Untangling the complex world of wine direct shipping and compliance
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Discrimination Against Out-Of-State Retailers After Granholm

September 18th, 2007
By R. Corbin Houchins, Beverage Industry Counsel

Imminent revision of Illinois direct shipment law is producing much heated comment about retailer shipping rights, some trenchant and some off the mark, but all of significance beyond one state.

Illinois House Bill 429, sent to the governor for signature on August 8th, conforms to the all but universally held belief that Granholm condemns treating wineries differently depending upon the reciprocity or non-reciprocity of their states’ direct shipment laws. Ending reciprocity is not in itself controversial, and there is nothing particularly unusual about the way Illinois is going about it -conversion to a licensed shipper system with a volume cap (for both sales to consumers and direct distribution to retailers). One can argue about the constitutionality of volume caps, but that has not been the main issue in public media discussions lately.

Most attacks on the new law involve its allegedly unconstitutional exclusion of retailers (including those positioned as “virtual wineries”) from licensed shipment. The big question is whether Granholm prevents states from allowing deliveries to consumers from a bottle shop across town, but not from one across the state line.

I was recently misquoted in a trade magazine as saying the retailers might prove “unjust discrimination.” If injustice were enough to invalidate discriminatory liquor laws, statutes would be falling like drosophila in a gin bottle. It’s unjustified discrimination against interstate commerce relative to local commerce that condemns a law under the Commerce Clause, and justifying means only showing the discrimination is necessary to preserve certain state interests.

Exactly what those interests are remains subject to differences of opinion. Granholm is the most profound statement on the subject in many years. It is not, however, among the easiest Supreme Court opinions to encapsulate.

To understand Granholm, one must observe a distinction lawyers make between the essential rationale, or “holding,” of the case and incidental statements of judges. The holding is binding precedent and, if the case is a Supreme Court decision, pretty much determines what the federal constitution means in all subsequent cases decided by all other courts. Everything in the opinion not essential to the result is considered “said in passing” -obiter dicta in Latin, or “dicta” for short. Dicta may give important insights into judges’ reasoning and help predict their future decisions in other cases on appeal, but dicta don’t control the outcome of cases in lower courts. (An example of significant dicta is the proposition that reciprocal shipment laws are unconstitutional because they create trade zones, contrary to the purpose of the Commerce Clause. The Court was not deciding a case about reciprocity, so what it said on the subject was not essential to the result.)

Separating holdings from dicta is an exercise of judgment. For Granholm, a reasonable reading begins with the formulation of the Supreme Court in its decision to grant review of the lower court decisions and picks up the facts the Court seemed to regard as dispositive. That produces a line of reasoning: “The Commerce Clause forbids overt discrimination favoring local commerce relative to interstate commerce, except in very limited circumstances. A state that allows its own sellers to ship directly to consumers but restricts out-of-state sellers in shipping directly to the same consumers is overtly discriminating. No relevant exception applies because (1) historical and constitutional analysis shows that the supposed 21st Amendment right of states to discriminate in favor of in-state producers when they regulate direct shipment of wine does not, in fact, exist, (2) as with any other article of commerce, the burden of justifying discrimination is on the states, and (3) neither state proved it needed to engage in discrimination to advance a legitimate local purpose that could not be adequately served by other means. Therefore, the discriminatory laws are invalid under the Commerce Clause.”

From the rationale of the case and the key facts noted in the opinion, one can extract the holding, which is in effect a decisional algorithm lower courts must apply unless the Supreme Court modifies it in a subsequent opinion. Put in the form of a conditional statement, a permissible interpretation of the Granholm holding might look like this:

If:

  1. Law 1 of a state authorizes businesses resident in the state to sell and ship wine directly to consumers within the state.
  2. Law 2 of the same state either prohibits, or renders economically impractical, wine shipments from out-of-state businesses.
  3. The state claims the discrimination is justified because it is necessary for preventing sales of wine to minors, for collecting excise taxes on wine, facilitating orderly markets, protecting public health and safety, and ensuring regulatory accountability.
  4. Out-of-state wine sellers face the loss of state and federal licenses if they fail to comply with state law regarding sales to minors and payment of taxes.
  5. There is no reason to believe direct shipment by out-of-state sellers would cause more access by minors than direct shipment by in-state sellers.
  6. Out-of-state wine sellers have a history of complying with tax reporting and payment procedures associated with distribution through three tiers.
  7. The state’s objectives related to orderly markets, public health and safety and accountability can be achieved with ordinary licensing requirements and modern means of transmitting information, without discrimination based on licensee location.
  8. The TTB can revoke the out-of-state wine seller’s federal basic permit for violation of the state’s laws, resulting in inability to sell in any other state.
  9. The state does not demonstrate that, notwithstanding the above factors, its legitimate objectives can be achieved only by discriminating against interstate commerce.

Then:

Law 1 and Law 2 cannot constitutionally coexist. The state has to change one of them, to treat in-state and out-of-state sellers on evenhanded terms.

Different observers will put different lists of “if-clauses” in the holding, depending on what facts they conclude were essential. If I were arguing the pro-commerce case, I’d like to take items 4 through 8 out of the holding, demoting them to “makeweight” statements that support the outcome but weren’t essential to it. The states and their allies would, of course, like to expand the list.

The differences are important, because parties wanting a pro-regulation response in a Commerce Clause case will have to find an essential if-clause unsatisfied. There are two traditional routes to that. Pointing out factual distinctions that prevent checking off a necessary condition is known as “distinguishing” a case. Expanding the list of if-clauses to embrace so many facts that the decision would be repeated only in a precisely identical case is called “limiting the case to its facts,” a step just short of overruling. Post-Granholm litigation involving industry members other than wineries or licensed beverages other than wine is going to be all about making and parrying attempts to distinguish the Granholm decision or limit it to its facts.

One blogger on the Illinois issue described fanciful attempts to distinguish famous civil and criminal rights cases on irrelevant fact differences (school segregation of Hispanics versus African-Americans, etc.), arguing that it would be equally silly to distinguish Granholm on the basis of retailer versus winery. Rights cases like Brown and Miranda, however, contain no suggestion that they turn on such peripheral differences. By contrast, Granholm makes explicit reference to features of wineries, established in the record of lower court proceedings, that support the majority decision.

Three glaring differences between the two producer cases decided in Granholm and the impending retailer cases make the outcome of the latter problematic. First, wineries have a track record of filing shipment reports, excise tax returns, and other compliance documents in multiple states, without creating collection problems. Second, a federal layer of winery regulation means that punishment for violations can be nationwide loss of access to markets, not merely loss of the state whose laws were violated, by action against the basic permit. Retailers do not hold federal basic permits. Third, it seems likely the states will have some factual ammunition to bolster the argument that interstate retailing will present them with sellers that are both much more numerous and less demonstrably law-abiding than wineries.

In Granholm the states relied heavily on a free pass to discriminate when the goods are liquor, with a very sketchy presentation on the need for of discriminatory treatment to achieve regulatory ends. Now that everyone knows location discrimination will have to be justified by demonstrated necessity, the states may make a better factual record. Justification is not easy, but it is certainly not impossible. The Granholm court noted, as an example, Maine’s right to discriminate directly against out-of-state game fish to protect its piscine population against exotic species. The various interests advanced by the states in Granholm were not dismissed as spurious, only as not demonstrably unprotectible by nondiscriminatory means.

So where does that leave non-Illinois retailers wishing to ship to Illinois residents?

There is plenty of comfort for the pro-trade retailer position among the Granholm dicta, but to win a lawsuit simply by citing Granholm, the retailers will have to meet the conditions of the if-clauses the courts see as part of its holding. Failing that, they will have to persuade the courts not merely to apply Granholm, but to extend the holding beyond its facts. In that endeavor, they would be aided by dicta in Granholm, which, though not binding, might encourage judges to take a more expansive view. In particular, the statement that citizens have a right of access to the markets of other states on equal terms contains an echo of lofty principle.

There is no ordained outcome. The next round will depend on how well the parties play the litigation game and the predilections of human beings who decide cases.

2 Responses to “Discrimination Against Out-Of-State Retailers After Granholm”

  1. Tom Wark says:

    “Three glaring differences between the two producer cases decided in Granholm and the impending retailer cases make the outcome of the latter problematic. First, wineries have a track record of filing shipment reports, excise tax returns, and other compliance documents in multiple states, without creating collection problems. Second, a federal layer of winery regulation means that punishment for violations can be nationwide loss of access to markets, not merely loss of the state whose laws were violated, by action against the basic permit. Retailers do not hold federal basic permits. Third, it seems likely the states will have some factual ammunition to bolster the argument that interstate retailing will present them with sellers that are both much more numerous and less demonstrably law-abiding than wineries.”

    The issue of filing shipping reports is of very little significance if the point is to determine if retailers can be relied upon to to follow the laws laid down by a state with regard to paying taxes and filing reports. Retailers across the country have been doing so in a number of states, not to mention there home states for years.

    Second, the fact that no federal basic permit exists for retailers suggest that there is no incentive for retailers to follow the laws. This discounts the fact that retailers would in most cases be agreeing to submit to state jurisdiction and it discounts the existence of the 21st Amendment Enforcement acts. Both these things offer a great deal of incentive for retailers to follow the letter of the law.

    Finally, a survey of those states that issue permits to both out-of-state wineries and out-of-state retailers show that the vast majority of permits are issued to out-of-state wineries, not to out-of-state retailers. This evidence has been presented both to legislators as well as to courts. There is no question that the burden placed on regulators is far greater as a result of winery-originating shipments than retailer originating shipments.

    All these issues were thoroughly outlined in Illinois and really are not in question. Illinois wine consumers lost a long held right not because there were questions about how Granholm applied to retailes. They lost their rights due to the control of the state legislature by wholesalers and due to the fact that the other players in the Illinois debacle had demonstrated no concern for the long term health of the American wine industry.

    One can only hope that these three issues you outline are the only obstacles that are in the way of consumers being able to have access to the wines they want.

    Tom Wark
    Executive Director
    Specialty Wine Retailers Association

  2. R. Corbin Houchins says:

    Tom Wark is an astute observer of wine industry developments, and I join him in hoping that the distinctions I draw between the wineries’ case in Granholm and the interstate retailers’ cases to be heard will not lead to a different result. My post concerns the misapprehension, frequently encountered among pro-trade supporters, that Granholm itself prohibits discrimination against out of state retailers relative to in-state retailers, and not the strength of the retailers’ position. The point is that the retailers will have to make their case on the fact record they and their opponents develop. The factual distinctions between retailers and wineries are not trivial, and if retailer litigants present their cases as if merely citing Granholm will assure victory, they may well set back the cause of freer trade.

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