Opinion ID: 1254905
Heading Depth: 2
Heading Rank: 2

Heading: The Constitutionality of the Challenged Statutes

Text: Having found that the Wholesalers have standing to pursue this appeal, we now turn to the Wholesalers' argument that the district court erred when it granted in part Plaintiffs' motion for summary judgment and held portions of Kentucky's statutory provisions unconstitutional. We review de novo the district court's grant of summary judgment. Lenscrafters, Inc. v. Robinson, 403 F.3d 798, 802 (6th Cir.2005). Summary judgment is appropriate where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A court considering a summary judgment motion considers the facts in the light most favorable to the nonmoving party and draws all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The constitutionality of a state statute is a question of law which this Court reviews de novo. Cmtys. for Equity v. Mich. High School Athletic Ass'n, 459 F.3d 676, 680 (6th Cir. 2006).
This case asks the question of whether Kentucky's laws governing the wine industry violate the Commerce Clause. The plaintiff wineries filed suit filed after the Supreme Court invalidated wine-related laws which allowed only in-state wineries to sell and ship wine directly to consumers, Granholm, 544 U.S. 460, 125 S.Ct. 1885, 161 L.Ed.2d 796, so a brief examination of that case is warranted. The Granholm Court examined the interaction between the Twenty-first Amendment to the Constitution, which grants broad authority to the states to regulate alcohol importation and distribution, and the Commerce Clause, which prohibits discrimination against out-of-state goods. 544 U.S. at 484-85, 125 S.Ct. 1885. The Court held that the Twenty-first Amendment ... does not displace the rule that States may not give a discriminatory preference to their own producers. Id. at 486, 125 S.Ct. 1885; accord Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 275-76, 104 S.Ct. 3049, 82 L.Ed.2d 200 (1984). Although the Granholm Court addressed statutes that it deemed to be facially discriminatory, the Court recognized that statutes can discriminate against interstate commerce on their face or in effect. 544 U.S. at 487, 125 S.Ct. 1885. [4] Accordingly, when Plaintiffs allege practical effect discrimination, we must turn to other Commerce Clause jurisprudence for guidance. To determine whether a statute violates the Commerce Clause, this Court must first determine whether the statute discriminates against interstate commerce, either by discriminating on its face, by having a discriminatory purpose, or by discriminating in practical effect. E. Ky. Res. v. Fiscal Court of Magoffin County, Ky., 127 F.3d 532, 540 (6th Cir.1997) (citing Wyoming v. Oklahoma, 502 U.S. 437, 454-55, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992)). If the statute is not discriminatory, it is valid unless the burdens on interstate commerce are `clearly excessive in relation to the putative local benefits.' Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970)). See also United Haulers Ass'n v. Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 127 S.Ct. 1786, 1797, 167 L.Ed.2d 655 (2007) (holding that Pike applies when a law is directed to legitimate local concerns, with effects upon interstate commerce that are only incidental). If the statute is discriminatory, however, it is virtually per se invalid, unless the state can demonstrate that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. Granholm, 544 U.S. at 489, 125 S.Ct. 1885. [5]
Turning to Kentucky's statutory scheme, the threshold question is whether the in-person purchase requirements of KRS §§ 243.155 and 244.165 are discriminatory. Plaintiffs concede that the statutes are not facially discriminatory, but argue that the statutes discriminate against out-of-state wineries in practical effect. In order to show that a law discriminates in practical effect, Plaintiffs must show both how local economic actors are favored by the legislation, and how out-of-state actors are burdened by the legislation. E. Ky. Res., 127 F.3d at 543. Plaintiffs argue, and the district court agreed, that the challenged statutes satisfy this requirement because they present an economic barrier that both benefits in-state wineries and burdens out-of-state wineries by making it financially infeasible for out-of-state wineries to sell directly to Kentucky residents. Plaintiffs contend that with the statutes in place, out-of-state wineries are either forced to incur the added cost of paying a wholesaler or they must wait for Kentucky consumers to travel up to 4800 miles to purchase out-of-state wine. Plaintiffs also claim that the in-person purchase requirement benefits local wineries because it grants in-state wineries access to the State's consumers on preferential terms by driving up the cost of out-of-state wine, as condemned in Granholm, 544 U.S. at 474-75, 125 S.Ct. 1885. Plaintiffs present evidence that in Oregon, where Plaintiff Cherry Hill Vineyards operates, there are approximately 300 wineries, most of which are small wineries like Cherry Hill. Only 13 of these wineries supply wine to Kentucky, and some of those sell only to restaurants. Plaintiffs argue that many small wineries do not produce enough wine or have sufficient consumer demand to make it economical for wholesalers to carry their products. The majority of wineries who do not have a wholesaler are foreclosed from the Kentucky market altogether unless they can take orders directly from Kentucky residents and ship wine. Under Kentucky's in-person requirement, even if a winery has established a relationship with an individual consumer or a restaurant and has verified their age and shipping address, the customer must travel to the winery each time he or she wishes to execute a purchase. In support of these general allegations, Plaintiff Cherry Hills avers that in order to distribute their wine through a wholesaler, they and other wineries pay up to 50% of their profits to the wholesaler, which can result in a profit differential of $10-15 per bottle of wine. Plaintiffs also presented evidence of customers, including Plaintiffs Schneider and Reilly, who would buy wines directly from out-of-state wineries but for the in-purchase requirement. Plaintiffs reference and discuss a Federal Trade Commission (FTC) report which concluded that state laws like Kentucky's, which prevent direct sales and force producers to use wholesalers, create an anticompetitive barrier to e-commerce for small wineries. Federal Trade Commission, Possible Anticompetitive Barriers to E-Commerce: Wine (2003), available at http://www.ftc.gov/os/2003/07/winereport2. pdf. Based on this evidence, we agree that Kentucky's in-person requirement makes it economically and logistically infeasible for most consumers to purchase wine from out-of-state small farm wineries. It is impractical for customers to travel hundreds or thousands of miles to purchase wine in-person, and out-of-state wineries are clearly burdened by Kentucky's regulatory scheme. Plaintiffs must also show how local economic actors are favored by the legislation See E. Ky. Res., 127 F.3d at 532. The benefits to state actors flow from the same facts discussed above. Because of the economic and logistical barriers caused by the in-person requirement, small Kentucky wineries benefit from less competition from out-of-state wineries, especially from wineries in states such as Oregon, which are located a great distance from Kentucky and whose wine may be deemed distinct or preferable by consumers. Kentucky's wholesalers receive benefits that are even more direct: based upon the evidence presented by Plaintiffs, wineries such as Cherry Hill and customers such as Reilly and Schneider would bypass Kentucky's wholesalers altogether if the in-person purchase requirement were lifted. As a consequence, the statute guarantees the Wholesalers a source of revenue that would not exist but for the statute. This Court finds that Plaintiffs have presented specific evidence that meets the burden of showing both how local economic actors are favored by the legislation, and how out-of-state actors are burdened by the legislation. See E. Ky. Res., 127 F.3d at 532. Accordingly, this Court concludes that Plaintiffs have demonstrated that the challenged statutes discriminate against interstate commerce in practical effect.
Our conclusion that the challenged statutes are discriminatory does not end the inquiry. This Court must also consider whether Kentucky's statutory regime advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory means. See Granholm, 544 U.S. at 489, 125 S.Ct. 1885 (quoting New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988)). The Wholesalers argue that the in-person requirement was motivated by Kentucky's extensive problems with underage drinking. They provide and reference a number of reports that discuss the problem of underage drinking and argue that the elimination of the in-person requirement would create negative effects on alcohol enforcement. This argument is almost identical to an argument that was presented and rejected in Granholm. Based in part upon a report from the Federal Trade Commission, the Granholm Court found little evidence that the purchase of wine over the Internet by minors is a problem, and noted that wine is not the alcoholic beverage of choice among youth. 544 U.S. at 490, 125 S.Ct. 1885. The Granholm Court also remarked that even if there was a risk of minors receiving direct shipments of wine, this risk is not addressed solely by prohibiting shipment from wineries. As a less restrictive step to address this risk, the Court pointed to the Model Direct Shipping Bill which would require age-verification upon delivery of wine. Id. at 491, 125 S.Ct. 1885. We agree with the reasoning of the Granholm Court, and note that the Wholesalers have not presented evidence about underage drinking that is unique to Kentucky and would warrant a different result. Also, as the district court noted, Defendants and the Wholesalers presented no evidence that small farm wineries and their shippers cannot or will not comply with existing or future shipping laws governing deliveries of alcoholic beverages to Kentucky customers. Therefore, consistent with the Granholm Court's finding, we conclude that age verification upon delivery of wine is a reasonable nondiscriminatory means to address the proferred state interest. The Wholesalers also reference Defendants' arguments in the district court, which include an argument that the in-person sales requirement is motivated by concerns for tax revenue. Defendants predicted a heavy loss in sales and use tax if internet wine sales were permitted. However, as the district court noted in its opinion, this argument appears to assume that internet sales would be permitted without restrictions. Cherry Hill Vineyards, 488 F.Supp.2d at 620. Again, the Granholm Court addressed and rejected a similar argument, and found that states can adequately collect tax revenue through requiring a permit as a condition of direct shipping, relying upon self-reporting, and utilizing federal remedies. This reasoning is directly applicable because, like the defendants in Granholm, the Wholesalers have not shown that tax evasion from out-of-state wineries poses such a unique threat that it justifies discriminatory regimes. 544 U.S. at 491-92, 125 S.Ct. 1885. Ultimately, the Wholesalers fail to establish that the state regime advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory means. Consequently, we conclude that Kentucky's in-person purchase requirement, which is discriminatory in practical effect, violates the dormant Commerce Clause.