In the
United States Court of Appeals
For the Seventh Circuit
___________

Nos. 07-3323 and 07-3328

DAVID L. HEATH, in his official capacity
as Chairman of the Indiana Alcohol and
Tobacco Commission, and
Defendant-Appellant

WINE & SPIRITS WHOLESALERS OF
INDIANA,
Intervenor-Defendant-Appellant,
                                      v.
PATRICK BAUDE, LARRY J. BUCKEL,
KITTY BUCKEL, J. ALAN WEBER, JAN
WEBER, and
CHATEAU GRAND TRAVERSE, LTD.

                                                          Plaintiffs-Appellees.
______________
Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division
No. 1:05-cv-0735 Judge John D. Tinder, Judge
______________

AMICUS CURIAE BRIEF OF VINSENSE, INC.

Richard R. Hofstetter, Attorney No. 8447-49
P.O. Box 1966
Nashville, IN 47448
(812) 988-5813
Attorney for VinSense, Inc. 

STATEMENT OF INTEREST OF AMICI CURIAE

VinSense, Inc. (“VinSense”) is an Indiana corporation organized under the Indiana not for profit Corporation Act, as amended, which began its existence on January 17, 2007.  Membership in VinSense is open to the public.  As of December 1, 2007, VinSense had approximately 2000 members, nearly all of whom reside in Indiana.      
VinSense is organized for the specific purpose of representing the interests of wine consumers in Indiana.  Article II of its Articles of Incorporation define its purpose as follows:    

PURPOSE OF THE CORPORATION—Article II

VinSense, Inc. is an Indiana not-for-profit corporation committed to advancing the interests of wine consumers in Indiana, and in the process, to fostering the economic benefits of winemaking and wine tourism in Indiana.  In particular, VinSense, Inc. is dedicated to the abolition of the three-tier system, a Prohibition-era relic which creates state-sanctioned monopolies and effectively excludes Hoosier consumers from purchasing from 95% of the world’s wineries. To this end, VinSense will serve as an information source on issues affecting the sale and distribution of wine in the Hoosier state, including the status of legislation affecting the sale and consumption of this beverage.  VinSense, Inc. will advocate the consumption of wine only in moderation, as a fitting accompaniment to food; in so doing, the organization will strive to maximize its health benefits while promoting public safety.  The organization will discourage the abuse of this beverage by excessive or underage consumption, principally through education and the sharing of information.  Membership in the organization will be open to the public.      

VinSense also maintains an informational website, www.vinsense.org. 

The attorneys for all parties have consented to the filing of this Amicus Curiae Brief.   

I.  THE PLIGHT OF THE INDIANA WINE CONSUMER
VinSense has approximately two thousand members spread throughout the state of Indiana.  In addition, VinSense estimates that there are tens of thousands of serious wine consumers residing in Indiana.  Despite these formidable numbers, and the increasing popularity of this beverage, consumers are powerless to decide what wines they may buy and consume in Indiana.  
By law, the Indiana wine wholesalers dictate what wines we may consume in this state.  This proverbial “bottleneck” prevents market forces from coming into play.  And it is the Indiana consumer who pays the penalty.
Frequently, our members will ask retailers to find a wine that has just received a good rating in the Wine Spectator.  They have grown weary of hearing this reply: "If it's not in the Beverage Journal, we can't get it."  The Beverage Journal lists the wines that the wholesalers will deign to provide to us, and is considerably less embracing than what we find in the Wine Spectator. 
Just what is being forced upon us? The Indiana Beverage Journal only lists several hundred wineries that are carried by the wholesalers and which are available to the Indiana consumer.  The U.S. Tobacco Tax and Trade Bureau reports that there are over 5,000 American wineries, with at least one winery located in each of the fifty states.   Of the total number of wineries, it is estimated that only 11% are represented by the Indiana wholesalers.  Our members, and other serious wine consumers in our state, are not satisfied with this choice.  We want to buy wines from the other 89% of American wineries that are not represented here by wholesalers.  It is a right that is enjoyed by the great majority of Americans, but denied to Hoosiers. 
Why this plight?  Quite simply, the wholesale distribution system does not work for everyone.  Many wineries produce only highly allocated wines or limited quantities from fickle grapes grown in fickle climates.  Those wineries do not want, or need, a wholesaler to give them market access.  Other wineries produce “boutique” wines on such a small scale that no wholesaler would desire to put that winery into their portfolio.  Other wineries may have so few Indiana customers that it is prohibitive for them to distribute in Indiana in any manner except by direct shipment.  Our members have found that many of the wines highly rated in the Wine Spectator, The Wine Enthusiast, The Quarterly Review of Wine or the Wine Advocate are simply not available here.  Many highly touted wineries voluntarily choose to build their business model around "direct shipping", which permits them to access most of the market without passing through the wholesale bottleneck.  Unfortunately, it leaves the Hoosier consumer out in the cold.     
The other aspect to the consumers’ plight is the onerous provision of the recently passed Indiana legislation which requires a face-to-face encounter.  Take Oregon as an example.  Oregon is about 2,200 miles from Indiana, not practical to visit by motorized vehicle.  After dropping $400 in airfare, we must decide which of the approximately three hundred wineries spread throughout several large viticultural areas to visit.  Very quickly, we find that are about nineteen wineries (some highly touted) which are simply never open to the public.  Too bad, Indiana consumer.  No visit,  no direct shipment.   
And that assumes that the Oregon wineries could even obtain an Indiana Direct Shipper's Permit in the first place.  They cannot, because all Oregon wineries self-distribute and thus are ineligible for the permit.  (Surely the Indiana wholesalers knew this when they proposed the "no wholesaler" condition as a last minute “compromise” to this onerous bill.)  The “no wholesaler” provision totally excludes direct shipping from California, Oregon, Washington and Michigan, where all wineries enjoy self-distribution privileges.  These are the principal wine growing regions of this country, and they are effectively off-limits to Hoosier oenophiles.    
II.  THE REASON: THE WHOLESALER BOTTLENECK 
Indiana has adopted the “three-tier system” which mandates (with very few exceptions) that vintners sell exclusively to a limited number of licensed wholesalers, and that retailers buy exclusively from those wholesalers.  Unfortunately, the “three-tier system” does not adequately serve the interests of the fourth tier: consumers. 
In practice, the three-tier system creates a virtual monopoly on the supply and sale of alcoholic beverages in Indiana.  The wholesalers, not Adam Smith’s “invisible hand”, decree what we may consume here in Indiana.  This arrangement has proved to be extraordinarily lucrative for the wholesalers, who understandably are fighting to preserve that privileged business.  Unfortunately, that business is profitable precisely because it is prejudicial to the interests of consumers.  The wholesalers get to pick which wines they will handle, and they pick large volume big producers and mostly ignore small producers.
In the absence of a competitive free market in wine, consumers pay higher prices for an inferior selection.  We wish in particular to direct the Court’s attention to the United States Federal Trade Commission Report of July, 2003 entitled: “Possible Anti-competition Barriers to E-Commerce: Wine” (hereinafter “FTC Report”):           
For these reasons, FTC staff concludes that consumers could reap significant benefits if they had the option of purchasing wine online from out-of-state sources and having it shipped directly to them.  Consumers could save money, choose from a much greater variety of wines, and enjoy the convenience of home delivery.  Indeed, in states that are litigating the constitutionality of direct shipping bans deprive the state’s consumers of lower prices and greater variety.  FTC Report, at 4. 

VinSense does not believe that Indiana has a legitimate public interest in restricting adults’ access to wine.  Unquestionably, there is a legitimate state interest in assuring that wine does not fall into the hands of minors.  Likewise, the state has a legitimate interest in assuring that taxes be collected on the production and sale of this beverage.  But these state interests can be served without requiring all wine to go through the three-tier structure.  In fact, the three-tier structure has no necessary connection at all with the collection of taxes or the prevention of underage consumption of alcohol. 
Once again, the Federal Trade Commission has studied this issue, and has reached this conclusion:
In addition, many states appear to have found means of satisfying their tax and other regulatory goals that are less restrictive than an outright ban.  These states generally report few or no problems with shipments to minors or with tax collection.  FTC Report, at 4.   

Once again, the Federal Trade Commission has concluded that there is no increase in the underage consumption of alcohol in states which allow direct shipping:
Citizens are concerned about the direct shipment of wine to minors.  Some states have chosen to address this concern in part by banning direct shipment of wine to all consumers, or banning direct shipment to out-of-state sellers.  Others have opted for alternatives that are less restrictive than an outright ban.  The states that permit interstate direct shipping generally report few or no problems with shipments to minors.  Some states have applied the same types of safeguards to online sales that already apply to bricks-and-mortar retailers, such as requirements that package delivery companies obtain an adult signature at the time of delivery.  Some states also have developed penalty and enforcement systems to provide incentives for both out-of-state suppliers and package delivery companies to comply with the law.  FTC Report, at 4.       

Let us assume, arguendo, that Hoosier teenagers might take advantage of the opportunity to order a 1999 Jordan Cabernet online with daddy’s purloined credit card, or have a twenty-one-year-old friend order it for him.  Wouldn’t it better serve the interests of the state, as well as consumers, to require that an adult sign for its receipt, rather than to restrict shipment? 
According to research compiled by Free the Grapes, a California-based not-for-profit organization dedicated to consumer interests, twenty years ago there were only four states that allowed for legal, direct-to-consumer wine shipment.  Now there are currently 33 states representing about 78% of the American population which have abandoned the three-tier system in favor of competitive markets and allow licensed and regulated direct shipment without face-to-face appearances.  Id.  According to Free the Grapes, these states have successfully enacted legislation which protects children and assures the collections of taxes due.  The State of Indiana simply has not persuaded the members of VinSense that Hoosier children possess such specific needs for “protection” different from children in other states that the entire market should be monopolized, and that adult consumers should pay more for an inferior selection of wine as a consequence. 
It is hard to deny that competitive market forces would have a beneficial effect on price, as well as supply, were the legislature to permit this to happen.  That is precisely what has happened in other jurisdictions which have uncorked the genie of free enterprise.  The wholesalers have not offered, and cannot offer, a shred of evidence that they can better serve the interests of Indiana consumers than Adam Smith’s “invisible hand”.  The wholesalers have not offered, and cannot offer, a scintilla of evidence that children have been harmed, or that public revenues have suffered, in the thirty-three states where wine can be shipped without a face-to-face appearance.   
In the free market envisioned by the Founders of this country, vintners ought to be allowed to sell directly to retailers and consumers if they so desire.  Consumers ought to be able to obtain interstate direct shipment of wines (either from wineries, or wine clubs).  The nature of the wine market itself makes it impracticable to funnel this product exclusively through current bottleneck of wholesale distribution. Free the Grapes reports there are currently more than 4,000 wineries operating in the United States alone, many more abroad, and countless new ones opening their doors every year.  Id.
Consider these facts compiled by the Wine Institute, a public policy advocacy association whose mission is to initiate and advocate state, federal, and international public policy to enhance the environment for responsible consumption and enjoyment of wine.  Free the Grapes reports that wineries in the United States have increased by 500% in the last 30 years, and that during this period, the number of wine wholesalers has actually decreased by 75%, and now averages between two and three per state.  Id. The Wine Institute also reports that while the total number of wineries operating in the United States has grown in the past three decades, the number of wholesalers during that period dropped from 450 to 170. (See Wine Institute Statement to House Subcommittee on Commerce, Trade, and Consumer Protection on E-Commerce: The Case for on-line Wine Sales and Direct Shipment, October 29, 2003).  The Wine Institute further reports that wineries in the United States alone produce about 10,000 new varietals every single year.  Id.  Wine has become a fitting, almost ubiquitous, accompaniment to fine food; and its health benefits are manifold and well-documented.  Wine is now America’s favorite alcoholic beverage.  
The sheer number of wineries, and the diversity and complexity of the niche markets they serve, make it impossible for wholesalers to supply the demands of consumers.  In practice, the wholesalers have shown little inclination to carry small quantities of wines from the dazzling and ever expanding number of small, “boutique” vintners, for the obvious reason that it is burdensome and far more trouble than it is worth.  Similarly, retailers, who pay dearly for shelf space, cannot realistically offer every wine over the shelf to Hoosier consumers, even if the wholesalers would provide it to them.  Our Federal Trade Commission has concluded:
Consumers can purchase many wines online that are not available in nearby bricks-and-mortar stores. . . .Similarly, the testimony unambiguously reveals that, by banning interstate direct shipments, states seriously limit consumers’ access to thousands of labels from smaller wineries.  Depending on the wine’s price, the quantity purchased, the method of delivery, consumers can save money by purchasing wine online.  Because shipping costs do not vary with the wine’s price, consumers can save more money on more expensive wines, while less expensive wines may be cheaper in bricks-and-mortar stores.  FTC Report, at 3. 

In point of fact, only 17% of America’s wineries are represented by distributors. Indiana wholesalers only represent a small portion of the distributors nationwide, so obviously Hoosiers are effectively shut out of the vast majority of the wine market (particularly the high-end market) if they cannot order these wines.  VinSense estimates that less than 5% of the world’s wines may be purchased in Indiana, giving rise to its sour-grapes mantra: “Because the glass is 95% empty, not 5% full”.    
The current wholesale distribution system works reasonably well for the large producers and continues to exist even in those states that allow open direct shipping.  But the current distribution system in Indiana effectively locks out the “mom and pop” vintners from the Hoosier market.  
Fortunately, an efficient network for the marketing and sale of limited quantities of wine produced by small, “boutique” wineries already exists: the Internet.  It is relatively inexpensive for a winery to launch a website, and potentially open its products to consumers worldwide.  That is in fact exactly what has happened.  There are literally hundreds of websites offering sophisticated wines to satisfy sophisticated palates.  These e-vintners offer selections that are too diverse, in quantities that are too small, to interest our Hoosier wholesalers.  As a consequence, Hoosier consumers must do without. 
The Wine Spectator is widely regarded among oenophiles as a reliable source of information about the quality of wines available in the market.  The Spectator judges wines on a point system, 100 being the (unattainable) high mark, anything over 90 being excellent, and anything in the 80 range being good/palatable.  Consumers rely very heavily on these rankings in selecting wines for personal consumption, much as we would check reviews before watching a movie.  Hoosiers, however, would be wise to supplement their subscription to the Spectator with a subscription to the Indiana Beverage Journal.  The latter defines what wines the wholesalers provide and, consequently, what wines Indiana consumers may legally purchase. 
It is immediately apparent that the Journal provides a considerably smaller subset of the Spectator’s list, and as one can expect, there are a large number of truly outstanding wines that Hoosiers simply cannot buy.  As only one example of many: the Spectator ranks the 2004 Kosta Browne from Russian River Valley in California as the nation’s finest pinot noir at 96 points.  This excellent bottle is available for only $38, providing you do not live in Indiana. 
Even when the wholesalers list a wine, they may find it uneconomical to keep it in stock (too expensive, too high maintenance, too little demand).  For all practical purposes, these wines are excluded from the Indiana market as well, even though they may be listed In the Indiana Beverage Journal.  Several VinSense members, who happen to be retailers, have bemoaned the fact that exclusive wines seem to be perpetually on “back order” with the wholesalers (translation: the wholesaler will buy it from the producer only when it receives an order for a commercially feasible quantity from the retailer). 
III.  WHY BAUDE V. HEATH SHOULD BE AFFIRMED
Judge Tinder declared the “face-to-face” requirement as violating the Commerce Clause.  Judge Tinder’s ruling is sound.  It is axiomatic that the “face-to-face” requirement is more burdensome to a vintner in Willamette Valley, Oregon than it is to Oliver winery in Bloomington, Indiana. 
A brief summary of the legislative history behind the “face-to-face” requirement, contained in House Enrolled Act 1016 (2006), will shed some light on this conundrum.  Prior to the U.S. Supreme Court’s decision in Granholm v. Heald, 125 S.Ct. 1885, 161 L. Ed.2d. 796 (2005), Indiana vintners enjoyed free and unrestricted access to the market.  Non-Indiana wineries did not.  Granholm made that law unconstitutional.  Indiana’s law, therefore, could be brought into compliance with the Commerce Clause only by eliminating the discrimination.  And that could be accomplished in only one of two ways, either: (a) by opening up Indiana’s market to outside wineries upon the same terms as enjoyed by domestic wineries, or (b) by restricting market access to Indiana wineries and foreign wineries alike. 
Since the first option would have ended the wholesalers’ monopoly in Indiana, the wholesalers and their lobbyists quickly jumped into action.  Not long after the ink had dried on the Granholm opinion, friendly legislators were guiding a bill through the state house in Indianapolis requiring Indiana wineries to sell exclusively through the wholesalers as well and restricting their ability to sell directly. 
VinSense notes that three of those Indiana legislators have filed an amicus brief urging this court to overturn Baude v. Heath: Senator Johnny Nugent, and Representatives Matthew Bell and Chester Dobis.  In a nutshell, these lawmakers view Judge Tinder’s ruling as an unwarranted intrusion into the legislative process.  They conveniently fail to disclose that the “legislative process” they are attempting to defend is one that is well lubricated by cash.  In 2006, Nugent, Bell and Dobis reported “campaign contributions” in the respective amounts of $72,823, $46,437 and $27,700 from a variety of special interest groups, prominent among them being the beer, wine and liquor wholesalers.  
As discussed above, the “face-to-face” requirement is discriminatory for another reason apparently overlooked by our legislators in 2006: many excellent out of state wineries offer their products exclusively through direct shipping, and are not even open to the public.  In this time of burgeoning e-commerce, some wineries have found it expedient to market exclusively on the Internet.  Alban Vineyards in Arroyo Grande, California; Kistler Vineyards in Sonoma County, California; and Beaux Freres in Newberg, Oregon are three examples of many.  Their websites make it clear that they are “not open to the public” and, consequently, there simply can be no face to face contact required by Indiana law.   
The law that emerged during that sausage-making session in 2006 reflected a compromise which contains the very “face-to-face” provision struck down by the District Court below.  The “face-to-face” requirement was, in fact, a bone that the legislature threw at the wineries, to give back some of the freedom that the Indiana wineries had formerly enjoyed.  Once they had seen Paris, it was indeed a challenge for the legislature to keep Indiana’s farm wineries down on the farm.   
As it turned out, the legislators had been a bit too generous.  They failed to end the discrimination.
IV.  THERE IS ANOTHER LEGISLATIVE BATTLE FERMENTING
Judge Tinder’s ruling, for all of its clarity and sound reasoning, did not cure all of the problems with Indiana’s three-tier system.  Judge Tinder did exactly what he had to do as a federal judge: he struck down a portion of poorly drafted state legislation which conflicted with the highest law of the land.  The real problem that plagues Indiana’s three-tier law can only be solved, comprehensively, through the legislative process.    
As the Indiana legislature begins its “short session” momentarily, we can expect the wholesalers to be back, checkbook in hand, with new proposed legislation that will attempt to cure the discrimination.  VinSense will be there, too, for the first time, with proposed legislation which will also attempt to cure the discrimination.  At least we can all agree on one point: any future law in Indiana must be written so as not discriminate against interstate commerce. 
The consumers and the wholesalers will be taking radically different approaches to achieving this common goal.  The consumers will propose to end the discrimination by uncorking the genie of free markets in Indiana.  We believe that it is time for Indiana to join the majority of states which view wine as a commodity and embrace the telephone and the Internet as tools of commerce.  The wholesalers, on the other hand, will propose to end the discrimination by putting that genie back into the bottle.     

Respectfully submitted,

___________________
Richard R. Hofstetter
Attorney No. 8447-49
Attorney for VinSense, Inc.         
(working pro bono)
P.O. Box 1966
Nashville, IN 47448
(812) 988-5813