SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

LEGISLATIVE HEARING ON

H.R. 1063

TO AMEND THE WEBB-KENYON ACT

AND

H.R. 1534

THE "PRIVATE PROPERTY IMPLEMENTATION ACT OF 1997"



Thursday, September 25, 1997

Room 2237 Rayburn Building, 10:00 am



Testimony of Mr. James Goldberg, esq.

Statement of

JAMES M. GOLDBERG

on behalf of

THE JOINT COMMITTEE OF THE STATES

to the

SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY

HOUSE COMMITTEE ON THE JUDICIARY

concerning

INTERSTATE SHIPMENT OF ALCOHOL BEVERAGES

(H.R. 1063)

September 25, 1997

Mr. Chairman, Members of the Subcommittee, my name is James M. Goldberg. I am an attorney in private practice in Washington, DC. I am here this morning on behalf of the Joint Committee of the States, an organization which, through its two Active Member organizations, represents all of the state alcohol beverage regulatory agencies in the United States.

The Joint Committee's two Active Members are:

 The National Alcohol Beverage Control Association (NABCA), comprised of the 18 states (plus Montgomery County, MD) which directly control the distribution of alcohol beverages through state-operated retail and/or wholesale outlets. In addition, NABCA's members also act as regulators of private sector alcohol beverage sales. I serve as General Counsel for NABCA.

 The National Conference of State Liquor Administrators (NCSLA) represents the remaining jurisdictions, called "license states," which act as alcohol beverage regulators only.

I appreciate the opportunity to appear here this morning to voice the strong support of the Joint Committee of the States for H.R. 1063, a bill which would enable states to gain access to the federal court system for the limited purpose of enforcing state laws pertaining to the interstate shipment of alcohol beverages.

History of Alcohol Beverage Regulation and Enforcement

Since the early days of this country, alcohol beverages have been a controversial, and highly regulated, product. But, save for the imposition of excise taxes and the proscription against certain unfair trade practices contained in the Federal Alcohol Administration Act (27 U.S.C. 201 et seq.), the great bulk of alcohol beverage regulation has occurred at the state and local level.

The federal government's most ambitious regulatory attempt of all, Prohibition ("a great experiment, noble in motive," according to President Herbert Hoover), failed miserably. However, several states still continue Prohibition in the form of "dry" cities and counties; for example, nearly 50% of the land area of the State of Illinois is "dry."

Congress long ago acknowledged the special nature of alcohol beverages and the diversity of public attitudes pertaining to its regulation. By so doing, Congress stripped alcohol beverages of the protection afforded most products under the Constitution's Commerce Clause, i.e., to be freely traded between and among the states. In 1890, Congress adopted the Wilson Act (27 U.S.C. 121), also known as the "Original Packages Act," which was designed to "limit the effect of the regulations of commerce between the several States...." However, the Wilson Act was found to be ineffective, so Congress enacted the Webb-Kenyon Act (27 U.S.C. 122), the purpose of which, according to the U.S. Supreme Court was

to prevent the immunity characteristic of interstate commerce from being used to permit the receipt of liquor through such commerce in states contrary to their laws, and thus in effect afford a means by subterfuge and indirection to set such laws at naught.

The Webb-Kenyon Act was actually adopted twice by Congress, once in 1913 and again in 1935, after the Twenty-First Amendment's repeal of the Eighteenth Amendment.

A federal district judge subsequently stated the situation more succinctly, holding that alcohol beverages

when transported in interstate commerce,... cease to be under national control to the extent that states have enacted laws governing the transportation, sale and use within their boundaries.

Interstate Shipments of Alcohol Beverages

In recent years, the direct marketing and shipment of alcohol beverages across state lines to individual consumers has been increasing, due undoubtedly to several factors:

 the growing popularity of wine, coupled with individual travel to wineries in California and elsewhere, where consumers can sample new products which, due to limited production, may not be available to them;

 the establishment of new microbreweries, which produce a myriad of products different in taste from the mass-produced beers;

 the growing popularity of "unique" and ultra-premium distilled spirits, such as single-malt Scotches and small- batch bourbons; and

 the sharp increase in overall consumer purchases from catalogs and via the Internet.

There are, however, more "ominous" factors -- at least from a state regulatory perspective -- at work:

 new wineries and breweries are complaining that they are unable to obtain distribution of their products through traditional wholesale channels; and

 decreasing consumption of alcohol beverages puts pressure on retailers and others to maintain their sales volume through use of non-traditional means.

The result has been an interstate shipment industry which was estimated by one national magazine at $1 billion annually. While that figure seems high -- given the fact that Beer Across America, Inc., which claims to be the largest direct marketer of alcohol beverages, reports sales volume of $25 million a year -- it is undisputed that interstate shipments are growing at a rapid rate.

There is only one major problem with this phenomenon: it is illegal in many states to ship or, in some cases, even personally carry, alcohol beverages from another state.

Thus, today's illegal interstate shipper is the 1990's equivalent of the "bootlegger" and the "moonshiner" of the 1920's and 1930's. Instead of using handmade stills and "souped-up" jalopies to outrun the "revenooers," today's illegal interstate shipper is using sophisticated marketing methods and plain-brown wrappers in plain brown trucks to avoid capture by alcohol beverage regulators.

State laws on interstate shipment vary widely. Approximately 13 states have adopted a version of the Reciprocal Wine Shipment Act, passage of which was encouraged nearly a decade ago by the National Conference of State Legislatures. This law permits a limited quantity of wine to be direct-shipped to consumers from a state which has adopted similar legislation. The law generally requires labeling of cartons, prohibits shipment to minors and, in some cases, prohibits solicitation of orders by means of catalogs or other advertisements. Many of the labeling and other requirements seem to be routinely ignored.

Another 19 states permit limited direct shipments from other states, but under tightly controlled conditions such as permits obtained from state regulatory agencies. Again, these laws seem to be widely ignored

.

Finally, some 20 states prohibit direct shipments altogether.

State Enforcement Stymied

Against this backdrop of growing illegal interstate shipments, states have been frustrated in their attempts to enforce their laws.

For example, in 1995, the State of Florida filed suit in U.S. District Court seeking an injunction prohibiting four named and numerous unnamed out-of-state shippers from continuing to ship alcohol beverages into the state in violation of state law banning all such shipments. In May, 1996, however, Judge William Stafford dismissed the case, noting that the federal Webb-Kenyon Act does not specify a right of action in federal court. The opinion held that there is no implied right of action in federal courts for state enforcement of Webb-Kenyon proscriptions. Judge Stafford's decision has been appealed to the United States Court of Appeals for the Eleventh Circuit, and was argued August 29, 1997. Based on reports of the argument, the outlook is not favorable to the state's position.

In 1996, the State of Florida commenced a similar action against different defendants in Circuit Court for Leon County, Florida. On September 3, 1997, Judge George S. Reynolds III dismissed the action, noting that the court did not have personal jurisdiction against the defendants, because, among other reasons, their sales to Florida residents were explicitly consummated outside of the State.

Earlier this year, the State of Utah filed a seven-count criminal information against Beer Across America, Inc. and its President Louis A. Amoroso, charging, among other things, that the defendants unlawfully shipped beer into the state and engaged in a pattern of unlawful activity (i.e., racketeering). Motions to dismiss have been filed and are pending at this time.

Also during this period, several states have amended their illegal importation statutes to make violation a felony rather than a misdemeanor or an offense punishable by a civil penalty only. Among the states adopting such laws is North Carolina, which provides that violation is punishable as a Class 1 felony and/or by a $10,000 fine. In adopting the law, the state estimated a loss of some $2 million annually in excise and sales tax revenue due to illegal direct shipments. The rationale behind these actions is to enable state alcohol beverage regulators to attempt extradition of out-of-state violators in appropriate circumstances. Many in industry have condemned these laws, and several wineries announced plans to "boycott" Kentucky, the first state to adopt such a felony law, by not shipping into the state.

When the State of Florida adopted a felony statute in 1997, one California winery wrote the Governor of Alabama, asking him to stop purchasing Florida citrus as a way of protesting Florida's action.

Some states have had limited success in halting illegal shipments. Earlier this year, the State of Maryland accepted a $35,000 "offer in compromise" from Kendall-Jackson Winery, which had shipped a case of wine to an official of the state's Alcohol and Tobacco Tax unit in violation of law. However, Maryland was only able to secure Kendall-Jackson's acquiescence because the winery holds an out-of-state shipper's license issued by the state. Federal Enforcement Activity

State efforts to enlist the aid of the Bureau of Alcohol, Tobacco and Firearms have thus far achieved only minimal success. Several states and industry representatives met with BATF officials in the spring of 1996 to urge the agency to act and received a less-than-enthusiastic welcome. BATF officials did point out that its enforcement capability was hampered by the fact that since it does not issue so-called "basic permits" to brewers and retailers, it has no ability to take action against those segments of the industry.

BATF did issue Industry Circular 96-3, notifying the alcohol beverage industry that compliance with state laws was an implied condition of the issuance of a "basic permit" and noting that the agency would review complaints of illegal interstate shipping filed by state regulatory agencies. However, BATF stated that it would "independently" determine whether the state law violation has "some pronounced impact" on the regulatory and/or criminal enforcement scheme of the state in question.

BATF is supportive of states enforcing their own laws against interstate shipping. BATF did file an amicus curiae brief in Florida's appeal of its unsuccessful federal court litigation, and we believe that the agency would support the adoption of H.R. 1063.

Illegal Interstate Shipments Negatively Impact States

Illegal interstate shipments of alcohol beverages can, and do, have a negative impact on state regulatory efforts. Although all states prohibit the sale of alcohol beverages to anyone under 21 years old, the vast majority of interstate shipments are sold without regard to the age of the purchaser and without a way for a skeptical seller to check proper identification, as would be the case in an over-the-counter sale. Further, since most interstate shipments do not label the contents of the package being shipped or delivered, interstate delivery services, such as UPS and Federal Express, do not check the age of the recipient.

As indicated, there are many states which still maintain "dry" areas, where residents have determined, either through referendum or through their elected representatives, that they wish to remain "alcohol-free" zones. Illegal interstate shipments into these areas violate those proscriptions and give out-of-state sellers an unfair competitive advantage over in-state, licensed and regulated sellers.

There is also the matter of state tax collection. Perhaps second only to tobacco, alcohol beverages are the most heavily taxed product sold in this country. Out-of-state sellers shipping illegally into a state deprive the state of the excise tax revenue which is generated from in-state sales of beer, wine and distilled spirits, not to mention the sales tax revenue which goes uncollected from an illegal interstate sale. H.R. 1063 is Necessary to Insure Effective State Enforcement

Adoption of H.R. 1063 is thus critical if states are to effectively enforce their laws against illegal interstate shipping of alcohol beverages.

There may be some who believe that state prohibitions on interstate shipment of alcohol beverages are anachronistic and just plain wrong. However, with all due respect, the issue is not about whether this Subcommittee believes a particular state's policy is right or wrong, but whether the Subcommittee believes, as Congress has historically believed, that states should be permitted to set their own laws regulating alcohol beverages.

That is why we would reject calls to amend H.R. 1063 to allow state access to federal courts only for those states which have enacted laws permitting a limited amount of direct shipping. To adopt such an amendment would be substituting Congress' view of proper regulation for those of each individual state.

There may be others who support H.R. 1063, but say that subjecting the holder of a BATF "basic permit" to state action as well as possible revocation of their permit would amount to "double jeopardy." But H.R. 1063 does not speak to felony actions, and "basic permit" holders today are subject to BATF as well as state enforcement action if they violate a variety of other state alcohol beverage regulations.

Some will argue that H.R. 1063 should be rejected because it would "clog" already crowded federal court dockets. However, H.R. 1063 only authorizes suits by 50 plaintiffs, i.e., the states, and we do not anticipate a multiplicity of litigation against thousands of shippers by each of the states. All states with laws prohibiting interstate direct shipment wish to do is "send a message" to out-of-state shippers to respect their laws.

We do, however, think one addition should be made to H.R. 1063. As introduced, the bill makes no mention of venue, that is, the appropriate federal court in which a state should bring its action. We believe that venue is appropriate in either the jurisdiction in which the interstate shipper is headquartered or where the illegal shipment is received.

Conclusion

In conclusion, Mr. Chairman, the Joint Committee of the States urges this Subcommittee to approve H.R. 1063 with the change indicated. States have the tools to deal with "moonshiners" and "bootleggers" within their borders; they need the help of Congress to effectively enforce their laws against the out-of-state "bootlegger" who brazenly flouts existing law.

We have supplied additional background information on this issue to both the majority and minority staffs and we would be pleased to work with you to address whatever questions or concerns you may have about this most important bill.

DISCLOSURE PURSUANT TO RULE XI, CLAUSE 2(g)(4)

OF THE RULES OF THE HOUSE OF REPRESENTATIVES

National Alcohol Beverage Control Association, a member of the Joint Committee of the States, received a $150,000 grant from the National Highway Traffic Safety Administration to research and compile a "best practices" list of retail-oriented underage drinking prevention programs.

Judiciary Homepage