Is it regulating manufacturing, or the sale to consumers? Michigan court refuses to enjoin law that prohibits a winery/cidery receiving a bonded transfer from selling the transferred wine/cider to consumers without further processing.
A mischaracterization of what a Michigan statute regulates and what rights of a winery/cidery it impacts created a disappointing result for Michigan winery/cidery arguing that federal law allowing for bonded transfer of wine and cider preempted the state’s restrictions on the winery/cidery’s acceptance of wine and cider in bond for eventual sale to consumers.
We initially covered this case when it was filed back in July. You can read that entry here for the background and arguments asserted in the complaint and the winery/cidery’s requests for a temporary restraining order and preliminary injunction.
The winery/cidery wanted to accept the bonded transfers from other wineries and cideries in a form that could be sold – unaltered (think kegs or bottled/canned wines and ciders) – to the public for consumption in their taproom.
The problem is that Michigan does not allow a bonded transferee small wine maker (cider and wine) to sell the wine transferred to it in bond (cider is wine, remember) for consumption unless the wine maker has modified the bonded wine by performing part of what Michigan considers “manufacturing” on the wine, or unless it has bottled the bonded wine (they can also receive shiners (unlabeled bottles) and label and sell them).
The offending provision that the state cites in prohibiting this practice and which the cidery/winery wanted enjoined because it’s what the state was claiming allowed the state to seize the winery/cidery’s wine/cider and keep it from being sold was MCL 436.1294a which states:
436.1204a Prohibition of the sale or transfer of alcoholic liquor in this state; exceptions; applicability of section to nonalcoholic ingredients.
(1) A manufacturer shall not sell or transfer alcoholic liquor to a licensed manufacturer in this state except as provided in subsections (2) and (3).
(2) Notwithstanding any provision in this act to the contrary, a manufacturer may sell or transfer wine or spirits to a licensed manufacturer, and a licensed manufacturer may purchase or receive wine or spirits, under any of the following conditions:
(a) For a sale or transfer of wine:
(i) The selling or transferring manufacturer is a wine maker, small wine maker, or out-of-state entity that is the substantial equivalent of a wine maker or small wine maker and is selling or transferring the wine to a wine maker, small wine maker, or out-of-state entity that is the substantial equivalent of a wine maker or small wine maker.
(ii) The purchasing or receiving wine maker or small wine maker manufactures wine at its licensed premises or the purchasing or receiving small wine maker bottles wine at its licensed premises.
(3) A wine maker, small wine maker, distiller, or small distiller may not sell alcoholic liquor purchased or received under this section unless 1 of the following conditions is met:
(a) The purchasing or receiving manufacturer modifies the purchased or received alcoholic liquor by performing a portion of the manufacturing process as described in section 109(1).
(b) The purchasing or receiving small wine maker bottles the purchased or received wine.
(c) The purchasing or receiving wine maker or small wine maker is selling a shiner on which the wine maker or small wine maker has placed a label under section 111(10).
The practice of transferring in bond is allowed by the federal government, but the court took exception with the argument that this means the state cannot restrict the use or sale of alcohol transferred in bond accepting the assertion that because “the federal government regulates production of alcohol while states retain control over the distribution and sales of alcohol” MCL436.1204a is fine because it is a statute regulating the sale and distribution of alcohol. “[G]overning the process of distribution for small wine makers, and dictating which small wine makers may sell wine they have purchased in bond.”
Apparently the winery/cidery’s argument was not that the statute does, in fact regulate the manufacture, by defining what “manufacture” means and then seeking to limit manufacturing to a certain set of criteria even in instances where that conflicts with federal law because federal law accepts that title transfers and makes no such distinctions once title is transferred and tax is paid. It’s as if the state had said you can’t sell wine that contains berries to consumers, even though you can make it. And the court said – that’s fine because although the federal government allows you to make wine sold with berries – since we allow you to make it, that’s not in conflict because all we’re doing is saying you can’t sell it to consumers which is only regulating the sale… even though such a law directly regulates and restricts a practice the federal government regulates and allows – it allows you to make and own that berry wine and it allows you to remove that berry wine from bond for nonindustrial purposes and label that berry wine as your wine. The court is just saying while the federal government lets you make it, the state of Michigan is allowed to prohibit you from selling it.
Nor was the winery’s argument that federal allows any accepting transferee of bonded wine to withdraw the wine once tax is paid making it the transferee’s wine, and any claims that the wine is somehow different because it was not subject to some process the state considers “manufacturing” is interfering with the federal ambit of manufacturing. Those arguments were not made and not tested. Rather, the court considered and rejected the argument advanced by the winery/cidery that the “sheer volume of federal regulations” regarding the production of wine means the federal government meant to preempt state law on the issue. That’s an odd argument and doesn’t seem to strike at the heart of “here’s somethign the federal govenrment allows us to do and with this practice/regulation/law the state is specificlaly not allowing us to do it.”
The court also considered and rejected the argument that the statute impaired the winery/cidery’s ability to engage in the federally-granted “power to perform bonded transfers of wine.” But that’s a red herring. The argument is that by restricting the sale of wine the state views as not “manufactured” it is impeding and usurping rights granted by the federal government in determining what is “manufactured” – supplanting the state’s judgment for the federal government’s judgment when wine transferred in bond belongs to and is “manufactured” by the receiving winery and is treated as such because the winery can do whatever it likes and is allowed to do with any wine – including removal for consumption and sale – all nonindustrial uses are allowed by the federal regs for that wine you’ve accepted in bond:
§ 1.70 General.
All uses of distilled spirits and wines, except as provided in §§ 1.60, 1.61, and 1.62 of this part, are regarded as “nonindustrial.” Such “nonindustrial” use shall include, but not be limited to, distilled spirits or wine used for beverage purposes, or in the manufacture, rectification, or blending of alcoholic beverages; or in the preparation of food or drink by a hotel, restaurant, tavern, or similar establishment; or for sacramental purposes; or as a medicine.
In essence what the state of Michigan is saying is that the federal right to own and treat that wine as your own, as though you manufactured it, a power granted by your federal license and a proper in-bond transfer, means nothing in this state and we, the state of Michigan, can substitute our own interpretation and mandate for it.
The court’s failure here was in buying into a distinction between manufacturing/distribution/sales without accepting that the statute really does concern and is only a function of what is “manufactured” and is regulating what is “manufactured” by defining that term and then limiting it in ways the federal government does not and only then saying “if it doesn’t meet our definition of manufacture” then it can’t be sold.
I hope the winery/cider appeals this and makes these arguments on appeal as it really does appear that a mischaracterization of what the statute does changed the outcome here.
The court also rejected contentions by the winery/cidery that the law was too vague to be enforced.
Oddly, the court addressed an argument apparently made in the context of the vagueness claims that is typically made as an equal protection claim – that the state enforces the statutory provisions randomly and arbitrarily with the result being that other similarly situated licensees in the state are treated differently. Normally these claims are brought on their own as equal protection violations. Here, it apparently wasn’t its own equal protection claim, but was something different – an argument made in favor of the vagueness assertions which the court rejected as a misplaced assertion.