What were they thinking?

Naturally, there is another side to the story, which deserves analysis because of the policy issues it raises for liberalization of wine distribution laws, a goal nearly every commentator embraces.

First, Wine.com’s own justification: Wine Spectator Online for January 8th quotes CEO Richard Bergsund, who declared, “We’d like to see markets open up, and we’d like to see fair competition. There are two ways to try and make change in a law you don’t like: One is operating within the law, and one is ignoring the law. We’ve chosen the former. We just believe that we’re at an enormous disadvantage if we’re the only one paying the high cost of compliance.” A lengthier explanation, signed by Mr. Bergund and Wine.com founder Mike Osborn, can be found in the Wine Spectator forums here. In case anyone would like to follow the fracas in greater detail, Wine.com also responded on 01.06.08 at 3:56 PM and on 01.04.08 at 4:06 PM to the Vinography blog post, receiving two supportive posts (on 01.04.08 at 7:38 PM and on 01.08.08 at 5:04 PM) among numerous flames and a sensible suggestion of how they might have advanced their interests without all the blowback, posted by Winemonger.com on 01.09.08 at 11:50 AM.

The issues that stand out for me involve the legal and ethical obligations of persons harmed by laws of dubious validity. For the record, here is the “devil’s advocate” perspective on the blogs thus far:

1) If a state is allowing Wine.com to deliver wine to its residents from a local retail-licensed facility, then under Granholm a serious question arises regarding its legal power to do so while prohibiting the same deliveries from a similarly licensed location outside the state. Wine.com can decide for various reasons not to raise that question, accepting the contingency that its business model would have to change if the laws were leveled up or down.

2) Until such time as a court with jurisdiction in one of the approximately 37 states that prohibit retailer direct shipment issues a final judgment of invalidity that becomes effective (not, for example, stayed on appeal), locally licensed businesses there have a right to operate in a market that complies with the applicable law. Those of us who think the law is invalid have a right to challenge it. The outcome of the challenge could, equally consistently with Granholm, either continue the interstate ban and end Wine.com’s in-state shipments or permit both in-state and out-of-state retailers to ship.

3) The right to force a state to make that choice does not logically imply a right to violate current law to the detriment of a complying competitor. It is ludicrous and crass to compare making an illegal wine shipment in contravention of an arguably invalid law to nonviolently resisting overt racial discrimination in the civil disobedience phase of the civil rights movement. It was, by widely accepted ethical standards, wrong for authorities to enforce segregation, even before those laws were formally invalidated. No comparable moral opprobrium attaches to enforcing commercial laws that foolishly limit consumer choice and serve the interests of a narrow segment of the economy. Good reasons for repealing a law are not a free ticket to ignore it.

4) Not incidentally, anyone outraged by passage of bad special interest legislation should be a partisan of campaign finance reform. The specialty retailer folks were quite right in pointing out the gross expenditures of wholesaler trade associations as part of the problem. If you were in a business that depended upon legislation, rather than only the value of your services, for profitability, wouldn’t you want to be pals with the lawmakers?

5) That leaves the question of the alternatives available to a business in Wine.com’s position, assuming it decides to exercise its undoubted right to seek the aid of the state in responding to illegal competition. Some commentators question whether Wine.com has the legal right to stimulate orders resulting in illegal shipments. One would have to know more about the details of the sting operation than has been made public to ascertain whether it was executed without violating any laws. Even if it did involve violations, authorities would probably exercise their discretion to overlook them if they were done with no benefit to Wine.com other than their contribution to deterring illegal transactions. Commentator fulminations notwithstanding, it is entirely proper for a business to act on the profit motive in bringing competitor violations to light. Some of the “natural” alternative responses raise legal problems. A prudent lawyer would not, for example, let her client call up a competitor who was beating him on price by stepping outside the law with a message that it would be reported unless the competitor knocked it off. (The antitrust and accessory liability counseling issues are beyond the scope of this post.) One blogger suggested that before doing the stings Wine.com could have made a public statement that it intended to compile evidence of illegal shipments and turn it over to authorities, a method that would certainly be less hazardous than direct communication with competitors. If the program were to start after a certain announced date, to give competitors a chance to get into compliance, it might have reduced criticism. Criticism, at least from the sources of the linked blog posts, would presumably also have been reduced if Wine.com had merely borne the injury. Probably it would have been reduced further if Wine.com had supported the specialty retailers’ legislative programs. Those are, of course, public relations, rather than a legal, considerations. Wine.com has no obligation to avert criticism. Commentators have no way of knowing whether their protests have any negative effect on its business, and no discernible basis for offering public relations advice in the first place.

6) Regarding the separate issue of legislative strategy, Wine.com has introduced the issue of “credibility” of a lobbying organization that, according to Wine.com, does not claim to represent a membership dedicated to legal competition. It is far too early to tell what difficulties, if any, pro-trade groups will encounter in their battles with the wholesalers because of pervasive lawbreaking in their ranks. However, whatever one’s evaluation of the legislative front, lobbying cannot credibly be advanced as a substitute for state help in keeping competition legal under existing law. No one is against effective lobbying; the question is how to define one’s obligations while that process is under way.

3 Comments

  1. Josh

    #3: “The right to force a state to make that choice does not logically imply a right to violate current law to the detriment of a complying competitor.”

    I don’t think that anyone except Alder is championing breaking the law as a form of civil disobedience. Most retailers who are ignoring the laws are doing so purely for their own self interest. Wine.com is also acting it it’s own self interest by initiating sting operations. So, if you’re a lawyer, you might look at the situation and say “One is breaking the law and the other isn’t” and then side with Wine.com.

    However that would be ignoring the harm done to wine consumers whose choices have been arbitrarily limited. The key point is that the retailers’ self-interest aligns more closely with the preferences of consumers than Wine.com’s. That’s why people are taking a dim view of Wine.com. That’s also why people are predicting the worst for them. Smart companies do not deliberately do harm to their customers.

    #4: “If you were in a business that depended upon legislation, rather than only the value of your services, for profitability, wouldn’t you want to be pals with the lawmakers?”

    This is a red herring. Is this even a comment about Wine.com? If it is, even tangentially, let me reply that no one is saying Wine.com shouldn’t lobby and “be pals” with lawmakers. What people are saying is that it was unimaginably stupid for Wine.com to suddenly become the wine police and try and do the bureaucrats (who can’t, by definition, effect *any* legislative change) job for them. If Wine.com’s actions can’t reasonably be called a lobbying exercise since no legislators were involved, only bureaucrats, then it was a PR move and should be analyzed and judged as such.

    Again, smart companies do not throw consumers under the bus while they try and position themselves to more easily benefit from antiquated, anti-consumer laws.

    #5: “Even if it did involve violations, authorities would probably exercise their discretion to overlook them if they were done with no benefit to Wine.com other than their contribution to deterring illegal transactions.”

    So, in your reading of the facts, there is no benefit at all to Wine.com for turn in it’s competitors? Why are we even talking about this then? The whole thing should never have occurred.

    #5: “Those are, of course, public relations, rather than a legal, considerations. Wine.com has no obligation to avert criticism. Commentators have no way of knowing whether their protests have any negative effect on its business, and no discernible basis for offering public relations advice in the first place.”

    I disagree is some measure with each of these statements.

    This is almost exclusively a public relations issue. As stated above, Wine.com’s sting was not an act of lobbying, it was a PR maneuver aimed at state bureaucrats and deserves to be addressed as one. Instead of pandering to state bureaucrats they should be addressing the needs of their customers.

    Moreover, Wine.com has every obligation, if they value their profits, to please their consumer base. Critics know that by *not* buying from Wine.com in the future they are impacting sales (their own lack of purchases) on the margins, and that by speaking out negatively about Wine.com they may influence others to do the same. A boycott of a product is a perfectly rational response to a perceived injustice, and history is filled with examples of consumers successfully changing the behavior of companies whose actions they disagreed with by boycotting.

    Finally, are you honestly saying that consumers have no standing to comment on how they feel about a company’s actions simply because they are not PR professionals? Are ideas for alternate courses of action null and void simply by virtue of the profession of the conveyor of the idea? And isn’t a retailer an expert, by definition, on its consumer’s preferences and therefore the perfect person to weigh in on the effectiveness of a PR initiative affecting those customers?

    You my be playing devil’s advocate, but that doesn’t prevent readers from making assumptions about where you actually stand on these issues. This isn’t a court of law, it’s a court of public opinion. And in that court I’d say both Wine.com and your arguments are losing badly.

    Reply
  2. Tom Wark

    “Probably it would have been reduced further if Wine.com had supported the specialty retailers’ legislative programs. Those are, of course, public relations, rather than a legal, considerations.”

    Not public relation considerations, really. In fact, every state that opens to retailer to consumers shipping would help Wine.com’s bottom line insofar as it would allow the company to shut down their warehouse in that state, reduce their expenses, yet still be able to service the state with no interruption since the wine could be shipped from another existing warehouse.

    In fact, I’d argue that there is no wine retailer in America that benefits more than Wine.com by supporting legislative and litigation programs to overturn anti-consumer shipping laws.

    That makes it a bottom line issue, not a PR issue.

    Reply
  3. Bill Connoly

    If you have gone on Wine.com site you will see who they are buying their wines from. Only major players in national distribution 3 tier system. It’s no wonder they are ratting out other retailers who buy from smaller importers and distributors that have more interesting wines and take a big bite out of their business. Why do I want to buy wines on wine.com that I can find at the gas station around the corner? their business model might work if they had someone buying wine that actually cared about offering a quality product to the consumer.

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