Home Wine Business Editorial Three Tier Talk What the Biden Administration’s Anti-Trust Directive Means for the Wholesale Tier

What the Biden Administration’s Anti-Trust Directive Means for the Wholesale Tier

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Experts believe the Executive Order may correct unfair trade practices; few predict any immediate or drastic results.

Could the Biden Administration try to break up wholesaling behemoths Southern Glazer’s Wine and Spirits (Southern-Glazer’s) and Republic National Distributing Company(RNDC), using Teddy Roosevelt-era trust-busting laws as part of its July anti-trust initiative?

It’s certainly a possibility, says C. Paul Rogers III, the former dean of the SMU Dedman School of Law in Dallas, Texas. But, Rogers, as well as a variety of other attorneys who work with alcohol regulation or anti-trust, say the president’s July 9 executive order will be used on wine’s second tier—if it’s used at all—to correct possible unfair trade practices.

That’s because the difficulties in forcing the companies to divest, given that they control about half of the U.S. wine wholesale market, would likely make such an attempt impractical.

“That would be pretty unusual,” says Rogers. “But the executive order didn’t come out of nowhere.”

The United States Capital / Joshua Sukoff, Unsplash
The United States Capital / Joshua Sukoff, Unsplash

In this, the Biden Administration has included a review of wine’s three tiers in a far-reaching action that starts with Big Tech, takes in the food and meatpacking industries, and even includes hearing aids. In fact, many wine industry analysts were surprised to see alcohol included in the president’s order, given what seemed to be more pressing problems.

The goal, says Rogers, is to change the federal government’s approach towards anti-trust and just how big big companies should be. For more than a century, a variety of Supreme Court rulings have said that size itself is not a problem, and that a higher standard is required—a harm to society at large. That’s why recent wine mega-deals, like the Southern-Glazer’s merger, RNDC’s partnership with Young’s Market, and the E. & J. Gallo-Constellation Brands agreement, were approved.

Now, though, the Biden effort wants to use a different standard, which was more common at the beginning of the 20th century. That’s when Roosevelt and the Progressive movement took aim at monopolies like Standard Oil and those that controlled meatpacking and railroads. That standard, comments Rogers, said that a “substantial” lessening of competition caused by too big companies was enough to warrant legal action. And there has been less competition in the second tier, with the number of wholesales cut by two-thirds since 1995.

This change in approach got the attention of the Wine & Spirits Wholesalers of America. It issued a statement after a request for a comment for this story which included: “The current federal and state alcohol regulatory framework provides for the world’s most diverse marketplace. … Deregulation enables predatory behavior and puts consumers at risk of becoming victim to counterfeit and illicit alcohol, as well as increases the risk of underage access of a socially sensitive product.”

Still, few expect drastic action. Says attorney Seth Weinberg, a partner in Manhattan’s Weinberg Zareh Malkin Price LLP and whose practice includes alcohol and mergers and acquisitions: “I can’t believe the attorney general doesn’t have higher priorities, like voting rights or the Capitol issues, than worrying about the alcohol supply chain.”

In addition, John McGinnis, the George C. Dix Professor in Constitutional Law at Northwestern University’s Pritzker School of Law in Chicago notes that the states control most alcohol regulation thanks to the 21st Amendment, which ended Prohibition. So there’s little the federal government could do even it wanted to.

And even some smaller producers are wary of any changes. Scott Osborne, who co-owns Fox Run Vineyards in New York’s Finger Lakes, says that even though consolidation has limited his access to the market, at least he understands how the system works. He’s afraid that potential remedies would make market access even worse.

“The system is so well established and so well entrenched,” says Jason R. Canvasser, a member at Clark Hill PLC in Detroit who represents clients in the liquor and cannabis industries. “That’s why I was a little bit surprised that the federal government would weigh in. I think very few people expected it.”

Most interviewees agree that the FTC, under the order, will more closely scrutinize proposed second-tier mergers. That would make it more difficult for something like the Southern-Glazer’s deal to gain approval. Otherwise, say the attorneys and analysts interviewed, what’s possible—though not necessarily probable—are a variety of rules changes and tweaks using the TTB’s rulemaking powers. In this, says Weinberg, the TTB may be able to influence some state regulators, who use TTB rules as guidance.

Among the possible TTB changes:

  • Adding diversity requirements for employment. Several attorneys mentioned this, noting that the largest wholesalers remain more white and more male than the U.S. population.
  • Some sort of cannabis-related rulemaking, clarifying the roles wholesalers can provide.
  • Finally sorting out the bottle-size conundrum, so that producers can sell alcohol in almost any sized container. Though not necessarily a wholesaler issue, this would affect them since they’d have to work the new sizes into their supply chains.
  • Updating trade practice laws, which remain rooted in 20th century technology. This would allow innovation that currently isn’t covered by TTB rules, say several attorneys, be it internet advertising, in-store marketing, or tastings.
  • Label approval. Again, not necessarily a wholesaler issue, says Weinberg, but one also mired in 20th century technology and one that would affect second-tier supply chains.
  • Collaborating with social media and influencers. Currently, this is a vast gray area. For instance, if a wholesaler provides an influencer with free product or a trip, does that qualify as compensation?
  • Small wholesalers might be granted more relaxed regulations in order to better let them compete, says Rebecca Stamey-White, a partner at Hinman & Carmichael LLP in San Francisco. This practice is a typical remedy in anti-trust enforcement, and especially when divestiture isn’t practical. Smaller companies, for example, might face less scrutiny over pricing and product placement.
  • More trade practice investigations to rein in larger companies, another typical remedy in anti-trust enforcement when divestiture isn’t practical.

Finally, says Canvasser, there might even be a chance that the TTB could step in to moderate the current legal impasse over in- and out-of-state retail shipping. Different federal appeals courts have offered different decisions over the past couple of years, further muddying the waters that includes the Supreme Court’s 2019 Tennessee retailers decision and which seemed to limit state powers over out-of-state retailers.

Canvasser doesn’t say it’s likely, but says he can see a scenario where the TTB might allow some out-of-state retail shipping. This is something that wholesalers, who oppose all forms of direct shipping, would fight furiously against.

Jeff Siegel

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Jeff Siegel is an award-winning wine writer, as well as the co-founder and former president of Drink Local Wine, the first locavore wine movement. He has taught wine, beer, spirits, and beverage management at El Centro College and the Cordon Bleu in Dallas. He has written seven books, including “The Wine Curmudgeon’s Guide to Cheap Wine.”

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