E Commerce Alcohol Sales Limited by Law

Jan 28, 2021

IBA’s alcohol manufacturing and E commerce mergers & acquisition transaction divisions were both disappointed to learn recently that the United States Supreme Court elected not to review the case associated with the writ of certiorari filed with the court related to the Lebamoff vs. Whitmer case in Michigan (SCOTUS Denies Certiorari in Challenge to MI Alcohol Delivery Law (natlawreview.com)).   The case was of special interest to IBA based on our regular engagement in transactions involving alcohol manufacturing businesses (Distilleries, Wineries, Breweries, and Cideries) and E Commerce companies in Washington and Oregon.

The Michigan case involves several very important issues that deserve knowledgeable, experienced judicial review that impact Washington & Oregon related to insuring free market conditions exist that support consumer and entrepreneurial activity and do not limit competition or selection.  The basis for the litigation was Michigan law that allowed for alcohol to be sold and delivered by in state retailers to customers that was ordered by phone or through an E commerce purchase.  Michigan law also requires Michigan retailers selling alcohol to only purchase their product from liquor wholesalers operating in the state.  Michigan does not presently allow retailers located out of the state to sell product directly to consumers.  Lebamoff Enterprises, a Fort Wayne, Indiana, liquor retailer along with multiple Michigan alcohol consumers brought suit in Michigan arguing for the right to sell product in the state with equal opportunity to businesses located in the state.  Persuaded at the District Court level by arguments referencing the Commerce Clause and Privileges and Immunity Clause a summary judgment was issued in the favor of the claimants.  The State of Michigan appealed and the decision was reversed in the United States 6th District Court of Appeals winning on the grounds that the Twenty-First Amendment delegates to each state the decision whether to sell alcohol within its borders and if yes, on what terms and in what way. That decision is provided in its entirety for review here (20a0119p-06.pdf (uscourts.gov)).

Why is this decision important in Washington and Oregon?  The reason is that the wine, spirits, beer, and cider produced in the Pacific Northwest are some of the best in the United States, and by evaluation of numerous critics, the world. In addition, the Pacific Northwest is home to many of the most innovative and successful online retailers in the world.  Current antiquated state and federal laws, which never contemplated the E commerce economy, fail to promote competition and selection for consumers. The laws result in less choice and higher prices, concepts that run counter to virtually every other market dynamic available in America.

I would like to offer the following examples of current problems existing in the marketplace:

  1. Many states operate with a three-tier alcohol system with manufacturers, distributors, and retailers. In most states, including Michigan, manufactures located in the state can sell directly to consumers (Think wine purchased in a tasting room or through a wine club), but every other retail sold alcohol product must be purchased by the business owner from a state-based distribution company.  The problem with this system is that the distributor acts as a gatekeeper that prevents boutique alcohol manufacturing companies from having access to retail outlets for their products.  As a reference over a half million wines are approved for sale in the United States, but only a fraction are available for purchase in Michigan.  IBA has heard many stories of the time and effort spent by family owned wineries trying to get approved by states and added as a purchased & distributed products by wholesale liquor vendors in other states.  If unsuccessful, their product desired by customers in the state has no access point to their consumers.  In 2021, it makes sense that alcohol manufactures should be able to sell directly to retail vendors for their products, if the retail business wants to stock the product for sale. This is true in virtually every industry, but alcohol.
  2. The best way to compete with Amazon and other large E-commerce retailers is to carry unique and specialized products and serve a United States marketplace. A wine store in Oregon carrying a large selection of Pinot Noir from small production wineries, that cannot be obtained anywhere else, should be able to sell their product throughout the country to customers seeking the sought after varietal. In this situation, the consumer wins because they can access unavailable product from local retailers or seek the best possible market price.  Shouldn’t retail businesses, traditional and E commerce, compete on price, quality, and customer service not through reduced competition created by artificially fenced territories.

Currently only 15 states and the District of Columbia allow for out of state retailers to sell alcohol directly within their borders (States where breweries, distilleries, retailers, and wineries can ship DTC – Avalara).   Some states, like Idaho, only allow retailers to ship product in from states that have reciprocal opportunities for their businesses.  Other states, including Oregon, allow for open commerce into the state by out of state retailers.  The majority of the states, Washington included, do not allow for out of state shipments from retailers to their residents.

The Lebamoff vs. Whitmer case had the potential to resolve inefficiencies in our free market capitalist economy that have been created through commerce moving from main street to the Internet super highway that are impacting alcohol manufacturers and retail vendors of the products.  It our hope at IBA that these important issues will be addressed either at the federal level by Congress or through the establishment of legal precedent, so all Washington Rieslings have the ability to find the way to tables across the nation, if they can find a palate and price point attractive to a wine drinker.

If you are seeking representation in the sale of an E commerce or alcohol manufacturing company by an experienced, knowledgeable, highly skilled mergers & acquisition intermediary, IBA would welcome the opportunity to provide an overview of our client services.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.