Small wineries being squeezed?
Small wineries fear court ruling that they must use distributors
AFTON - Has a federal district court put the cork in Virginia's growing farm winery business?
The answer could depend on next year's General Assembly.
Wineries and vineyards have emerged as a welcome success story in Virginia as two signature products, tobacco and peanuts, have been in decline.
Gov. Mark R. Warner, a vineyard owner himself, helped create a strategy for the wine industry last year. It calls for doubling the market share nationally for Virginia wine by 2015.
However, a court ruling in April threatens those ambitious plans. It may be a death knell for some of the state's smaller wineries.
To boost the state's wine industry, the legislature had allowed Virginia wineries to haul their products directly to stores and restaurants instead of paying a licensed wine distributor to do so. State law did not give out-of-state wineries the same privilege, and the court found that unconstitutional.
The court also ruled that exclusive sales of Virginia wines in state ABC stores, and some other parts of the wineries law, are unconstitutional.
It is the loss of the ability to self-distribute that concerns Virginia wineries most.
"It's very scary," says Sarah Gorman, a lawyer and Charlottesville resident who helps manage her family's winery and vineyard in Nelson County. She says self-distribution is critical to the winery's business plan.
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Roughly a half-dozen wineries, including the Gorman family's Cardinal Point Vineyard, are near Afton. The rolling farmland beneath the Blue Ridge Mountains provides the ideal backdrop for winery tours and farm tourism.
Sarah Gorman's parents, Paul and Ruth Gorman, bought the farm in 1983 to grow grapes. Her father is a retired Army general and former commander-in-chief of the U.S. Southern Command in Panama. The Gormans once were stationed in an area of Germany known for its vineyards.
The Gormans built the winery three years ago to increase their income from 15 acres of grapes, which they had been selling to other wineries. Sarah's brother, Tim, is the winemaker.
"We were counting on the ability to self-distribute," Sarah said. "I see it as meaning the difference between success and not."
Cardinal Point expects to produce 3,000 cases of wine this year for the first time. Sarah doesn't believe the relatively small vintage would be of much interest to a wine wholesaler.
Even if a distributor were interested, the winery still would need the one-on-one contact with retailers and restaurants that self-distribution makes possible, Sarah said. The more Cardinal Point gets its wines into shops and restaurants, the more traffic it generates at the winery, where sales bring the most profit.
The vast majority of Virginia wineries do some self-distribution, said Tony Champ, owner of White Hall Vineyards in Albemarle County and president of the Virginia Wineries Association. Champ said he sells about 40 percent of his wine through self-distribution. He also uses a distributor and sells wine at his own shop.
He makes $3 more on a bottle of self-distributed wine that retails for $15 than he makes on the same bottle sold through a wholesaler, Champ said. The additional cost may be too much for some small wineries.
The association is working to craft legislation that would fix the constitutional problems in current state law, Champ said. The wineries hope to reach a compromise with wine wholesalers who may fear that fixing the law could cost them business.
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Wrangling in federal court over the constitutionality of Virginia's wineries law has been going on since 2001, with the General Assembly making changes in 2003 to address some of the court's objections.
After the legislature made its changes, the constitutional challenge by Virginia wine drinkers and out-of-state wineries entered a second round in U.S. District Court. As a result, Williams in April again found parts of state law unconstitutional, including self-distribution by wineries.
The Alcoholic Beverage Control Board appealed Williams' ruling to the 4th U.S.Circuit Court of Appeals in Richmond, which is scheduled to receive briefs from the parties this Wednesday. Williams twice turned down the ABC Board's requests to suspend his ruling while the case is on appeal.
The wineries fear that enforcement of the ruling before the General Assembly has a chance to fix the constitutional problems with state law next year could do irreparable harm to the industry.
"It's a looming crisis for the industry," said Terri Cofer Beirne, a lawyer and lobbyist for the wineries association.
Curtis W. Coelburn, executive director of the Virginia Department of Alcoholic Beverage Control, said he did not know if the state would now request a stay of Williams' ruling from the appeals court.
ABC does not have any information that Virginia wineries are not already complying with the lower court's ruling, Coelburn said.
ABC probably will not initiate legislation in response to the ruling because of the interest by retailers, wineries, wholesalers and others, Coelburn said. If everyone agreed, the issue of self-distribution could be solved simply by either allowing all to do it or none, he said.
"I don't know how you make [self-distribution] constitutional," said Chuck Duvall, vice president of the Virginia Wine Wholesalers Association.
Duvall said the wholesalers want the state's wine industry to survive and would be willing to talk with the wineries about legislation. The wholesalers, he noted, had intervened in the federal lawsuit to support state law.
The wholesalers "would have a lot of difficulty" changing the law to open up self-distribution to out-of-state wineries, Duvall said. The state could have problems policing out-of-state wineries that self-distribute.
Last year, 6.9 million cases of wine were sold in Virginia, only 4 percent of which came from Virginia wineries, the wholesalers association said.
Allowing Virginia farm wineries to wholesale their goods would mean allowing thousands of other U.S. wineries to do the same, which would put an end to Virginia's three-tiered alcohol distribution system, the wholesalers have said.
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The three-tiered system, which is used by most states and was established after the repeal of Prohibition in 1933, sets up a marketing system that involves licensed alcoholic-beverage manufacturers, licensed wholesalers and licensed retailers.
The system allows states to regulate alcohol sales. According to a 2003 Federal Trade Commission study, the states had hoped that by requiring the sale of alcohol through wholesalers they could better collect taxes, limit sales to minors and prevent organized crime from getting control of distribution.
Walter Marston, a Richmond attorney for the wine wholesalers group, said the use of distributors also is a check on manufacturers, which has kept the industry from being dominated by a few large players. Requiring the use of wholesalers provides market access to a wider range of wineries and brewers and provides more choices for consumers, he said.
Wholesalers dispute the contention by the wineries that distributors are not interested in carrying the products of smaller wineries.
"Where is the evidence?" Marston asked. The wholesalers note that Virginia distributors already handle small amounts of wine (100 or fewer cases) for more than 400 out-of-state wineries.
"The real problem for the small winery is they are small," Marston said. "The way to be big is to reach a lot more customers."
Marston acknowledged, though, that a wholesaler might not give as much attention to a small wine producer as he would to one supplying a larger percentage of his sales.
If the loss of self-distribution is a problem for the smaller and less well-established wineries, a constitutionally acceptable law could be written to help them specifically, Marston said. Small out-of-state wineries and small Virginia wineries could be allowed to distribute their own products, with larger wineries, both in-and out-of-state businesses, required to use a distributor.
"What is wrong with that?" he asked. "Economic regulation involves all kinds of line drawing."
It would be nice if the wineries were talking with the wholesalers, Marston said. "Hopefully, there will be some dialogue."
Beirne said the wineries association, once it decides on what course it will take, will "absolutely" be talking with the wholesalers.
"We need to," she said.
Any ideas? Staff writer Greg Edwards can be reached at (804) 649-6390 or firstname.lastname@example.org