A number of recent lawsuits filed by beverage alcohol producers have raised new interest in self-distribution rights, an often-overlooked area of the industry. Self-distribution is when a supplier of alcohol, such as an importer or domestic manufacturer, is authorized to sell directly to retailers without having to work with a wholesaler to get their products to market
As an exception to the standard three-tier sales process, self-distribution is not widely available, but over the last few decades several states have relaxed their laws to allow for it. In most cases, self-distribution is only available for in-state suppliers—and then often only for smaller, craft producers. Self-distribution permissions also vary widely depending on whether it is beer, wine or spirits product that is being sold.
The goal of these lawsuits is to remove the apparent discriminatory results of existing self-distribution laws by requiring states to extend the same permissions to out-of-state suppliers.
Self-distribution has clearly been a huge boon for small, craft producers, who often struggle to earn the attention and due care from wholesalers that tend to prefer moving established brands that sell in large volumes. If these lawsuits are successful, then, they could mark a significant shift in the alcohol market in the U.S. on par—or perhaps even greater—than the evolution of the direct-to-consumer (DtC) shipping market.
The benefits of beverage alcohol self-distribution
In the dying days of Prohibition, policymakers convened on how to establish a market in the U.S. that didn’t reintroduce the perceived evils that plagued 19th century sales of beverage alcohol. Above all, they feared a return of “tied houses,” where producers would entwine themselves so closely with retail establishments through contracts and ownership arrangements that (it was argued) they could force overconsumption on hapless Americans.
The solution, as described in the seminal study Toward Liquor Control, was for there to be a legally mandated separation between producers and retailers. Going forward, state laws would require that wholesalers act as intermediaries in the sale of alcohol, establishing the three-tier system that continues to govern the beverage alcohol market in the U.S.
Over the many decades since Prohibition, the wholesaler tier consolidated dramatically resulting in a limited number of very large distributors that favored brands that required less effort to market and sold both at good margins and in high volumes. This may not have been a problem for the authors of Toward Liquor Control, but for many in the beverage alcohol industry, the limitations of the three-tier system were becoming increasingly apparent, primarily in how inefficient it was for small producers to gain any real foothold in the market. Consumers suffered as well, especially those looking for more variety in their alcohol selections
To help relieve such barriers to new market entrants, states began around the 1970s to empower craft producers by amending their laws, including adopting self-distribution rights alongside permission for tasting room sales. The modern craft alcohol market we enjoy today owes a great deal to these law changes. It’s no wonder that craft alcohol hot spots like —like California, Oregon and Colorado—were early adopters.
This is not to say that distributors are inherently a barrier to craft producers. Distributors can provide invaluable logistical and sales support—if they want to. The issue is that, especially as it became increasingly consolidated through the 20th century, the distributor tier became more focused on large brands that don’t require as much initial care when selling to retailers. By providing a path to markets that doesn’t rely on third parties agreeing to carry their products, states with self-distribution laws gave craft producers a foot in the door, allowing them to get established and grow.
Why are producers suing states?
Perhaps unsurprisingly, when states adopted self-distribution permissions, they did so with a focus on supporting their own local craft producers. As such, self-distribution is largely available only to in-state producers, and at that, often only for small beer manufacturers. Many states restrict self-distribution to select licensees that become unobtainable if they produce over a certain annual gallonage and only a handful make those licenses available to out-of-state producers.
Producers have begun to challenge those laws, arguing that they are unconstitutionally discriminatory. This argument follows from the Supreme Court’s 2005 Granholm v. Heald ruling, which found that, if a state allowed direct-to-consumer shipping of wine, it had to enable out-of-state wineries to access that market. While Granholm focused on DtC shipping, the ruling can (and arguably should) be read broadly as saying that whenever a state establishes a means for selling alcohol, it cannot restrict out-of-state entities from that market without clear and convincing evidence that it is necessary to further the state’s public health and safety interests.
Under this interpretation, if a state allows their local producers to self-distribute, it must enable out-of-state producers to also self-distribute in that state under equitable terms. And so, challenges have been brought against Iowa, Idaho, Maryland and New York, arguing that these states must open up their self-distribution laws to out-of-state producers.
This argument won a big victory last year, when Oregon acceded to a lawsuit by a Washington brewery and moved to begin issuing self-distribution licenses to out-of-state breweries. However, since that case never went to trial, there is not a clear record for future courts to follow—but hopefully those courts will note Oregon’s apparent view that its laws would not stand up to the challenge and so perhaps neither should the other states’ laws.
There is still much uncertainty about how these lawsuits will play out. Indeed, there is the potential risk that states, faced with the demand to open self-distribution up to out-of-state producers, will simply retrench and allow no beverage alcohol self-distribution. But the prospect of expanded interstate self-distribution rights—even if still only for craft producers—is tremendous and one that demands all due attention in the coming years.
Take Action
Search for self-distribution rules in our State-by-State Guide to Wine Distribution.
