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Fight brews over liquor distribution in Indiana

February 9, 2009

The nation's largest liquor distributor is suing the state in hopes of overturning an arcane law that requires distributors doing business here to be owned by Indiana residents.

Southern Wine & Spirits of Indiana Inc., part of a Miami-based company that does business in 30 states and distributes about 20 percent of the country's booze, filed suit after the Indiana Alcohol and Tobacco Commission said it is not eligible to distribute liquor in Indiana "due to the owners being from out of state."

The powerful liquor distribution lobby has fought to keep the post-Prohibition-era residency requirement on the books as a means to protect its turf and prevent competitors from poaching their brands.

But observers say Southern Wine's lawsuit has merit and a good shot at success.

The suit argues the state's denial violates the company's right to do business across state lines, a guarantee set out in the Commerce Clause of the U.S. Constitution. The company successfully challenged a similar law in Texas, getting a federal judge to overturn it in May 2007. "No federal court in memory has ever found a residential requirement as a condition to doing business constitutional," said J. Alexander Tanford, an IU law professor who has fought with some success to allow Hoosiers to buy wine online. "This seems open and shut to me."

Despite informing Southern in October 2008 that it isn't eligible for a liquor permit, the state granted the company's request for a wine distribution permit. The state dropped its residency restrictions on beer and wine distribution several years ago.

The beer distribution business asked for the change after an out-of-state resident bought a local beer distributorship but had to remain a minority owner for five years to establish residency and meet the requirements of the law, said Marc Carmichael, president of the Indiana Beverage Alliance, a group that represents beer wholesalers.

"We just decided as a group that this is silly," he said of the residency requirement. "The Legislature put the rules in place to try and regulate the product before it was easy to check on someone's background."

Liquor distributors have lobbied to retain the law in part because they have more to lose: While beer distributors have franchise agreements with beer brands that give them exclusive rights to a brand for a set time period, liquor distributors don't enjoy the same contractual protections. Liquor brands can switch distributors without financial consequences.

"A residency requirement is about the only thing that protects them from losing their brands without compensation," Carmichael said. "If I were them, I'd be doing the same thing."

Indiana is a natural market for Southern Wine's expansion. The firm has the state practically surrounded, doing business in Illinois, Ohio and Kentucky.

Most booze distribution in the Indianapolis area is controlled by a handful of locally based heavyweights, including National Wine & Spirits Inc. for liquor and wine, and Monarch Beverage Co. and Zink Distributing Co. for beer and wine.

Southern's arrival would pose a "huge threat" to National Wine & Spirits, said John J. Baker, the company's chief operating officer.

He acknowledged that saving the residency law could be tough. If it doesn't survive, the state must find another way to ensure a fair and competitive market, Baker said. He's concerned in particular about a joint venture between Southern and Texas-based Glazer's Distributors, announced last year, that gives the firms control of about 80 percent of the nation's wine and spirits volume.

"It's very important for the state to keep tabs on the business and how it's conducted," Baker said. "We want to play fair."

Allowing Southern Wine to enter Indiana could benefit Hoosier consumers by offering more choices, said Tanford, the IU professor.

"Indiana is an underserved market," he said. "Southern Wine has much more product in their catalog they can distribute."

Tanford said the state has every right to require distributors to obtain licenses, pay fees and comply with a laundry list of regulations, but the residency rule is another story. He expects existing wholesalers will claim that state regulation will be more difficult for companies that aren't headquartered here—an argument Tanford dismisses as hiding the real issue: a fear of competition.

If the same residency rule were to be extended to other industries, he said, something like half the companies in Indianapolis would have to shut down.

Southern Wine, which filed its case in December in the New Albany division of the U.S. District Court for the Southern District of Indiana, argues as much in the lawsuit.

"The effect of the resident ownership provisions is to protect Indiana residents currently holding liquor wholesaler's permits from out-of-state competition," it says. "It serves no legitimate concern for the safety of Indiana citizens."

The suit names as a defendant the Indiana Alcohol and Tobacco Commission and Dave Heath, the group's former chairman who resigned from the post in December. Heath's interim replacement, Indiana Excise Police Superintendent Alex Huskey, did not return phone calls from IBJ.

Officials with Southern Wine and their Indiana attorney, Rebecca Bennett Howard with New Albany-based Wyatt Tarrant & Combs LLP, also did not return phone calls.

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