SPOTLIGHT ON INTERSTATE SHIPMENT OF WINE LITIGATION

 

            Numerous state have attempted to protect their native wine and beer industries by banning many forms of e-commerce, including direct sales and shipments of wine to consumers from vendors outside the state. These protectionist measures have hindered interstate commerce, which only Congress has authority to regulate.  But constitutional challenges to these state laws banning direct shipments to consumers, in the case of sales of wine and other alcoholic beverages, must overcome arguments that authority to control liquor sales is vested in the states through the 21^st Amendment.

            At present, twenty-four states prohibit direct shipments of wine to consumers by out-of-state wineries, thereby impeding the ability of small wineries to market their wines and of consumers to purchase them. Some states make it a felony to ship wine from out-of-state into their borders.  A number of states that prohibit out-of-state wineries nevertheless allow in-state wineries to ship directly to consumers.

            The U.S. Supreme Court will eventually have to decide this issue.  The Supreme Court frequently hears cases that will resolve a split among the lower federal appellate court circuits.  The U.S. Courts of Appeals have now produced an unusual patchwork of conflicting decisions on the constitutionality of state laws to ban interstate shipments of wine directly to consumers.

            Seventh Circuit.  The Seventh Circuit reversed a federal district court and upheld Indiana’s ban on direct shipments of wine under the 21^st Amendment.  The Supreme Court most likely blundered when it denied certiorari to the appeal. 

            In Bridenbaugh v. Wilson, Judge Frank Easterbrook wrote, "This case pits the twenty-first amendment, which appears in the Constitution, against the ‘dormant commerce clause,’ which does not."  Easterbrook continued that the 21st Amendment (which repealed prohibition) "directly authorizes state control over imports, while the premise of dormant commerce clause jurisprudence is an inference that the grant of power to Congress in Art. I sec.8 cl. 3 implies a limitation on state authority over the same subject. We must decide how the combination of express grant and implied withdrawal of state power applies to" the Indiana wine shipment law.

            Article I, Section 8, of the Constitution provides that "The Congress shall have Power ... to regulate Commerce with foreign Nations, and among the several States ..." The dormant commerce clause is the judicial concept that the Constitution, by delegating certain authority to the Congress to regulate commerce, thereby bars the states from legislating on certain matters that affect interstate commerce, even in the absence of Congressional legislation. The 21st Amendment provides, in part, that "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

            Fifth and Sixth Circuits.  Earlier this year, the Fifth Circuit affirmed a judgment from the district court that struck down Texas’s wine shipment ban under the Commerce Clause.  The Fifth Circuit held that the state’s power to regulate alcohol under the 21^st Amendment could not save the statute.  Interstate shipments of any good in commerce could only be regulated by the U.S. Congress.   The state of Texas chose not to appeal the ruling.  Later, the Sixth Circuit struck down Michigan’s ban using the same reasoning as the Fifth Circuit.

            Fourth Circuit.  In Beskind v. Easley, the Fourth Circuit entered a ruling that was a hybrid of the other circuits.  The Fourth Circuit held that North Carolina’s ban violated the Commerce Clause; however, the remedy proposed by the court was not to allow direct interstate shipment of wine, but rather to forbid shipping by in-state wineries.  The decision seemingly made no economic sense, but instead put pressure on the state legislature to revisit the problem, which it did.  The Fourth Circuit decision prohibited North Carolina wineries from participating in retail commerce inside the state of North Carolina while permitting out-of-state vendors to tap into the North Carolina market. 

            In Beskind, the Fourth Circuit observed that, "A facial examination of North Carolina's [wine shipment] laws leaves little doubt that those laws treat in-state manufacturers of wine differently from out-of-state manufacturers of wine, with the undoubted effect of benefitting the in-state manufacturers and burdening the out-of-state manufacturers." And, “Because North Carolina's [wine shipment laws] discriminate against out-of-state wine manufacturers and shippers in favor of in-state wine manufacturers and shippers, the scheme violates `a central tenet of the Commerce Clause. ´” The appeals panel concluded that “North Carolina retains great flexibility to determine what sort of relief to provide to cure the discriminatory treatment, and thus we follow North Carolina's indication of its preference.”  That is why the Fourth Circuit provided the remedy of banning in-state shipments of wine: to force the state legislature to redress the economic barrier.  Fortunately, the North Carolina legislature responded by opening up direct shipping of wine to consumers, and the governor signed the bill into law.

            Separately, in Virginia, a federal district court struck down the Commonwealth’s ban, which was then legislatively repealed while the case was pending before the Fourth Circuit to allow direct interstate shipping of wine to consumers. 

            Eleventh Circuit.  The 11th Circuit overturned a district court decision upholding Florida’s ban, remanding the case to the district court to determine whether the State’s alleged concerns about taxation presented a viable defense.

            Second Circuit.  The challenge to New York’s ban is the latest “wine shipment” case to reach a U.S. Court of Appeals.  In Swedenburg v. Kelly, two proprietors of small, family-owned wineries in Virginia and California and three New York consumers have brought a lawsuit against the state of New York challenging a portion of New York’s Alcoholic Beverage Control (ABC) Law as unconstitutional. People magazine described the New York case this way.  “Juanita Swedenberg may not look like a fire-breathing radical.  But in wine-drinking circles, that’s exactly what she is.  ‘My ancestors,’ she says, ‘fought the tax on tea.’  And what she’s fighting, with startling success, is the multibillion-dollar wholesale wine industry.”  According to the libertarian Institute of Justice in Washington, D.C., “the liquor distributors, who intervened to defend the law that requires all wine shipped into New York be handled by wholesalers, receive a markup of up to 25 percent on wine imported into New York.”
             Currently, New York prohibits out-of-state wineries to ship wine directly to New York consumers.  However, in-state wineries have been allowed to ship wine directly to New York consumers since 1993.  The New York attorney general claims that the 21st Amendment supercedes the Commerce Clause and allows New York State to ban interstate direct shipments of wine.  The U.S. Supreme Court will most likely wait for a decision from the Second Circuit before it moves to resolve the conflict among the circuits.

            The Institute of Justice is providing legal assistance to the challenge to New York’s law.  In a brief before the Second Circuit, the Institute of Justice writes,  “[The liquor distributors’] brief has something of an Alice-in-Wonderland quality.  In it, a quartet of multibillion-dollar oligopolists accuse the two small winemaker plaintiffs of ‘avarice’ for wanting to sell a few dozen cases of wine directly to consumers in New York.  If a picture is worth a thousand words, the spectacle of these wholesalers fighting feverishly to prevent what they refer to as a de minimis amount of wine from entering the state without flowing through their profit-taking grasp is utterly priceless.”

            According to Kathleen Holland, Asst. General Counsel of the New York Farm Bureau, New York’s wine and grape industry contributes significantly to the state’s economy.  New York has nearly 1,000 grape farms and over 170 wineries covering approximately 32,000 acres across 32 counties.  New York’s wine and grape industry is the third largest in the United States behind California and Washington. New York held the second spot until it was surpassed by Washington, when the latter state began to allow interstate direct shipment of wine.  “In 2001, 149,000 tons of grapes worth $45 million were harvested by New York’s grape farms.  New York’s wineries have over $500 million in gross sales producing $85 million in state and local revenues and directly employing upwards of 18,000 New Yorkers,” according to Holland.  “New York is the second largest wine consumption state (in total gallons consumed), but eighteenth in adult per capita consumption due to the restricted opportunities for consumers in New York to purchase wine,” Holland writes on the Farm Bureau web page.

            Who will ultimately win this contest over the right to buy and sell in the interstate wine market? “The direct shipment of wine pits consumers and small wineries against wholesalers seeking to protect their multi-billion-dollar monopoly over alcohol distribution,” said Steve Simpson, an Institute of Justice senior attorney. “In the end, I have no doubt that consumers and America’s free market will win the day.”

            Open Markets.  With free trade and open markets now in Virginia, North Carolina, South Carolina, and Texas, a total of twenty-five states now permit direct interstate shipment of wine to consumers.  Thirteen of those states have "reciprocal" agreements allowing residents in one state to order wine from another state with reciprocity.  Lawyers for the plaintiffs in the various “wine shipment” cases are coordinating their efforts.  They are also working with former Solicitor General and Whitewater Special Prosecutor Kenneth Starr, who has been retained by a group of small wineries.  The wholesale wine industry and large liquor distributors have retained former White House counsel C. Boyden Gray, former Solicitor General and U.S. Court of Appeals Judge Robert Bork, and other legal strategists.

            The Federal Trade Commission has concluded that state bans on direct shipping hurt Internet commerce and limit consumer choices. The FTC’s study of online orders for wine found consumers save as much as 21% off some wines, when they have out-of-state sources of competition available to them.  "E-commerce can offer consumers lower prices, greater choices and increased convenience," FTC Chairman Timothy Muris said. "In wine and other markets, however, anti-competitive barriers to e-commerce are depriving consumers of those benefits." Addressing concerns that online wine sales could give minors easier access to alcohol, Muris said the FTC found no evidence or reporting of problems that online ordering of wine contributes to underage consumption.  He said many of those states that permit interstate shipments of wine to consumers require a sober adult’s signature to accept delivery.

            At present winemakers face a confusing patchwork of state laws that force them to determine if shipping to a particular residence is legal.  Using the Internet would allow wine suppliers, particularly smaller wineries, to market and ship directly to consumers, thereby circumventing the add-on costs of wholesalers and retailers.

© Copyright 2007 by Michael A. S. Guth. All Rights Reserved.  No portion of this article, including this web page, may be copied, retransmitted, reposted, or duplicated in significant portion without the express written permission of Dr. Michael Guth. Users are always welcome to establish links to this web page or to quote from it freely.