Out of State Wineries Challenge California Wine Distribution Law

Out of State Wineries Challenge California Wine Distribution Law

By: Jaime E. Colon-Velez, Esq

A recent lawsuit labeled, Dwinell v. McCullough, filed November 28, 2023 in the U.S. District Court for the Central District of California by two out-of-state wineries seeks to challenge an allegedly discriminatory and protectionist California restriction against out-of-state wineries selling directly to California retailers and restaurants. Under the current law, California is one of many states that allows out-of-state wineries to ship directly to individual consumers. However, said law also currently requires out-of-state wineries to go through a wholesaler, adding approximately 30 percent to the overhead cost of making those out-of-state wines according to the Complaint, thus making them less competitive price wise compared to native California wines.

The plaintiffs, Buckel Family Wine, LLC out of Gunnison, Colorado and Dwinell LLC, d/b/a Dwinell Country Wines out of Goldendale, Washington, claim that the California law violates the U.S. Constitution’s Dormant Commerce Clause which prohibits states from discriminating against out of state participants in interstate commerce. While the 21st amendment grants the states control of alcohol sales, the U.S. Supreme Court has repeatedly held that restrictions on alcohol sales must be for either the purpose of maintaining orderly markets or to promote temperance, not merely for the benefit of helping local businesses.  In their Complaint, Buckel and Dwinell argue that the California law is unnecessary, and its primary purpose is solely to protect in-state business interests. If removed, wineries would have better control over their prices and delivery logistics without having to be beholden to a wholesaler, a wholesaler that many smaller wineries are unable to acquire in the first place.

These types of laws have been litigated in other states previously, most notably in the seminal Granholm v. Heald case in 2005, which was decided by the US Supreme Court. That case ruled that laws in New York and Michigan which prohibited out-of-state wineries from shipping wine directly to consumers but allowed it for in-state wineries were unconstitutional. This decision led to the attempted passing of the Community Alcohol Regulatory Effectiveness Act of 2011 which would allow states to regulate alcohol products from out-of-state differently than those within the state. However, the act never made it out of subcommittees. More recently, however, the State of Oregon faced a similar lawsuit, Roberts v. Gripton, wherein out-of-state breweries were denied the right to self-distribute alcohol within Oregon. After only eight months of litigation, the State of Oregon settled the case, granting out-of-state breweries the right to self-distribute which was integrated into Oregon law via Oregon House Bill 2013 in October 2023.

In their Complaint, Buckel and Dwinell argue that the ban directly impacts consumers by affecting the overhead costs to out-of-state wineries and thus forcing them to pass these costs on to consumers. The removal of this law would result in lower costs for consumers and more freedom of choice at wine retailers throughout the state. Removing these restrictions is also critical to wine retailers who are thus able to better diversify their offerings with more out-of-state wines and thus remain competitive in the wine retail marketplace. By working directly with out-of-state wineries, retailers can obtain products at a lower price and thus pass these savings directly onto consumers.

Many organizations have come out in support of the lawsuit, including The National Association of Wine Retailers (“NAWR”). NAWR Executive Director Tom Wark told Wine Spectator Magazine that, “[t]he discriminatory ban on out-of-state wineries selling directly to California retailers without going through the state’s middlemen wholesalers should have been eliminated the day after the Granholm v. Heald Supreme Court decision 18 years ago… This lawsuit will help the state’s retailers, it will open new distribution avenues for out-of-state wineries and it will give California consumers more choices.” In a separate statement released by NAWR Wark stated, “State laws only serving protectionist and discriminatory purposes deserve to be struck down as a matter of law and marketplace fairness… The required use of a wholesaler by out-of-state wineries but not in-state wineries is a relic of the 1930’s post-Prohibition world, stifles economic development, hampers the ability of retailers to access worthy products from out of state, denies consumers access to legal products, and unjustifiably props up the financial and political interests of California middlemen wholesalers.”

Many local winemakers such as Adam Lee, proprietor of California’s Clarice Wine Co., have also expressed support for the bill, believing that the playing field should be level for local or out-of-state wineries. “If we’re going to allow California wineries to sell directly to retailers, then we should let out-of-state wineries do the same thing,” he said to Wine Spectator Magazine.

While this case is obviously very early in litigation, a favorable outcome for plaintiffs in line with Granholm and Roberts does seem likely in this case and it may be in the best interest of the State to settle the suit, save their citizens unnecessary litigation costs and simply draft new legislation to cover this issue as Oregon did in Roberts.

Whether you are an out-of-state winery looking to expand into California or one of the many amazing local wineries in need to legal representation, Quinn Covarrubias can assist.

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