Source: http://law2.umkc.edu/faculty/projects/FTrials/conlaw/Granholm.html
Timestamp: 2017-10-21 10:20:11
Document Index: 571848133

Matched Legal Cases: ['§2', '§2', '§2', '§2', '§2', '§178', '§ 204', '§122', '§2', '§2']

Like many other States, Michigan and New York regulate the sale and importation of alcoholic beverages, including wine, through a three-tier distribution system. Separate licenses are required for producers, wholesalers, and retailers.... We have held previously that States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment. As relevant to today’s cases, though, the three-tier system is, in broad terms and with refinements to be discussed, mandated by Michigan and New York only for sales from out-of-state wineries. In-state wineries, by contrast, can obtain a license for direct sales to consumers. The differential treatment between in-state and out-of-state wineries constitutes explicit discrimination against interstate commerce.
This discrimination substantially limits the direct sale of wine to consumers, an otherwise emerging and significant business. From 1994 to 1999, consumer spending on direct wine shipments doubled, reaching $500 million per year, or three percent of all wine sales. The expansion has been influenced by several related trends. First, the number of small wineries in the United States has significantly increased. By some estimates there are over 3,000 wineries in the country, At the same time, the wholesale market has consolidated. The increasing winery-to-wholesaler ratio means that many small wineries do not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products. This has led many small wineries to rely on direct shipping to reach new markets. Technological improvements, in particular the ability of wineries to sell wine over the Internet, have helped make direct shipments an attractive sales channel.
Approximately 26 States allow some direct shipping of wine, with various restrictions. Thirteen of these States have reciprocity laws, which allow direct shipment from wineries outside the State, provided the State of origin affords similar nondiscriminatory treatment. In many parts of the country, however, state laws that prohibit or severely restrict direct shipments deprive consumers of access to the direct market.
We first address the background of the suit challenging the Michigan direct-shipment law. Most alcoholic beverages in Michigan are distributed through the State’s three-tier system. Producers or distillers of alcoholic beverages, whether located in state or out of state, generally may sell only to licensed in-state wholesalers. Wholesalers, in turn, may sell only to in-state retailers. Licensed retailers are the final link in the chain, selling alcoholic beverages to consumers at retail locations and, subject to certain restrictions, through home delivery.
Under Michigan law, wine producers, as a general matter, must distribute their wine through wholesalers. There is, however, an exception for Michigan’s approximately 40 in-state wineries, which are eligible for “wine maker” licenses that allow direct shipment to in-state consumers.
Some Michigan residents brought suit against various state officials in the United States District Court for the Eastern District of Michigan. Domaine Alfred, the San Luis Obispo winery, joined in the suit. The plaintiffs contended that Michigan’s direct-shipment laws discriminated against interstate commerce in violation of the Commerce Clause. The trade association Michigan Beer & Wine Wholesalers intervened as a defendant. Both the State and the wholesalers argued that the ban on direct shipment from out-of-state wineries is a valid exercise of Michigan’s power under §2 of the Twenty-first Amendment....
New York’s licensing scheme is somewhat different. It channels most wine sales through the three-tier system, but it too makes exceptions for in-state wineries. As in Michigan, the result is to allow local wineries to make direct sales to consumers in New York on terms not available to out-of-state wineries. Wineries that produce wine only from New York grapes can apply for a license that allows direct shipment to in-state consumers. These licensees are authorized to deliver the wines of other wineries as well, but only if the wine is made from grapes “at least seventy-five percent the volume of which were grown in New York state.” An out-of-state winery may ship directly to New York consumers only if it becomes a licensed New York winery, which requires the establishment of “a branch factory, office or storeroom within the state of New York.”
Juanita Swedenburg and David Lucas, joined by three of their New York customers, brought suit in the Southern District of New York against the officials responsible for administering New York’s Alcoholic Beverage Control Law seeking, inter alia, a declaration that the State’s limitations on the direct shipment of out-of-state wine violate the Commerce Clause. New York liquor wholesalers and representatives of New York liquor retailers intervened in support of the State....
Laws of the type at issue in the instant cases contradict these principles. They deprive citizens of their right to have access to the markets of other States on equal terms. The perceived necessity for reciprocal sale privileges risks generating the trade rivalries and animosities, the alliances and exclusivity, that the Constitution and, in particular, the Commerce Clause were designed to avoid. State laws that protect local wineries have led to the enactment of statutes under which some States condition the right of out-of-state wineries to make direct wine sales to in-state consumers on a reciprocal right in the shipping State. California, for example, passed a reciprocity law in 1986, retreating from the State’s previous regime that allowed unfettered direct shipments from out-of-state wineries. Prior to 1986, all but three States prohibited direct-shipments of wine. The obvious aim of the California statute was to open the interstate direct-shipping market for the State’s many wineries. The current patchwork of laws–with some States banning direct shipments altogether, others doing so only for out-of-state wines, and still others requiring reciprocity–is essentially the product of an ongoing, low-level trade war. Allowing States to discriminate against out-of-state wine “invite[s] a multiplication of preferential trade areas destructive of the very purpose of the Commerce Clause.”
The New York regulatory scheme differs from Michigan’s in that it does not ban direct shipments altogether. Out-of-state wineries are instead required to establish a distribution operation in New York in order to gain the privilege of direct shipment. N. Y. This, though, is just an indirect way of subjecting out-of-state wineries, but not local ones, to the three-tier system....New York’s in-state presence requirement runs contrary to our admonition that States cannot require an out-of-state firm “to become a resident in order to compete on equal terms.”
State laws that discriminate against interstate commerce face “a virtually per se rule of invalidity.” The Michigan and New York laws by their own terms violate this proscription. The two States, however, contend their statutes are saved by §2 of the Twenty-first Amendment, which provides:
Before 1919, the temperance movement fought to curb the sale of alcoholic beverages one State at a time. The movement made progress, and many States passed laws restricting or prohibiting the sale of alcohol. This Court upheld state laws banning the production and sale of alcoholic beverages, Mugler v. Kansas, 123 U.S. 623 (1887), but was less solicitous of laws aimed at imports. In a series of cases before ratification of the Eighteenth Amendment the Court, relying on the Commerce Clause, invalidated a number of state liquor regulations....
After considering a series of bills in response to this Court’s [cases], Congress responded to the direct-shipment loophole in 1913 by enacting the Webb-Kenyon Act. The Act, entitled “An Act Divesting intoxicating liquors of their interstate character in certain cases,” provides:
“That the shipment or transportation … of any spirituous, vinous, malted, fermented, or other intoxicating liquor of any kind, from one State … into any other State … which said spirituous, vinous, malted, fermented, or other intoxicating liquor is intended, by any person interested therein, to be received, possessed, sold, or in any manner used, either in the original package or otherwise, in violation of any law of such State … is hereby prohibited.”
The constitutionality of the Webb-Kenyon Act itself was in doubt. [Our prior cases] implied that any law authorizing the States to regulate direct shipments for personal use would be an unlawful delegation of Congress’ Commerce Clause powers. Indeed, President Taft, acting on the advice of Attorney General Wickersham, vetoed the Act for this specific reason. Congress overrode the veto and in Clark Distilling Co. v. Western Maryland R. Co. (1917), a divided Court upheld the Webb-Kenyon Act against a constitutional challenge....
Michigan and New York now argue the Webb-Kenyon Act went even further and removed any barrier to discriminatory state liquor regulations. We do not agree. First, this reading of the Webb-Kenyon Act conflicts with that given the statute in Clark Distilling. Clark Distilling recognized that the Webb-Kenyon Act extended the Wilson Act to allow the States to intercept liquor shipments before those shipments reached the consignee. The States’ contention that the Webb-Kenyon Act also reversed the Wilson Act’s prohibition on discriminatory treatment of out-of-state liquors cannot be reconciled with Clark Distilling’s description of the Webb-Kenyon Act’s purpose–“simply to extend that which was done by the Wilson Act.”
The statute’s text does not compel a different result. The Webb-Kenyon Act readily can be construed as forbidding “shipment or transportation” only where it runs afoul of the State’s generally applicable laws governing receipt, possession, sale, or use. Cf. id., at 141 (noting that the Act authorized enforcement of “valid” state laws). At the very least, the Webb-Kenyon Act expresses no clear congressional intent to depart from the principle, unexceptional at the time the Act was passed and still applicable today, that discrimination against out-of-state goods is disfavored.
Last, and most importantly, the Webb-Kenyon Act did not purport to repeal the Wilson Act, which expressly precludes States from discriminating. If Congress’ aim in passing the Webb-Kenyon Act was to authorize States to discriminate against out-of-state goods then its first step would have been to repeal the Wilson Act. It did not do so. There is no inconsistency between the Wilson Act and the Webb-Kenyon Act sufficient to warrant an inference that the latter repealed the former.
The Wilson Act reaffirmed, and the Webb-Kenyon Act did not displace, the Court’s line of Commerce Clause cases striking down state laws that discriminated against liquor produced out of state. The rule of Tiernan, Walling, and Scott remained in effect: States were required to regulate domestic and imported liquor on equal terms. “[T]he intent of … the Webb-Kenyon Act … was to take from intoxicating liquor the protection of the interstate commerce laws in so far as necessary to deny them an advantage over the intoxicating liquors produced in the state into which they were brought, yet, [the Act does not] show an intent or purpose to so abdicate control over interstate commerce as to permit discrimination against the intoxicating liquor brought into one state from another.”
Some of the cases decided soon after ratification of the Twenty-first Amendment did not take account of this history and were inconsistent with this view.
The Court reaffirmed the States’ broad powers under §2 in a series of cases, and unsurprisingly many States used the authority bestowed on them by the Court to expand trade barriers.
It is unclear whether the broad language in Young’s Market was necessary to the result because the Court also stated that “the case [did] not present a question of discrimination prohibited by the commerce clause.” 299 U.S., at 62. The Court also declined, contrary to the approach we take today, to consider the history underlying the Twenty-first Amendment. Id., at 63—64. This reluctance did not, however, reflect a consensus that such evidence was irrelevant or that prior history was unsupportive of the principle that the Amendment did not authorize discrimination against out-of-state liquors. There was ample opinion to the contrary.
First, the Court has held that state laws that violate other provisions of the Constitution are not saved by the Twenty-first Amendment. The Court has applied this rule in the context of the First Amendment, the Establishment Clause, the Equal Protection Clause, the Due Process Clause, and the Import-Export Clause.
Second, the Court has held that §2 does not abrogate Congress’ Commerce Clause powers with regard to liquor. The argument that “the Twenty-first Amendment has somehow operated to ‘repeal’ the Commerce Clause” for alcoholic beverages has been rejected. Though the Court’s language in Hostetter may have come uncommonly close to hyperbole in describing this argument as “an absurd oversimplification,” “patently bizarre,” and “demonstrably incorrect,” the basic point was sound.
Finally, and most relevant to the issue at hand, the Court has held that state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause. “When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry.” Brown-Forman, supra, at 579.
Bacchus provides a particularly telling example of this proposition. At issue was an excise tax enacted by Hawaii that exempted certain alcoholic beverages produced in that State. The Court rejected the argument that Hawaii’s discrimination against out-of-state liquor was authorized by the Twenty-first Amendment. “The central purpose of the [Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition.” Despite attempts to distinguish it in the instant cases, Bacchus forecloses any contention that §2 of the Twenty-first Amendment immunizes discriminatory direct-shipment laws from Commerce Clause scrutiny.
Recognizing that Bacchus is fatal to their position, the States suggest it should be overruled or limited to its facts. As the foregoing analysis makes clear, we decline their invitation. Furthermore, Bacchus does not stand alone in recognizing that the Twenty-first Amendment did not give the States complete freedom to regulate where other constitutional principles are at stake. A retreat from Bacchus would also undermine Brown-Forman and Healy. These cases invalidated state liquor regulations under the Commerce Clause. Indeed, Healy explicitly relied on the discriminatory character of the Connecticut price affirmation statute. Brown-Forman and Healy lend significant support to the conclusion that the Twenty-first Amendment does not immunize all laws from Commerce Clause challenge.
The States argue that any decision invalidating their direct-shipment laws would call into question the constitutionality of the three-tier system. This does not follow from our holding. “The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system.” Midcal, supra, at 110. A State which chooses to ban the sale and consumption of alcohol altogether could bar its importation; and, as our history shows, it would have to do so to make its laws effective. States may also assume direct control of liquor distribution through state-run outlets or funnel sales through the three-tier system. We have previously recognized that the three-tier system itself is “unquestionably legitimate.” State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent. The instant cases, in contrast, involve straightforward attempts to discriminate in favor of local producers. The discrimination is contrary to the Commerce Clause and is not saved by the Twenty-first Amendment.
The States provide little evidence that the purchase of wine over the Internet by minors is a problem. Indeed, there is some evidence to the contrary. A recent study by the staff of the FTC found that the 26 States currently allowing direct shipments report no problems with minors’ increased access to wine. FTC Report 34. This is not surprising for several reasons. First, minors are less likely to consume wine, as opposed to beer, wine coolers, and hard liquor. Id., at 12. Second, minors who decide to disobey the law have more direct means of doing so. Third, direct shipping is an imperfect avenue of obtaining alcohol for minors who, in the words of the past president of the National Conference of State Liquor Administrators, “ ‘want instant gratification.’ ” Without concrete evidence that direct shipping of wine is likely to increase alcohol consumption by minors, we are left with the States’ unsupported assertions. Under our precedents, which require the “clearest showing” to justify discriminatory state regulation, this is not enough.
New York and its supporting parties also advance a tax-collection justification for the State’s direct-shipment laws. While their concerns are not wholly illusory, their regulatory objectives can be achieved without discriminating against interstate commerce. In particular, New York could protect itself against lost tax revenue by requiring a permit as a condition of direct shipping. This is the approach taken by New York for in-state wineries. The State offers no reason to believe the system would prove ineffective for out-of-state wineries. Licensees could be required to submit regular sales reports and to remit taxes. Indeed, various States use this approach for taxing direct interstate wine shipments, e.g., N. H. Rev. Stat. Ann. §178.27 (Lexis Supp. 2004), and report no problems with tax collection. See FTC Report 38—40. This is also the procedure sanctioned by the National Conference of State Legislatures in their Model Direct Shipping Bill.
Michigan and New York benefit, furthermore, from provisions of federal law that supply incentives for wineries to comply with state regulations. The Tax and Trade Bureau (formerly the Bureau of Alcohol, Tobacco, and Firearms) has authority to revoke a winery’s federal license if it violates state law. BATF Industry Circular 96—3 (1997). Without a federal license, a winery cannot operate in any State. See 27 U.S.C. § 204. In addition the Twenty-first Amendment Enforcement Act gives state attorneys general the power to sue wineries in federal court to enjoin violations of state law. §122a(b).
Michigan and New York offer a handful of other rationales, such as facilitating orderly market conditions, protecting public health and safety, and ensuring regulatory accountability. These objectives can also be achieved through the alternative of an evenhanded licensing requirement. FTC Report 40—41. Finally, it should be noted that improvements in technology have eased the burden of monitoring out-of-state wineries. Background checks can be done electronically. Financial records and sales data can be mailed, faxed, or submitted via e-mail.
In summary, the States provide little concrete evidence for the sweeping assertion that they cannot police direct shipments by out-of-state wineries. Our Commerce Clause cases demand more than mere speculation to support discrimination against out-of-state goods. The “burden is on the State to show that ‘the discrimination is demonstrably justified,’ ” Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 344 (1992) (emphasis in original). The Court has upheld state regulations that discriminate against interstate commerce only after finding, based on concrete record evidence, that a State’s nondiscriminatory alternatives will prove unworkable. Michigan and New York have not satisfied this exacting standard.
Congress’ power to regulate commerce among the States includes the power to authorize the States to place burdens on interstate commerce. Absent such congressional approval, a state law may violate the unwritten rules described as the “dormant Commerce Clause” either by imposing an undue burden on both out-of-state and local producers engaged in interstate activities or by treating out-of-state producers less favorably than their local competitors. A state law totally prohibiting the sale of an ordinary article of commerce might impose an even more serious burden on interstate commerce. If Congress may nevertheless authorize the States to enact such laws, surely the people may do so through the process of amending our Constitution.
“The plaintiffs ask us to limit [§2’s] broad command. They request us to construe the Amendment as saying, in effect: The State may prohibit the importation of intoxicating liquors provided it prohibits the manufacture and sale within its borders; but if it permits such manufacture and sale, it must let imported liquors compete with the domestic on equal terms. To say that, would involve not a construction of the Amendment, but a rewriting of it… . Can it be doubted that a State might establish a state monopoly of the manufacture and sale of beer, and either prohibit all competing importations, or discourage importation by laying a heavy impost, or channelize desired importations by confining them to a single consignee?”
In the years following the ratification of the Twenty-first Amendment, States adopted manifold laws regulating commerce in alcohol, and many of these laws were discriminatory. So-called “dry states” entirely prohibited such commerce; others prohibited the sale of alcohol on Sundays; others permitted the sale of beer and wine but not hard liquor; most created either state monopolies or distribution systems that gave discriminatory preferences to local retailers and distributors. The notion that discriminatory state laws violated the unwritten prohibition against balkanizing the American economy–while persuasive in contemporary times when alcohol is viewed as an ordinary article of commerce–would have seemed strange indeed to the millions of Americans who condemned the use of the “demon rum” in the 1920’s and 1930’s. Indeed, they expressly authorized the “balkanization” that today’s decision condemns. Today’s decision may represent sound economic policy and may be consistent with the policy choices of the contemporaries of Adam Smith who drafted our original Constitution; it is not, however, consistent with the policy choices made by those who amended our Constitution in 1919 and 1933.
My understanding (and recollection) of the historical context reinforces my conviction that the text of §2 should be “broadly and colloquially interpreted. Indeed, the fact that the Twenty-first Amendment was the only Amendment in our history to have been ratified by the people in state conventions, rather than by state legislatures, provides further reason to give its terms their ordinary meaning. Because the New York and Michigan laws regulate the “transportation or importation” of “intoxicating liquors” for “delivery or use therein,” they are exempt from dormant Commerce Clause scrutiny. As Justice Thomas has demonstrated, the text of the Twenty-first Amendment is a far more reliable guide to its meaning than the unwritten rules that the majority enforces today. I therefore join his persuasive and comprehensive dissenting opinion.
A century ago, this Court repeatedly invalidated, as inconsistent with the negative Commerce Clause, state liquor legislation that prevented out-of-state businesses from shipping liquor directly to a State’s residents. The Webb-Kenyon Act and the Twenty-first Amendment cut off this intrusive review, as their text and history make clear and as this Court’s early cases on the Twenty-first Amendment recognized. The Court today seizes back this power, based primarily on a historical argument that this Court decisively rejected long ago. I respectfully dissent....