Kentucky's limits on direct wine sales rejected, but confusion remains

WASHINGTON — A 2005 Supreme Court opinion is the gift that keeps on giving for California winemakers hoping to sell directly to customers in other states.

It's also been proof that the law of unintended consequences lives on, however.

Continuing their legal winning streak, winemakers won an opportunity Wednesday to open up the Kentucky market. A federal appellate panel upheld a trial court's decision striking down Kentucky's direct-selling restrictions.

"The in-person purchase requirement in portions of Kentucky's statutory scheme discriminated against interstate commerce by limiting the ability of out-of-state small farm wineries to sell and ship wine to Kentucky consumers," the Cincinnati-based 6th U.S. Circuit Court of Appeals ruled.

The Kentucky law in question permitted out-of-state wineries to ship directly only to customers who purchased the wine in person. Wineries that violated the law faced criminal penalties.

The decision by the three-member appellate panel follows from the landmark 2005 case called Granholm v. Heald. In that case, the Supreme Court struck down by 5-4 New York and Michigan laws that prohibited out-of-state wineries from shipping directly to consumers.

Justices rooted the Granholm v. Heald decision in the Commerce Clause of the Constitution, which has been interpreted as blocking states from enacting anti-competitive measures. Ever since, lower courts have used the Granholm v. Heald reasoning to strike down other state laws.

The results have ranged from high excitement to sheer confusion.

"For a year and a half after the Supreme Court decision, it was like Valhalla," said Scott Miller, a winemaker in California's El Dorado County. "We saw a dramatic increase in out-of-state sales. But now, we have absolutely no cohesiveness in what we can and cannot do."

Miller, the owner of Single Leaf Vineyards in the small Sierra Nevada foothills town of Somerset, said different laws had been proliferating in different states since 2005. He called the result "an absolute zoo" that's complicated business for "mom and pop" wineries such as his own.

San Francisco-based attorney Tracy Genesen, for instance, noted that the 7th U.S. Circuit Court of Appeals, covering Midwestern states, recently upheld the same kind of in-person purchase requirements that the 6th Circuit judges deemed unconstitutional. The conflicting rulings governing Kentucky and Indiana could set the stage for a return to the Supreme Court, Genesen suggested.

Genesen, who's with the firm Kirkland & Ellis, won a separate case last month on behalf of the Family Winemakers of California striking down a Massachusetts law. It restricted the size of wineries that could ship directly to consumers, a tactic akin to what other states have tried.

"We've had wholesalers and some regulators acting in tandem to erect roadblocks to direct shipping," Genesen said.

The Wine and Spirits Wholesalers of Kentucky Inc. had hoped to retain Kentucky's restrictive law, which benefits them. The wholesalers had appealed a lower court ruling that initially struck down the law two years ago.

"The wholesalers face a palpable economic injury," 6th Circuit Judge Eric L. Clay acknowledged Wednesday, noting that "the wholesalers are denied potential profits from each of these (direct) sales."

Nonetheless, Clay and two other 6th Circuit judges concluded that the in-person purchase requirement effectively discriminated against out-of-state wineries.

"With the statutes in place, out-of-state wineries are either forced to incur the added cost of paying a wholesaler or they must wait for Kentucky consumers to travel up to 4,800 miles to purchase out-of-state wine," Clay wrote.