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Supreme Court Strikes Interstate Shipping Bans in NY and Michigan

May 17, 2005
The United States Supreme Court ruled Monday that wine consumers may buy directly from out-of-state wineries, striking down laws in Michigan and New York that banned interstate shipments. In all, 23 states have laws that ban interstate wine shipments, eight with discriminatory laws similar to those in New York and Michigan.
"States have broad power to regulate liquor," wrote Justice Anthony Kennedy in the majority opinion. "This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms." Kennedy was joined on the majority opinion by Justices Antonin Scalia, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.
"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," wrote Kennedy.
The Wine & Spirits Wholesalers of America (WSWA) had a typically upbeat response to the ruling. "The Court today affirmed a state's right to regulate the sale and distribution of alcohol and said in doing so they must treat in-state, out-of-state and presumably out-of-country producers all the same," president and CEO Juanita D. Duggan said. "That means states have a choice between supporting face-to-face transactions by someone licensed to sell alcohol or opening up the floodgates."
Duggan indicated that "WSWA supports state efforts to strengthen, not weaken, alcohol laws by making all producers play from the same set of rules that ensure accountable, responsible alcohol sales. Face-to-face ID checks by those licensed to sell alcohol are the best way to do that."
Bobby Koch, president of Wine Institute, called the ruling "a major victory in a 20-year battle to end discrimination against America's family-owned wineries and the millions of consumers who want their wines. The decision today paves the way for Michigan and New York to join the 27 other states that allow for the legal, regulated direct shipping of wine to consumers.
"It's a major turning point in favor of a fair and open wine market, and at the same time it's a major defeat for the wholesaler associations," said Koch. "They've been misguided in their attempts to maintain their distribution stronghold, which has only served to stifle consumer choice."
James Seff, a partner with the San Francisco law firm Pillsbury Winthrop LLP submitted an amicus brief to the court on behalf of Wine Institute in their challenge of state laws prohibiting a winery from shipping wine directly to consumers in another state. Seff noted that it's important to understand what today's historic ruling does not mean. "This ruling does not mean that direct shipping is now legal in every state; it means that states must treat out-of-state wine the same as in-state wine." Seff also added that if a state was really opposed to wine sales via the Internet, it could outlaw all direct shipping, including direct shipping by its own wineries. However, he said that he'd be surprised if that would happen.
New York governor George Pataki has been working on legislation that will open the state for direct shipments for several months and he indicated today that he welcomes direct shipping, calling it "a plus for the wineries of New York" and "the right policy."
Nida Samona, chairwoman of the Michigan Liquor Control Commission, however, indicated that her department was going to recommend to the state legislature that all direct shipments be banned. According to the Detroit Free Prneries competing in the larger market, Seff speculates that some prices may be going down.
Will a Wholesaler Bring Commerce Clause Challenge?
In the dissenting opinion, Justice Clarence Thomas argued the interstate shipping bans were within the bounds of the Webb-Kenyon Act, which prohibits the shipment of alcoholic beverages into a state in violation of its laws, and that the current three-tier system is discriminatory.
"Whatever the wisdom of that choice, the Court does this Nation no service by ignoring the textual commands of the Constitution and Acts of Congress. The 21st Amendment and the Webb-Kenyon Act displaced the negative Commerce Clause as applied to regulation of liquor imports into a State," Thomas wrote. He was joined in his opinion by Chief Justice William H. Rehnquist and Justices Sandra Day O'Connor and John Paul Stevens.
Thomas argued at length about how the framers of the Webb-Kenyon Act and the 21st Amendment intended to allow states the right to control the direct shipment of alcohol. Additionally, Thomas had concerns with the majority ruling in light of the three-tier system. "Moreover, if the three-tier liquor regulation system falls within the 'core concerns' of the 21st Amendment, then so do Michigan's and New York's direct-shipment laws. The same justifications for requiring wholesalers and retailers to be in-state businesses equally apply to Michigan's and New York's direct-shipment laws."
According to R. Corbin Houchins of the Graham & Dunn law firm, the Supreme Court decision may call into question where a wholesaler must be located in order to do business with a retailer (see "What will the Supreme Court's direct shipment decision do for wine distribution?" FAQs following this article). Every state now requires retailers that buy from wholesalers to buy from a wholesaler located in their state. But should a Nevada retailer, for example, be allowed to buy directly from, say, Young Market's in Los Angeles?
"The decision opens the door to a commerce clause challenge," Houchins said. "The dissenters say the majority has done a terrible thing, and imply that it does shake the foundations of the current distribution system perhaps more than it really does. But the decision raises a legitimate issue on the location of business."
That ball is already in play in Costco's recent challenge to the three-tier system in Washington state (see "Stakeholders in Costco Case Await Ruling," WBI, November 22, 2004). Not expressly, because Costco is challenging discrimination between out-of-state and in-state wineries being able to sell directly to retailers, which is different than discrimination between two wholesalers; but the issue of wholesaler location is inextricably bound up in what's happening with the Costco case. All the Supreme Court decision says, however, is that the state has to choose between letting everybody or nobody sell to consumers on economically equivalent terms to in-state wineries.
Koch again encouraged wineries to prepare for challenges from wholesalers. "We've seen from the wholesaler associations that they have a very interesting way of operating," he said. "With their cynical PR stunts and their phony front groups, this is an organization that has thrown and will continue to throw everything at this challenge. Let's not forget that they have succeeded in a handful of states, making it a felony crime for a winery to ship directly to an adult consumer. This is a time when our base needs to be energized, because I believe that the middle tier, for some odd reason, now feels threatened, even though you look at the track record of the 27 states that allow direct shipping, and the wholesalers in those states, and the retailers, and the consumers and the wineries, areent distribution systems, but nowhere says that it constitutes illegal discrimination. Read literally, the opinion is about discrimination between intrastate and interstate commerce, not among sources of interstate commerce. On balance, however, the decision is a call upon the states to choose either prohibition of all direct shipment or location-neutral permission. At this point, one would be hard-pressed to find a constitutional basis for blocking direct shipment from wineries in non-reciprocal states, if wineries in reciprocal states have that privilege.

3. Does the Supreme Court decision open the way for discarding the entire system of mandated middle tiers?

That depends on how one defines the system. The majority opinion says explicitly that under the 21st Amendment a state may require all liquor to go through a three-tier distribution system. It does not say a state may require the middle tier of that system to have a local presence. Thus, it remains unclear whether a state may require a wholesaler to have a warehouse in the same state as the retailer to which it sells, but the majority opinion appears hostile to requiring a business to be sited in the customer's state if efficiency would be served by allowing it to be located elsewhere. That appears to open the way to challenge three-tier systems that require the bottom and middle tiers to have bricks and mortar presences in the state, as all now do.

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