August 6, 2002
State liquor franchise laws are monopoly protection rackets that shield big liquor wholesalers from competition, according to Americans for Tax Reform (ATR).
Rather than allowing competition between liquor wholesalers (also called distributors), many states have laws that make it virtually impossible for manufacturers and importers to switch wholesalers except in the most extreme circumstances, such as the wholesaler going bankrupt. In general, monopoly protection laws require wine and distilled spirit suppliers (manufacturers and importers) to affirmatively prove that they possess "good cause" to cancel, not renew or even modify a contract with wholesalers.
The "good cause" restrictions are particularly onerous:
- These laws usually do not treat legitimate business reasons as "good cause" and almost always nullify contract termination or expirations.
- Even when contracts are breached, states usually require the supplier to prove that the breach was substantial and that obligations were "reasonable."
- Consequently, almost any lawsuit by a wholesaler forces the defendant to shoulder the burden of proof and allows an alcohol control board, judge or jury to second-guess the "reasonableness" of any contract provision.
Wholesalers claim that monopoly protection laws protect their brand-building efforts. But wholesalers already receive compensation (typically 20 to 25 percent markup) that is far greater than wholesalers in other industries. As a result of these laws, more than 40 percent of all wine and distilled spirits in the U.S. passed through just 5 companies, with the biggest dwarfing almost all its suppliers. According to ATR, the lack of competition hurts consumers by diminished innovation and service-based performance.
Source: Damon B. Ansell, "Monopoly Protection Laws Target Wine and Spirits Industry -- hurt consumers and taxpayers," Policy Brief, Americans for Tax Reform, December 14, 2001.
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