Wine auctions offer great opportunities…if you know what to look for.
OUR BUBBLY LAW-SCHOOL classmate Rose had done very well working at Booz Allen. Now, instead of poring over cases, she wanted to buy and sell cases of wine at auction. As big fans of the wine auction world—with many clients in this area—we were happy to help.
In some respects the purchase at auction of, say, a case of Château Pétrus 2005, isn’t that different from bidding on an Edward Hopper etching. The lots might carry similar presale estimates, and in both cases factors such as provenance and the bidder’s level of confidence regarding authenticity might affect the price paid—or even whether they sell at all. But on the question of condition, which is of concern to all auction buyers, wine and fine art differ dramatically. It is easy enough to spot a damaged painting using a black light, but try assessing whether a 100-year-old Sauternes is still drinkable just by examining the bottle.
Uneven temperatures or other poor storage conditions can ruin fine wine, so auction houses take great care when arranging their sales. With more valuable older cases, they might actually visit the cellars where the wine was kept. Even the best-stored wine won’t survive 10 hours baking on a dock in Singapore awaiting shipment, so it is no surprise that many auction houses prefer to arrange their own shipping—although even the best-laid shipping plans can go awry, as Christie’s recently found out when 60 cases of wine from celebrity chef Charlie Trotter reportedly went missing en route from Chicago to New York for sale (luckily, the wine was insured).
When a consignor’s wine arrives at the auction house, experts inspect each bottle for ullage, or bottle fill level, whether the label is missing or stained, and other matters. An original label in excellent condition can significantly enhance the lot’s value, and known cellars owned by known sellers typically fetch a premium in the auction room. As part of due diligence, the auction expert may also taste a small quantity to check the wine’s actual condition and verify its authenticity.
“Doesn’t popping the cork and sampling from a bottle destroy its value?” asked Rose.
Yes, we replied, but the seller’s consignment agreement typically gives the auctioneer this right, including permission to use samples of the wine for promotional purposes. Try doing that with a Chagall drawing.
“Counterfeit wines have recently gotten a lot of ink,” Rose observed. “How do forgers typically work?”
First, we countered, although newspapers love to write stories about sales of fake wine, counterfeits make up only a tiny drop in the bucket of wine sold annually at auction.
That said, the techniques forgers use are quite ingenious, and include tampering with the outside of the bottle, such as by printing a fake label, or sanding out the last digit on the date on the cork and branding a new year in its place. Other forgers take a less labor-intensive route, filling empty bottles acquired from antique shops or restaurants with inferior wine. Some buyers who purchase expensive bottles based on the labels alone can’t tell the difference between Pomerol and Pepsi, so they never realize that they have been cheated—but, again, the chances of an auction buyer’s ending up with a fake bottle are extremely remote.
Rose then dredged up a legal principle from our Contracts 101 class: “Couldn’t buyers of fake wine sue the auction house for fraud?”
“In theory,” we replied, “but as you may recall, fraud is difficult to prove, since it requires showing that the seller knew the wine was fake and intended to deceive the buyer. The very few fake wine cases (as it were) almost invariably feature a crooked consignor selling counterfeit wine through an unwitting auction house.
The buyer of suspect wine at auction faces other hurdles, too. For instance, some auctioneers offer limited or even no warranties of authenticity and, as far as condition goes, explicitly state that the wine is sold as is. Also, authenticity claims for wine, as for fine art, are subject to state-by-state statutes of limitation. These laws establish how long a buyer has to make a claim and whether the clock starts ticking from the date of the auction sale or the date the buyer discovered, or should have discovered, the forgery. This is a particular issue for fine wine aficionados, who may open a bottle only years after the auction, meaning that by the time they suspect they have been defrauded, their remedy has died on the vine.
Last October, for example, a Federal Appeals Court in New York ruled that billionaire William Koch had waited too long to sue Christie’s auction house for four bottles of red wine etched with the initials “Th.J.” that Christie’s catalogue stated had been owned by Thomas Jefferson but that Koch alleged Christie’s knew were fake. Koch bought the wine in 1987 and 1988, and although doubts about the bottles surfaced in 2000, Koch waited five years to investigate. The court dismissed the suit, stating: “For wine, timing is critical. The same is true for causes of action.”
One area where waiting can benefit a savvy wine buyer is in the auction room. Unlike fine-art auctions, wine auctions typically take many hours. The best deals may be found late in the day, when many bidders have left and a bottle of the same wine sold earlier may go for less. To compensate for the drop in price, one recent trend is for wine auctioneers to offer the winning bidder on a particular bottle the option to buy, at the same price, all other bottles of the same wine consigned by the same seller.
“Anything I should ask the auction house about shipping wine to one of my homes?” asked Rose.
We advised her to confirm if the state to which she wants to send the wine requires any particular licenses or permits, since shipping wine without obtaining a required alcohol license is illegal.
“Since when do states have so much control in this area?” Rose sniffed.
“Since the end of Prohibition,” we replied, when the federal government allowed the states to regulate most alcohol sales.
However, since the landmark 2005 Supreme Court ruling in the case of Granholm v. Heald, in-state and out-of-state sales of alcoholic beverages must be treated equally. Granholm held that laws in New York and Michigan preventing out-of-state wineries from shipping directly to consumers living in those states but allowing in-state retailers to do so violated the Commerce Clause of the U.S. Constitution.
“Forget about Michigan,” Rose remarked. “What if the auction house wants to sell my wine in Mongolia?”
We replied that many wine consignment agreements (unlike those for fine art) give the auction house the right to choose the sale venue—and Asia is an increasingly tempting market. In fact, one reason that U.S. wine auction sales reportedly declined 5 percent in 2011 (to $146 million), compared with a record 17 percent jump in worldwide auction results that year, is that U.S. consignors generally chose to sell in the Far East, and Hong Kong in particular, where, in 2011, fine wine sales rose 39 percent.
We ended our meeting reminiscing about the cheap beer served at our old law-school mixers and discussing our friend’s expensive new investments. “The days of wine and Rose are just beginning!” she crowed.
“How pretentious,” we thought. Or was it just sour grapes? Download this article here.