Posted by Connor O’Shea on April 8, 2013.

Since the New York Farm Winery Act reinvigorated the industry in the late 1970s, wine production and consumption in New York has greatly expanded.  With the rise to prominence of certain AVAs within the state—particularly the Finger Lakes and the Hamptons—wine grape production has grown over 17%, and New York is now the third largest wine market and producer in the United States.¹  As New York producers have continued their attempt to chip away at California’s dominance of the American wine market, the state legislature has tried to facilitate the New York wine industry’s growth by enacting protectionist measures.  While some measures have failed when confronted with the Dormant Commerce Clause,² others still remain.  In particular, the structure of definitions assigned to certain terms within the state alcoholic beverage code provide discrete advantages for in-state wine producers.

Three terms in particular are central to the protectionist measures of the New York Alcohol Control Law: “winery,” “custom crush facility,” and “New York State labeled wine.”  These terms all relate to the percentage of grapes processed that are grown in New York.   “Winery” is a defined as a wine manufacturer that operates a facility within New York.  A “custom crush facility” must operate within New York and use wine grapes grown exclusively within the state.  The intermediary of these is a “New York State labeled wine,” which must contain seventy-five percent New York-grown grapes.³ These terms, as implemented throughout the alcoholic beverage code, provide increasing degrees of benefits for facilities that use more New York grapes—that is, “wineries” receive somewhat more protection than out-of-state producers while “custom crush facilities” receive the highest advantages.⁴

These definitions are particularly relevant in the context of the three-tier system imposed on out-of-state wine in New York.  The three-tier system is a licensing and distribution regime adopted by New York and other states in the wake of the 21^st Amendment to control the flow of alcohol into the state.  Out-of-state wine producers must sell to a wholesaler or distributor licensed by New York, who then sells to a New York-licensed retailer, who can in turn sell to consumers.  Each transaction carries its own taxes, elongating the importation process and also artificially increasing the price of out-of-state wine.

By operating a facility within New York State, as a winery does, manufacturers can bypass some of the hassle and tax associated with the three-tier system.  For example, since the same tax and licensing scheme does not apply to grapes, a winery can import out-of-state grapes and make wine in-state.  Furthermore, such a winery could label their product a “California wine” if a certain percentage of the grapes are imported from California.  Such a facility could also use 75% New York grown grapes and make a New York State labeled wine, using cheaper grapes from another state for the other 25% and potentially cutting costs.⁵  Similarly, the in-state producers, those operating a custom crush facility, bypass the system entirely by growing and producing wine in-state.⁶

While states like New York have a strong interest in protecting their wine industries, a circuit split is developing as to the constitutionality of such a protectionist system.  New York argues, and the U.S. Court of Appeals for the Second Circuit has agreed, that the language of the 21^st Amendment giving states the right to regulate alcohol protects a three-tier system from Commerce Clause analysis.  On the other hand, the Fifth and Sixth Circuits have held that a three-tier system unfairly discriminates against similarly situated in-state and out-of-state wine producers⁷ and the 21^st Amendment does not shield these systems from Commerce Clause analysis.  Finding that there is a strong federal and state interest in free trade of wine, the Fifth and Sixth Circuits declared three-tier alcoholic beverage distribution systems unconstitutional.⁸  With such a notable circuit split, the Supreme Court may soon take up the issue.

New York has always had an interest in protecting its wine industry, as evidenced by its Alcohol Control Law and three-tier distribution system, and the Second Circuit supported that interest.  The questions for future cases are how far a state can go to protect its alcohol industry, and whether it can successfully impose certain taxes and restrictions on out-of-state importation under the guise of 21^st Amendment regulation.

I have always been a fan of giving the little guy—like New York with only 4% of U.S. wine production—a shot against a Goliath such as California, which has nearly 90% of the U.S. market.  On the other hand, there is a strong national interest in maintaining a free flow of goods between the states.  But until the Supreme Court decides to take a case involving a three-tier system, New York’s system will remain intact and we can all only imagine the lively debate that will be had by Justices Breyer and Scalia over the federal interest in free trade of Pinot Noir.