Inside View of Virginia ABC's Regulatory System

The difficulty our industry faces can be demonstrated by the operations of the legal department of the Virginia ABC.

In Virginia, the Alcoholic Beverage Control (ABC) holds a unique and potentially problematic position: it serves as both the state's largest alcohol wholesaler/retailer and its primary regulator. You read that right - the VA ABC is BOTH the state's biggest alcohol seller AND the agency that oversees everyone else in the industry.

This dual role recently became apparent during my experience as CEO of Vinoshipper, a licensed direct shipper, when I was called to a Virginia ABC hearing.

During the hearing, I encountered what I can only describe as an absurd situation. An ABC-employed attorney claimed I was biased in my position as CEO of a licensed direct shipper. Their reasoning? I manage our business on a day-to-day basis as the CEO (Chief Executive Officer – yes, they actually asked me to confirm what “CEO” meant) and that our business aims to make a profit. Let that sink in - the state's largest alcohol retailer questioned my credibility because I run a business that needs to be profitable. The irony would be amusing if it weren't so concerning.

This experience led me to examine the inherent contradictions in the VA ABC’s structure. Typically, a state’s regulatory agency would have the state’s Attorney General’s office represent cases to ensure there was no conflict of interest or bias. Virginia has abandoned this concept, not wanting the AG’s office to represent them as they believe they can do a better job than the AG’s office themselves. There was a foot note legislative addition made (does not appear in the normal legislation) allowing the agency to represent itself.

The irony deepens when you consider who was questioning my bias. The attorney works directly for the VA ABC, which profits enormously from its monopoly in the state. They were arguing that I was biased in my statements to support the sale and direct shipment of craft products to consumers in their state – products, that the ABC does not and cannot sell themselves. How can an attorney on the agency’s payroll represent the regulatory side without bias when their employer runs the largest alcoholic beverage business in Virginia. It is worth mentioning that the new VA ABC CEO is a former executive of Breakthru Beverage Virginia (one of the largest wholesalers in Virginia) and the former head of the Virginia Wine Wholesalers Association, who, outside of the illegal wine shipper crowd, would be considered the largest Virginia competitor to any direct shipper.

Again, in simple terms, here is an attorney who works for an agency to ensure the rules are followed within their state while also having the greatest economic bias in stopping sales to consumers outside of the VA ABC retail network by creating disruptive roadblocks and interpretations for direct shippers that have zero regulatory benefit. The conflict of interest here is terrible.

The 21^st amendment granted states the right to control beverage alcohol sales within their borders, but many states have interpreted this as a way to protect the three-tier system, established in the 1930s following the passing of the 21^st amendment. The three-tier system is not required by the Amendment, it is an old fashioned concept created initially to ensure the collection of taxes and to make sure one supplier did not dominate all tiers. States should be looking to support producers’ economic interest and consumers’ access to products, using all available resources, including a non-mandated three tier system.

I do wonder how the US has allowed itself to get in such a regulatory mess over its beverage alcohol rules and how the Commonwealth of Virginia allowed an agency to self-manage its disputes, at the same time as running the largest profitable alcohol business in the state.

Our US regulatory system is out of control and is decreasingly serving the interests of the consumer who they state they are there to protect. They are reducing the taxes that the states could collect on sales, while focusing on collecting fees to cover their own increasing overhead. At the end of the day, if you make it hard enough, people work around the structure and so they have to set up more rules, then more rules again. If they only applied common sense everyone would benefit – but the regulatory system has lost sight of the goals and Virginia is one of the worst.

The impact of the VA ABC’s restrictive practices is quantifiable. Through Vinoshipper data of blocked transactions, we can show the actual impact their self-serving interpretation of rules has had on reducing consumer selection, resulting in the loss of tens of thousands of dollars in sales tax revenue, that rises to millions of dollars over a few years of restrictions.

Even more concerning is the VA ABC’s hearings system employing their own judges to review cases and then adjudicate findings. Unsurprisingly, decisions nearly always favor the agency. As observed in a recent case, if the hearing judge rules against the VA ABC, the agency can appeal their own decision. I guess their goal is to keep going until they can convince themselves they are correct. I feel this edges on the corruption of a self-managed, self-adjudicated, self-appealing structure with zero outside accountability. It gives the whole industry a bad name and precedent.

It feels like the VA ABC is running a profitable business first and upholding the desires of the General Assembly second. Their ability to regulate direct competition has created a marketplace that is biased to the VA ABC and the wholesalers it answers to.

The VA ABC mission statement clearly states the facts: “To strengthen the Commonwealth through public safety, education and revenue from the responsible regulation and sale of alcoholic beverages.” Their mission is clear – block all other market participants to strengthen the state’s bottom line, not through fair competition but through regulation. Code of Virginia, chapter 59.1-9.1, may be known and cited as the "Virginia Antitrust Act,” and promotes the free market system in the economy of this Commonwealth by prohibiting restraints of trade and monopolistic practices that act or tend to act to decrease competition.

Virginia ABC is potentially breaking its own Antitrust Act by prohibiting trade and undertaking monopolistic practices.

It is a shame that the VA ABC has come to this. With transparency and continued documentation of these issues, perhaps we can bring about the necessary change to an agency whose current practices are harming an industry that is already struggling.

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