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Glimmer of Hope in Challenging On-Site Requirements

On December 17th, the US Court of Appeals for the 3rd Circuit (Delaware, New Jersey and Pennsylvania) rendered its decision in Freeman v. Corzine (formerly known as Freeman v. Fischer and Freeman v. Governor of New Jersey). The case applies Granholm to several aspects of New Jersey law, which banned direct shipment by all wineries, but allowed direct-to-consumer sales only by in-state wineries. To no surprise, it concluded that the facial discrimination created by giving only its own wineries a sales route around the three-tier system violated the dormant Commerce Clause, absent proof of a legitimate state objective it cannot achieve without discriminating against the interstate seller (the necessity test, which no state has passed so far in Granholm litigation).

A less predictable part of the 3rd Circuit ruling involved personal importation, a subject courts have not heretofore directly examined under Granholm. The Freeman opinion takes a straightforward nondiscrimination approach: If a state allows its resident wineries to sell directly to consumers without volume limits, it cannot impose significant volume limits on wine a consumer purchases at an out-of-state winery and brings into the state, without meeting the necessity test. To comply with Freeman, it appears that states must either fashion demonstrable proofs of necessity that will withstand close judicial scrutiny (as New Jersey failed to do) or choose between (a) imposing on their wineries’ tasting room sales the same, usually extreme, limits that apply to personal importation and (b) allowing consumers personally to import out-of-state on-site purchases with no more limits than apply to local tasting rooms.

Because the federal direct shipment law permits wineries to ship on-site purchases directly to consumers who could lawfully have carried it home as luggage under personal importation laws, independently of state direct shipment laws, invalidating state volume limits could in theory expand direct distribution geographically and make it available to wineries that do not hold shipping licenses. It seems highly unlikely, however, that states would by inaction permit creation of a significant market in untaxed personal importation of on-site sales.

Plaintiffs in Freeman also challenged the ban on all direct shipment, on the grounds that on-site laws, though not facially discriminatory, discriminate in effect by prohibiting out-of-state wineries from using the only method at hand to compete with local wineries, a visit to which by the local consumer is not as burdensome as a trip outside the state. (Non-facial discrimination is usually examined under a less stringent standard, whether the purported benefit to the state outweighs the harm to commerce, known as the Pike test.) Like most courts that have encountered it, the 3rd Circuit rejected the differential burden argument in conclusory terms, finding that the law “even-handedly forces all wine sales out of one channel and into other available channels” –i.e., no proven discrimination in effect. However, unlike some other courts, it held out the possibility that in another case the pro-commerce litigants might successfully prove differential burden by demonstrating economic loss because of the disproportionate travel requirement inherent in on-site laws. It also implied that future plaintiffs who could prove even modest economic loss to out-of-state producers might profitably argue that benefits from the non-facial discrimination are too slight to pass the Pike balancing test.

By R. Corbin Houchins, 12/23/2010, CorbinCounsel.com

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