Years ago, one of us (Hahn) helped write a “friend of the court” brief for the U.S. Supremes in a case called Granholm v. Heald [Download Here], in which out-of-state wineries challenged state laws that discriminated against direct shipments to in-state consumers. Six high-profile economists, including three Nobel laureates (George Akerlof, Daniel McFadden and Vernon Smith), signed that brief.
Now what, you might ask, did these economists know about wine that would be of interest to the court? One of them (McFadden) actually owned a vineyard in the Napa Valley. But then, in wine-crazed California, so did a lot of other well-heeled professionals. What sets economists apart is their skepticism about regulations that restrain competition, and few industries are as heavily regulated by government as the wine and spirits business.
Of course, states have some legitimate interests here – even economists, it’s fair to say, would like to keep alcohol out of the hands of teenagers who drive cars. But in the wake of the repeal of Prohibition (77 years ago), a host of economic players ranging from alcoholic beverage distributors to panhandling politicians conspired to create a web of restrictions designed to reduce competition – and thereby to feather their own nests. In this spirit, many states barred out-of-state producers from skipping the middleman and delivering wine direct to customers’ doors. Out-of-staters, it seems, would be ever so much more careless than the locals in handing over the stuff to kiddies.
The economists’ brief didn’t challenge the states’ right to regulate alcohol sales, but did point out the illogic of discriminating against all those nice winemakers in California, Oregon and Washington. And when the Supremes ruled that in-state and out-of-state winemakers had to be treated alike, most of the offending states decided to end the discrimination rather than to ban direct delivery from in-state wineries.
Score one for economists – at least the ones who see competition as a key to innovation and growth, not to mention to the availability of full-bodied Syrahs with a hint of anise and pepper for less than $20 a bottle. But declaration of victory was premature. In 2006, the Massachusetts legislature struck back, deciding to allow only producers who make less than 30,000 gallons annually ship directly to consumers. Why 30,000 gallons? Maybe because it’s a nice round figure. More likely, because every winery in the Bay State produces less than 30,000 gallons a year, while many potential competitors from out-of-state produce more.
There’s a happy ending to this tale. A district federal judge decided the law violated the Interstate Commerce Clause. And on January 14, the U.S. Court of Appeals (First District) put a stake through the law’s protectionist heart [Download Here].
What’s next? How about a law limiting direct-to-consumer sales to wineries that declare undying love for the Red Sox on their labels?