why should other wineries not be expected
to do the same?
Compliance with the law is possible. While there may be costs
involved in complying with state laws, it can be done. I commend the
many companies that do comply with state laws. There are commercial
enterprises and technological advances that facilitate this process.
The Internet, for example can be an affective and efficient means of
understanding and complying with the laws of each state, instead of
being used as a means of facilitating violations of the law.
The pernicious notion that states can (they really mean ``should'')
address producers' concerns about difficulties in selling their
products in certain states by changing their laws to no longer restrict
those products is akin to having promoters of gambling or
prostitution--which are legal in some areas--insist that other states
change their laws to facilitate the export of these products to all
states.
When States do Permit Direct Shipments, Alcohol Sellers Still are
Not Complying with the Laws. Evidence that the states' concerns are not
alleviated by the passage of legislation permitting direct shipments is
shown by the experience of states that do permit direct shipments. It
is my understanding that at the National Alcohol Beverage Control
Association (NABCA) Symposium on Alcohol Beverage Law, held in March,
1999, a representative of the New Hampshire State Liquor Commission
reported that the New Hampshire law permitting direct sales to
retailers and consumers has been met with very limited use. Since the
law went into effect on July 1, 1998, only 14 permits have been
purchased. Taxes of $373 have been collected, reflecting very low
levels of retail sales. This indicates that alcohol sellers are not
utilizing the straight-forward compliance procedures provided by the
law. The vast majority of direct sellers continue to sell alcohol to
New Hampshire residents without taking the effort or paying the
licensing fees to comply with the law.
While the state of New Hampshire created a mechanism for relatively
simple compliance, the mechanism is not being used. The suspicion is
that alcohol shippers do not want to submit to any regulatory oversight
or are unwilling to pay any taxes or licensing fees.
The much-anticipated experience of Louisiana, the other state
permitting direct sales by companies that register with the state, has
been similar. A permit is required in order to ship alcohol directly to
purchasers. A fee of $150 is charged to manufacturers and $1,500 to
out-of-state retailers such as wine or beer clubs, or retail marketers.
To date, the state has collected a mere $7,000 in licensing fees--fewer
than 50 out-of-state vendors. Again, this indicates that enacting
legislation to permit direct shipments (with certain restrictions) is
not a successful approach since few shippers are willing to comply the
law.
______
Responses of Wayne Klein to Questions From Senator Grassley
Question 1. Several of you have indicated that the ATF has
regulations on alcohol sales. Has the ATF issued regulations or
guidance on this issue of the direct selling of alcohol across state
lines?
Answer. Yes. On February 11, 1997, the Bureau of Alcohol, Tobacco
and Firearms (BATF) issued Industry circular 96-3, which noted that
compliance with the Webb-Kenyon Act is a condition for the maintenance
of the federal basic permit issued by the agency. Without a basic
permit, a company is not eligible to engage in the distribution or sale
of alcohol beverages. However, RATF is prohibited by law from
regulating brewers or retailers, so 96-3 is of limited application. The
BATF can take no action against brewers or against wine or beer clubs
(as retailers).
Industry Circular 96-3, however, states that BATF will respond to a
request for state assistance only where a written determination has
been made by the state regulatory agency or Attorney General that the
conduct at issue violates state law, and where the BATF has
independently determined that the conduct has some ``pronounced
impact'' on the state regulatory or enforcement scheme.
A copy of Industry Circular 96-3 is attached. BATF has taken no
enforcement action relating to direct shipping against any holders of
permits since the issuance of the circular. State regulators report
that BATF devotes little of its resources to alcohol (one estimate is
less than 10 percent). Instead, BATF focuses on collecting fees and is
reluctant to bring enforcement actions. At the 1999 NABCA Symposium, a
BATF official stated that the Department of Treasury (of which BATF is
a unit) has not taken a position on direct shipping in the past. It
recognizes the issues of violations of state laws and minor sales but
is taking a cautious approach as it tries to learn more about the
issue.
Question 2. Mr. Klein, your testimony indicates that you are
prosecuting an Illinois company for illegal shipments of alcohol into
Utah. You also mention that the state of Utah had warned the defendant
in your case to stop shipping alcohol into your state. Could you
elaborate on how the defendant was warned and whether the defendant
responded to this warning in some way?
Answer. Yes, the defendants in our case were advised that their
conduct violated the law and were requested to cease shipments. It was
only after shipments continued six months later (over a hundred cases
per month) that the state determined to bring a criminal prosecution.
The Affidavit of Probable Cause, accompanying the criminal charges
provides the background of this warning:
9. On or about April 19, 1996, a representative from UPS,
Loss Prevention, reported that UPS had in its possession
several cases of beer (each case containing twelve bottles)
which were shipped from BAA [Beer Across America) to residents
within the State of Utah. Sgt. Braegger, Utah Division of
Investigations (``UDI''), contacted Amoroso [Louis Amoroso,
President of Beer Across America] on this same day and advised
him that BAA was illegally importing alcoholic beverages into
the State of Utah. Amoroso was also told at this time that Utah
law required BAA to obtain an appropriate license, that all
shipments must be sent through the Utah Department of Alcoholic
Beverages, and that if shipments continued without the
appropriate license, the product would be seized and legal
action taken. Sgt. Braegger was then immediately contacted by
Morton Siegel who identified himself as the attorney for BAA.
After a discussion of the laws of the State of Utah and the
expressed intent of UDI to enforce the alcoholic beverage laws,
Mr. Siegel advised that BAA would cease imports into the State
of Utah and the expressed intent of UDI to enforce the
alcoholic beverage laws, Mr. Siegel advised that BAA would
cease imports into the State of Utah until legal arrangements
could be made with the Utah Department of Alcohol Beverages.
10. Upon checking with Earl Dorius, Utah Department of
Alcoholic Beverages, I [the affiant, UDI agent Evan Terry] was
advised that BAA had not filed for nor received a license from
the State of Utah for the import of any alcoholic beverage
before April 19, 1996. Subsequent to that time, BAA has never
filed for or received a license.
11. In my contacts with numerous customers within the State
of Utah, I was advised that in many instances after April 19,
1996, BAA advised the customers that BAA could not ship into
Salt Lake City, but encouraged customers to list a shipping
address outside of the city. In addition, upon reviewing
printed materials for BAA, I have noted that these materials
contain information stating that BAA will refuse orders and
will not ship into certain states because of legal
requirements. The State of Utah is not on this list.
The records of seized shipments bear out that BAA encouraged
customers to list false addresses. A review of 244 invoices from
shipments from BAA to Utah residents in October and November 1996 shows
that 33 of them (or 13.5 percent) listed an out-of-state address for
billing, but a Utah address for shipment.
In addition to warnings by Sgt. Braegger, Lt. Mitch Ingersoll of
UDI spoke with Mr. Siegel on two occasions during this period. Lt.
Ingersoll explained the operation of Utah's liquor laws and Utah's
intent to prosecute if shipments continued. Mr. Siegel told Mr.
Ingersoll that he refused to advise his client (BAA) to stop shipping
into Utah.
Question 3. From the written testimony, I get the impression that
direct sellers of alcohol use common carriers like ``UPS'' or ``FEDEX''
to deliver the alcohol to customers. Are there any laws on the books to
go after the carriers who transport alcohol into a state in violation
of state law on behalf of direct seller[s] of alcohol? If not, should
there be such laws?
Answer. There is a Utah statute that prohibits carriers from
transporting alcohol in a state in violation of state laws. Utah Code
Ann. Sec. 32A-12-504 provides:
It is unlawful for any motor carrier, or any officer, agent,
or employee of a motor carrier, or any other person, to order
or purchase any alcoholic product or to cause any alcoholic
product to be shipped, carried, or transported into this state,
or from one place to another within this state, when the
alcoholic product is intended by any interested person to be
received, possessed, sold, or in any manner used, either in the
original package or otherwise, in violation of the laws of this
state.
I believe that many, if not most, states have similar laws. There
are good arguments in favor of, and against, strictly enforcing such
laws. There is an initial question of fairness in enforcing laws such
as this against innocent shippers. Since some shippers (and perhaps the
majority) do not label the packages as containing alcohol and do not
completely identify the source of the package as an alcohol shipper, it
is possible that shippers can be transporting alcohol without knowing
the contents of the package. The state must determine whether it is
fair to punish them?
A further complication is that some manufacturers have alcohol
products packaged and introduced into the shipping process by other
companies. This further disguises the contents, sometimes resulting in
the alcohol being described as glassware or fruit juices.
On the other hand, practical considerations indicates that it might
not be unfair to impose such requirements, if the shipper knows the
contents of the packages. In many cases, the same company picks up the
alcohol from the warehouse of the alcohol producer and then distributes
the packages through its network to the ultimate destinations. Thus,
while the delivery driver at the destination may not know what is in
the package, the company knows very well that the alcohol was picked up
from an alcohol seller and that it was destined fro delivery in various
states. Indeed, UPS representatives told me that in many cases,
companies that do a significant amount of shipping prepare the delivery
documents using computers and computer programs provided by UPS. In
other words, UPS easily can know whether it is shipping alcohol. FEDEX
and UPS say they have corporate policies against transporting alcohol
into states where it is illegal, but they also do not ask what is in
packages picked up from wineries. In such cases, the carrier can be
considered to be aiding and abetting the alcohol marketer in selling
its alcohol products into states where the sales are illegal.
Unfortunately, there may be significant limitations on the ability
of states to regulate common carriers who are delivering alcohol to
consumers in the various states. It is my understanding that the
Airline Deregulation Act, and perhaps other statutes, prohibit the
states from imposing rules or regulations on federally-regulated air
carriers. I believe that FEDEX is such a carrier. States may be unable
to impose restrictions on interstate shipments because of the
Constitution's Commerce Clause without express permission from
Congress.
As to whether there should be laws prohibiting carriers from
transporting alcohol, it is my opinion that this is a decision that
should be made by the various states as part of their regulatory
structure for alcohol control. But, if a state desires to restrict the
transport of alcohol, Congress should assist that state by removing the
ability of violators to claim immunity from enforcement because of the
Commerce Clause. Importantly, S. 577, would permit the Attorney General
to bring enforcement actions against carriers as well as alcohol
producers--so long as the conduct violates state law. It is left to the
individual state to (a) determine whether to make transportation
unlawful, and (b) decide whether the facts of a particular case justify
initiation of an enforcement action. This bill will help those states
who choose to go after carriers who are aiding in the illegal conduct.
Question 4. One of the major arguments used against the direct sale
of alcohol is that states into which alcohol is shipped will miss out
on sales tax revenue. Are any of the witnesses aware of whether the
internet tax commission is looking at this issue or has made any
pronouncements on this issue?
Answer. I do not know whether the Internet tax commission is
examining this issue. There have been no pronouncements as yet. The
commission likely will examine this issue only within the broader
context of sales taxes being collected on all types of remote selling.
However, it is important to keep in mind that the sale of alcohol
involves more than just the collection of sales tax. Alcohol production
and sales are subject to excise taxes and the collection of fees on
producers, distributors, and retailers as part of the regulatory
process. These alcohol-specific taxes serve a distinctly different
function than sales tax. Sales taxes generally are designed as pure
revenue sources and are paid into the general tax coffers of a state.
By contrast, alcohol-specific taxes serve a different function.
They may be intended to discourage sales (by increasing the cost to
consumers), to fund the costs of regulation (e.g. public education,
training of servers, enforcement efforts, defraying costs to society of
alcohol use), or to fund social projects (such as school lunches in
Utah, where 13 percent is added to the markup of alcohol purchases to
fund school lunch programs). Often these alcohol-specific taxes provide
the funding for the alcohol regulatory agencies.
Alcohol-specific taxes are imposed by states pursuant to exercise
of their police powers and exist in furtherance of policy goals
selected by the states. Thus, these taxes are of a very different
nature than sales taxes and they should be treated in a different
manner than sales taxes.
It should be noted that S. 577 is not an anti-Internet nor is it a
tax bill. It is a simple law enforcement device allowing state
enforcement action against anyone who violates state law, regardless of
how the sale was solicited or consummated.
I hope this provides sufficient response to your questions. If you
have further questions, please feel free to contact me.
______
Industry Circular--Department of the Treasury, Bureau of Alcohol,
Tobacco and Firearms--Number 96-3
direct shipment of alcohol beverages
February 11, 1997.
Bonded Wineries, Breweries, Importers, Wholesalers, Retailers and Other
Concerned
Purpose. The purpose of this circular is to inform industry members
that an ATF Ruling will be published in a future issue of the Alcohol,
Tobacco and Firearms Bulletin. The ruling will read substantially as
follows:
The Bureau of Alcohol, Tobacco and Firearms (ATF) has recently
received a number of requests from various States for our assistance in
the enforcement of State alcohol beverage laws. The States are
concerned with mail order, telephone, and Internet sales and shipments
made directly to consumers in a State from sellers located outside the
State. these transactions usually involve small quantities of wine or
beer shipped by out-of-State sellers (including beer and wine of the
month clubs) and, when considered individually, seem to have a
negligible effect on interstate commerce. taken in the aggregate,
however, these shipments result in a substantial revenue loss to the
States of the purchasers. The National Conference of State Liquor
Administrators has estimated that these types of interstate sales
currently amount to $300 million annually and result in State tax
revenue losses of tens of millions of dollars. The States are also
concerned that shipments may be made to underage drinkers.
The States have asked ATF whether these types of transactions
violate the Webb-Kenyon Act, 27 U.S.C. Sec. 122. The States have also
asked about the circumstances under which ATF will take enforcement
action against these types of transactions.
Background. Section 202(b) of the Liquor Law Repeal and Enforcement
Act, known as the Webb--Kenyon Act, was enacted relative to the
adoption of the Twenty-first Amendment and is, in effect, a statutory
declaration of the constitutional prohibition. The Twenty-first
Amendment provides that 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 prohibited.
The Webb-Kenyon Act provides that the shipment or transportation of
any beverage alcohol product, from one State into any other State in
violation of any law of such State is prohibited. Neither the Twenty-
first Amendment nor the Webb-Kenyon Act provide for any criminal or
civil penalties for violations thereof.
The Federal Alcohol Administration Act (FAA Act), 27 U.S.C.
Sec. 203, requires a basic permit in order to engage in the business of
importing into the United States, distilled spirits, wine or malt
beverages. Likewise, a basic permit is required to engage in the
business of distilling spirits or producing wine. Finally, a basic
permit is required for persons who engage in the business of purchasing
for resale at wholesale distilled spirits, wine, or malt beverages.
Retailers are not required to obtain basic permits under the FAA Act.
In addition, 27 U.S.C. Sec. 204(d) provides that basic permits are
conditioned upon compliance with the Twenty-first Amendment and other
Federal laws relating to its enforcement.
Consequently, ATF could under appropriate circumstances take
administrative action against a basic permit where a basic permittee
ships alcohol beverage products into a State in violation of the laws
of that State. However, the extent of this authority does not extend to
situations where an out-of-State retailer is making the shipment into
the State of the purchaser.
Held, the Webb-Kenyon Act is a law relating to the enforcement of
the Twenty-first Amendment and is a condition of the basic permit under
27 U.S.C. Sec. 204(d) for violations of which ATF may suspend or revoke
the basic permit.
Held further, ATF will respond to an official State request for
assistance only where a written determination has been made by the
chief administrative officer of the State liquor enforcement agency or
the State Attorney General that the conduct violates State law and ATF
has independently determined that the State law violation has some
pronounced impact on the regulatory and/or criminal enforcement scheme
of the State in question. That is, ATF will evaluate the conduct in
question in relation to the proper exercise of its federal authority
over matters that necessitate federal intervention. For example, ATF
will not take action to suspend or revoke a basic permit for a
violation of a local ordinance prohibiting the sale or delivery of
alcohol beverage products prior to 10 a.m., when the direct shipment is
delivered by a common carrier earlier than 10 a.m.
__________
Responses of Stephen Diamond to Questions From Senator Hatch
Answer 1. There was language in some of Justice Brandeis' decisions
in the 1930's that suggested that the Twenty-first Amendment immunized
discriminatory state regulations. In Young's Market, however, Brandeis
found the challenged California statue to be a reasonable, i.e.
nondiscriminatory, one. In other decisions, he suggested that
retaliatory state legislation might better be described as protective,
implying that the legislation was reasonable. In Ziffrin, decided
contemporaneously, Justice McReynolds explicitly evaluated the
reasonableness of the challenged law.
Subsequently, in Bacchus, the Supreme Court explicitly rejected
protectionist, i.e. facially discriminatory, tax legislation in which
Hawaii attempted to exempt two locally produced alcoholic beverage
products from a general tax on all other alcoholic beverages. Facial
discrimination, exempting in-state products from taxes, permitting only
products created from locally grown grapes to be sold in grocery
stores, [(see Loretto 601 F. Supp. 850 (1985)] is therefore forbidden.
That a wine producing state has a lower tax rate on wine or a beer
producing state has a lower tax rate on beer has not been deemed
discriminatory. A policy that benefits local producers, but does not do
so explicitly or exclusively, is thus permitted. States also can do
permit in-state breweries and wineries to sell retail on site. All
states require that sales be through regulated channels. Most of these
states do not produce wine--about which much of the present controversy
seems to be focused. They are not protecting their own producers either
explicitly or implicitly.
Answer 2. If the judicial interpretation of extra-territoriality
was such that a state could not prevent unregulated interstate
shipments, i.e. no jurisdiction over sellers, no realistic possibility
of action against transportation companies, then the state's capacity
to collect taxes or regulate prices in ways that justices of the
Supreme Court have recently suggested are options available to states
would be vitiated.
Answer 3. Those who supported Repeal believed that there could and
should be no single, centrally imposed, regulatory structure for
alcoholic beverage sale and use. To create its own regulatory regime,
either a monopoly or a license system, a state needed and needs the
capacity to control its own borders. State wholesale monopolies or
regulated private wholesalers were the techniques used to structure
access to and permit regulation of the state market.
Answer 4. If states cannot control the flow of alcohol across their
borders, they cannot realistically protect their tax or monopoly mark-
up revenues. They also cannot regulate the distribution system in the
interest of temperance or orderly markets (the ultimate purpose of
orderly markets again being temperance). If the business of in-state
retailers is significantly reduced by out-of-state shipments, they may,
to survive, engage in sales to the underaged or intoxicated, sales
after hours, etc. A lesson of Prohibition was that government should
not simply ban what are perceived to be undesirable activities. It
should instead administer a system which reduces the likelihood of
illegal behavior rather than simply punishing it when it is discovered.
It is the unregulated and potentially limitless nature of the shipments
that threaten state regulatory interests.
Answer 5. It is unlikely that voluntary codes of ethics would work.
This is not because the alcoholic beverage industry is any more lawless
than any other industry. It is because voluntary codes, to the extent
they have ever worked, have only done so when the activities involved
were sufficiently public and visible, at least within the trade, that
they could be effectively policed by competitors, who would report or
threaten to report violations to the authorities. This does not appear
structurally possible with interstate shipments.
______
Responses of Stephen Diamond to Questions From Senator Grassley
Answer 1. BATF rejected requests that it pursue interstate
shipments under Webb-Kenyon, but did eventually, as amicus, support
Florida's unsuccessful effort to get injunctive relief under the Act.
In Industrial Circular No. 96-3, issued February 11, 1997, BATF stated:
ATF could under appropriate circumstances take administrative
action against a basic permit where a basic permittee ships
alcohol beverage products into a State in violation of the laws
of that state. However, the extent of this authority does not
extend to situations where an out-of-State retailer is making
the shipment into the State of the purchaser.
BATF has announced, I believe, that it would investigate state
complaints about winery shipments.
Answer 2. Common carriers are included in several states' penal
statutes prohibiting unauthorized interstate shipments. Some state
regulators have voiced concern that carriers might successfully defend
themselves from felony prosecutions, by asserting their ignorance of
the contents of the package, especially when the shipment is not made
directly from the winery or retail store, but from, for instance, a
packaging company. On the other hand, several states have informally
put pressure on common carriers to refuse such shipments.
Recently a federal court in Massachusetts, in Wine and Spirits
Wholesalers of Massachusetts, Inc. v. Net Contents, Inc., 10 F. Supp.
3d 84 (1998), a suit brought by wholesalers against an out-of-state
shipper and Fed. Ex, held that, with regard to the tort claim against
Fed Ex, state law was pre-empted by the Airline Deregulation Act, which
prohibits states from regulating prices or services. If the same result
were to be reached in a suit brought by a state, states would not be
able to pursue legal action against air carriers unless Congress were
to amend the Act.
Answer 3. I have no information on this subject. The commission may
not be considering alcoholic beverage taxes since states prohibit such
sales for regulatory as well as fiscal reasons.
Additional Submissions for the Recoed
----------
American Vintners Association,
Napa, CA, March 5, 1999.
Senator Orrin Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
Dear Senator Hatch, Free the Grapes! ia a national, non-profit
coalition of 145,000 wine consumers and associations representing over
1,000 of America's winemakers. Our mission is to ensure consumer access
to fine wine by exposing pending legislation that is anti-consumer and
anti-free trade. Our strategy is to rally wine lovers who are fedup
with laws which protect wholesaler middlemen at the expense of their
ability to enjoy wines not available in their market.
Our funding comes exclusively from wine consumers tired of
unnecessary government intervention, and individual winemakers who just
want to satisfy demand for their wines and get back in the cellar to
blend the latest vintage. (Some of the organizations at left provided
seed money in mid-1998.) From the stacks of letters and emails I
receive, I can assure you that our consumer supporters show an
enthusiasm for this issue which is inversely proportional to the size
of our modest budget.
These same wine lovers, your voters, are very aware that America's
wineries produce far more labels each vintage than any wholesalers or
retailers could possibly stock and sell. Of America's 1,800 wineries
located in 48 states, over 1,700 of them are small, family owned and
operated; cumulatively, they produce less than 5 percent of all the
wine produced in the U.S. Yes, less than 100 U.S. wineries produce over
95 percent of all wine, and they need the 3-tier system to efficiently
distribute millions of cases.
We advocate augmenting, not replacing the current 3-tier system by
allowing the estimated 1 percent of wine that is direct shipped to be
appropriately regulated. Buying wine by catalogue or online is not like
buying sweaters from Maine; both consumers and wineries understand the
differences with a socially sensitive product. As evidenced by their
model legislation, the wine industry supports purchasing licenses in
each state, making excise tax payments, volunteering to pay sales tax
liabilities, reporting shipments, labeling cartons, and using couriers
accustomed to validating identification of adult recipients.
Additionally, Free the Grapes! issued in January a voluntary ``Wine
Industry Code for Direct Shipping'' which includes these provisions and
is now open for a comment period, although the Santa Barbara County
Wineries Association already endorsed the code without changes.
I urge you to carefully consider the costly implications and
motivations behind this effort to more aggressively prosecute out-of-
state winemakers for shipping a bottle of wine. Certainly every state
should be able to enforce its law. My fear is that legislation
resulting from your hearing will put a damper on creative state-by-
state solutions that have been enacted (e.g., NH, LA) or are currently
being considered (e.g., AZ, TX, MT, NY) which satisfy my consumer
constituents, and are supported by the wine industry.
One wonders how the public is served, and what the motivations are,
behind legislation which seems unrelated to legitimate state interests
for ensuring public safety. You should know that California, which
accounts for 29 percent of the nation's table wine consumption, allows
direct shipping--wholesalers, wineries, retailers and consumers all
thrive. If there are no problems with direct shipping in California, or
with the other 29 states that allow intra-state direct shipping, what
other motivations can there be for the legislation you are considering?
In some states (e.g., FL, GA, KY), harsh felony laws are only meant
to intimidate winemakers into compliance with laws seemingly inimical
to the letter and spirit of the commerce clause. In North Dakota, a
pending bill supported by wholesalers names wine consumers accomplices
to felony offenses for direct shipping. In Texas, a pending bill
carriers the same penalty as a conviction for assault with a deadly
weapon. Do you really want to criminalize wine connoisseurs and
winemakers?
The motivations for this legislation are simple: the powerful wine
wholesaler middlemen mistakenly fear that direct shipping is the first
step towards dismantling the 3-tier wine distribution system. They want
100 percent of sales to flow through their coffers, not 99 percent,
because they wrongly fear that 99 percent will eventually decrease.
They are using the 21st Amendment to prop up a business model that was
appropriate when created 65 years ago. Direct shipping has two main
causes: it is pressure relief valve for wineries to satisfy tourism-
generated demand for small production wines; and secondly, for small
family-owned and operated wineries to gain access to consumers in
states where wholesalers have no financial incentive to represent them.
Undoubtedly our well-funded opponents will cry foul over lost state
tax revenues and underage access. I've addressed the tax issue; in
fact, state revenue may increase as states establish the provisions to
receive both the excise and sales taxes wineries are willing to pay.
The underage access issue will no doubt capture your imagination with
colorful testimony fron well-meaning but misguided witnesses. Reports
of elaborate PR ``stings,'' concocted purely for TV cameras, are
artificial, forced sales attempting to prove a hypothetical point. They
are not indicative of legal, responsible transactions that are the
norm.
Do you really believe that the clerk at the corner store is better
qualified to validate identification than a courier who is trained to
deliver radioactive materials, flammable liquids, and body organs?
Is the system perfect? Of course not. We do not condone, nor turn a
cheek, to those who break any state laws. But the industry is
voluntarily establishing standards and supporting provisions to
mitigate any risks to public safety and state revenue sources. As you
know, Congress has established a commission to grapple with the issues
of burgeoning Internet commerce and there is a laudable effort to
interject interstate wine shipments into the discussion.
If you're going to shackle the winemakers, and criminalize the
connoisseurs, where does this lead? Under the 21st Amendment
Enforcement Act''--which I would rename the ``Wholesaler Protection
Act''--are Americans now subject to not only federal and state law, but
also the laws of any other state which chooses to use the 21st
Amendment to prosecute them? Are the states, in effect, enacting laws
that they cannot themselves enforce?
This legislation may only add the number of cases before the
Federal judiciary and could end up costing Americans more in taxes.
Please, let the states and the industry solve this industry squabble
for the benefit of adults who just want to enjoy a delicious glass of
wine with tonight's dinner.
Thank you very much for your time and for considering the viewpoint
of thousands of consumers.
Sincerely yours,
Jeremy Benson,
Executive Director.
__________
University of California,
Berkeley, CA, March 5, 1999.
The Hon. Orrin G. Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
The Hon. Patrick J. Leahy,
Ranking Minority Member, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
Dear Senators Hatch and Leahy: I write about Senator Hatch's Bill,
scheduled for hearing before the Judiciary Committee on March 9, 1999,
that has been said to ``add enforcement'' to the Webb-Kenyon Act passed
by Congress in 1913. I am a Professor specializing in Constitutional
Law (and the former Dean) at the School of Law of the University of
California at Berkeley (Boalt Hall). I attach a copy of my curriculum
vitae.
I believe it is most important to underline that the Bill goes far
beyond simply providing a remedy for a violation of Webb-Kenyon.
Instead, it makes fundamental changes in current law and in doing so
affects serious constitutional and public policy issues. Webb-Kenyon
prohibits the importation of alcoholic beverages into a state in
violation of that state's laws. It is generally understood that
Congress' intent in passing the statute in 1913 was to give federal
sanction to a state's decision to ``go dry,'' an authority that had
been denied to the states by the Supreme Court in Leisy v. Hardin, 135
U.S. 100 (1890).
Webb-Kenyon does not authorize a state to erect discriminatory
barriers to interstate commerce. Indeed, in the absence of an express
federal enactment, any attempt by a state to do so--by conferring
different rights on in-state and out-of-state producers of alcoholic
beverages--would violate the core principle underlying the Commerce
Clause of Congress can so regulate trade between the states.
Nor does the 21st Amendment, which confers special powers on the
states regarding alcoholic beverages, affect that conclusion. In
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Supreme Court
held the 21st Amendment did not permit state regulations of the local
sale or use of liquor to discriminate against interstate commerce. To
do so, the Court reasoned, would be inconsistent with a central tenet
of the Commerce Clause: forbidding economic protectionism.
I believe that the Bill, rather than simply creating a federal
remedy for a violation of Webb-Kenyon in its current form, would
dramatically expand the powers of the states to regulate alcoholic
beverages. Most significantly, it would run counter to the spirit of
Bacchus and remove the protection that the Commerce Clause grants the
alcoholic beverage industry, along with all others, from state erection
of barriers to free trade.
I would be happy to provide any further information you may find
helpful.
Sincerely,
Jesse H. Choper,
Earl Warren Professor of Public Law.
______
University of California,
Berkeley, CA, March 9, 1999.
The Hon. Orrin G. Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
The Hon. Patrick J. Leahy,
Ranking Minority Member, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
Dear Senators Hatch and Leahy: I wish to add an important addendum
to my letter to you of March 5 concerning my views on the proposed
amendment to the Webb-Kenyon Act.
I should have noted and I regret not doing so in my letter, that I
was retained in this matter by the American Vintners Association.
Further, my opinion is my own, not that of the University of California
or Boalt Hall, and my title appeared for purposes of identification
only.
Needless to say, I want to underline that my conclusion in that
letter was reached as a matter of objective appraisal of the governing
constitutional and statutory provisions, not simply put forward as
advocacy.
With best wishes.
Sincerely,
Jesse H. Choper,
Earl Warren Professor of Public Law.
__________
Kendall-Jackson,
Santa Rosa, CA, March 2, 1999.
The Hon. Patrick Leahy,
Senate Judiciary Committee,
Russell Senate Office Building,
Washington, DC.
Dear Senator Leahy: On behalf of the wine industry in general and,
more specifically, Kendall-Jackson winery, I would like to take this
opportunity to express to you my concerns the upcoming Judiciary
Committee Hearing and any potential legislation that may be introduced
for that hearing. We understand that legislation may be modeled in part
after H.R. 1063, a bill that was introduced in the house last session
by Congressman Ehrlich to expand the jurisdiction of the Webb-Kenyon
Act to Federal courts. That bill died in committee last session.
Chairman Coble's position was that the bill would not move forward
unless members of the industry came to a compromise, although the wine
industry proposed a compromise solution, the alcohol beverage
wholesalers would not agree to this compromise.
There is a tendency to muddy this issue with serious matters of
concern for public policy, namely, underage consumption of alcohol and
State taxation. However, we believe that two facts are important to
remember (1) based on our experience with direct shipping in
California, we believe that underage purchases of wine is anomalous,
and there is nothing but anecdotal evidence about underage internet
access to alcohol (few teens for or can afford cabernet sauvignon); and
(2) there are existing remedies at the state and federal levels to
address violations of underage purchases of alcohol.
As a threshold matter, Kendall-Jackson questions whether it is
necessary to grant states access to Federal courts to enforce
violations of state law given that there is an existing Federal remedy
available to the states at present. Pursuant to the 21st Amendment to
the United States Constitution the ``transportation or importation into
any State * * * in violation of the laws thereof, is * * *
prohibited.'' The Federal government does not have a role in regulating
the liquor industry through the Federal Alcohol Administration Act. 27
U.S.C. Sec. 201 et seq. A federal ``basic permit'' is required to
engage in the business of producing, importing or purchasing an alcohol
beverage for resale. 27 U.S.C. Sec. 203. The basic permit is
conditioned on compliance with federal law. 27 U.S.C. Sec. 204 (d).
Even with the Constitution empowering states to regulate alcohol, the
Commerce Clause could arguably be interpreted to erect an impediment to
state regulation of liquor. See, U.S. Const., Art. I, Sec. 8, Cl. 3.
However, Congress passed the Webb-Kenyon Act to prohibit ``[t]he
shipment or transportation * * * of any * * * intoxicating liquor * * *
into any other State * * * in violation of any law of such State.'' 27
U.S.C. Sec. 122.
While the Webb-Kenyon Act did not provide for federal remedy or
jurisdiction (see Florida Dept. of Business Regulation v. Zachy's Wine
and Liquor, 125 F. 3d 1399 (11th Cir. 1997), cert. denied, 118 S.Ct.
1402 (1998) (holding the 21st Amendment and Webb-Kenyon do not confer
on the states a civil remedy)), it does serve two important functions
:(1) liquor has been divested on its interstate character and States
are empowered to restrain trade and burden commerce (with some
limitations) \1\ as they regulate liquor; (2) the Federal government
which issues basic permits to distillers and wineries can revoke the
basic permits upon the violation of federal law. Webb-Kenyon
``assimilated'' state law violations into federal law violations for
this purpose. Therefore, a violation of Webb-Kenyon by shipping liquor
in violation of state law subjects the basic permit to suspension or
revocation. 27 U.S.C. Sec. 204(e).
---------------------------------------------------------------------------
\1\ The Supreme Court held that the ``Twenty-first Amendment grants
the States virtually complete control over whether to permit
importation or sale of liquor and how to structure the liquor
distribution system. Although States retain substantial discretion to
establish other liquor regulations, those controls may be subject to
the federal commerce power in appropriate situations.'' California
Retail Liquor Dealers Assn. v. Medcal Aluminum, 445 U.S. 97, 110
(1980).
---------------------------------------------------------------------------
The Department of Treasury is charged with enforcement of the
Federal Alcohol Administration Act, but it has delegated this task to
ATF. Under current law, a state may submit a complaint, ATF will
investigate the complaint and, if it is credible, take appropriate
action, including the withdrawal of the offenders basic permit. ATF
Industry Circular 96-3. This avenue is rarely used--perhaps due to the
effectiveness of State enforcement efforts--but in the single instance
of which I am aware involving a producer in Louisiana, ATF investigated
the case which resulted in the voluntarily withdrawal of its permit.
This example demonstrates that the intended result will occur if the
available remedies are used. If there is serious concern that AFT would
not take the appropriate action, there may be adequate remedies to
encourage more appropriate action by AFT short of an additional federal
law such as H.R. 1063.
Kendall-Jackson seeks to comply with all local, state and federal
laws and would never jeopardize its ATF basic permit--that permit is
the life of its business, as is true with all wineries. Clearly, the
Federal remedy is an adequate deterrent and remedy. State courts
already have jurisdiction over those who violate their state laws--
unless there are no minimum contacts. Therefore, the only remaining
issue that Congress could consider is how to reach out-of-state brewers
and retailers who do not have minimum contacts with the state.
Cases in Florida and Utah have touched upon this issue. The Florida
state court case (State of Florida v. Sam's Wines & Liquors) held that
mere shipment does not constitute minimum contacts. The Florida Federal
court case (State of Florida v. Rachambeau Wines and Liquor) confirms
that there is no Federal court jurisdiction to enforce Webb-Kenyon. The
court's discussion of the legislative history, including the intent of
Congress to exclude jurisdiction, is worth reviewing. The Utah case
(State of Utah v. Amoroso and Beer Across America) addressed the
question of where the sale occurs, holding that the sale takes place in
the State where the seller is located and that the shipment is for the
convenience of the customer. In other words, there is no violation of
State law in the recipient State that would seek to enforce Webb-
Kenyon. Therefore, one is left wondering what hypothetical situation
the proponents of Webb-Kenyon Act reform hope to reach.
States have been enforcing their liquor laws against out-of-state
entities and continue to do so today. See, e.g., Ivey v. Bacardi
Imports, Inc., 541 So.2d 1129 (Fla. 1989); James B. Beam Distilling Co.
v. State, 382 E.2d 95 (Ga. 1989), rev'd 501 U.S. 529 (1991), appeal
after remand, 437 S.E. 2d. 782 (1993), cert. denied, 513 U.S. 1056
(1994); All Brand Importers, Inc. v. Department of Liquor Control, 567
A.2d 1156 (Conn. 1989); Division of Alcoholic Beverages and Tobacco,
Department of Bus. Regulation v. McKesson Corp., et al, 524 So. 2d 1000
(Fla. 1988) rev'd on other grounds, 496 U.S. 18 (1990); Williams v.
Commonwealth, 56 S.E. 2d 537 (Va. 1949); Oregon Liquor Control Comm'n
v. Coe, 99 P.2d 29 (Or. 1940).
Last session, proponents of H.R. 1063 decried the limited reach of
state court jurisdiction. However, the exercise of state court
jurisdiction is limited by the lack of personal jurisdiction, which is
a fundamental legal principle with roots in due process that stands for
the common sense proposition that you cannot sue someone and exercise a
judgment against them in a place where they have no connection. H.R.
1063 did not solve this problem. the fallacy of the approach of H.R.
1063 is two-fold. First, the limits of due process and personal
jurisdiction do not disappear in federal court--they are essentially
the same. Second, the grant of federal jurisdiction to enforce the
recipient-state laws is useless: since the sale occurs out of state,
the recipient-state laws would not even apply. See e.g., State of Utah
v. Amoroso and Beer Across America (holding that the sale takes place
where the seller is located and that the shipment is for the
convenience of the customer).
Even so, one needs to address the emotional issue of underage
drinking. Fundamentally, I believe the history of New York and
California--two States that allow direct shipment--demonstrates that
direct shipment of wine is not a factor with underage drinking.
Panelists speaking about direct shipping at the Unified Wine and Grape
symposium in Sacramento, including Manuel R. Espinoza, the Deputy
Director of California's Alcoholic Beverage Control Board, came to the
same conclusion. Unfortunately, if a law enforcement official wants to
create a sting operation by directing an underage person to obtain wine
through direct shipment, sooner or later it will result in an improper
shipment. Nevertheless, we are confident that this contrived situation
does not occur with any statistical significance.
The vast majority of wine produced by Kendall-Jackson is
distributed through the traditional three-tier distribution system. To
put this issue of direct shipment in perspective; during a period
between February 1992 and December 1998, Kendall-Jackson sold
approximately 15 million cases of wine. Over the same timeframe it
shipped about 2 tenths of 1 percent (0,0002 percent) to consumers
outside California. Kendall-Jackson presently does not ship outside of
the State of California due to the danger of entrapment sting
operations and harsh state laws, some imposing felonies--punishable
with jail time--simply for shipping a bottle of wine. This situation
simply harms small family-owned wine businesses and adults who wish to
purchase wine without addressing any real world problem such as
underage drinking. There are commonsense ways to address underage
drinking problems. For one, producers and shippers should always
require the purchasers to certify their age and the container should be
marked indicating an adult signature is required before it is released.
Several States, including New Hampshire, have enacted laws requiring
producers to register with the State before they can ship into the
State. This seems to be a reasonable approach--and one that can be
achieved without burdening the Federal judiciary.
Another issue concerns the States' ability to tax transactions over
the internet. I know that you are keenly interested in legislation
affecting internet tax. For the highly regulated wine industry,
taxation is a way of life. federal and state regulators have free and
open access of our records in order to verify that all the taxes that
are levied on our product have been paid. This is not something that is
new to our industry. Look at the States of Louisiana and New Hampshire.
While working with legislators in those progressive states to craft
permit legislation that would allow us to reach loyal customers, we
have openly agreed and encouraged these states to have access our
records to document that the appropriate taxes have been remitted for
wines shipped to their states. The issue is not payment of Texas, the
industry would agree to pay its fair share, the issue is the undue
barrier to interstate commerce.
The industry is highly concentrated among the top few wholesalers.
According to the Johnson Liquor Handbooks, wine producers in the U.S.
have increased from 377 to 1,772 from 1963 to 1994 (over 400 percent).
In the same period, the wholesale tier has dropped dramatically from
10,900 to 2,928 distributors nationwide. Therefore 25 percent as many
wholesalers are left to serve 4 times as many wineries. This
proliferation of primarily small, family owned, wine businesses and
consolidation of distributors has significantly restricted access to
reasonable commerce channels. Clearly, the small wineries are not able
to get representation to serve loyal customers in many markets. The top
15 U.S. wine and spirits wholesalers distribute over 50 percent of the
market share. We the producers, on the other hand, want to provide the
consumers with a greater choice in products at a reasonable price.
Simply put, we want to encourage entrepreneurs to continue to devise
new legal methods to bring their products to market.
There is a final piece of the puzzle that needs consideration.
Attorneys-General has targeted wine producers as the villain in some
states with sting operations. I find it very interesting that the other
two parties to the transaction escape scrutiny. The producers have put
safeguards in place at the time of ordering that require certification
by the customer that they are adults. When we give our product to the
second party in the chain, the shipper, it is clearly labeled ``adult
signature required''. The carrier must be diligent and confirm that our
wine id delivered to a legal consumer. The third party is the consumer.
Have there actually been prosecutions by these same Attorneys-General
of underage purchasers using direct shipment to acquire alcohol? The
simple answer is no. A sting operation is one thing, actual violations
are another. Kids are not going to use direct shipment to acquire
alcohol. They don't want the paper trail of a credit card purchase.
They are not going to purchase relatively expensive table wine. They
are not willing to wait for the period of the delivery time. They can
not risk the possibility of delivery when their parents are home, and
if the carrier does its job, they would not be able take delivery since
they are not adults and would not be able to sign for the shipment.
Kendall-Jackson supports direct interstate shipments. Please call
if you have questions or concerns. Again, thank you for your
willingness to hear our side of this issue.
Sincerely,
Jess S. Jackson,
President, Kendall-Jackson.
__________
University of Baltimore,
School of Law,
Baltimore, MD, March 8, 1999.
Re: S. ______: 21st Amendment Enforcement Act
M. Craig Wolf, Esquire,
Counsel, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
Dear Mr. Wolf: Thank you very much for your request for comment on
S. ______. I suppose that it is not very often that elementary
principles of civil procedure are essential to the deliberation of our
country's highest legislation. S. ______ appears to present such a rare
occasion and I am happy to assist you.
I will address service of process and venue, though only briefly,
and comment more fully on personal jurisdiction. I note that the
``lastest draft'' that you faxed me provides for venue in the district
where the defendant resides. This differs from an earlier draft you
sent me that provides a suit may be brought in ``a judicial district
where a person resides or is found that has received liquor transported
or shipped to that person from another person * * *'' (emphasis added).
Presumably this means a district court in the state which seeks to
bring such an action.
If the Committee has decided to abandon an approach which allows a
state to enforce its liquor laws in its ``own'' federal courts, and
instead, to require state attorney general offices to chase
``electronic bootleggers'' around the country (no doubt, an expensive
proposition for some states in hard times), there is not much for me to
comment upon. Suing a defendant where it resides or ships liquor from
poses no serious issues of process, venue or personal jurisdiction.
Assuming the possibility that the plaintiff's venue approach of the
earlier draft was discarded because of constitutional personal
jurisdiction concerns, I presume to address such concerns. In my
opinion, they are not serious enough to require state officials to
chase long distance violators of their liquor laws around there
country.
As to the matter of service of process, I submit that Rule
4(k)(1)(A) of the Federal Rules Civil Procedure would suffice even if
state plaintiffs were able to sue in federal courts in their own
states. Process under this rule is effective if the defendant is
amendable to suit under the due process analysis I will discuss below.
As to venue, I submit that it would not be objectionable to fix
venue in the district courts in the plaintiff state. Although 28 U.S.C.
Sec. 1391, the general venue statute, no longer provides for
plaintiff's venue as such, it did so until 1990. In light of the
jurisdictional considerations I discuss below, I believe that venue
could appropriately be fixed in federal courts in the plaintiff's
state.
With respect to personal jurisdiction, the question that jumps out
at one who considers S. ______ is: how is it possible to assert
personal jurisdiction over a party in a forum across the country from
where that party conducts its operations simply because that party has
shipped a few cases of wine to the forum? The answer to this question
is not as simple as might appear at first glance.
The seductively simple answer that the suit to prevent interstate
violation of state liquor laws may not be brought in the state where
liquor is shipped in violation of state laws rests on the notion that
the Supreme Court, since Hanson v. Denckla, 357 U.S. (1958), has tended
to construe personal jurisdiction restrictively. While it is true that
defendants resisting state personal jurisdiction have won in the
Supreme Court more frequently than plaintiffs asserting it, that is not
the central reality of the Supreme Court jurisprudence of due process
and personal jurisdiction of the modern era, i.e., the era opened by
International Shoe v. Washington, 326 U.S. 310 (1945). The central
reality of the court's jurisprudence in this area is the development of
protection for three interests:
1. Fairness to a defendant, requiring that the burden of defense not
be disproportionate to defendant's affiliating circumstances vis a
vis the forum;
2. Protection of the mutual sovereignties of the states from judicial
encroachment; and
3. Protecting the right of states to provide forums for controversies
in which they or their citizens have substantial interests.
The first of these interests, the protection from constitutionally
inconvenient litigation springs in the modern era from International
Shoe Co., v. Washington, 326 U.S. 310 (1945). The court, pursuant to
the Fourteenth Amendment, required minimum contacts between a defendant
and a forum in order to require a defendant to defend in the forum. In
that case the suit was to collect Washington State employment taxes
from a manufacturer of shoes that had sent shoe salesmen to the state.
In holding that assertion of jurisdiction by Washington over the out of
state defendant was constitutional the Court noted, among other things,
that the suit arose out of the defendant's activities in the state. In
the years since International Shoe, the Court has looked to whether or
not agents of a defendant have been physically present in the forum,
but the Court has not always required some sort of physical presence in
the forum as a precondition of a determination of constitutional
fairness.
An interesting example of a finding of jurisdiction over a
defendant who was never present in a state may be seen in Calder v.
Jones, 465 U.S. 783 (1984). In that case actress Shirley Jones sued the
National Enquirer and a reporter, one Calder, in a California state
court for defamation. The reporter, who lived in Florida and did not
travel to California in connection with the story, asserted lack of
personal jurisdiction. The Court upheld California's jurisdiction over
the reporter on the basis of the foreseeable effects the story caused
in California.
In a case decided the same day, Keeton v. Hustler Magazine, Inc.,
465 U.S. 770 (1984), the Court upheld personal jurisdiction under New
Hampshire law over a libel suit against Hustler, an Ohio corporation.
It found minimum contacts on the basis of the sale of 10,000 to 15,000
copies of Hustler every month in New Hampshire.
In both cases, it might be argued that the ``presence'' of the
defendants in the forums was of a lesser magnitude than that of the
defendant in International Shoe, which actually had employees in
Washington. Nonetheless, the Court in both cases was influenced by the
interest of both forums in protecting their citizens from the harm of
defamation.
It is clear that the object of due process to protect a defendant
from unconstitutional inconvenience has not been viewed in isolation.
It has been balanced with the interests of the forum. A number of lower
federal and state courts have upheld jurisdiction based upon the
sending of goods or services into a forum state. See e.g., APC
Commodity Corp. v. Ram Dis Ticaret, A.S., 965 F. Supp. 461 (S.D.N.Y.
1997); Digital Equipment Corp. v. Alta Vista Technology, Inc., 960 F.
Supp. 456 (D. Mass. 1997); Connecticut Nat. Bank v. Hoover Treated Wood
Products, Inc., 376 Mass. App. Ct. 231, 638 N.E.2d 942 (1994); Bergherr
v. Sommer, 523 N.W.2d 17 ( Minn. App. 1994), review granted and appeal
dismissed, Univ. of Iowa Press v. Urrea, 211 Ga. App. 564, 440 S.E.2d.
203 (1993), cert denied.
The second interest that the Supreme Court has acted to safeguard
in the post-International Shoe era is the scope of jurisdiction of
individual state judiciaries. It has done so by preventing state courts
from adjudicating controversies more appropriate for the resolution by
courts of other states owing to firmer connection of the parties with
such states. That a state must not adjudicate the personal rights of
persons with whom it lacks sufficient connection so as to avoid
encroachment on states which have such connections is not a novel
proposition. It generally prevented state courts from exercising
jurisdiction over persons not found within a state, particularly in the
nineteenth century. See Pennoyer v. Neff, 95 U.S. 714 (1878).
The notion was resuscitated in Hanson v. Denckla, 357 U.S. 235
(1958). In that case the testamentary beneficiaries of a Florida
decedent sought, in a declaratory judgment action, to have an inter
vivos trust established by the decedent invalidated. All of the parties
except the trust company that held the property were Floridians. The
trustee was a Delaware corporation. The trustee had no corporate
presence in Florida. It had simply continued to deal with the decedent
after she had moved to Florida, sending her reports on the affairs of
the trust.
In rejecting Florida's exercise of jurisdiction over the Delaware
trustee, the court conceded that ``progress in communications and
transportation has made the defense of a suit in a foreign tribunal
less burdensome.'' Id. at 251. That may have been sufficient to vitiate
the inconvenience that was crucial to International Shoe. But the Court
articulated another rationale for the due process restrictions on
personal jurisdiction: ``They are a consequence of a territorial
limitation on the power of the respective states.'' Id. Implicit in
this is the proposition that for Florida to adjudicate the status of
the trust on the basis of such tenuous contacts to the Delaware trustee
would amount to an encroachment of the sovereignty and jurisdiction of
Delaware.
This principle became clearer over time. In Kulko v. Superior
Court, 436 U.S. 84 (1978), the Court rejected California's exercise of
jurisdiction over a suit for child support against a New York father
whose children lived with their mother in California. The father's
``contact'' with California was essentially limited to acquiescence in
the choice of the children to live with their mother and whatever
effects the presence of the children in California may have had there.
The Court held, inter alia, that California should not have adjudicated
a suit that more properly should have been maintained in New York:
``[T]he controversy between the parties arises from a separation that
occurred in the State of New York; appelle * * * seeks modification of
a contract that was negotiated in New York and that she flew to New
York to sign.'' Id at 97.
In Worldwide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980)
persons injured in an automobile accident in Oklahoma sued the
manufacturer, national distributor, regional distributor and local
dealer of the vehicle they had purchased in New York and then drove to
Oklahoma. The regional distributor, which did business only in New
York, New Jersey and Connecticut, and the local dealer, which served a
community in New York, resisted jurisdiction in Oklahoma. In upholding
the objections of these parties to jurisdiction, the Court again acted
to prevent the forum from encroaching on the jurisdiction of a state
with stronger connections to the defendants:
Even if the defendant would suffer minimal or no
inconvenience from being forced to litigate before the
tribunals of another State; even if the forum State has a
strong interest in applying its law to the controversy; even if
the forum state is the most convenient forum for litigation,
the Due Process Clause, acting as an instrument of interstate
federalism, may sometimes act to divest the State of its power
to render a valid judgment.
Id. at 294.
Finally, in the last word on the subject, Asahi Metal Industry Co.,
Ltd. v. Superior Court of California, 480 U.S. 102 (1987), the Supreme
Court extended its protection through the Due Process Clause of the
jurisdiction of the states to protection of the jurisdiction of foreign
countries. Asahi initially involved a product liability suit in a
California state court by injured plaintiffs against the Taiwanese
manufacturers of a motorcycle tire. The Taiwanese defendant impleaded
the Japanese manufacturer of the tire's valve stem. After all other
parties were removed from the case by settlement, the Japanese
defendant moved to dismiss the Taiwanese defendant's claim for
indemnification on the basis of lack of jurisdiction.
The Japanese defendant sent no products directly to California,
though many of its products made their way to California through the
efforts of others. In light of the limited contacts of the Japanese
defendant with California, the Court regarded California's exercise of
personal jurisdiction as an infringement on the jurisdiction of foreign
states with which the defendant had a closer relationship. Id. at 115.
The protection of the jurisdiction of the states and, where
applicable, foreign countries, has become as significant a component of
due process in the context of personal jurisdiction, as inconvenience
to the parties. It should not play an important role in limiting
jurisdiction under S. ______ since suits under that provision would be
in federal courts. Nevertheless, the affiliating circumstances that
permit a dispute to be adjudicated in one forum rather than another are
indicia of the forum with the strongest interest in a suit. That a
state under S. ______ would be adjudicating its claim in a federal
court would not mean that it should be precluded from benefitting from
advantages it would enjoy in litigating in its own courts. These would
include access to proof and ease in administration of the remedy.
Divesting completely the place most affected by conduct proscribed by
S. ______ would amount to a departure from the sound logic of state
personal jurisdiction cases that have manifested a purpose to limit
adjudication to the most appropriate forums.
The third interest that the Court has protected in the course of
post-International Shoe jurisprudence is the interest of a state to
provide a convenient forum for adjudication of controversies in which
it or its citizens have an interest.
The leading case involving this interest is McGee v. International
life Insurance Co., 355 U.S. 220 (1957). That case involved a suit in a
California state court by the beneficiary of a small life insurance
policy against a Texas insurer. The insurer defaulted in California and
the insured sought to enforce the California judgment in the Texas
courts. The Texas courts refused to enforce the judgment based on lack
of personal jurisdiction of the California court. The Supreme Court
held that the Texas courts erred in not giving full faith and credit to
the California judgment.
McGee involved the slightest connection with a forum that the Court
has approved as a basis for jurisdiction. there was no indication that
the defendant insurer had any connection with California other than the
policy at issue, which it had offered to the insured when it took over
an Arizona insurer with which the insured had previously had a policy.
An important factor in the Court's approval of California's
assertion of jurisdiction on the basis of such limited contacts was the
enactment by California of a statute that subjected out-of-state
insurance companies to personal jurisdiction in suits by California
residents on insurance contracts with such companies. The Court stated:
It cannot be denied that California has a manifest interest
in providing effective means of redress for its residents when
their insurers refuse to pay claims. These residents would be
at a severe disadvantage if they were forced to follow the
insurance company to a distant State in order to hold it
legally accountable.
Id. at 223. Clearly the interest of California, as expressed in a
statute led the Court to permit it to require an out of state company
to incur expense in defending that was undoubtedly disproportionate to
the business it did there.
Although McGee is the high-water mark for personal jurisdiction in
decisions of the Supreme court, the significance of providing a home
forum for the state or its citizens has not been overlooked in
subsequent decisions.
In Shaffer v. Heitner, 433 U.S. 186 (1977), plaintiff attempted to
sue directors of Greyhound Corp., a Delaware corporation, in Delaware
in a shareholder's derivative suit. the defendants had no contact with
Delaware other than ownership of stock in Greyhound which a Delaware
statute deemed to have a situs in Delaware. Plaintiff attached the
stock at the beginning of the suit (effected by stop transfer orders on
the books of the corporation) in order to exercise quasi-in rem
jurisdiction.
There was no connection between the property seized and the cause
of action. There was no connection by the defendants with Delaware
other than ownership of stock in a Delaware corporation. The Court
applied the minimum contacts test of International Shoe to the
assertion of quasi-in rem jurisdiction and held that Delaware's
assertion of jurisdiction violated due process.
Justice Brennan argued vigorously in dissent that jurisdiction was
warranted on the basis of Delaware's interest in ``vindicating [its]
substantive policies regarding the management of its domestic
corporations.'' Id. at 222. Justice Marshall responded for the majority
that ``[t]his argument is undercut by the failure of the Delaware
Legislature to assert the state interest [the plaintiff] finds so
compelling.'' Id. at 214.
Weeks after the court's decision in Shaffer, the Delaware
legislature enacted a statute that provided that acceptance of election
as a director in a Delaware corporation was deemed as consent to
service of process upon a registered agent in actions for violation of
duty as a director. Jurisdiction under this statute was upheld by the
Delaware Supreme Court in Armstrong v. Pomerance, 423 A.2d 174 (Del.
1980). The court stated:
Clearly, Delaware's interest in providing a sure forum for
shareholders derivative litigation involving domestic
corporations is firmly grounded on considerations more
important and compelling than mere convenience of the parties.
Id. at 178.
As in McGee, the interest of the forum outweighed other factors
relevant to the personal jurisdiction inquiry.
In Kulko v. Superior Court, 436 U.S. 84 (1978), although the
Court, as discussed above, rejected jurisdiction, it addressed the
matter of ``California's legitimate interest in ensuring the support of
children resident in California * * * Id. at 98. It responded to that
consideration by noting that Californians could prosecute claims for
child support without leaving California through the Uniform Reciprocal
Enforcement of Support Act. The Court took cognizance of California's
need to provide a forum for its residents and found it had been met.
The interest of a state in providing a convenient forum to
effectuate important interests of the state or plaintiff is an interest
that the Court has recognized. It carried the day in McGee.
I submit this interest should be considered as informative on the
issue of where jurisdiction under S. ______ should be exercised.
The 21st Amendment grants the states broad powers to regulate the
importation and use of intoxicating liquors. This interest is probably
stronger than that involved in providing a forum for insurance claims
in McGee and in providing a forum for shareholder's derivative actions
in the wake of Shaffer. The interest in providing a forum where the
impact of violations of liquor laws are felt, in the state the laws of
which are violated, may outweigh the inconvenience to senders of such
beverages entailed in defending in places in places where laws are
violated. This is particularly so since offending shipment is sent
intentionally per a customer's order.
Looking at due process decisions involving assertion of
jurisdiction by states. I do not believe that it would violate due
process to require interstate shippers of alcoholic beverages to defend
suits under S. ______ at the places to which such beverages are
shipped. I believe that the state law precedents are most relevant
because these suits would entail collisions between state and private
interests that are analogous to those at issue in post-International
Shoe Supreme Court jurisprudence. In that jurisprudence, inconvenience
to a defendant has not been an absolute that has negated jurisdiction.
It has been balanced with other interests.
Once again, I appreciate this opportunity to comment on this
important proposal.
Sincerely,
John A. Lynch, Jr.,
Professor of Law.
__________
Prepared Statement of the Hon. Ron Sarasin, President, National Beer
Wholesalers Association
Mr. Chairman, thank you very much for scheduling this hearing on an
issue of great importance to the 3,000 federally licensed beer
wholesalers in the United States. Beer wholesalers are the independent,
often family-owned small businesses that proudly distribute America's
beverage.
The National Beer Wholesalers Association opposes the direct
shipment of licensed beverages to consumers in violation of state law.
This is a large and growing problem that poses grave risks to the
health and safety of the American people, and especially those who are
underage. As you will hear and see today, young people may, with ease,
order beer, wine and distilled spirits over the phone or via the
Internet and have these licensed beverages delivered to their home or
dorm room days later, no questions asked. Almost as troubling, young
people and older consumers can and do order licensed beverages and have
them delivered to their homes even though such direct shipments violate
the law in at least 20 states. It is incumbent on this Committee to
give state law enforcement officials the tools necessary to enforce
their own laws, and your bill will do just that.
As you know, the 21st Amendment to the Constitution, which repealed
Prohibition, also granted to States extrordinary authority over
licensed beverages within their borders. Section 2 of the Amendment
bears repeating here:
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.
Some 24 states prohibit such shipments outright; 19 others have
significant restrictions on the quantities of licensed beverages that
can be directly shipped. Nonetheless, many companies continue to ship
licensed beverages into states that prohibit direct shipments.
A recent Internet search by my staff found two dozen companies
offering to ship beer directly to anyone filling out the on-line
questionnaire. Most of these web sites contained a line about the buyer
having to be 21 to make the purchase, but one click of the mouse
removes that barrier. However, none of them contained any indication
that half the states prohibit direct shipments and many more place
heavy restrictions on the quantities that may be purchased in this
manner. In my opinion, Mr. Chairman, that comes close to fraud.
The main justification for enactment of this legislation is that
States face a nearly impossible enforcement task in trying to identify
and take action against direct shipments that violate state law. Often,
the only way a state can even find out about a violation of law is
through a ``sting'' operation, when an agent of the state places the
order, receives the illiegally shipped order, and then files a
complaint against the shipper. Even then, out of state companies are
often beyond the reach of the authorities.
Mr. Chairman, enactment of your bill will provide incentive for all
to obey the law. It will provide state law enforcement authorities with
the ability to go into federal court to enforce its law against direct
shipments. It is fundamental a states' rights approach to this vexing
problem.
Indeed, there are many sound reasons for a state to prohibit direct
shipments to consumers:
To stem the loss of state tax revenue, estimated to be at
least $200 million a year;
To keep minors from getting licensed beverages delivered to
their doors;
To prevent deliveries to the 400 ``dry'' counties in the
United States;
To ensure a level playing field for licensed, law-abiding
and taxpaying wholesalers and retailers within the state;
To preserve and protect the three-tier system for licensed
beverage distribution.
Of these reasons, perhaps the most misunderstood today is the last.
I submit to you that the three-tier system, developed in nearly every
state in the wake of Prohibition, is more vital today than when it was
established. The system requires an independent wholesale tier to
insulate retailers from undue influence by suppliers, ensure the
integrity of the product, provide a paper trail of handling of the
product, and permit state enforcement officials to stop the flow of
particular licensed beverages into their state for reasons of health,
safety or violation of law.
There are legal alternatives to direct shipping. In Maryland, for
instance, a consumer may order a particular beverage not normally
available and secure delivery through a wholesaler and retailer at no
great additional cost. The CellarMasters wine program is another
notable success in providing consumers access to hard-to-find beverages
while conforming to state laws. NBWA is committed to helping small
brewers and microbreweries get their product to market and, to that
end, we have joined forces with the Brewers Association of America,
representing small brewers, to make it happen.
But direct shippers who operate in violation of state law are more
interested in avoiding the state excise taxes and keeping the increased
profits obtained by eliminating the in-state retailer and wholesaler
than they are in consumer welfare. This is simply not a consumer issue.
Mr.Chairman, the beer wholesalers in your state are licensed, pay
all appropriate taxes, keep all required records and sell one of the
most regulated products available today. Simply put, we believe that a
beer-of-the-month club halfway across the country should have to obey
the same laws.
We strongly support the right of states, as guaranteed by the 21st
Amendment, to regulate the distribution and sale of licensed beverages
within their borders. Enactment of your bill will that possible.
__________
Prepared Statement of Simon Siegl, President, American Vintners
Association
Chairman Hatch and Members of the Committee: I am grateful for the
opportunity to submit written comments on proposed legislation titled
``The Twenty-First Amendment Enforcement Act.'' The American Vintners
Association is the national trade association, representing over 550
wineries in 43 states. On behalf of our members, and all American
wineries, we urge you to tread very cautiously in making any changes to
federal statutes in this area. Any federal legislation must represent a
balanced approach of controlling undesirable commerce while enabling
negotiations, on a state-by-state basis, to continue in a manner that
permits wineries and their customers to conduct business.
i. the demographics of the industry underscore the importance of the
issue to wineries
Wine is enjoying a period of tremendous growth in the United
States. Consumer interest is fueling high demand, supporting increases
in vineyard acreage and wine production which, in turn, allows existing
wineries to grow in size and new wineries to be established. During
this growth, the industry remains very much ``90-10'' in profile: 90
percent of the country's wine is produced by 10 percent of the
wineries. This serves to illustrate that the majority of America's
wineries are small in size, and sell primarily to a select market of
customers who often have visited the winery and retain an active
relationship.
ii. the issue is consumer-driven and national in scope
Wine is a very complex--occasionally intimidating--subject and
beverage. Through promotion efforts and media exposure, wineries are
able to gain consumer attention and interest. The explosion of
communications--especially the presence of the Internet--has provided
consumers more information about wineries all over the world than ever
before.
Like any business, a winery always wants to satisfy its customers
requests. When a consumer learns that wines of interest are not
available in local stores. It is very easy for him or her to
communicate directly with the winery. When that consumer learns that
the winery cannot sell or ship its wines to them they become very
frustrated. Wineries and their customers ought to be able to complete
these sales with a minimum of difficulty.
The situation is national in scope. It is matrix of the production
of wine in 47 states and the presence of consumers everywhere.
iii. direct shipment is not a threat to wholesalers
Wholesalers seem to be convinced that direct shipment is their
death-knell. This is hardly the case. Wholesalers are thriving in the
thirty states that currently have inter- and/or intra-state direct
shipment. it is more convenient and economical to purchase wines from
the local retail stores when possible. Consumer orders for direct
shipment are focused on hard-to-find wines, or wines from very small
wineries that cannot effectively work in the conventional distribution
system.
Opponents of direct shipment put forward two primary arguments that
are easily addressed. First, is the statement that underage access will
be increased. While the perception can be simulated with ``stings'',
the fact is that states with many years of experience in intrastate
shipment to consumers have not received complaints. The suggestion that
greater protection is offered against direct shipments to minors by
``face to face'' sales with the retail sector is challenged by a study
conducted by the Department of Health and Human Services that show 50
percent of 18-20 year olds consume alcohol at least once a week.
Clearly these underage citizens are obtaining their beverages through
the three-tier system, and needn't face the higher cost, risk and delay
of direct shipments.
The second opposition argument is that direct shipments are an
effort to evade taxes. Wineries are ready and willing to pay applicable
state excise and sales taxes. The state need only establish a
mechanism, as New Hampshire and Louisiana have already done. The
Electronic Commerce Tax Commission is poised to address the tax
collection system fir all interstate commerce, and can easily include
wine in its deliberations.
Wineries view direct shipment of wine as a supplement to the three-
tier system, not a substitution. Direct shipment allows the very small
wineries to generate a customer base outside their immediate home
market, to grow and develop into a viable brand that a wholesaler will
want to represent. This mechanism also allows larger wineries to
respond to customers who seek special bottlings or older vintages that
are too small in volume to distribute through their distribution
network.
iv. balance is required in considering the legislation before the
committee
We view the potential of adding federal jurisdiction over state
laws through the Webb Kenyon Act a major change in the delicate balance
of the political solution that ended prohibition. The draft legislation
under consideration by the Committee allows significant expansion of
states' ability to regulate business in other states and will be
subject to abuse. Congress should not alter the balance between the
protections of competition conferred by the Commerce Clause and the
regulatory needs embodied by the 21st Amendment. If Congress believes
it is necessary to control undesirable commerce it should not harm
negotiations, on a state-by-state basis, to continue in a manner that
permits wineries and their customers to conduct business.
In 1933, the antidote to widespread bottlegging was not greater
enforcement of unpopular laws. It was legalization and regulation under
the auspices of the 21st Amendment. If direct shipment of wine is
viewed as ``widespread bootlegging''', then today's antidote should be
establishing reasonable market access for limited shipments of wine to
consumers by United States wineries.
On behalf of the member wineries of the American Vintners
Association, and the millions of responsible wine consumers throughout
our nation, I am hopeful that you will be fair, will encourage
competition, and will seek a balanced resolution of this issue.
Sincerely,
Simon Siegl,
President.