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Wednesday, June 28, 2006 05:42 pm

Grape expectations

Illinois wineries say lawsuit from afar could cripple them

Illinois winemakers say their livelihoods are threatened by a lawsuit filed last week in Sangamon County.

Villa Monteleone Winery, an upscale winemaker in Italy that produces 45,000 bottles a year, sued the Illinois Liquor Control Commission on June 22, claiming that the state is illegally protecting state wineries by allowing them to sell directly to retailers instead of going through distributors. Under state law, every winery outside Illinois must sell to distributors, which boosts the price to consumers and amounts to unfair competition, says Villa Monteleone.

Rather than ask that it be allowed to sell directly to retailers, Villa Monteleone is asking a judge to force the state to make Illinois wineries abide by the same rules that apply to everyone else. It’s an unusual legal strategy, one that could devastate the Illinois winemaking industry if it proves successful, vintners say.

“It’s definitely a new twist on what we’ve been going through during the past year,” says Bob Swaim, an Illinois lobbyist for the California-based Wine Institute.

At least one disinterested legal expert is scratching his head.

“The relief is what a distributor would ask for, not what you’d normally expect a winery to ask for,” says Keith Beyler, a Southern Illinois University law professor who teaches civil litigation.

Some wine-industry insiders speculate that distributors, not a small winery in northern Italy, are the force behind the lawsuit.

“It’s a distributor move to protect their turf,” claims Richard Faltz, president of the Illinois Grape Growers and Vintners Association, an entity so young and so small that it doesn’t have a lawyer. “This could be a real blow to the industry. If someone feels like they’re deprived, they’d ask to have the same rights [as in-state wineries] rather than take the whole industry down.”

Most Illinois wineries are so small that it doesn’t make economic sense for them to deal with distributors that market large volumes, Faltz says. When the Legislature in the mid-1990s passed laws allowing in-state producers to sell directly to retailers and consumers, there were only three or four wineries in Illinois. There are now nearly 70, and most of them counted on bypassing distributors when they went into business, says Faltz, who started his 26-acre vineyard near Oswego six years ago.

“The provision is a very important aspect of the Illinois wine business,” Faltz says.

That a lawsuit would be filed by someone was a virtual certainty, in light of a decision last year by the U.S. Supreme Court, which ruled that states cannot discriminate between in-state and out-of-state wineries in setting rules for sales. But few observers expected this.

For one thing, the Illinois lawsuit is filed in state court as opposed to the federal courts, which have proved friendly to retailers and wineries that don’t want middlemen. In Washington state, for example, Costco, a big-box retailer, recently won a federal lawsuit aimed at overturning a law that prevents the company from buying directly from out-of-state wineries and negotiating volume discounts. The state last week appealed the decision, which has the potential to completely revamp the way alcohol is sold in Washington.

“I absolutely would have filed in federal court,” says James Seff, a San Francisco lawyer who filed an amicus brief on behalf of the Wine Institute in the Supreme Court case. Seff says the philosophy behind last year’s landmark decision is simple: Treat everyone equally. “That pits the local wineries directly against the local distributors,” he says. Under the Supreme Court’s logic, if small in-state wineries can sell directly to retailers, then so can giant producers such as Gallo and Chateau Ste. Michelle, which could cost distributors millions of dollars.

“My goodness,” Beyler says when told that the Italian winery is citing equal-protection clauses in the Illinois Constitution. Beyler says that federal court seems a better venue for a plaintiff seeking a level playing field. “Basically, very frankly, as an equal-protection matter, it’s highly rational for a state to discriminate in favor of its in-state business,” the professor says, “and that makes the equal-protection argument a tough one to make.”

Furthermore, Beyler and other legal experts say, a court cannot take away the right to sell to retailers unless a winery is named as a defendant. “If there’s one basic principle about the law, it’s that you can’t take away someone’s legal rights in a case where they’re not even a party,” says J. Alexander Tanford, an Indiana University law professor who represented the winning side in the Supreme Court case. “You can ask to get the same benefit, but you can’t ask the courts to take away rights from other people when they were given to them by the Legislature.”

Beyler agrees. “They’ve [wineries have] got to be brought into the lawsuit,” the professor says. “I don’t want to say it’s guaranteed to lose. I’m really puzzled about what’s really going on.”

J. William Roberts, the lawyer who’s suing the state, is nobody’s fool.

As managing partner of Hinshaw & Culbertson, Roberts heads one of the largest law firms in Illinois. Before being appointed U.S. attorney for central Illinois by President Ronald Reagan, Roberts was state’s attorney for Sangamon County. He was also chief counsel to former Gov. Jim Edgar.

He’s been named a Super Lawyer by Illinois Super Lawyers magazine.

When it comes to discussing legal strategy, he’s a consummate poker player.

“I think we ask that they, the state wineries, be treated like everyone else,” Roberts says. “This seemed to us to be the better way to do it legally.” He declined to elaborate.

The lawsuit comes after legislators failed to craft a solution during the past session, when it was obvious that the Supreme Court decision had the potential to radically change the way wine is sold in the United States. After wineries and distributors agreed to a compromise, the Senate unanimously passed a bill that would have allowed wineries to ship a dozen cases a year directly to customers. But the bill didn’t make it out of committee in the House after lobbyists for retailers demanded the same right to ship wine as the wineries wanted. “We ourselves did not have a problem with what the retail merchants wanted, but other people did,” says David Stricklin, lobbyist for Illinois wineries. Did distributors object and kill the bill? “That’s a pretty good guess,” Stricklin answers.

Under pressure from a federal judge in the Costco case, Washington state legislators passed a bill that allowed all wineries to bypass distributors. Roberts scoffs at any suggestion that his lawsuit is an attempt to pressure legislators into passing new wine-distribution legislation. “Far be it from me to speak to the Legislature — they’re not in town this week,” he says.

Judge and Dolph, the distributor that handles Villa Monteleone’s wine, is aware of the lawsuit, a spokesman says, but is not directly involved. Judge and Dolph, which sells more than 30 percent of the liquor and wine consumed in Illinois, is a subsidiary of Chicago-based Wirtz Corp., which had more than $1 billion in revenue last year and realized a profit of $86 million, according to Forbes magazine.

“I believe we knew it was coming when the winery reached out for help,” says Guy Chipparoni, a lobbyist and spokesman for Judge and Dolph. “We’re tracking it closely and keeping an eye on it.”
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