71st Annual Conference
“craft distilleries:
be careful what they wish for”
Moderator: Lorraine Lee
Washington State Liquor Control Board
Philip Prichard
Prichards’ Distillery, Inc.
Robin J. Bowen
McDermott Will & Emery
National Alcohol Beverage Control Association
Seminar IV - Craft Distilleries: Be Careful What They Wish For
Legal Overview
May 19, 2008
Robin J. Bowen
Alcohol Beverage Counsel
McDermott Will & Emery LLP
202.756.8139
rbowen@mwe.com
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Boston
Brussels
Chicago
Düsseldorf
Houston
London
Los Angeles
Miami
Munich
New York
Orange County Rome
San Diego Silicon Valley Washington, D.C.
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© 2008 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be
considered attorney advertising. Previous results are not a guarantee of future outcome.
Who’s Interested?
Small Business
Constituents
Other Alcohol
Beverage
Interests
Agricultural
Interests
Elected Officials
Chambers of
Commerce
Tourism Interests
Advocacy Groups
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Potential Wish List
Licensing
Lower costs for entry
 Application Fees
 Renewal Fees
 Bonds
Special tailoring
 Type of production activities
 Limits on production volume
 Use of in-state agricultural products
Ability to hold multiple licenses
 Manufacturer
 Distributor
 Retailer
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Sales & Distribution
Tastings
Retail
 Off-premise sales to consumers from
the distillery premises and/or another
location
 On-premise sales to consumers
(restaurant)
 Direct sales and shipping to consumers
Wholesale
 Direct sales and shipping to retailers
What Is a Craft Distiller in the State of Washington?
Craft Distillery License
 License fee is $100 per year versus $2000 per year for a distiller license.
 Produce 20,000 gallons or less of distilled spirits.
 At least half of the raw materials used in production must be grown in the
State of Washington.
Sales & Distribution
 Off-Premise (Face-to-Face), may sell up to 2 liters of distilled spirits of its own
production per person per day at the distillery.
 On-Premise, eligible for a restaurant license.
 Tastings
– Serve free samples of one-half ounce or less to persons at the distillery.
– Maximum total per person per day is 2 ounces.
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What Is a Craft Distiller in New York?
Class D Distiller’s License (Farm Distillery)
 License fee is $128 per year versus $937 to $50,800 per year for other distiller
licenses.
 Produce 35,000 gallons or less of distilled spirits per year.
 Manufacture distilled spirits primarily from New York farm and food products.
Sales & Distribution
 Off-Premise (Face-to-Face), may sell distilled spirits of its own production to persons at
the distillery.
 On-Premise, eligible for a restaurant license.
 Tastings
 Wholesale
– May sell its distilled spirits to wholesale and retail licensees/permittees.
– May sell its distilled spirits in bulk to wineries, farm wineries and other distillers.
– Same wholesale rights as all other distiller licensees.
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Constitutional Considerations: Commerce Clause
State laws violate the Commerce Clause if they mandate differential treatment
of in-state and out-of-state economic interests to the benefit of in-state
interests.
Granholm v. Heald, 544 U.S. 460 (2005).
Discrimination Analysis:
Discriminatory on its face – Michigan allowed only in-state wineries to ship
directly to Michigan consumers.
Discriminatory in its effect – New York allowed in-state wineries to ship directly
to New York consumers and required out-of-state wineries to establish a
physical premise in New York in order to gain direct-to-consumer shipment
rights.
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Constitutional Considerations: 21st Amendment
The 21st Amendment empowers the states to regulate transportation,
importation and use of alcohol beverages but not in a manner that is contrary
to the Commerce Clause.
Granholm v. Heald, 544 U.S. 460 (2005).
The Court draws historical support for this conclusion from Wilson Act, 27
U.S.C. § 121, and Webb-Kenyon Act, 27 U.S.C. § 122.
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Constitutional Considerations: Commerce Clause
If a state law violates the Commerce Clause by discriminating against out-ofstate interests, does the law advance a legitimate purpose that cannot be
adequately served by reasonable nondiscriminatory alternatives?

The state must prove that the discrimination is demonstrably justified and
must provide “concrete record evidence” that the nondiscriminatory
alternatives will prove unworkable.

The court applies heightened scrutiny in its review.
If a state statute is not clearly discriminatory (i.e., it serves a legitimate state
interest and only burdens interstate commerce incidentally), the plaintiff must
show that the burden on interstate commerce is clearly excessive.
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Progeny of Granholm
Washington - Costco Wholesale Corp. v. Hoen, 407 F. Supp. 2d 1247, (W.D. Wash. 2005)
Delaware - Hurley v. Brady, 2006 U.S. Dist. LEXIS 69090 (D. Del. 2006)
Oklahoma - Action Wholesale Liquors v. Oklahoma Alcoholic Beverage Laws Enforcement
Comm’n, 463 F. Supp. 2d 1294 (W.D. Okla. 2006), stay lifted and injunction granted, 492 F. Supp.
2d 1313 (W.D. Okla. 2007)
Kentucky - Cherry Hill Vineyards, LLC v. Hudgins, 488 F. Supp. 2d 601 (W.D. Ky. 2006)
Tennessee - Jelovsek v. Bresden, 482 F. Supp. 2d 1013 (E.D. Tenn. 2007)
Indiana - Baude v. Heath, 2007 U.S. Dist. LEXIS 64444 (S.D. Ind. 2007)
Maine - Cherry Hill Vineyard, LLC v. Baldacci, 505 F.3d 28 (1st Cir. 2007), aff’g, 2007 U.S. Dist.
LEXIS 75741 (D. Me.) (adopting magistrate’s decision, 2006 U.S. Dist. LEXIS 51657)
Arizona - Black Star Farms, LLC v. Oliver, 2008 U.S. Dist. LEXIS 15242 (D. Ariz. Feb. 2008)
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Post-Granholm Challenges - Licensing
Restrict direct shipping rights for wineries based on production limits.
Kentucky

Direct shipping rights available only to small farm winery licensees producing 50,000
gallons/year or less. Applies to in- and out-of-state wineries.

HELD: Nondiscriminatory. Benefit available to wineries that are similarly situated.
Arizona

Direct shipping rights available to in- and out-of-state wineries with production of
20,000 gallons/year or less.

HELD: Nondiscriminatory. Over 2,000 U.S. wineries eligible to take advantage of the
benefit.
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Post-Granholm Challenges – Sales & Distribution
Off-premises sales allowed for in-state wineries but direct shipment prohibited for in- and outof-state wineries.
Tennessee
HELD: Nondiscriminatory. The ability to purchase wine on winery premises and the ability to
purchase wine through direct shipping are different in kind and reach (separate markets, not
similarly situated).
Maine
HELD: Nondiscriminatory. Plaintiffs filed to show the regulatory scheme was discriminatory in effect.
Indiana
HELD: Nondiscriminatory. On-premise sales and out-of-state direct shipping are not related rights.
On-premise sales provisions only codified an advantage that arises from geography. Plus state law
permitted out-of-state wineries to obtain on-premise sales rights in non-winery venues (farmer’s
market, expo, etc).
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Post-Granholm Challenges – Sales & Distribution
Limit direct shipments of wine to two cases per customer per year.
Kentucky
HELD: Nondiscriminatory. “The Commerce Clause does not require that
customers be convenienced.”
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Post-Granholm Challenges – Sales & Distribution
Require a face-to-face transaction between the customer and the winery before direct shipment can occur.
Kentucky
 Required wine to be purchased in a face-to-face transaction at in- and out-of-state wineries before direct shipment.
 HELD: Discriminatory in effect. Principal sources of supply are not near Kentucky but are on the West Coast.
Statute was not saved on the basis of grounds of temperance, preservation of local option, protection of minors and
revenue collection.
Indiana
 Required an initial face-to-face transaction to establish a direct shipment relationship between the winery and
consumer.
 HELD: Discriminatory in effect. Other more reasonable alternatives to verify age are available.
Arizona
 Required wine to be purchased in a face-to-face transaction at in- and out-of-state wineries before direct shipment
 HELD: Nondiscriminatory, facially neutral.
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Post-Granholm Challenges – Sales & Distribution
Authorize direct sales to retailers by in-state wineries only.
Washington and Oklahoma
HELD: Discriminatory. State justification based on orderly distribution and tax
collection were insufficient to save the statutes.
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Are Control States at Risk if They “Favor” In-State Craft
Distilled Spirits?
Market Participant Principle
Nothing in the purposes animating the Commerce Clause prohibits a State, in the
absence of congressional action, from participating in the market and exercising the
right to favor its own citizens over others.
Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810 (1976).
If a state is acting as a market participant, rather than as a market regulator, the dormant
Commerce Clause places no limitation on its activities.
South-Central Timber Development, Inc. v. Wunnicke, 476 U.S. 82, 93 (1984).
BUT, the State may not impose conditions, whether by statute, regulation, or contract,
that have a substantial regulatory effect outside of that particular market. Id. at 97.
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Are Control States at Risk if They “Favor” In-State Craft
Distilled Spirits?
Wholesale/Retail – State is a market participant at both the wholesale and retail
levels and can elect which brands it wants to sell. See Brooks v. Vassar,
462 F.3d 341, 354-57 (4th Cir. 2006).
Wholesale Only – State is a market participant at the wholesale level, but its
decisions restrict retailer choice.
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What This Really Means to You. . .
Clear evidence that your agency needs more funding.
Thank you.
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71st Annual Conference