Hon. RUSSELL B. LONG,

WINE INSTITUTE,

OFFICE OF GENERAL COUNSEL,

San Francisco, Calif., November 12, 1973.

Chairman, Senate Committee on Finance,
Washington, D.C.

DEAR SENATOR LONG: On September 11, 1973, the House of Representatives passed and sent to the Senate H.R. 2096, the so-called wine bill. We understand that H.R. 2096 has been referred to your Committee.

A letter to you regarding H.R. 2096 from Mr. William G. Clark, General Counsel of the National Alcoholic Beverage Control Association, under date of September 19, 1973, has recently come to my attention and, since it seriously misstates the bill's purpose and potential effects, I would like to take this opportunity to respond.

H.R. 2096's only purpose, clearly stated in section 1(b) "is to eliminate the obstructions to the free flow of commerce in wine among the several States resulting from acts of the States which impose discriminatory and unreasonable burdens upon such commerce." Indeed, Mr. Clark himself assures your Committee that the NABCA "and its Member States endorse the principle that no artificial or discriminatory barriers should be allowed to impede interstate commerce." Why, then, does the NABCA lodge such a substantial attack on a bill designed to effectuate an end which it endorses?

The answer is apparently based on the NABCA's utter confusion about how the bill, if enacted, would work. For example, Mr. Clark indicates that although he and his client endorse the elimination of discriminatory barriers to commerce "We cannot agree that State laws and regulations enacted to control the pur chase, storage, distribution, sale and consumption of alcohol beverages strictly within the affected State's own territory constitute a barrier to interstate commerce. We feel, on the contrary, that such laws and regulations represent a proper exercise of State authority, and their enforcement a necessary dischargé of State responsibility to assure the well being and safety of its citizens."

Yet not one of the bill's sponsors, insofar as we are aware, feels that H.R. 2096 would operate against State laws and regulations enacted pursuant to the States' admitted authority, under their police power, "to assure the well being and safety" of their citizens. All H.R. 2096 does,, all it is intended to do, and all that any reasonable reading of it may suggest that it could do, is to prevent one State from passing any law or regulation which unreasonably discriminates against wine produced outside of the State, or from out-of-State materials, in favor of wine produced within the State, or from in-State materials.

The NABCA's single overriding basic objection, the concern which Mr. Clark voices over and over again, and which he takes great care to explicate, is that if H.R. 2096 is enacted each monopoly State "would then be required by Federal law to purchase and stock each and every wine, regardless of type or origin, offered to it by a supplier." This is an intentional misstatement of the bill, as I shall demonstrate. Mr. Clark estimates "that there are more than 40,000 different wines on the American market," and points out, quite properly, that no monopoly State could reasonably be expected to stock each and every one of these. Even Pennsylvania, the largest monopoly State and the biggest single purchase of alcoholic beverages in the United States, lists for sale, at Mr. Clark's estimate, only 628 different wine items. While we agree that requiring a monopoly State to accept every wine offered to it for listing would be an intolerable burden, we have repeatedly assured the NABCA that such a result could not occur. In fact, at the hearing last year on H.R. 9029, substantially identical legislation, the NABCA was invited to submit amendatory language to make certain that the bill would not be susceptible to monopoly States' unrealistic interpretation. When they failed to respond to this opportunity, and in order to remove the slightest scintilla of doubt regarding the bill's purpose or effects, the bill's sponsors incorporated into it section 3. Section 3(a) makes absolutely clear that the bill would not affect monopoly States' listing procedures:

"Notwithstanding the provisions of section 2 of this Act, each State retains the right

(1) to engage in the purchase, sale, or distribution of wine; and

(2) to exercise discretion in the selection and listing of wine to be purchased or sold by each such State." (Emphasis supplied.)

This plain and simple language. added only to allay what. in my opinion, and in the opinion of other counsel who have examined the bill, were the NABCA's

perfectly groundless fears, is limited only by section 3 (b) of the bill, which provides as follows:

"No State which exercises the rights set forth in subsection (a) may impose with respect to wine of any class . . . any tax, regulation, license fee, prohibition or markup, which discriminates against wine of such class produced outside such State." (Emphasis supplied.)

But, according to Mr. Clark's September 19 letter to you, section 3(b) takes away from the monopoly States what section 3(a) specifically authorizes, rendering the assurances of section 3 (a) nugatory. In Mr. Clark's view, section 3(b) "in effect ... requires that a State which permits the sale of any wine within its territory must permit the sale of all wines." (Emphasis supplied.) Yet this is not what section 3(b) says and no amount of verbal conjuring on the NABCA's part can make it so. Section 3(b), as is apparently obvious to all who understand plain English, merely prohibits monopoly State action “which discriminates against wine produced outside such State." And as should be equally obvious, H.R. 2096 applies only to States which both produce wine and discriminate in its favor against wine produced elsewhere. If a State produces no wine, it cannot under any circumstances violate the provisions of the bill. In a letter of October 1, 1973, to Senator Mondale, Mr. Clark acknowledges that "[m]ost of the control states produce no wine ." In fact, statistics

prepared by the California Wine Advisory Board indicate that in 1972 only eight of the 18 monopoly States produced any wine at all. And these amounts, as the following table shows, were minuscle:

In addition, you should be aware that in Michigan the State exercises monopoly control only over wine which contains more than 16 percent alcohol, in Ohio only over distilled spirits, in Oregon, Vermont and Idaho only over wine which contains more than 14 percent alcohol, and in Washington, although all alcoholic beverages are sold in State stores, all wines are also sold by private licensees. Thus, among monopoly States which produce wine, only in Pennsylvania and Iowa do the States exercise full monopoly control over all wines. Obviously, the potential for discrimination by monopoly States is statistically insignificant. And as I have suggested in my own letter to Senator Mondale of October 30, Mr. Clark would do well to examine the standard dictionary definition of "discriminatory." Webster's Seventh New Collegiate Dictionary defines "discriminatory" as "applying or favoring discrimination in treatment." "Discriminate" is defined, in part, as "to distinguish by discerning or exposing differences; esp, to distinguish (one like object) from another." It is thus impossible to discriminate against something (e.g., out-of-State wine) unless one also at the same time discriminates in favor of some like object (e.g., locally produced wine). Thus, it would be impossible for a State to discriminate against wine produced elsewhere if it produces no wine of its own in favor of which it can discriminate. Since "most control states produce no wine" H.R. 2096 would not in any way operate against such monopoly States. It is therefore particularly difficult to understand why the monopoly States take such vociferous exception to the bill, for the plain fact is that the bill will not affect them.

Nor do Mr. Clark's "examples" of the alleged mischief H.R. 2096 would purportedly create for the monopoly States disclose a realistic understanding of the bill. Thus, he suggests that "the great potential for being accused of discrimination occurs [b]ecause of some [monopoly State] 'regulations,' i.e., limitation on number of items of the same type, quality, class, proof, size, etc.," required by necessarily limited monopoly State resources. However, it is per

...

fectly clear that section 3(b) of the bill would only prohibit such regulations if they were drawn in a way "which discriminates against wine of such class produced outside such State." Thus, a monopoly State could perfectly legally limit the number of items of the same type (e.g, a regulation limiting the percentage of wine in total inventory to 10 percent), quality, (e.g., a similar regulation on cost of such wine), class (e.g., a similar regulation regarding sparkling wine), proof (e.g., a similar regulation regarding wine over 14 percent alcohol) and size (e.g., a similar regulation regarding wine in quart bottles). The only thing a monopoly State could not do would be to condition these limitations on the origin of the wine by discriminating in favor of wine produced in the State or from State-grown products.

Likewise, Mr. Clark suggests that numerous monopoly State "prohibitions' could be used as the basis for a charge of discrimination." As example he cites prohibitions on wine sales based on container type, label content or type, and "questionable origin" (by which I assume he means that a wine the label of which may mislead the consumer as to the wine's true origin may be prohibited). Without belaboring the issue unnecessarily it seems perfectly reasonable for a monopoly State, or any other State for that matter, to choose to prohibit the sale of wine in certain containers (e.g., in containers over a given size, or in pocket flasks), or bearing certain label matter (e.g., labels which contain obscene, indecent or patently offensive matter) or the origin of which is misrepresented on the label (e.g., American wine labeled so as to appear to be French wine). All H.R. 2096 requires is that such prohibitions apply equally to both locally produced and out-of-State wine. Thus it would not be permissible to permit the sale of local wine in quarts while prohibiting the sale of quarts from out-of-State, nor would it be permissible to permit local wine labels to contain obscene matter while prohibiting such material on out-of-State wine labels, nor, finally, would it be permissible for a State to permit the origin of locally produced wine to be misrepresented to the public, while prohibiting such misrepresentations by out-ofState wine producers (in fact, such misrepresentations are prohibited by overriding Federal regulations in any case). To repeat, all H.R. 2096 prohibits is discrimination against wine based on the wine's origin.

Mr. Clark paints a bleak picture indeed. As he sees it, H.R. 2096 would permit "The wine industry to dictate the wine-purchasing policy of every Control State which engages in the wine business. Any winery could offer such State any brand of wine, however obscure or little known, and cite it for Federal law violation if it declined to make a purchase. . . . We seriously doubt that this is the intent of Congress."

We find ourselves in full accord with the NABCA on the last sentence quoted above. Congress does not intend such an absurd result, nor, fortunately, could any rational court construe the language in H.R. 2096 so that such a result would obtain.

In this connection it is worth noting that when a court is called upon to ascertain Congress' intent in enacting legislation it will usually turn to the legislative history of the bill in question. H.R. 2096 was reported out of the House Committee on Interstate and Foreign Commerce (H.R. Rep. No. 93-264. 93d Cong., 1st Sess. (1973)) and debated on the floor of the House of Representatives, and passed, on September 11, 1973 (110 Cong. Rec. 7727-39 (daily ed. Sept. 11, 1973)). Nowhere in the House Committee Report or in the House debate did any proponent of the bill suggest that it would have the effect Mr. Clark attributes to it. The issue was raised, of course, but only by opponents and only in support of the NABCA's contentions. The responses of several of the bill's prononents are clear and unambiguous. Representative Moss, who introduced the bill, said in part:

"The idea that anyone in the exercise of business judgment--and in this legislation we tie the exercise of business judgment as an essential in determining the promulgation of lists-nobody in the exercise of a business judgment is going to make a list requiring either the stocking or the buying or the canvassing of every single product offered for sale. That would be an outrageous exercise of the poorest sort of business judgment.

"So, these laws, this freedom upon the choice of management by the control States is not threatened. It is not a problem.” (Emphasis supplied.) (Id. at 7730.) Represenative Holifield pointed out that:

"Section 3 of the bill was amended so as to make it clear that each State retains the right to exercise discretion in the selection and listing of wine to be sold by the State. This intention is supplemented by language in the committee report." (Id. at 7731.)

Representative Staggers, the Chairman of the House Committee that reported the bill, read the monopoly State objection from the committee report and answered it by reading section 3 of the bill. "I think this answers the question very conclusively," he said. (Id. at 7733.) Representative Johnson of California stated that "[t]he bill is not intended to, nor does it in any way, affect the powers or operations of any control States." (Id. at 7736.) And Representative Heinz of Pennsylvania, which as I have indicated is the largest of the monopoly States, strongly supported the bill, saying, in part,

". . . [T]he bill does not interfere with the exercise of full discretion which the Commissioners have regarding the number of brands or the kinds of brands of wine a State wishes to purchase or sell.

[T]he bill does not interfere in any way with the right of a 'control' State to list or delist any or all brands of wine.

"Let me repeat. The only purpose of H.R. 2096 is to prevent one State from passing any discriminatory tax, discriminatory regulation, discriminatory markup, or discriminatory requirement against wine produced simply because that wine is produced outside of the particular State." (Id. at 7731.)

No court or individual who examined this legislative history could construe H.R. 2096 to affect the monopoly States in the adverse way Mr. Clark suggests "would be the end result" of its enactment.

Mr. Clark points out that 18 States, plus Montgomery County, Maryland, are members of the NABCA. A majority of these monopoly jurisdictions include wine in their operations. According to Mr. Clark, "[t]hese States have a population in excess of 62 million—roughly 30 percent of the population of the entire United States and they account annually for about one-fourth of the nation's alcohol beverage sales." Mr. Clark's clear implication is that H.R. 2096 would thus affect twenty-five percent of the nation's wine sales and one-third of its population. But these impressive statistics are misleading. For example, of the 9,560,000 cases of wine Mr. Clark indicates the monopoly States sold in 1972, fully 4,645,217 cases, or about 48.6 percent were sold in Pennsylvania alone. And, as I have mentioned, one of the strongest speeches supporting H.R. 2096 in the House was offered by Henry Heinz III, who represents Pennsylvania's Eighteenth District. Thus, not only do very few monopoly States produce wine (and so would be theoretically subject to H.R. 2096), but all of the monopoly States account for a very small portion of total wine sales, and one Representative from the monopoly State which accounts for nearly half of this small amount rose in vigorous support of H.R. 2096. Nevertheless, it should be obvious that if H.R. 2096 would have any adverse effect on the sale of wine in any States, including monopoly States, the bill would not have received the overwhelming support of Representatives from California and New York, our two States which between them produce the largest amount of American wine. Mr. Clark's contrary suggestion simply runs counter to common sense.

Mr. Clark also suggests that H.R. 2096 was really introduced "in order to satisfy the ambitions of the major supplier [of wine-California] to capture even more of the market." Although 248 Representatives voted in favor of the bill, and although it received wide support from many Representatives of States other than California, Mr. Clark bases his somewhat contentions and unsupported assertion on the statement that "California alone presently accounts for approximately SEVENTY PERCENT (70%) of the total wine sales in this Country." (Emphasis in original.) But even if the bill's broad-based support from other States fails to convince the NABCA that the legislation's purpose will benefit all wine suppliers by removing unreasonable discrimination against their wines, an examination of California's overall share of the American wine market should. It is true, according to Wine Advisory Board statistics, that in 1972 California produced about 70.6 percent of the wine entering U.S. distribution channels. But in 1971 California's market share was 73.9 percent. Thus, in one year the State's market share decreased by a full 3.3 percent. During the same period the market share of wine produced in States other than California rose 1.1 percent from 14.3 percent in 1971 to 15.4 percent in 1972, and, perhaps most significant, the market share of wine imported from abroad rose 2.2 percent from 11.8 percent in 1971 to 14 percent in 1972. If these trends continue H.R. 2096's enactment will benefit wine producers outside of California, both in other States and other countries, who are gaining an increasing share of the U.S. wine market, on a proportionally larger basis than it will benefit California producers. And, as Representative Holifield suggested in the House debate,

"In a period when we are running deficits in our balance of payments and are seeking to increase trade with foreign nations, discriminatory State imposts on wine which apply to foreign wines as well as out-of-State wines seriously im

pair our ability to trade with wine exporting nations," (110 Cong. Rec. 7731 (daily ed. Sept. 11, 1973)).

In the final paragraphs of his September 19 letter to you Mr. Clark sets up two straw men and then attempts to demolish them: He first contradicts

"Those who say that the opponents of H.R. 2096 are blowing the matter of potential litigation all out of proportion-that the Control State procedures are specifically and adequately reserved-[by citing] . . . the opinion of the Attorney General of the United States. . . that, "The purpose of the bill which we understand is supported by the California-based Wine Institute, is presumably to set ap a new test case in the courts as to the scope of the Twenty-first Amendment!" Although it may be quibbling, we note that when former Attorney General Kleindienst wrote the quoted opinion on January 3 of 1972 he was, in fact, Deputy Attorney General under then Attorney General Mitchell. Of course it is true that Wine Institute supports H.R. 2096, as did 248 Representatives and as do others, including many consumers, who stand to profit from a bill which removes impediments to the free flow of commerce among the several States. But in my opinion it does not follow that any "new test case in the courts" will be brought against the monopoly States, as Mr. Clark implies. Such a case, if brought at all, will no doubt be directed against a State which unreasonably discriminates against wine produced elsewhere, and which produces wine of its own in favor of which such discrimination would operate. In any event, not even the language which Mr. Clark quotes supports his implication that the enactment of H.R. 2096 would provoke a spate of suits against the monopoly States.

Finally, Mr. Clark quotes Deputy Attorney General Kleindienst to refute the claims of "those who argue that the opponents of this type of legislation are incorrect in their assertions that its enactment into law would represent a drastic change in the interpretation of the Twenty-first Amendment . . .”

The enactment of H.R. 2096 might well cause a reappraisal of the scope of the Twenty-first Amendment, and we are at a loss to know just who has said that this is not the case. But Mr. Clark's quote from the Justice Department letter, correct as far as it goes, does not go far enough. Mr. Clark quotes only this much : "We feel it appropriate to inform the Committee that if the Congress were to enact H.R. 9029 [prior, similar legislation], it would be necessary for the Supreme Court to reverse a well established line of precedents in order for the legislation to be sustained."

However, as two Representatives specifically pointed out in the floor debate (Representative Latta-an opponent of the bill-and Representative Moss), the very next sentence of Mr. Kleindienst's letter provides as follows: "The [Supreme] Court noted recently that it had never squarely determined how the Amendment affects the power of Congress under the commerce clause." (Citing Heublein v. So. Carolina Tar Commission, 409 U.S. 275, 282 note 9.) (Emphasis supplied.)

And, although it is true that the Justice Department raised certain questions regarding the bill's scope in the light of the Twenty-first Amendment, the Department also stated:

"There is evidence that the original purpose of the Amendment was to permit dry states to protect themselves from importation of liquor rather than to permit liquor producing states from erecting trade barriers against out-of-state products. Generally speaking, there has always been a strong policy in favor of interpreting the Constitution to prohibit such barriers."

In brief summary, then, we feel the NABCA's fears are entirely groundless. The enactment of H.R. 2096 would in no way affect monopoly State operations, as section 3 of the bill makes clear, unless such monopoly States unreasonably discriminate against wine produced out-of-State or from out-of-State materials. In no case would the bill operate against a State, monopoly or otherwise, unless that State produced its own wine and then discriminated in its favor. Nothing in the bill would require the monopoly States to list every wine item offered to them, or remove from them the right to exercise their business judgment regarding the purchase and sale of wines. Any other conclusion is simply irrational. In fact, the enactment of H.R. 2096 would benefit the consumers of all States which the bill would affect by ensuring a greater choice and selection of wine, regardless of origin.

For all the reasons set forth above we respectfully urge your Committee to approve H.R. 2096. Should you require any additional information in support of our position, it would be our pleasure to supply it.

Respectfully submitted,

JEFFERSON E. PEYSER, General Counsel, Wine Institute.