Why three Washington breweries are suing Oregon

Three Washington-based breweries filed a lawsuit against the state of Oregon late last month. They are challenging Oregon restrictions on shipping beer directly to consumers from out of state. Breweries outside of Oregon wanting to sell their beer in the state also need to obtain a wholesaler’s permit, which adds additional costs to those businesses. Ezra Johnson-Greenough is the founder of The New School Beer. He joins us to share details of the lawsuit and what it could mean for the future of the industry if it’s successful.

Note: The following transcript was computer generated and edited by a volunteer.

Dave Miller: From the Gert Boyle Studio at OPB, this is Think Out Loud. I’m Dave Miller. We turn now to a legal battle over beer. Three Washington breweries recently filed suit in federal court in Oregon. They say Oregon is unconstitutionally blocking them and other out of state breweries from shipping or selling beer directly to Oregonians. Ezra Johnson-Greenough wrote about this recently, he is a founder of New School Beer. It’s a website dedicated to news about beer and cider in the Northwest and he joins me now. Welcome.

Ezra Johnson-Greenough: Thanks for having me, Dave.

Miller: It’s good to have you on. Can you explain what these three Washington breweries are arguing?

Johnson-Greenough: Well the three Washington breweries are Portside Brewing of Vancouver, Washington, Garden Path Fermentation of Burlington and Mira’s Beer of Seattle. And they are alleging that Oregon statutes violate the U.S. Constitution by unlawfully discriminating against out of state and in particular Washington brands by not allowing them to self distribute to retailers or ship direct to consumer.

Miller: What does it mean to self distribute or ship directly and what would they have to currently do instead if they want to sell their beer to Oregonians?

Johnson-Greenough: They have a similar effect. They are two very different statutes regarding distribution, that’s how most consumers get their beer. There’s a three tier system setup that requires the producer to sell to a wholesaler distributor and then the distributor brings it to the bar, the restaurant, the bottle shop. Now in Oregon and in Washington, actually breweries can self distribute, meaning they can, they’re small enough, they can actually sell it directly to those places.

Miller: Within the state?

Johnson-Greenough: Within the state, exactly. Now Washington does allow Oregon breweries to self distribute to Washington, but Oregon does not allow Washington breweries to distribute back into Oregon without signing a contract with a separate wholesaler distribution arm in Oregon.

Miller: And it’s not just Washington, right? I mean, is that also the case for California breweries or Colorado ones or New York ones for that matter?

Johnson-Greenough: Of applying to Oregon, yes. Every state has their own laws on distribution and direct consumer shipping, which is part of the problem. The whole country is a mishmash of different rules that were established over top of the repeal of prohibition.

Miller: So what is the constitutional argument that these Washington breweries are making? Why are they saying that this shouldn’t be allowed federally?

Johnson-Greenough: It dates back to a case that went to the Supreme Court in 2005: Granholm vs. Heald and that established the principle that states could not favor their own alcohol industries by discriminating against or unduly burdening interstate commerce. It’s known as the Commerce Clause and it’s kind of superseded the 21st Amendment and really makes it a fair playing field for alcohol brands across the country or at least, that’s the idea.

Miller: You noted that Washington doesn’t have a similar law, meaning that Oregon breweries can sell their beer across the Columbia without going through a wholesaler. How common is it?

Johnson-Greenough: That Oregon breweries do that?

Miller: Exactly.

Johnson-Greenough: It’s fairly common, especially on the southwest Washington side, where we’re so close to them, but there’s also popular breweries in Oregon that will just drive up to Seattle once a month with a huge amount of beer, move it to everyone, come back, and it’s a really great way for them to reach a new audience.

Miller: Is the idea behind these Oregon laws, a kind of protectionism for Oregon breweries, or is it about making sure that Oregon based wholesalers can hold on to what seems like an effective monopoly?

Johnson-Greenough: I can’t really tell you the original thought in it, but I think both of those things are likely. Really, distributors have a lot of power in the relationship and they provide a super valuable service and really essential for many breweries, but especially for smaller breweries that are not selling a lot of beer and can’t really command a good deal, or perhaps have never sold beer in Oregon, such as Washington. It can be a real real burden for them.

Miller: So it’s the smaller or perhaps mid-sized breweries in Washington or maybe in other states that would have the, perhaps would benefit the most if they could go directly to Oregon consumers?

Johnson-Greenough: Yeah, exactly, because a mid to large size Washington brewery will likely sign a wholesale distribution agreement anyway, because those companies can get their beer all over the state, but they charge their own markup, and then you’re essentially locked into a, a long term, perhaps life of the brand, contract with those distributors. And it doesn’t really make sense for a small brewery that can only serve a limited amount of people and really needs that, that kind of, the percentage of profits that they lose in that deal. And a lot of distributors are relying much on big accounts, like large grocery store chains, that a smaller midsize brewery couldn’t supply if they wanted to.

Miller: Now, just to be clear, am I right that we’re not talking about taxes, excise taxes that the state would be foregoing if these laws were to change, if direct to consumer sales were still possible, the state of Oregon would still get money from, get more money from out of state beer sales than from in state beer sales?

Johnson-Greenough: That’s true. Yes, I mean, Oregon doesn’t really lose anything except for the very, very slim chance that a Washington distributor would, a Washington brewery would try to start their own distributor and pay those licensing fees. But that’s really a very far-fetched thing that doesn’t happen and wouldn’t wouldn’t actually yield much money for the state of Oregon.

Miller: What would this mean for Oregon consumers then, let’s say that this lawsuit is successful and breweries all over the country can sell directly to Oregonians. What would that mean?

Johnson-Greenough: It would mean the brewers and consumers would be able to reach a whole new crowd. They would be able to, it would promote small business, it would create a much more even playing field. It would likely see more options in the market. And it goes both ways. So yes, you can see more things from across the country in Oregon, but Oregon breweries could potentially ship their beer direct to consumers in other places. And I do want to make sure I’m differentiating between direct to consumer, which is known as DTC and self distribution, which are two different things.

Miller: Would they? But with this lawsuit, is this lawsuit challenging prohibitions on both of those?

Johnson-Greenough: Yes, exactly, on both of them.

Miller: Meaning that Oregonians could then theoretically buy beer online and have it shipped to them from Vermont?

Johnson-Greenough: Theoretically that would be the long term plan. This lawsuit is directly related from Washington to Oregon. But yes, this would establish a principle that could eventually, the dominoes could fall to allow that across the country.

Miller: I want to turn back to one of the broader issues you mentioned, which seems like that there are benefits for breweries, especially larger ones in terms of their relationships with wholesalers, but also challenges there. In the big picture, how do you think about the role that wholesaler distributors play in the beer world?

Johnson-Greenough: They play an integral role. Most brands that consumers are probably familiar with go through a distributor and they probably wouldn’t be known by most people without that distributor.The distributor secures the shelf placement in your Fred Meyers or Safeway. They often set up the end caps. They get into all these places that a small brewer is not going to have this connection, they’re not gonna have the cold storage, the delivery driver, the sales people. My only main criticism is just that once a brewery starts distributing with one of these companies, they are essentially locked into that agreement. And there’s very little chance for them to get out unless the distributor just wants to free them. And some of them do. But also it’s well within their rights to to ask for a 3-6 times gross revenue buy back of their rights.

Miller: Meaning, we’ll set you free to pursue your own other relationships, but you have to give us a lot of money first?

Johnson-Greenough: Yes. And it’s far too much money for most breweries to to afford. I mean, we’re talking in the hundreds of, hundreds of thousands of dollars, even for small and midsize breweries.

Miller: If I’m not mistaken, the brewers in this suit, they’re not asking for financial damages. They just want to change Oregon’s laws. What’s the potential timeline for a suit like this?

Johnson-Greenough: They’re estimating it’s going to be 2-3 years and yeah, they’re not looking for damages. They’re looking for the court to strike portions of the existing law or kick it back to the legislature to make the necessary updates. They considered lobbying, but that’s gonna cost a lot more money and take even more time. But going through the court system will hopefully give them a better chance, be faster, be more cost efficient.

Miller: Ezra Johnson-Greenough, thanks very much.

Johnson-Greenough: Thank you.

Miller: Ezra Johnson-Greenough is the founder of New School Beer. It is a website devoted to news about beer and cider. There are tons of ways you can get in touch with us if you have recommendations or comments or questions on Facebook and Twitter, we’re @OPBtol. You can also always leave us voicemails. The number is (503) 293-1983.

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