Oregon, Iowa Litigation Signals Interest in More Self-Distribution

While the wave of litigation to remove legal barriers to retailer direct-to-consumer (DtC) keeps crashing against the breakwaters of district courts, a recent ripple in the courts may signal a potential shift in rules around self-distribution, which could have deep effects on the industry in the years to come.

First, the Oregon Liquor and Cannabis Commission (OLCC) settled a suit brought by a Washington brewery that asserted that the state’s beer self-distribution and DtC shipping laws were improperly discriminatory against out-of-state brewers. Rather than argue the case in front of a judge, the OLCC decided to extend the ability to self-distribute beer to Oregon retailers and to DtC ship beer to Oregon residents to all beer producers across the country. Breweries will need to get licensed and approved by the OLCC before they can affect these sales, but the prior restrictions on who could receive those licenses are now gone.

In a neat follow up, an Oregon winery filed suit against Iowa in July alleging that Iowa’s wine self-distribution laws are also unconstitutionally discriminatory. Iowa currently allows holders of a Class A wine manufacturer license to self-distribute their wines to Iowa retail shops. However, Class A licenses may only be issued to applicants of “good moral character,” which, as defined by Iowa law, is a condition that may only be achieved by being an Iowa resident (Iowa Code, Chapter 123.3(40)). The Oregon winery objects to this limitation (as might many of us), though it remains to be seen if the court will agree.

While it is quite early to predict how the Iowa case will progress, these two cases present an enticing rise of interest in self-distribution and expanding its availability to more out-of-state suppliers.

Why do we care about self-distribution?

Self-distribution is an important but rather underdiscussed method of selling alcoholic beverages that could provide meaningful benefit for small and growing producers and their consumers alike.

In the three-tier system, which is how most beverage alcohol is distributed and sold across the country, there is a strict hierarchy of how products get to market: suppliers (producers and importers) may sell only to distributors, who then sell to retailers, which is where consumers can make their purchases. Distributors thus hold a privileged position in the industry as they are effectively a legally mandated intermediary, without which alcohol could not be sold in most situations.

Often enough, this is no trouble as alcohol distributors’ value can go beyond fulfilling a statutory requirement. They handle logistics and transportation and provide local contacts to help sell products. They understand the rules in their state and can help guide their suppliers to avoid legal trouble. Indeed, many industries utilize wholesale services, and it stands to reason that even without the benefit of the law, most alcohol would still be sold through distributors. But that legal mandate, along with other legal protections they have acquired over the years, can lead to poor outcomes.

Smaller producers, in particular, can struggle under the three-tier system, as many distributors lack the time or capacity to fully support new or limited production brands. (Part of this is likely a consequence of the extreme consolidation in the distributor tier over the last few decades, as today’s massive distributors chase the higher profits that established brands bring.) It can be difficult to even attract the attention of a distributor, let alone ensure that they will give your brands their due attention and care. The result is that many craft manufacturers are either unable to get into retail shops or are stuck in unprofitable distribution relationships.

To help their craft producers, many states have adopted exceptions to their strict three-tier systems, granting suppliers some permission to sell directly to consumers (such as through tasting rooms or DtC shipping), and enabling them to sell directly to retailers—self-distribution. With few exceptions, however, self-distribution rights are granted only to local, in-state manufacturers.

The Oregon and Iowa cases directly attack this in-state only permission, identifying it as a policy that unfairly discriminates against out-of-state interests. If a state allows for self-distribution, it clearly must find it to be compatible with its three-tier system and not so inherently risky or deleterious to public safety that the state can’t establish rules and procedures to control it. As such, where in-state wineries, breweries and distilleries may self-distribute, the main reason to not extend that permission to similarly situated out-of-state suppliers is protectionism.

Oregon apparently agrees and it now grants all U.S. breweries access to its self-distribution market (those breweries of course will still need to abide by Oregon’s laws when self-distributing in the state, including any licensing or tax requirements the state imposes).

Since Oregon settled the case, rather than hash it out in court, there was no discussion of the legal merits or creation of any definitive precedence that courts in other states can look to, but it is hard to see why Iowa’s wine self-distribution law would not be discriminatory when the OLCC itself thought Oregon’s self-distribution law was. And if Iowa also opens up to wider self-distribution, then a wave could quickly expand self-distribution rights across the country.