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Student, Professor Grapple with the Vagaries of Wine Business

Written by Barbara Beliveau, Assistant Professor of Economics

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A recent addition to my office décor is a sign featuring a quote from Albert Einstein: “If we knew what we were doing, it wouldn’t be research.” For me, this captures the uncertainty and adventure of research. We don’t know where our explorations will lead or what we will find out and that’s what makes it research.

These situations are common with St. Mary’s Projects (SMP), the College’s senior thesis. Almost three years ago Elizabeth Rouse ’07 came to me wanting to develop a business plan for her parents’ winery. She ended up writing about how the repeal of Prohibition in 1933 was responsible for many of the legal difficulties they, and others, were facing. “What the heck does the repeal of Prohibition have to do with the problems of small wineries?” I hear you ask. Here’s the story of how her SMP morphed from a business plan to a signifi cant study of judicial history.

wineryRouse explained that there are regulations that make mail order and Internet sales between states very difficult and, in some cases, illegal. For example, a vineyard in Virginia can legally sell you wine if you live in Virginia or New York, but not if you live in Maryland. These restrictions severely limit vineyards’ sales and growth. Now, this struck me as very strange. Free trade between states had always seemed axiomatic, a foundation stone of the U.S. Constitution along with freedom of speech and religion. The observed disconnect between expectation and reality became the genesis of the project.

Why is wine different from virtually everything else?

We discussed how Virginia’s regulations hurt sales. And how Maryland’s regulations differed from Virginia’s. How other states’ regulations differed from these, and how this entire stateby-state regulatory structure was in conflict with the Commerce Clause in the United States Constitution (Article 1, Section 8) that states, in part, “…all duties, imposts and excises shall be uniform throughout the United States.”

Rouse reported reading about cases pending review by the Supreme Court that hinged on the constitutionality of these state regulations. She consulted with Susan Grogan, a St. Mary’s political science professor and specialist in judicial politics, about the significance of this and discovered that the source of the conflict was the wording of the 21st amendment to the U.S. Constitution, the amendment that repealed Prohibition. How could the repeal of Prohibition make it harder to sell wine in 2006 than it had been before Prohibition was adopted in 1919? Here’s what Rouse discovered:

The amendment that repealed Prohibition used the same wording as previous federal legislation that allows a state to prohibit shipments of alcohol from other states if it was illegal to sell alcohol in the state receiving the shipment. In other words, if it’s illegal to sell alcohol in Virginia, Virginia may legally prohibit producers in other states from shipping alcoholic beverages to residents of Virginia.

Legal scholars disagree about the significance of the inclusion of this language. Under the current interpretations, states are immunized from the effects of the Commerce Clause with respect to the sale of alcohol and the current patchwork of regulations can continue as long as each state enforces the same policies for all other states. Other scholars disagree. If their interpretation gains support, states will no longer be able to continue the current system of restrictions and wineries may find it easier to expand their markets.

Ultimately, the determining factor is the legislative intent of the Congress that drafted the amendment. This issue is the focus of current litigation at both the state and federal level. Interested parties await the results of this litigation. For some, the ability to purchase the wine of their dreams hangs in the balance.

Rouse’s findings struck me as so significant that we collaborated on an article to explain the origins of  the current situation to growers, consumers and legislators. We hope this information will generate support for legal remedies and relief for the industry. Small businesses like most wineries have been particularly hard-hit by the current economic situation and need all the help they can get. Our article has been accepted for publication by The Journal of Wine Economics and should appear later this year. Furthermore, her SMP was accepted, she graduated, and is now working for SNL Financial LC while maintaining her interest in the wine business and the economics governing its production and sale.