Pressing Washington's Wine Industry Into the Twenty-first Century: Rethinking What it Means to Be a Winery

• Publication year: 2021

PRESSING WASHINGTON'S WINE INDUSTRY INTO THE TWENTY-FIRST CENTURY: RETHINKING WHAT IT MEANS TO BE A WINERY

Rebecca Thompson

Abstract: Washington's wine industry is growing, and the ways in which Washington winemakers craft and sell their product are changing. Traditional "brick and mortar" wineries coexist with so-called "virtual wineries," which typically purchase grapes from growers and contract with other wineries or custom crush facilities to access winemaking equipment. The virtual winery is an incubator model and contributes to the rich diversity of Washington's wine industry. Washington's current winery licensing statute, RCW 66.24.170, does not clearly apply to virtual wineries because it links the concept of a winery with a particular physical location and fails to delineate exactly what types of winemaking activities licensees must engage in. This statutory ambiguity causes confusion for winemakers and regulators. House Bill 1641, introduced in January 2011, seeks to remedy the confusion by dividing the current winery licensing statute into two classes: one for traditional wineries, and one for virtual wineries. The latter would be licensed not as producers of wine but as retailers. While well-intentioned, House Bill 1641 could negatively impact Washington's wine industry by limiting virtual wineries' access to consumers via interstate direct shipment. Unlike licensed wine producers, wine retailers presently lack Commerce Clause protection from state laws discriminating against direct shipment of out-of-state wine. Thus, this Comment argues that Washington should follow the example of Oregon and enact legislation amending RCW 66.24.170 to clearly license virtual wineries as producers.

INTRODUCTION

Like fights about most regulation, those about wine rules are about economic interests. And, as in fights about most product regulation, the overlooked constituencies are consumers and mom-and-pop businesses.(fn1)

Washington is home to a robust and growing wine industry. In 2010, Washington grape growers produced 160,000 tons of more than thirty wine grape varietals, a record high.(fn2) These 160,000 tons of grapes yielded approximately twelve million cases of wine.(fn3) According to the Washington Wine Commission, the total statewide economic impact of Washington's wine industry is $3 billion.(fn4) The Washington wine industry has undoubtedly come a long way since its humble origins at Fort Vancouver in 1825.(fn5) The coming of age of Washington's wine industry manifests itself not only in sheer numbers but also in the changing ways that Washington winemakers craft, market, and deliver their product to consumers.

Many people may associate winemaking with a villa or château set against a hillside lined with row upon row of lush vines, a barn or cellar housing stacked barrels of aging wine, and an on-site tasting room. While this traditional "estate" or "brick and mortar" model still exists in Washington today, it is not the only model. Of the total 120,000 tons of Washington grapes crushed in 2006, only 35,275 were estate grown- the rest were either purchased or custom crushed.(fn6) These figures indicate that not all Washington winemakers grow and crush the grapes they produce. Rather, some winemakers purchase grapes from growers and crush them at their own facility.(fn7) So-called "virtual wineries" purchase grapes and arrange to have them crushed at someone else's facility.(fn8) The latter production model has gained recent popularity among Washington's smaller, start-up wine operations.(fn9)

The rapid growth in the American wine industry over the past four decades(fn10) has sparked increased competition, prompting wineries to develop new methods of reaching and retaining consumers.(fn11) According to the Federal Trade Commission (FTC), American wine consumers increasingly desire "individualistic, hand-crafted wines."(fn12) The FTC links this shift in consumer preferences with the emergence of more and more small wineries.(fn13) However, small, start-up wineries face greater difficulty finding distributors than do their established, large-scale counterparts.(fn14) As a result, many small wineries rely in part on direct-to-consumer sales, including through internet-based wine clubs and other forms of e-commerce.(fn15) In 2006, Washington wineries sold 42,000 cases of wine direct to consumers online.(fn16) Though direct-to-consumer sales represent a small percentage of total wine sales in Washington,(fn17) these sales are often a small winery's "cash cow."(fn18)

Despite the growing diversity of wine production and sales methods, Washington still only offers one domestic winery license.(fn19) Section 66.04.010(46) of the Revised Code of Washington (RCW) currently defines a domestic winery as "a place where wines are manufactured or produced within the state of Washington."(fn20) However, no statute defines "manufactured" or "produced."(fn21) This vague definition links the concept of a winery to a particular physical location, which Washington's virtual wineries lack.(fn22) It also results in confusion for winemakers and liquor board enforcement officials as to which winemaking activities licensees must conduct on their licensed premises.(fn23)

House Bill 1641, introduced in the January 2011 state legislative session, seeks to remedy points of confusion in Washington's winery licensing regime by splitting the current domestic winery license into "Class A" and "Class B" categories.(fn24) The Class A license would correspond to the traditional production model, while the Class B license would correspond to non-traditional wine production models associated with virtual wineries.(fn25) Though House Bill 1641 may appear at first blush a clear solution to a simple problem of statutory ambiguity, in application it could prove problematic by removing virtual winemakers from the legal realm of wine production altogether, licensing them instead as wine retailers.(fn26)

If enacted in either its original or substitute forms,(fn27) House Bill 1641 could place Washington's small wineries, particularly its virtual wineries, at a competitive disadvantage both within and outside Washington. On the state level, many already operating wineries would be required to either switch to the new license(fn28) and lose certain rights and privileges they presently enjoy, or spend more money to produce enough wine by fermentation to qualify for the new Class A license.(fn29) On the national level, virtual and other alternative wineries licensed as retailers rather than producers would be vulnerable to protectionist state laws regarding direct-to-consumer shipping.(fn30) While the U.S. Supreme Court case of Granholm v. Heald(fn31) extended Commerce Clause protection to wine producers,(fn32) the federal circuit courts have thus far declined to extend this protection to wine retailers and wholesalers.(fn33) The U.S. Supreme Court recently denied certiorari on the issue, leaving the circuit court decisions undisturbed.(fn34) Thus, if passed, House Bill 1641 could place Washington's virtual wineries in economic and competitive jeopardy and might even hamper the growth and diversification of Washington's wine industry as a whole.

California and Oregon provide virtual winery licensing models that Washington might follow. Under the California model, virtual wineries are licensed separately from traditional wineries as retailer-wholesalers.(fn35) California's approach gives virtual wineries limited access to consumers, relative to their traditional counterparts.(fn36) Under the Oregon model, by contrast, virtual and traditional wineries are able to hold the same license.(fn37) This model maximizes virtual wineries' ability to ship directly to consumers in other states.(fn38)

This Comment argues that the Washington Legislature should amend current RCW 66.24.170 based on Oregon's winery licensing scheme, designating virtual wineries as "wineries" rather than retailer-wholesalers. Part I describes the current wine production industry in Washington. Part II discusses federal and Washington winery licensing laws and their various points of confusion. Part III examines Washington's House Bill 1641 as a proposed solution. Part IV describes the connection between state winery licensing laws and the federal protectionism jurisprudence. Part V evaluates California and Oregon winery licensing laws as alternatives to Washington's House Bill 1641. Finally, Part VI argues that Oregon's law is the optimal model because it provides regulatory clarity and maximizes virtual wineries' access to consumers.

I. WASHINGTON IS HOME TO A ROBUST AND GROWING WINE INDUSTRY COMPRISING BOTH TRADITIONAL AND VIRTUAL WINERIES

As the second-largest producer of wine in the nation after California, Washington boasts an economically significant and increasingly prestigious wine industry.(fn39) Formerly regarded as a "cottage industry," Washington wine now has an estimated economic impact of $3 billion statewide and $4.7 billion nationwide.(fn40) Over the past four decades the industry has expanded and diversified at a rapid pace, growing from fewer than twenty wineries in the late 1970s to 762 licensed domestic wineries today.(fn41) The industry also continues to gain in reputation, with Washington wines increasingly ranked among the finest in the world.(fn42)

Washington's wine industry comprises both traditional...