Law favoring in-state wineries ruled unconstitutional

U.S. District Court Judge Marsha J. Pechman ruled Wednesday from Seattle that a Washington law allowing in-state wineries to sell directly to retailers, bypassing distributors, is unconstitutional because out-of-state wineries cannot do the same.

But Moscow, Idaho, winemaker Stuart Scott said he won’t change the way he does business any time soon at the Camas Prairie Winery, the oldest independent winery in Idaho.

Scott said he does not believe most wineries in Idaho or other states will leave behind their distributors for the sake of profit. Scott, in his 23rd year of business, said there is a convenience to selling through a distributor, especially for smaller wineries like his.

But the ruling is still a big deal, Scott said.

“For somebody my size, first of all, it can only help,” Scott said by telephone. Camas Prairie Winery made about 2,400 cases of wine this year. Pechman’s ruling in a case brought in February 2004 by Issaquah, Wash.-based Costco Wholesale Corp. said Washington winemakers have an unfair advantage in the market because they don’t have to sell to distributors.

In court, Costco lawyers argued that if it could purchase directly from out-of-state wineries it could offer lower prices. As a wholesaler, Costco already has its own distribution division.

Out-of-state wineries are constrained by what’s known as the “three-tier system,” which requires them to sell to a distributor in Washington and mark up their product 10 percent. The distributor then must charge at least a 10 percent markup when selling to retailers. Those markups increase costs to consumers.

The judge stayed her ruling until April 14 and asked the Washington Legislature to either extend the in-state privilege to out-of-state wineries or require every winemaker to sell to a distributor first.

“We’re pretty pleased with the ruling, given what we expected,” said Tim Hightower, president of the Washington Wine Institute, the lobbying arm of the Washington Wine Commission. Now, Hightower said, the Institute will ask lawmakers to give all wineries the “right to self-distribute” and sell directly to retailers if they wish.

“We think our wines can compare to any in the world, so this doesn’t scare us,” Hightower said.

Down in Moscow, Scott said that even if lawmakers decided to let out-of-state wineries sell to retailers, he would not necessarily take that approach.

“I probably would not try and take daily or heavy advantage of this,” Scott said, giving the example that it’s easier for him to allow his distributor, Great Micros Wholesale, of Spokane, to make contacts in places like Pullman and stock his wine on store shelves. “On the other hand, I have folks from Seattle and the Tri-Cities area who want my wine; then I can now send it to them myself. These are areas where I don’t have a distributor.”

Scott also worries that distributors might not be too happy if small shops like his decide to sell some of their wine directly to retailers.

“If distributorships don’t have … exclusivity, potentially what they might do is drop brands,” he said. An end to the three-tier system “won’t be the end of distributors because grocery stores are absolutely wedded to distributors,” he said.

Scott added that most states have a markup requirement, but that could change. A 2005 Supreme Court ruling found that three-tier laws for out-of-state wineries in New York and Michigan are unconstitutional and, so far, about seven states have enacted laws to come into compliance with the Supreme Court action. That ruling might have a larger impact, Scott said.

“It’s the 800-pound gorilla that has the potential for a greater impact on the winemaking business,” he said. “It’s the beginning of change.”