Uncorking The Wine Market

[November 1st, 2006] In a decision that advocates say could reduce wine prices in Oregon, an administrative law judge ruled last week that out-of-state wineries don't need an in-state middleman to ship the product directly to Oregon retailers.

Opponents of that ruling, such as Paul Romain, longtime director of the powerful Oregon Beer & Wine Distributors Association, also say its impact could be "huge" but in a bad way, because association members could lose business if it stands.

Last week's ruling deals with a case that began in June when the Oregon Liquor Control Commission denied an application for a wholesale malt beverage and wine license submitted by Morchella Wine Cellars of Lyle, Wash.

The dispute over Morchella, a small producer that will bottle about 3,400 cases of wine this year under its Syncline Wine Cellars label, in some ways exemplifies the market distortions that have resulted from Oregon's "three-tier" system of regulating alcoholic beverages. That system, enacted after Prohibition ended in 1933, segregates the wine and beer market into three functions: production, distribution and retail. More than a dozen other states, including Washington, use a similar three-tier system. Those systems have come under attack across the country.

With limited exceptions in Oregon, OLCC rules require that wine and beer must pass through independent distributors that have "premises" in Oregon on their way to stores and restaurants. (Oregon wineries can sell directly to retailers if they obtain OLCC wholesale licensure. Current laws make it nearly impossible for Oregon breweries to sell directly to retail. And hard liquor passes from producer to the state to retailers.)

The OLCC's June denial of Morchella's application deviated from an earlier landmark ruling by a federal judge in Spokane in favor of Costco, which challenged the basic elements of Washington state's three-tier system (see "Spillover Effect," WW, May 17, 2006).

Currently, Morchella cannot sell directly to stores or restaurants in Oregon, although the winery is located just across the Columbia River from the city of Hood River. To reach Hood River retailers, in fact, its wines must travel to a Portland warehouse and then back up the Gorge.

Morchella's attorney, John DiLorenzo of Davis Wright Tremaine (that law firm also represents WW), challenged the OLCC's denial on a simple point: Nowhere, DiLorenzo argued, does the statute say that a wholesaler must have "premises" in Oregon.

Administrative law judge Charlotte Rutherford listened to both sides in a Sept. 21 hearing that was closed to the public, the press and even to Romain, who wields enormous influence both in the Legislature and at OLCC headquarters in Milwaukie.

Romain says Rutherford's decision is unlikely to stand, because it would open Oregon's tightly controlled wine and beer markets to all sorts of unintended consequences that include uncontrolled sales of high-alcohol-content beverages that the OLCC has restricted for public safety reasons. "You could have a contract brewer in Arkansas shipping in high-test malt liquor anywhere he wanted," Romain says. "The same with fortified wines."

Currently, the state collects tax on beer and wine when shipments arrive at the distributor's warehouse, Romain adds, and that process would be disrupted under the ruling.

But DiLorenzo says the three-tier system is an anachronism that stifles competition and confers a monopoly on wine distributors at the expense of both producers such as Morchella and consumers.

The five OLCC commissioners have the option of overturning the ruling. Agency spokesman Ken Palke says the commission will make a decision on the Morchella case no earlier than its Dec. 14 meeting.

Romain says if the commission fails to reverse the judge's decision, he will probably file a lawsuit to prevent out-of-state wineries from getting licenses. DiLorenzo also pledges to proceed immediately to the Oregon Court of Appeals if his victory is overturned.

While legal wrangling may be irrelevant to most tipplers, DiLorenzo argues a definitive win for his client would not be. More out-of-state wine would flow into Oregon, and the elimination of some middlemen would mean wine would get cheaper.

"I think you could see some wine prices come down 20 percent," he says.