September 5, 2003, 12:00 AM

An appeals court ponders the issue of interstate online sale of wine

The Second U.S. Court of Appeals in New York heard arguments Wednesday in a case in which wineries are trying to extend their ability to sell wine into states that restrict online wine sales.

Kurt Peters

Executive Editor

Wineries and the state of New York are awaiting an appellate court ruling in a case that could crack open the market for online wine sales. The Second U.S. Court of Appeals in New York heard arguments Wednesday in a case in which wineries are trying to extend their ability to sell wine into states that restrict online wine sales. A lower court ruled last October that New York’s restriction on online and other direct-to-consumer wine sales was unconstitutional. The state appealed the ruling in June and both sides made their arguments this week.

“Wineries lose an estimated hundreds of thousands of dollars per month because they cannot ship directly to consumers,” the wineries’ brief in the appeal contends. The wineries seek to overturn a system that requires them to sell only through wholesalers. Similar legal actions have recently overturned bans in Texas and Michigan. New York, second only to California in wine production, is considered the major battleground over direct-to-consumer wine sales.

The wineries law firm, Kirkland & Ellis, notes that the market opportunities for many wineries have sharply declined over the past several decades. Since the mid-1960s, it notes, the number of wine wholesalers has decreased to about 3,000 from 11,000, while the number of wineries has increased. At the same time, most wholesalers insist on selling a limited number of the most popular wine labels, restricting the market access of many wineries.

“There now are often only two or three major wholesalers per market,” the suit contends. “Moreover, those wholesalers focus almost exclusively on well-known, high-volume wines at the expense of smaller, lesser-known brands. As a result, small- and medium-sized wineries cannot depend upon wholesalers to develop or maintain an out-of-state customer base for their wines.”

The New York Attorney General’s Office argues that its laws should not fall under federal jurisdiction and it argued to keep New York laws under the control of New York state government.

The lawsuit adds that states such as New York have attempted to make it easier for their own wineries to sell directly to consumers, but still impose tighter restrictions on out-of-state wineries. “States like New York have recognized that their own wineries face these distribution problems, but have imposed greater burdens on out-of-state wineries by insisting that out-of-state wineries sell their products only through wholesalers,” the suit argues. “This protectionist legislation effectively strangles many wineries’ efforts to grow and even survive under current market conditions.”

But Randy Mastro, a partner with Gibson, Dunne & Crutcher, a law firm representing New York wholesalers and retailers, argues that the state has more than 200 wine wholesalers offering plenty of retail opportunities for out-of-state wines. "This is not a free-trade issue," he says, noting that 90% of wines sold in New York are from outside the state.



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