Читать книгу Bottleneckers - William Mellor - Страница 8
ОглавлениеHow Bottleneckers Got Their Name
Sitting atop her tractor, Juanita Swedenburg bounced along a dirt path, seething with anger.1 Earlier, the sixty-something-year-old Virginia farmer had been flipping through a new issue of a magazine delivered to her house when she stumbled upon an article that started her slow burn. According to the article, she—a card-carrying Daughter of the American Revolution—was allegedly a criminal, a felon.
In 1976, Juanita and her husband, Wayne, had retired from careers in the US foreign service and bought a 120-acre farm in bucolic Middleburg, Virginia. Both were raised on farms, and they drew on their experience to raise cattle on their new property.2 Although they never entirely abandoned this pursuit, they soon shifted their efforts to a crop that was ideal, though then sparsely grown, in their slice of Loudon County: grapes. Prompting this course of action was Juanita learning that Thomas Jefferson thought that Virginia’s soil was like that of France, known, of course, for its wines.3
With experience only as wine consumers, Juanita and Wayne set out to start a winery specializing in the type of wine they had enjoyed while serving in Saigon in the foreign service. “In those days, it was the Paris of the East, and I was so much a wine novice,” Juanita recalled. “We drank really good 1948 and 1949 Bordeaux and cabernets. It taught me a lot about good wine.”4 Juanita and Wayne immersed themselves in learning the craft of wine making. After copious reading, workshops, trial and error, sharing of notes with neighbors, and years of physical labor,5 they planted their first grapes in 1982 and opened the Swedenburg Estates Winery in 1988.6
Their chardonnay, cabernet, and fruity Riesling began drawing a following, and they shipped cases to customers all over the country who wanted something different from what was available in their neighborhood stores.7 In any given year, mail-order sales amounted to somewhere between 10 and 20 percent of the two thousand cases they sold8—that is, until that fateful day when Juanita was alerted of her criminal ways.
Always looking to grow her skills as a winemaker, improve the business, and stay abreast of the industry, Juanita read wine publications religiously. It was in one of these magazines that she discovered her crime9—the laws of twenty-four states made it illegal for Juanita to ship wine from her farm in Virginia directly to consumers in the respective states.10 At first she ignored her new realization and continued shipping out wine,11 but her conscience—pricked by a pocket copy of the US Constitution she carried with her everywhere—got the better of her. When out-of-state customers visited her tasting room and asked for cases of alcohol to be shipped to their homes, Juanita’s reply became, “Sorry, I can’t.”
Three thousand miles away, the owner of another small family winery was also coming to the realization that he had been breaking the law for years. Only, in his case, he had learned of his criminality from threats of prosecution rather than a magazine. David Lucas had also started in the wine business later in life, after years spent serving the United States abroad. Raised in an agricultural family in California, as a young man David served in the peace corps, first growing rice in remote parts of India and then serving as a peace corps director in Iran. After leaving the peace corps, he worked in the fruit-and-vegetable canning industry, saving his money to buy some land and build his dream business—a winery.
He began his wine making as a sideline while still in the canning industry. His first wines tasted much like other popular wines in the United States—sweet and fruity with plenty of alcohol. A few years into his part-time wine-making pursuit, he landed a position with a company that would alter his wines and the course of his life—the Robert Mondavi Winery. As head of global research and joint ventures, David worked closely with Mondavi for sixteen years, learning the business and traveling around the world. Along the way, he tasted some of the world’s great wines and made a painful observation: his own wines were embarrassingly bad.
Making full use of his position at Mondavi, David became a student of wine making, paying close attention to how the world’s great wineries crafted their products. He abandoned his earlier efforts and began making wines that were food friendly, refined, and restrained and whose taste reflected the vineyards from which they came.
By the time David left Mondavi, his business was small but thriving; so much so that his tasting room was regularly full of out-of-state customers asking for his wines to be shipped to their homes. Although such shipments would never represent a large percentage of his business, they were nevertheless important to it. David only sold his wines directly, not through supermarkets, big-box stores, or other retailers. He was, therefore, all too happy to fulfill individual customer requests for shipment.
A concern, however, nagged him. He knew other wineries in his area shipped to out-of-state customers—it was common practice, in fact—but he wondered occasionally if there were restrictions on interstate alcohol shipping. All doubt was laid to rest when he received the first in a series of cease-and-desist letters from state liquor commissions. Like Juanita Swedenburg, David Lucas, a small-business owner and veteran public servant, was a felon. Or so said the laws of various states—laws intended not to protect the public from harmful perpetrators but to guard a powerful private interest from competition using government power. The origins of such laws can be traced to one of history’s leading industrialists—John D. Rockefeller Jr.
THE ORIGINS OF PROTECTIONISM
At the turn of the twentieth century, Rockefeller, and other industrialists like him, believed America had a problem—a “liquor problem.”12 It was a belief that had been building around them for decades in the form of the temperance movement.13 In the early nineteenth century, physicians, ministers, and employers had grown increasingly concerned about the drunkenness of workers and servants. Throughout the first half of the century, this concern mushroomed into a mass movement, encompassing more than a million people across a broad spectrum of the middle class who committed themselves to complete abstinence from alcohol.14 The 1840s saw the first state attempts at prohibition, followed in the 1880s by a second wave of attempts. Although most of these laws were overturned, a few survived into the early twentieth century as a new prohibitionist organization—the Anti-Saloon League—came to dominate the movement.15
The league operated with a level of sophistication not known before. It hired lawyers to write model laws, built up a war chest of funds, and collected political favors subsequently used to expand the number of elected officials beholden to it.16 First working state by state, the movement wielded those resources to achieve prohibition of alcohol in twenty-three states by 1916 and seven more by 1919.17 It also came out for a federal constitutional prohibition in 1913, working to achieve it in Congress in 1917, and then achieved a final ratification in Nebraska in 1919. The Eighteenth Amendment—commonly called Prohibition—went into effect a year later.18
Throughout this period, the league’s efforts were bankrolled by Rockefeller—a lifelong teetotaler—and fellow industrialists. Like early temperance adherents, they believed alcohol undermined the morals of their workers and hampered productivity.19 Moreover, the league thought that by enacting Prohibition, saloons would become unavailable as meeting and recruiting places for unions and socialist organizations, and social blight in the form of crime, poverty, insanity, disease, and urban disorder would come under control.20
At first, Prohibition seemed to work. In the early years, alcohol consumption appeared to decline, and police, social workers, ministers, and journalists reported reductions in problems associated with alcohol abuse.21 But these effects—to the extent that they actually resulted from the Eighteenth Amendment—were fleeting and never entirely successful. The drinking of alcohol continued, especially in large cities, and, as the 1920s progressed, additional negative effects of Prohibition materialized and metastasized—alcohol was illegally produced and distributed, organized crime flourished, bribery and corruption of public officials prevailed, cases of alcohol poisoning arose, and there was a widespread violation of the law. It was particularly this last problem that prompted Rockefeller and others to begin rethinking their support of Prohibition.
Although the “lawlessness” associated with Prohibition is sometimes thought to describe organized crime, it actually refers to the disrespect for all law, and the law’s loss of legitimacy, resulting from the mass disobedience of Prohibition. This lawlessness was aggravated by the looting, rioting, and mass demonstrations that grew out of the Great Depression.22 By 1932, such lawlessness had sealed the fate of Prohibition: John D. Rockefeller Jr. announced his support for repeal, the momentum for which had been building for some time, and other industrialists followed suit. As Rockefeller explained,
In the attempt to bring about total abstinence through prohibition, an evil even greater than intemperance resulted—namely, a nation-wide disrespect for law, with all the attendant abuses that followed in its train. That this intolerable situation should be done away with has seemed to me even more important for the moment than the promotion of temperance.23
On November 16, 1932, the US Senate submitted the Twenty-First Amendment, repealing the Eighteenth Amendment, to state constitutional conventions for ratification. On December 5 of the following year, Utah became the thirty-sixth and deciding state to ratify the amendment, putting repeal into immediate effect.24
In the minds of Rockefeller and others, however, repeal was no solution to the root problem. Rockefeller warned, “As Senator Capper has aptly said, ‘We may repeal Prohibition, but we cannot repeal the Liquor Problem.’ If carefully laid plans of control are not made, the old evils against which prohibition was invoked can easily return.”25 Among other things, the Twenty-First Amendment left such control to the states, but legislators—most of whom had little personal expertise in the complexities of liquor regulation—were ill equipped to navigate the difficult policy and political choices that accompanied it.26 Into this vacuum stepped Rockefeller; this time with a highly influential study that produced model legislation for the states.
Toward Liquor Control,27 a book bankrolled by Rockefeller and written by two of his close and trusted advisors, Raymond Fosdick and Albert Scott, outlined the details of two post-Prohibition systems of regulatory policy: one that the authors greatly preferred and another that they included for pragmatic purposes. The first, which they strongly recommended, was a monopoly approach, in which states would allow individual sales of alcoholic beverages in restaurants and hotels while maintaining a public monopoly on the sale of packaged goods. The second was a licensing system under the auspices of a state board that would ideally be as far removed from politics as possible. Critical to the success of the latter scheme was the control of the number of businesses allowed to sell liquor and the complete elimination of the “tied-house system.”
Tied houses were taverns owned by or under exclusive contracts with alcohol manufacturers.28 Prior to Prohibition, alcohol was not transported across the country as it is today. Instead, there were many breweries and other producers operating in cities and counties that were engaged in aggressive competition to exclusively sell products. They did so through a combination of manufacturer-owned taverns and independent establishments that agreed to sell only a certain brand of beverage. To compel such loyalty, producers sold to taverns on generous credit terms, provided them with equipment and supplies, and paid rebates. This tied-house system was widely believed to be a principal cause of excessive alcohol consumption and related social ills.29 The licensing system described in Toward Liquor Control called for the decoupling and separation of the producer and retailer “tiers” to avoid control or coercion. Newspapers, magazines, and prominent leaders hailed the book, and elected officials turned to it and the model legislation that stemmed from it to create new state alcohol laws. In the months that followed the ratification of the Twenty-First Amendment, states in quick succession adopted alcohol-control policies patterned after those recommended in Toward Liquor Control.30 Today, those same policies largely govern the alcohol industry: seventeen states operate under monopoly control and thirty-three states plus DC operate with licensing systems.31
As part of their licensing systems, states interposed a required third tier—the distributor (or wholesaler)—to place a separation between the manufacturer and retailer tiers. At the outset of the three-tier system, producers could only sell to and retailers could only buy from distributors. Firms in one tier could not hold ownership in companies in another. Nothing of value could be given to induce sales. All businesses across the levels were licensed by the state to operate only in their specific tier.32 In other words, lawmakers created a bottleneck. All alcohol sales flowed through, and only through, distributors—the quintessential “bottleneckers.”
It is these licensing systems that sixty years after their creation ensnared Juanita and David. If manufacturers like them wanted to sell their products to consumers in a given state, they had to find a distributor willing to carry their product. Yet the bottleneck created by the three-tier system provided little incentive for distributors to deal in specialty products from small manufacturers like Juanita and David, particularly if they were out of state and essentially unknown. Instead, the distributors’ preference was, and remains today, for well-known brands that sell easily and in greater volume.33
The effects of the bottleneck were predictable, and, in fact, predicted. The authors of Toward Liquor Control warned,
Any licensing system tends to project the whole question into politics and to keep it there. Indeed, it compels the traffic to be in politics of self-protection. The licensing body becomes a powerful political engine. Every licensee . . . begins to marshal his own political strength to serve his own ends.34
It did not take long for the political process to begin. When Utah voted for the Twenty-First Amendment in December 1933, Congress was in recess, which meant the federal government had no statutory means by which to manage the instantly legal alcohol industry. As an interim measure, President Franklin D. Roosevelt, by executive order, established the Federal Alcohol Control Administration (FACA) to guide the transition from Prohibition to regulation.35 Roosevelt chose Joseph H. Choate Jr., an East Coast upper-class attorney, to head the FACA. Choate worked in the interest of repeal and assisted in the reestablishment and growth of the liquor industry. He helped the industry, especially the trade associations, to design the market structure most amenable to alcohol businesses and also to the collection of taxes.36 The latter was of particular concern for state and federal governments, the representatives of which met with leaders from the liquor industry to set standards and policies and to develop procedures for efficiently collecting taxes.37 And so it happened that in the months following the end of Prohibition, as states considered various options for liquor control, alcohol businesses came to play a central role in crafting policies.
MAINTAINING THE BOTTLENECK
In the years that followed, distributors (also known as wholesalers) used favorable state policies—specifically three-tier laws—to build a powerful position and protect their government-manufactured slice of the market.38 Whenever attempts to reform or alter the three-tier system have surfaced, distributors have lobbied aggressively to protect their privilege.39 But their activities are not purely reactive. According to David Rehr, the former president of the National Beer Wholesalers Association, today the association is one of the most influential lobbies in America, boasting operations in every state and congressional district.40 It has a presence in every community and state legislature, and distributors visit every member of Congress as part of the association’s annual meeting in Washington, DC, with the stated intent of “shoring up the three-tier system.”41 In its annual reports from 2013 to 2015, the NBWA boasted that its members conducted more than 450 meetings on Capitol Hill during its 2014 legislative conference42 and more than 400 meetings in 2015.43
Such influence earned the NBWA the title of “heavy hitter” from a campaign-finance watchdog organization.44 Additionally, through its political action committee, the NBWA has consistently been one of the largest contributors to state and federal political candidates. From 1990 to 2014, its PAC contributed more than $32 million to candidates and spent more than $11 million in lobbying, including expenses associated with more than twenty lobbyists just at the federal level.45 The primary focus of this lobbying has been to protect the distributors’ interests in the three-tier system. For example, as Anheuser-Busch InBev worked to finalize its acquisition of Grupo Modelo, the maker of Corona beer, and to clear a review by the US Department of Justice in 2013, the NBWA lobbied to ensure that the beer conglomerate would not encroach upon the distributors’ turf.46
The NBWA’s annual legislative conferences in Washington, DC, routinely include a who’s who of elected officials and members of the media. The 2014 conference, for example, featured addresses by former House speaker John Boehner and former House majority leader Steny Hoyer. The conference also included a lunch with former representatives Aaron Schock and Tulsi Gabbard. Journalists from Politico, the Washington Post, and ABC News were panelists. Legislative issues on the conference agenda included state-based alcohol regulation, and conferees attended sessions like the “Perfect Pitch: Selling the Value of Alcohol Laws.”47
The Wine and Spirits Wholesalers of America (WSWA) works alongside the NBWA, having contributed more than $11 million to candidates between 1990 and 2014, more than $18 million through lobbying activity, and more than thirty federal lobbyists.48 Although not as prolific as the NBWA, the WSWA has nevertheless “made a concerted effort to aggressively build [its] industry grass roots and develop a broad base of political engagement across the country,” as President and CEO Craig Wolf boasted in a 2012 press release.49 The WSWA’s government affairs are managed by a senior vice president, four vice presidents, and a coordinator, all of whom keep members apprised of state and federal issues, provide resources for members’ political activity,50 and coordinate efforts with thirty-two state affiliates.51 The WSWA’s Web site includes a feature that enables members to identify a specific congressional or state legislative district and then produce custom reports with industry information for use in lobbying.52 The site also offers information on such topics as the economic impact of distributors, jobs created, and taxes paid. The NBWA offers a similar feature on its Web site.53
At the state level, alcohol bottleneckers likewise protect their interests through lobbying and contributions. For example, from 2009 to 2012, legislators in Juanita Swedenburg’s home state of Virginia considered a series of bills—none of which saw any action beyond committee hearings—to privatize state-owned alcohol retail stores. While the bills were being considered, legislators sitting on the respective committees received a total of more than $200,000 in campaign contributions from the Virginia Wine Wholesalers Association and the Virginia Beer Wholesalers Association.54
For both organizations, prolific spending and lobbying is the cost of ensuring that the government allows them to maintain their grip on a significant industry. Today, an estimated 6,690 distributor facilities serve more than four thousand breweries nationwide, up from fewer than fifty breweries in the late 1970s and early 1980s.55 Similarly, wine wholesalers total 5,900 across the United States.56 Together, distributors report an annual revenue of $135 billion.57
BATTLING THE BOTTLENECKERS
Because of the influence bottleneckers have held on state and federal legislatures, Juanita and David had only one viable recourse if they wanted to serve out-of-state customers—the courts. On February 3, 2000, they sued in federal district court in New York—a state with one of the biggest wine markets in the country but one that prohibited those that didn’t operate within its bounds from shipping wine directly to consumers in the jurisdiction—thereby bypassing distributors.58 Although Juanita and David were challenging New York’s laws, it quickly became apparent that it wasn’t the state’s interests that were really at stake.
No sooner had they filed their lawsuit than the state’s four largest liquor distributors, whose combined revenues exceeded $1 billion annually, intervened to help defend the bottleneck,59 with additional help coming from the WSWA and the NBWA.60 In the first hearing, Juanita and David’s two attorneys from the Institute for Justice were taken on by eighteen attorneys mostly representing industry insiders.61 Throughout the trial, the state attorney said nothing while the liquor distributors’ lawyers litigated the case with a degree of bombast and hyperbole that demonstrated that the real purpose, and result, of the laws was to protect liquor distributors, not public health and safety, as the distributors’ attorneys claimed.62
The health and safety assertions were particularly important because courts are sympathetic to regulations that purport to protect public health and safety but are skeptical about laws designed to economically favor a special interest group—like those laws protecting the favored position of alcohol distributors. With such a concern in mind, the lawyers fighting for the distributors relied heavily on the underage access issue, asserting that the direct shipment of wine would facilitate increased alcohol consumption by minors.63
Attorneys for Juanita and David responded by presenting data showing how sixteen thousand minors had acquired alcohol through the three-tier system over a five-year period, whereas none had managed to obtain wine by means of direct shipment, such as would happen if they purchased it over the Internet.64 Moreover, they presented evidence from the Federal Trade Commission indicating that protecting against underage drinking could be facilitated through regulatory actions short of discriminatory prohibitions against direct shipping.65
Casting doubt on the opposition’s public health and safety rationale was not enough, though, so Juanita and David’s attorneys demonstrated how the original three-tier system was adopted and protected at the behest of liquor distributors. One of the examples they cited was the New York legislature’s overwhelming passage of legislation allowing direct shipping in the 1990s; something that the liquor distributors urged Governor George Pataki to veto, and he did.66
For years, certain scholars had argued that post-Prohibition alcohol regulations had little to do with public health and safety but were instead about economic protection.67 In candid moments, even the distributors acknowledged what was truly at the heart of their fight. Bob Archer, a distributor in Virginia, admitted, “People we represent all over the world might just decide they want to sell directly to big retailers—Wal-Mart, Sam’s Club, and Costco—without us.”68 And when then chief executive of the WSWA Juanita Duggan criticized Juanita and David for their lawsuit, her accusations revealed that her primary concern was not public safety—it was that Juanita and David allegedly wanted to “legitimize the growing black market in illegal alcohol sales, sell direct to consumers, pocket outrageous profits and avoid state taxes.”69
The public health and safety assertions of the distributors were further undermined by the alcohol regulations themselves. As small wineries began to bloom in the 1970s, more states began to create exceptions to the three-tier system, allowing wineries to market and sell their wines directly to consumers. Direct sales further exploded with the expansion of the Internet in the 1990s.70 At this point, exceptions were granted to microbreweries to sell directly to consumers, reciprocity arrangements were set up between states that allowed the direct shipment of wine to consumers, and, as usual, not all fifty states prohibited direct inter- or intrastate shipment of alcohol or required a physical presence in the state.71 If alcohol distribution not involving distributors truly posed a threat to public health and safety, these exceptions would have been seen as too dangerous to allow.
More than two years after Juanita and David filed their lawsuit, Judge Richard Berman declared New York’s law unconstitutional. Simply put, Berman did not accept the distributors’ arguments, finding that “the direct shipping ban was designed to protect New York State businesses from out-of-state competition.”72 He also reasoned that the state had “not established that its goals [could not] be accomplished in a nondiscriminatory manner.”73
Not surprisingly, the bottleneckers quickly appealed, and on February 12, 2004, the Second US Circuit Court of Appeals sided with the distributors, on the basis that “all wineries, whether in-state or out-of-state, are permitted to obtain a license as long as the winery establishes a physical presence in the state.”74 Although this was consistent with the text of the law, the actual effect of upholding the direct sales ban was to discriminate against out-of-state businesses—particularly smaller ones—in favor of in-state distributors. Juanita and David would have had to open and fully staff a warehouse just to sell a small number of cases of wine in New York—an economic impossibility.75 Their next step was the US Supreme Court.
As attorneys for both sides prepared their briefs for the hearing, the bottleneckers and their allies continued their drumbeat about protecting public safety, particularly the dangers of underage drinking that would take place if the three-tier system were to be disrupted. John Fitzpatrick, a spokesman for the WSWA, warned, “As a society we need to be thinking about ways to make it harder for children to get alcohol, not easier.”76 His organization called Juanita an “elite” member of a “special interest” trying to facilitate underage drinking for financial gain.77 The attorneys general of some states even launched high-profile sting operations, ostensibly designed to demonstrate how easy it was for underage buyers to access alcohol. Revealingly, the sting artists never successfully ordered from wineries; they did, however, manage to order from retailers, which were licensed by the three-tier system.78
In the end, the bottleneckers’ efforts were for naught. On May 16, 2005, the Supreme Court decided 5–4 to strike down the laws on grounds of discrimination. Justice Anthony Kennedy, writing for the majority, held that the laws’ effect was to “allow in-state wineries to sell wine directly to consumers in that state but to prohibit out-of-state wineries from doing so, or, at the least, to make direct sales impractical from an economic standpoint.”79 The court ruled that laws such as New York’s “depriv[ed] citizens of their right to have access to the markets of other States on equal terms.”80 The court also dismissed the assertions about underage access to alcohol, finding that less onerous alternatives were available to serve legitimate state interests. Indeed, a state official in Georgia, which at the time already allowed shipments from out-of-state wineries, added that the Peach State had regulations in place to discourage purchases by minors.81
A key element in the court’s decision was the fact that the bottleneckers were unable to demonstrate compelling reasons for the law to stay in place, even after they had been asked to give specific examples of such reasons. Moreover, Justice Antonin Scalia pointed out that the fact that twenty-six states currently allowed direct shipment from out-of-state wineries “certainly suggests that what [the state] is arguing is not essential to the state’s enforcement of its alcohol laws.”82
THE BOTTLENECKERS STRIKE BACK
The Supreme Court’s decision was called “landmark”83 and a “pivotal moment in the long history of alcohol.”84 Although the court did not speak directly to the efficacy of the three-tier system, the ruling had a significant-enough effect on bottleneckers that they initiated efforts in state legislatures and the US Congress to nullify the high court’s decision and protect their position.
One approach taken by the bottleneckers was to lobby states to limit all direct shipping, from both in-state and out-of-state producers.85 This would apply in cases such as that of Michigan, whose variation on a total ban had been to prohibit commercial carriers such as FedEx and UPS from shipping wine. This meant that wine retailers must use their own vehicles to deliver product to Michigan residents, effectively closing Michigan to out-of-state retailers.86 Another approach of the bottleneckers was to seek onerous permitting systems with expensive fees to ship into the state in order to discourage out-of-state producers, particularly small ones, from shipping directly to consumers.87
At the federal level, distributors’ lobbyists responded to the 2005 Supreme Court decision by turning to Congress for a ban on direct shipping of wine and other forms of alcohol. Their effort was embodied in a bill put forth by Utah representative Jason Chaffetz titled the Community Alcohol Regulatory Effectiveness Act of 2011, or CARE, which was similar to legislation previously proposed by Massachusetts representative William Delahunt.88 Support for the act came primarily from alcohol distributors, which, through their PACs, had donated generously to those assisting their cause.89 In the decade since the Supreme Court decision, CARE’s nine sponsors have accepted more than $312,500 from the NBWA and $181,735 from the WSWA.90 And those nine lawmakers are not alone. According to an analysis by the National Association of Wine Retailers, wholesalers spent more than $80 million in contributions to state and federal legislators and on federal lobbying between 2005 and 2010.91
The bottleneckers also continue to defend their economic advantage against possible threats. In 2006, Costco sued Washington State for the right to stock its shelves with alcohol without going through distributors. As in similar cases throughout the country,92 distributors intervened in support of the law, and the court ultimately rejected Costco’s claims. Rather than appealing to the Supreme Court, Costco took its battle to the people with two ballot initiatives in 2010.93 Voters rejected both initiatives after being bombarded by advertising campaigns funded mostly by distributors. Whereas the campaign supporting the ballot initiatives collected donations from Costco, supermarkets, and others, amounting to a total of $2.28 million, opponents of the initiatives outspent supporters by almost a three-to-one margin, collecting a total of $6.1 million. Of this amount, $1.1 million came from the Washington Beer & Wine Distributors Association (WBWDA), $2 million came from the NBWA, and $2 million came from the Beer Institute, and there were contributions from distributor organizations in other states as well.94 Undeterred, supporters of the ballot initiatives returned in 2011 with another initiative, eventually achieving voter approval after substantial spending by Costco.95
In 2011, another example took place in North Carolina, where the grocery store chain Harris Teeter partnered with a large wine producer to offer an online service allowing customers to view past purchases and receive recommendations, which would have required a three-tier exemption. Distributors vigorously opposed the exemption, and the store eventually withdrew its application.96
Down the road from North Carolina, a 2014 Florida Senate bill created a “beer war.”97 In April of that year, lawmakers had adopted a bill to legalize half-gallon “growlers.”98 In the days before the bottling, canning, and wide distribution of alcohol, local establishments sold fresh beer to consumers, who transported the product to their homes in small galvanized pails called growlers, allegedly named on the basis of the sound they made as carbon dioxide escaped through the lid.99 With the advent of bottling and canning, growlers fell out of fashion, but they have seen a resurgence in recent years with the explosion of craft breweries and home brewing.100 Ever vigilant, distributors saw growlers’ popularity as a threat. If consumers could buy directly from producers, they estimated, the distributors would be cut out. To appease distributors, the Florida Senate bill contained a compromise: Breweries that produced more than two thousand kegs of beer per year had to sell all bottled or canned beer to a distributor—and then buy it back at a markup—before serving it in their own tasting rooms. As the owner of one brewery saw it, the bill would accomplish nothing beyond transferring $175,000 from his bank account to the bank account of a local distributor.101
The Senate bill, and a companion measure in the House,102 created a tidal wave of efforts to influence legislators’ votes. Senator Jack Latvala, a Republican from western Florida, said he received more feedback about the bill than he had about any other piece of legislation in the session.103 And when the House introduced its companion bill, one representative observed, “I have never seen this amount of lobbying on anything as much as this issue since I have been here.”104 Both bills eventually died in House committees.
Bottleneckers don’t merely play defense, however. They also go on the offensive to strengthen their already-substantial positions. For example, the Wholesale Distributors of Texas decided its privileged place within the three-tier system was not enough and successfully pushed for a law to pad profits in 2013. The new law made it illegal for producers like craft breweries to charge distributors money for territorial distribution rights. For years, Texas producers and distributors had entered into agreements under which the distributor bought the right to sell the producer’s product in a particular geographic territory. Although producers were, and are, required under the three-tier system to distribute their products through a distributor, they could choose the distributor they wanted to do business with and enter into contracts granting it exclusive territorial rights. For example, if a craft brewer based in Austin wanted to sell beer in Dallas, it could enter into an agreement with a Dallas-based distributor. The brewer would then receive a supply chain (warehouses, trucks, and staff), and the distributor would receive exclusive geographic rights to distribute that particular beer in the Dallas area.
In such a scheme, if the product is popular with consumers, gaining the exclusive rights to distribute it is valuable. The distributor enjoys the exclusive right to sell the product within a territory and can move enormous volumes of an in-demand commodity free from competition. Not surprisingly, then, distributors would traditionally pay anywhere from a few hundred thousand to a few million dollars in exchange for the exclusive right to distribute in a territory. The distributor would then own the rights to the product in that territory and could resell them to another distributor in the future.
The 2013 law made it illegal for producers to charge money for territorial rights; instead forcing them to give these valuable rights to distributors for free.105 Even worse, even though distributors would be able to acquire those rights at no cost, they could sell them to other distributors for a profit. In a state with a booming craft-brew industry, the economic advantage to distributors was therefore considerable. The Texas bottleneckers worked hard to achieve this provision, partnering with state senator John Carona, who introduced the language at the end of a long and hectic session.106 The distributors testified in favor of the provision in legislative hearings and relied on already-cultivated relationships with legislators to overcome strong resistance.107 Like their bottlenecker brethren nationally and in other states, Texas distributors have invested heavily in state politics. From 2009 to 2012, distributors in the Lone Star State gave $7 million to legislators, dwarfing the $17,924 given to them by craft brewers. Carona alone received $135,000 from alcohol distributors during that period, the second-highest payment received by any Texas lawmaker.108
Meanwhile, in the same year, more than 1,700 miles away, some New York distributors were on the verge of realizing their own beneficial scheme, even sacrificing some fellow bottleneckers in order to strengthen their position. In February 2013, New York legislators introduced similar bills in the Assembly109 and Senate110 to require that all alcoholic beverages sold by distributors in New York remain “at rest” in warehouses in the state for twenty-four hours prior to delivery to retailers. The target of the bill was at least 150 New York distributors that had warehouses in New Jersey, where space was vastly cheaper than in New York, and that delivered directly to New York City restaurants and retailers.111 The main beneficiaries of the legislation were New York’s two largest distributors, Southern Wine and Spirits and Empire Merchants. Because the law would have required those distributors with warehouses in New Jersey to spend enormous sums of money to rent or build climate-controlled warehouses in property located among some of the most expensive real estate in the world, as many as one hundred of these distributors might have been forced to close.112
If these bills had passed, they would have left more of the field open for Southern Wine and Spirits and Empire Merchants, both of which made significant contributions to New York politicians. Southern contributed almost $30,000 to New York lawmakers during the 2012 election year, while Empire contributed more than $330,000 to New York politicians during the same time.113 The bill’s Senate sponsor, Jeff Klein, received $53,000 in campaign contributions between 2009 and 2014 from Empire Merchants and some of its senior leadership.114
THE REAL EFFECTS OF BOTTLENECKING
In their efforts at self-protection, the distributors in the alcohol industry—like bottleneckers of all industries—have defended their government-enforced monopoly interests, and continue to do so, by using claims that they are protecting the public and serving a civic good. On the heels of the 2005 Supreme Court decision to overturn the direct sales ban, for example, Nida Samona, chairwoman of the Michigan Liquor Control Commission, said the decision was a setback for efforts to battle underage drinking. Her commission successfully urged lawmakers to ban direct shipments for both local and out-of-state wineries. “[This] protects the class we are fighting for—to make sure minors cannot purchase and consume alcohol before they are of age,” she said.115 Moreover, according to Craig Purser, president of the NBWA, the three-tier system aids in tax collection, maintains an orderly marketplace, and prevents overconsumption and related problems, such as underage drinking and drunk driving.116
Evidence of such benefits, however, simply does not exist. In fact, when pressed to substantiate their claims, three-tier proponents are forced to concede the truth. In legislative testimony, John Peirce, chief counsel for California’s Department of Alcoholic Beverage Control, admitted,
I haven’t specifically studied or have any data to back me up. . . . [I]s there a cause and effect relationship here? I don’t know. . . . You know, we are happy with what we see out there by and large.117
Even when stakes were at their highest, three-tier advocates could not cobble together enough convincing evidence to support the benefits. In Juanita and David’s case before the US Supreme Court, attorneys for the states asserted the aforementioned benefits of regulatory systems but could not substantiate their claims in any way that proved compelling to the court.118
On the other hand, there is plenty of evidence for the negative economic effects of alcohol bottlenecking. For consumers, the three-tier system restricts the diversity of available products and forces them to pay more.119 Conservative estimates put the distributor markup on alcohol at somewhere between 15 and 25 percent,120 with some appraising it as high as 30 percent, earning wholesalers the title of “fat cats” from small alcohol producers.121 As Deb Carey of Wisconsin’s New Glarus Brewing put it, “This debate boils down to the fact that the wholesalers do not want a drop of beer going to market . . . without them making their 30 percent profit from it. That’s it.”122
In fact, as analysts cited by the Federal Trade Commission concluded, the alcoholic beverage industry in the United States has “the most expensive distribution system of any packaged-goods industry by far, with margins more than twice those in the food business.”123 Additionally, by limiting the number of businesses that are issued permits at each tier and prohibiting out-of-state producers like Juanita and David from selling within their borders, states can control the types and amounts of alcohol sold. Bottleneckers assert that these burdens to the market are outweighed by the benefits to public health and safety, but, as discussed, little evidence exists to suggest that the three-tier system promotes such benefits.124
Small family producers like Juanita and David feel the harm caused by the bottleneckers. Despite the increased demand for a greater diversity of products, small producers struggle to place their products on the shelves.125 Burdensome state laws continue to make interstate commerce difficult, and distributors have little incentive to expend efforts and resources to distribute products with comparatively small returns on investment. Although Internet wine sales and microbreweries have expanded options for some consumers, these products represent a tiny fraction of the alcohol market and pose little threat to the dominant position of distributors, which continue to wield their considerable clout to maintain that dominance.126
BOTTLENECKERS OF A DIFFERENT BRAND
As will be demonstrated in the chapters that follow, distributors are not alone in their use of government levers for personal gain. Although our use of the term bottleneckers originates from the actions and effects of alcohol distributors, it is an appellation that aptly describes many interest groups that enlist the power of the government to establish an economic advantage through occupational licensing.
When describing a licensing system for the alcohol industry, the authors of Toward Liquor Control warned:
Under the license system, the will to survive permeates every department of the trade, and the means to press a tenacious fight for survival are abundant. As proposals to dismember any part of the liquor selling business become more threatening, the entire trade combines more solidly to protect itself. In brief, a licensed liquor trade, once established, cannot easily be dislodged.127
The following chapters show that Fosdick and Scott might as well have been describing occupational licensing across almost all occupations. Some of the licenses we chronicle—such as those in interior design—are new enough that we can see how the genesis of the law was entirely a product of creative and intensive lobbying by industry representatives, rather than consumers asking for protection and relief from harm. Other licenses—such as those in cosmetology—have existed for decades, their precise origins often lost to the passage of time. Yet the bottleneckers’ efforts to preserve their licenses at the present time illustrates all too well how a bottleneck, in any occupation, “once established, cannot easily be dislodged.” In chapter 2, we see both how a license for selling a product to dispose of the dead is brought to life and how bottleneckers fight for the license’s survival when someone attempts to kill it.
