Lawsuit could ferment Ariz. wine industry - East Valley Tribune: Business

Lawsuit could ferment Ariz. wine industry

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Posted: Sunday, September 18, 2005 6:21 am | Updated: 9:53 am, Fri Oct 7, 2011.

A small Michigan winery and a handful of East Valley wine-lovers who want to savor the Midwestern vintages are suing the state in a battle that could revolutionize wine sales in Arizona and have a domino effect nationwide.

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 Deptartment 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 state statutes invalid.

If that happens, Arizona residents would have access to as many as 10,000 U.S. wines they can’t purchase now, overall wine prices would be lower, and small local wineries would have access to tens of thousands of customers they can’t sell to under the current regulations, local industry experts say.

It also could fuel the state’s wine industry, eventually elevating it to the status of such wine producing states as California, Washington and Oregon, said Rod Keeling, president of the Arizona Wine Growers Association.

If the law is struck down, it also could have farreaching consequences, spurring a movement from small breweries, which have a comparable regulatory structure, and helping to fuel a national movement to do away with other state regulations that wine industry activists say are antiquated and stem from the Prohibition era.

DISTRIBUTORS FIGHTING

On the negative side, losing the protection of existing laws would have a devastating impact on distributors, who now handle the wine shipments from big or little wineries and breweries throughout the state.

The Wine & Spirits Wholesalers of America, a distributors trade group, said Arizona laws that permit direct shipments to customers — and the organization does not believe Arizona statutes permit those shipments, even from in-state wineries — would strip the state’s ability to control alcohol sales to minors. The distributors contend the attempt to do away with their role is an attempt to avoid taxes.

"It is not about giving consumers access to wines not available locally as has been claimed, but about the wineries desire to capture more profit and avoid paying state taxes," the trade group said about a previous lawsuit that was dismissed.

Morrison would not comment on the latest lawsuit and turned the matter over to the Arizona Attorney General’s Office, said Sgt. Wes Kuhl, a liquor department spokesman.

Kuhl also said that since the suit centered around an interpretation of the statute, Morrison would not describe how the state law in question works or is supposed to work.

The attorney general’s office can’t comment on the case or the issue, said spokeswoman Andrea Esquer.

Generally, Arizona law requires that wine shipped within the state be handled by a distributor and a retailer, a mode dubbed the three-tiered system.

The law makes an exception for so-called "farm wineries," which produce less than 75,000 gallons of wine a year — a characteristic of all of the state’s wineries. Farm wineries ship directly to customers and to retailers, according to the commonly accepted interpretation of the state regulations, said Kent Nicholas, attorney for the Michigan winery. That’s the issue the state liquor department and the attorney general won’t discuss.

Dennis Minchella, owner of Chandler winery Kokopelli, said local wineries can and do bypass distributors and sell to individual customers and to liquor retailers.

That means Arizona provides an unfair advantage for local wineries, which don’t have to bear the expense of middlemen in getting their products to local customers, Nicholas said. Out-of-state wineries — even the small ones — do have to use distributors and retailers to get their products to Arizona customers.

EARLIER ATTEMPT

A similar lawsuit filed in March by the same five local residents and a small Virginia winery made the same discrimination claims, but the suit was dropped when the state liquor department said the local wineries are required to use a distributor. It was the result championed and cheered by the distributors.

But unquestionably, it is not what is really happening, prompting the new law suit and bolstered by a U.S. Supreme Court decision in May.

After reviewing New York and Michigan laws aimed at protecting in-state wineries, the Supreme Court declared that the states could make their own laws regarding wine shipments, but they have to treat in-state and out-of-state wineries equally.

Minchella cheered the ruling.

He isn’t worried about competition from out-of-state wineries, and he would like to see the state laws scrapped as discriminatory.

He faces the same concerns in shipping his wines to fans in other states.

Minchella said if Black Star Farms gets the Arizona statute scrapped, it would benefit Kokopelli and other Arizona small wineries, especially if it starts a landslide movement of dumping distributor requirement laws nationwide.

Small wineries typically can’t and don’t use distributors, forgoing a more widespread national audience, Minchella said.

That’s because the distributor overhead for small case shipments would make the price of the wine prohibitive and because small wineries are unlikely to get the attention from distributors that industry giants like Gallo or Mondavi get when the distributors peddle product to retailers.

In fact, most distributors won’t even carry the products of the small wineries, said Keeling, who owns an eightacre winery near Wilcox.

Arizona has 16 wineries and 20 wine grape growers, Keeling said. Together they don’t produce the 75,000 gallons that would define a big winery.

Many states have regulations similar to Arizona’s, Minchella said, so somebody who once visited Arizona and liked his wines, heard about them from a friend or became intrigued by his Web site and wants to try his Sweet Lucy, can’t call up Kokopelli and order a case or two.

Similarly, East Valley wine lovers who want to try an outof-state vintage can’t unless the winery is big enough to get stocked on distributors trucks and retailers’ shelves.

10,000 NEW WINES

According to Free the Grapes, a Napa, Calif.-based organization trying to break down wine shipping barriers nationwide, there are 10,000 new wines produced each year by 3,500 American wineries, most of them small familyowned operations. A single row of those new wine bottles lined up would stretch for a half-mile.

Keeling said the local wine industry leaders have been expecting lawsuits such as the one by Black Star Farms in the wake of the Supreme Court decision.

He also expects the distributor lobby to show up and fight for the business. Not because of worries about wineries like Kokopelli and lawsuit plaintiff Black Star Farms, Keeling said, but because if the laws are struck down, retail giants like Wal-Mart and Costco will be able to buy direct from the huge wineries.

Keeling said the local wineries will fight the state just as hard as the distributors if it restricts direct shipments by local wineries to comply with the federal decision and avoid the discrimination lawsuits such as the one filed by Black Star Farms.

"If they remove our direct shipment rights, we can’t market our business," he said.

Keeling said if Black Star Farms wins and all the laws are dumped rather than modified to end restrictions for farm wineries only, "it could hurt small wineries, but at least it would be a free-market system."

He believes a free-market system could turn winemaking into a major economic segment for Arizona, an agriculture-based industry that uses significantly less water and land resources than other farm products and produces significantly higher returns on the land use.

Arizona’s climate — long, sunny days, cool nights and a monsoon season that replicates the West Coast’s maritime influence — is perfect for wine making, and "we’re seeing serious wine guys coming into Arizona," Keeling said.

"The bottom line is if we have a favorable regulatory environment, Arizona will probably join California, Oregon and Washington as top wine states," he said. "We have the opportunity to have a high-value wine industry in Arizona."

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