A federal court ruling this week governing alcohol sales in Washington could have a big impact on Arizona wineries.
In a suit brought by wholesale club giant Costco against the Washington State Liquor Control Board, U.S. District Judge Marsha Pechman ruled Wednesday that the state’s three-tier system for distributing beer and wine breaks federal antitrust law.
Washington’s system, similar to Arizona’s, requires that brewery or winery sales to a retailer or restaurant — or even shipped to a wine-loving customer — be handled by a distributor.
But not always. Pechman agreed with Costco’s claim that in-state wineries could ship directly, but out-of-state wineries couldn’t, a violation of the U.S. Constitution.
"It’s a landmark decision," said Rod Keeling, president of the Arizona Wine Growers Association.
"This is what (distributors) feared most. They fear Costco, and they fear the huge wine producer who wants to sell direct."
The Washington ruling would set a precedent that other states will be watching, Keeling said.
Washington will have to dump the distributor requirement altogether — the suggestion of the court — or force in-state wineries to use a distributor.
Pechman ruled the state Legislature will have to resolve the issue by April 14.
Arizona courts already are facing a similar lawsuit.
And two measures, expected to be considered when the Arizona Legislature convenes in January, will attempt to deal with mounting pressure to eliminate alleged discriminatory practices in liquor distribution laws nationwide.
When the Arizona system shakes out, the local wine industry could be facing boom or bust.
Black Star Farms, a Sutton Bay, Mich.-based winery, and five Scottsdale and Paradise Valley residents filed a suit Sept. 2 in U.S. District Court against Leesa Berens Morrison, director of the Arizona Department of Liquor License and Control, claiming regulations governing wine shipments are "protectionist and discriminatory," and violate constitutionally guaranteed rights to freedom of commerce. The winery and wine lovers want the court to declare the Arizona statutes invalid, as Pechman ruled Washington’s are.
The next milestone in the Arizona case is a scheduling conference slated for mid-January, said Kent Nicholas, Mesa-based lawyer for the plaintiffs.
In Arizona, small wineries — those that produce less than 75,000 gallons a year or about 30,000 cases — are not required to use a distributor. If required to do so, most would be out of business, because they do not have the economies of scale to allow a 20 cent to 30 cent per $1 payout to get their wines to retailers, Keeling said.
That’s even if distributors would handle their small volumes, he said. The state’s 21 licensed small wineries combined produced 40,000 gallons of wine last year, he said.
In response to the discrimination complaint, Morrison sent out a letter demanding that all big or small Arizona wineries use a distributor, a prospect that would have killed the local wine industry, Keeling said.
The wine growers geared up to fight the new rules outlined in Morrison’s letter, and she passed the issue on to the Arizona Attorney General for an opinion. State officials could not be reached Friday to say whether there has been any progress on the issue.
Mainly, the status quo continues in Arizona, while everyone tries to sort out a solution, Keeling said.
"Wineries continue to ship direct, and nobody has been cited," he said.
The two proposals expected in the Legislature offer opposing solutions, he said.
The Arizona wine growers want all small U.S. wineries, whether in-state or not, to be able to ship directly to Arizona customers.
That would allow Arizona residents, wine shops and even big retailers such as Costco to buy tens of thousands of different vintages directly from the thousands of little wineries such as Black Star Farms.
Keeling said it would eliminate the free-trade discrimination complaints, because businesses can have different regulations based on size.
But the wholesalers want to solve the discrimination claims by requiring all wine producers to use a distributor.
Keeling said the wine growers option offers distributors the best deal.