Opinion ID: 1254905
Heading Depth: 3
Heading Rank: 2

Heading: The Discriminatory Nature of the Kentucky Statutes

Text: Turning to Kentucky's statutory scheme, the threshold question is whether the in-person purchase requirements of KRS §§ 243.155 and 244.165 are discriminatory. Plaintiffs concede that the statutes are not facially discriminatory, but argue that the statutes discriminate against out-of-state wineries in practical effect. In order to show that a law discriminates in practical effect, Plaintiffs must show both how local economic actors are favored by the legislation, and how out-of-state actors are burdened by the legislation. E. Ky. Res., 127 F.3d at 543. Plaintiffs argue, and the district court agreed, that the challenged statutes satisfy this requirement because they present an economic barrier that both benefits in-state wineries and burdens out-of-state wineries by making it financially infeasible for out-of-state wineries to sell directly to Kentucky residents. Plaintiffs contend that with the statutes in place, out-of-state wineries are either forced to incur the added cost of paying a wholesaler or they must wait for Kentucky consumers to travel up to 4800 miles to purchase out-of-state wine. Plaintiffs also claim that the in-person purchase requirement benefits local wineries because it grants in-state wineries access to the State's consumers on preferential terms by driving up the cost of out-of-state wine, as condemned in Granholm, 544 U.S. at 474-75, 125 S.Ct. 1885. Plaintiffs present evidence that in Oregon, where Plaintiff Cherry Hill Vineyards operates, there are approximately 300 wineries, most of which are small wineries like Cherry Hill. Only 13 of these wineries supply wine to Kentucky, and some of those sell only to restaurants. Plaintiffs argue that many small wineries do not produce enough wine or have sufficient consumer demand to make it economical for wholesalers to carry their products. The majority of wineries who do not have a wholesaler are foreclosed from the Kentucky market altogether unless they can take orders directly from Kentucky residents and ship wine. Under Kentucky's in-person requirement, even if a winery has established a relationship with an individual consumer or a restaurant and has verified their age and shipping address, the customer must travel to the winery each time he or she wishes to execute a purchase. In support of these general allegations, Plaintiff Cherry Hills avers that in order to distribute their wine through a wholesaler, they and other wineries pay up to 50% of their profits to the wholesaler, which can result in a profit differential of $10-15 per bottle of wine. Plaintiffs also presented evidence of customers, including Plaintiffs Schneider and Reilly, who would buy wines directly from out-of-state wineries but for the in-purchase requirement. Plaintiffs reference and discuss a Federal Trade Commission (FTC) report which concluded that state laws like Kentucky's, which prevent direct sales and force producers to use wholesalers, create an anticompetitive barrier to e-commerce for small wineries. Federal Trade Commission, Possible Anticompetitive Barriers to E-Commerce: Wine (2003), available at http://www.ftc.gov/os/2003/07/winereport2. pdf. Based on this evidence, we agree that Kentucky's in-person requirement makes it economically and logistically infeasible for most consumers to purchase wine from out-of-state small farm wineries. It is impractical for customers to travel hundreds or thousands of miles to purchase wine in-person, and out-of-state wineries are clearly burdened by Kentucky's regulatory scheme. Plaintiffs must also show how local economic actors are favored by the legislation See E. Ky. Res., 127 F.3d at 532. The benefits to state actors flow from the same facts discussed above. Because of the economic and logistical barriers caused by the in-person requirement, small Kentucky wineries benefit from less competition from out-of-state wineries, especially from wineries in states such as Oregon, which are located a great distance from Kentucky and whose wine may be deemed distinct or preferable by consumers. Kentucky's wholesalers receive benefits that are even more direct: based upon the evidence presented by Plaintiffs, wineries such as Cherry Hill and customers such as Reilly and Schneider would bypass Kentucky's wholesalers altogether if the in-person purchase requirement were lifted. As a consequence, the statute guarantees the Wholesalers a source of revenue that would not exist but for the statute. This Court finds that Plaintiffs have presented specific evidence that meets the burden of showing both how local economic actors are favored by the legislation, and how out-of-state actors are burdened by the legislation. See E. Ky. Res., 127 F.3d at 532. Accordingly, this Court concludes that Plaintiffs have demonstrated that the challenged statutes discriminate against interstate commerce in practical effect.