What Does Granholm v. Heald Mean for theFuture of the Twenty-First Amendment,the Three-Tier System, and EfficientAlcohol Distribution?

Table of ContentsI. Introduction 1096II. Background on State Regulation of Alcohol 1100A. Early Twenty-First Amendment Interpretation 1102B. Contemporary Twenty-First Amendment Interpretation 1103III. Where Does Granholm Take the Court's Twenty-First Amendment Jurisprudence? 1104A. Complete Elimination of the Core Concerns Test 1106B. Partial Elimination of the Core Concerns Test 1108IV. Can Direct Shipment to Retailers Be Differentiated from Direct Shipment to Consumers? 1110V. The Future of Other Forms of State Alcohol Regulation 1116A. Franchise Laws 11181. Discriminatory Franchise Laws 11192. Nondiscriminatory Franchise Laws 1120VI. Conclusion 1128I. IntroductionIn recent years, several courts have evaluated the constitutionality of various state regulatory schemes governing the sale and distribution of alcohol.1 These cases have forced courts to examine the extent to which the Commerce Clause limits a state's ability to regulate alcohol under section 2 of the Twentyfirst Amendment.2 Although the Supreme Court has previously addressed the tension between the Twenty-first Amendment and the Commerce Clause, the rise of a national wine industry over the past three decades and the increasing use of Internet commerce have forced courts to address the conflict under new factual circumstances.3Over the past twenty-five years, the number of wineries in the United States has increased over 400%, with wineries now located in all fifty states.4 Annual wine sales in the United States now total approximately $18 billion.5 Similarly, wine consumption in the United States increased from 113 million cases in 1970 to 250 million cases by 2002, and some predict that the United States "will almost certainly become the largest [wine consuming nation] by the end of this decade."6Since the end of Prohibition, most states have regulated the alcohol industry through the use of a three-tier distribution system.7 This system typically permits manufacturers (tier one) to sell only to licensed wholesalers (tier two), who in turn can only sell to licensed retailers (tier three).8 Moreover, states generally prohibit "investment in more than one tier of the distribution system" by any one individual or corporation.9 These "tied house" restrictions prevent manufacturers from distributing their products at retail or wholesale.10 The original goal of this structured system was to "prevent organized crimewhich had run illegal liquor empires during Prohibition-from dominating the legalized liquor industry."" Additional justifications for the three-tier system included "ensuring] orderly markets" and "facilitating] state collection of tax revenues.As the American wine industry began to grow, however, states also began granting in-state wineries preferences under the three-tier system to encourage increased industry growth, employment, and tax revenue.I3 Many states began permitting direct shipment to private customers by in-state wineries, while preventing out-of-state wineries from doing the same.14 Wholesalers largely opposed these direct shipment laws and viewed them as a threat to their industry.15 In contrast, private consumers and out-of-state wineries, which were forbidden from transacting business directly with one another, argued that restrictions on an out-of-state winery's ability to sell directly to in-state consumers violated the dormant Commerce Clause.16In Granholm v. Heald,17 the Supreme Court concluded that states were free to regulate the direct shipment of wine as long as they treated in-state and out-of-state wineries equally.18 Despite Granholm, however, the Court did not entirely resolve the question of how much power the Twenty-first Amendment gives states to regulate alcohol within their borders. …