NJ Wineries Claim Sour Grapes By Federal Appeals Court Ruling

In Freeman v. Corzine (United States Court of Appeals for the Third Circuit, Nos. 08-3268 and 08-3302, December 2010), the plaintiffs – two New Jersey wine enthusiasts, a New Jersey couple seeking access to more Kosher wines, and a California winery – brought suit in the United States District Court for the District of New Jersey against Jerry Fischer, New Jersey’s Director of Alcoholic Beverage Control, alleging that several aspects of New Jersey’s Alcoholic Beverage Control Law (“ABC Law”) infringe on the dormant Commerce Clause in violation of 42 U.S.C. § 1983. 

The suit challenged the constitutionality of parts of New Jersey’s alcohol beverage control laws permitting certain New Jersey farmers and wineries to bypass wholesalers and sell directly to retailers and consumers.

Currently, out-of-state wineries must exclusively go through wholesale distributors to sell their products in New Jersey, but in-state vineyards can sell to customers directly in on-site tasting rooms, in its own storefronts and in larger retail stores throughout the state.  The plaintiffs argue that such rules provide in-state wineries with a competitive advantage. 

The Court of Appeals agreed with the plaintiffs, upholding the decision of the lower federal court which found the laws to be unconstitutional.  The appeals court sent the case back to the District Court level to determine the solution: (1) either give all vineyards the same rights to sell directly to consumers in New Jersey, or (2) order all wineries to go through wholesalers. Thus, the District Court will decide who the winner is - New Jersey farmers or New Jersey wholesalers. 

Fearing that the District Court may choose option # 1, the Garden State Wine Growers Association, which represents New Jersey’s 29 wineries, retained counsel and is contemplating petitioning the court to intervene in the case. According to news coverage of the case, if the rules change and all vineyards must sell their products through wholesalers, the vintners say the future of the state’s wine business could be in jeopardy. No matter which side the District Court finds in favor of, additional appeals will likely follow. 

New Jersey's Three-Tier Alcohol Distribution Laws

New Jersey, like most other states, has a three-tier alcohol distribution system. Pursuant to that structure, alcoholic beverages are sold by (1) suppliers and manufactures to (2) wholesalers, who in turn sell to (3) retailers, who then sell alcohol to consumers.  

The United States Supreme Court has held that such a three-tier system is legitimate.   Granholm v. Heald, 544 U.S. 460 (2005); and North Dakota v. United States, 495 U.S. 423 (1990).  The Granholm Court nevertheless cautioned that “straightforward attempts to discriminate in favor of local producers” of alcoholic beverages by, for instance, “subjecting out-of-state [producers], but not local ones, to the three-tier system,” are “contrary to the Commerce Clause and . . . not saved by the [states’ authority to regulate alcoholic beverages under] the Twenty-first Amendment.” Id. at 474, 489. 

New Jersey’s Alcoholic Beverage Control Laws (“ABC Laws”), which are enforced by the Director of the Division of the Alcoholic Beverage Control (“ABC”), have allowed certain New Jersey farmers and wineries to skip the wholesalers and sell directly to retailers and consumers. Out-of-state wineries and wine aficionados cried foul and challenged the special privileges given to New Jersey producers, arguing that permitting them to operate outside the rigid three-tier distribution gave NJ businesses an unfair advantage. 

The Third Circuit Appeals Court recognized that when “all out-of-state wine, but not all in-state wine [must] pass through an in-state wholesaler and retailer before reaching consumers, the discriminatory character of the system is obvious.” The Third Circuit Court further found that there was no legitimate purpose for this unequal treatment. As a result, the Third Circuit Court held that the privileges that allowed plenary or farm winery licensees to sell directly to retailers or consumers are unconstitutional.

The Third Circuit also invalidated a provision of the ABC Laws that required individuals to obtain a special permit from the ABC before importing more than a gallon of wine for personal use.