Archive for March, 2011
Direct Shipping Legislation Heats Up Across the Country
March 25th, 2011
This time of year always brings a flurry of legislative activity, and 2011 is no exception. The Granholm v. Heald Supreme Court ruling from 2005 is still having its impact on many states. 27 states are currently considering some form of direct shipping legislation, and at least 44 more have considered some sort of tax bill that would affect wineries. While legislation can change quickly and no outcome guaranteed, what follows is a summary of the most important direct shipping legislation as it stands as of today.
Maryland
Marylanders have long awaited a bill that would allow direct wine shipments into the Old Line State. This past Tuesday, both the Senate and the House acted on all three direct shipping bills proposed in the current session. The Economic Matters Committee both withdrew HB 234 and passed as favorable, HB 1175. SB 248, the counterpart to HB 234 (introduced not long after the Direct Wine Shipment Report by Maryland’s Comptroller, in support of winery direct shipping), was also passed as favorable, but includes amendments, touted as a “compromise”, which removed in-state and out-of-state retailers’ ability to ship direct to consumers. Additionally, the customer volume limits are now set to 18 liters per household per year (down from the original 24 cases per individual per year, as was initially introduced), the permit cost has increased to $200.00 per year, and the bond security increased to $1000.00. As introduced, HB 1175 also made no allowances for direct shipments from retailers. The Senate and House bills are scheduled to be presented for a third reading today on the floor of the House. Amendments concerning a new study on retailer shipping and the ability of Maryland retailers to ship Kosher wines to Marylanders will likely be introduced on the House floor.
New Jersey
If direct shipping legislation passes this year, New Jersey could open up to wineries for direct shipments for the first time. S 766 and counterpart A 1702 would allow permitted wineries to ship up to 24 cases annually. S 766 passed the Senate on 2/4/2010. The Assembly bill remains in the Regulatory Oversight and Gaming Committee, which is chaired by the bill’s lead sponsor, Assemblyman John J. Burzichelli. Burzichelli is also the lead sponsor of another, less desirable, direct shipping bill (A 3897) that would impose a capacity cap of 250,000 gallons on direct shippers. A3897 is also waiting for a vote in Committee. It remains to be seen if the recent Freeman decision will complicate the bills that are on the table.
Florida
Florida is currently open to direct shipments from wineries. The state’s previous direct shipping legislation was found to be unconstitutional under Granholm and was overturned in a 2005 court ruling under Bainbridge, et al. v. Turner. For the fifth time in six years, direct shipping legislation is being considered in Florida (no bills were considered last year). As introduced, HB 837 and counterpart SB 854 would allow wineries (not retailers) to ship directly to consumers. The bill contains severely onerous restrictions that would prevent most wineries from obtaining a permit or shipping into the state, including a 250,000 gallon production volume cap (capacity cap), bond, and a mandate to give wholesalers a year’s notice that the winery plans to direct ship.
HB 837 was voted on and determined “favorable” by the Business & Consumer Affairs Subcommittee on March 22, 2011, and is now in the Government Operations Appropriations Subcommittee.
Massachusetts
There are several problems with Massachusetts’ existing unworkable direct shipping laws. The 30,000 capacity cap restriction was found to be unconstitutional by the First Circuit Court in 2010, but other statutes regarding customer aggregate volume limits and carrier licensing remain in effect, and need to be updated in order to truly open the state to direct shipping. HB 1029 and HB 1883 would address these issues and would allow permitted wineries to ship wine to consumers. Both bills were referred to the Joint Committee on Consumer Protection and Professional Licensure in February, and still have a ways to go before becoming law.
Indiana
Currently, only wineries that have not had a relationship with a distributor in the past 120 days can obtain an Indiana direct shipping permit, and wine can only be shipped to Indiana residents who have previously visited the winery in person. Two bills in the current legislative session aim to remove these restrictions and open up direct shipments in Indiana to many wineries that are currently unable to get a permit. HB 1081 would remove the requirement for an initial face-to-face transaction, as well as remove the restrictive wholesaler relationship provision in the law. A similar bill, HB 1132, was also introduced in January of 2011, but has been amended to become a study “concerning the viability and efficacy of instituting a policy to permit the direct shipment of wine to consumers in Indiana.”
Rhode Island
Rhode Island remains closed to offsite direct wine shipments. SB 170 would create a direct shipping permit and allow shipments of up to 24 cases of wine per year, per resident from permittees. On March 23, 2011 the Senate Special Legislation Committee recommended the measure be held for further study.
Tennessee
Pending legislation in Tennessee would open up the entire state to direct wine shipments, eliminating the “dry” areas of the state that wineries are not allowed to ship wine into. The bill is currently on the calendar in both the Senate and the House.
Pennsylvania
At a hearing on March 22, 2011, the Liquor Control Board asked that the legislature “modernize” the liquor code. As part of the modernization, the PLCB asked that direct wine shipments to consumers’ doorsteps be allowed. Pending legislation (HB 110) would allow for a workable permit system. Thus far, the bill has yet to move out of the House.
Son of 5034: C.A.R.E. Act Re-Introduced as HR 1161
March 21st, 2011
If you have been following the debate over the CARE (Community Alcohol Regulatory Effectiveness) Act for the last nine months, it should be no surprise that the bill was re-introduced in the US House of Representatives last week. Proponents of the bill, including the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) had hinted for months that it would be re-introduced in the 112th Congress after the previous version was heard, but did not move out of the House Judiciary Committee in the 111th. As expected, HR 1161 was introduced just before the NBWA Annual Legislative Conference, which will take place March 27th-30th in Washington, D.C.
When comparing the text (see our redline version) of the current bill to that of the revised version of the original bill (HR 5034) from September, you’ll notice that not much changed in terms of substance. Aside from the assignment of a new bill number (HR 1161), the re-introduced bill was renamed to be the “Community” Alcohol Regulatory Effectiveness Act of 2011 from the “Comprehensive” Alcohol Regulatory Effectiveness Act of 2010. The Purpose (Sec. 2) and Declaration of Policy (Sec. 3a) were also rewritten and are now slightly more concise. However, the meat of the Act lies within the Construction of Congressional Silence (Sec. 3b) and the Amendment to Wilson Act (Sec. 4), both of which were untouched. For additional background on the CARE Act and its potential effects, see our previous post, which was published just before the House Judiciary Committee hearing on September 29th, 2010.
Because HR 5034’s lead sponsor, Bill Delahunt, retired from congress last year, HR 1161 has a new lead sponsor in Rep. Jason Chaffetz of Utah. Rep. Chaffetz was one of the original co-sponsors of HR 5034, which was shelved with 152 total co-sponsors. HR 1161 was introduced with only eight co-sponsors last week, but that number will certainly grow as the lobbying efforts begin to ramp up. The bill has yet to be introduced in the Senate.
And so the battle continues. NBWA and WSWA both applauded the introduction of HR 1161 as necessary to enable “states to defend their alcohol laws from litigation designed to eviscerate state control over alcohol policy decisions.” A coalition of supplier groups, including the Brewers Association, Beer Institute, Distilled Spirits Council of the United States, Wine Institute, National Association of Beverage Importers, and WineAmerica, remain opposed and immediately responded by referencing their preemptive February joint producer letter to Congress urging them to refrain from spending “valuable time wading into an intra-industry squabble and unraveling a successful regulatory structure to the detriment of consumers, the industry, and the federal interest in a fair, competitive, and orderly marketplace for alcohol beverages.”
“Ultimately, this legislation is about who should make decisions regarding alcohol regulation, not what those decisions should be,” said NBWA President Craig Purser in a statement. “Alcohol is different than other consumer products and that’s why the 21st Amendment to the U.S. Constitution created a state-based system of alcohol regulation that effectively balances local community control, tough consumer protections as well as choice and variety. The majority of Americans believe that laws regarding the regulation of alcohol should be made at the state and local level – and so do we.”
Paul Kronenburg, President of Family Winemakers of California, summarized the supplier opposition to HR 1611. “Family Winemakers of California (FWC) remains opposed to efforts at the national level to undermine the Commerce Clause and embolden states to pass discriminatory alcohol laws. Rarely are states reluctant to regulate and they don’t need H.R. 1161 to remind them of their authority. Florida is a prime example where wholesalers recently introduced a production cap bill despite last year’s Massachusetts decision finding caps unconstitutional. FWC will work with others to preserve our national economic union and consumer choice by opposing H.R. 1161.”
"We see HR 1161 as a radical departure from the principles of a single economic union laid down in the Constitution," said Tom Wark, executive director of the Specialty Wine Retailers Association. "This bill would revoke all Commerce Clause protections against discriminatory state laws that wine retailers currently enjoy and would undoubtedly lead to protectionist laws that hurt retailers and consumer access to wine, beer and spirits."
In a previous post, we discussed how the CARE Act would not change anything overnight, despite hyperbole to the contrary. Effectively, it would allow states the ability to pass new laws that include non-facial forms of discrimination such as capacity caps, in-person purchase requirements, and limits on production capacity. One certainty is that the hyperbole and rhetoric on both sides will escalate as the industry associations dig in and make their case for (and against) federal legislation. Wholesaler groups are going out of their way to say that this is not an “intra-industry” squabble, but the battle lines are currently drawn with wholesalers united on one side, and suppliers united on the other.
Further Reading:
HR 5034 Bill Summary and Status
HR 1161 Bill Summary and Status
NBWA Press Release
WSWA Press Release
Beer, Wine and Spirits Producers Press Release
Viewpoint: Back to the Future with HR 5034 (June 2010)
H.R. 5034 Update: Revision Reignites Debate, Important Hearing Set for Wednesday (September 2010)
The Meaning of Silence
March 10th, 2011
Last Monday the U.S. Supreme Court declined review of the 2010 Court of Appeals decision in Wine Country Gift Baskets.com v. Steen, a Texas case refusing to apply Granholm’s antidiscrimination principle to wine sales by out-of-state non-producing retailers. (Previous blog posts have referred to the case as the Texas Siesta Village suit, using its original lead plaintiff name; for convenience, I will call it Steen here.)
Denial of review leaves standing the 5th Circuit opinion, which reads Granholm to mean only that states giving their in-state manufacturers the right to circumvent the “three-tier system” cannot for protectionist purposes deny the same dispensation to out-of-state manufacturers. In that analysis, the state can allow its own retailers to deliver directly to Texas consumers while denying the same privilege to out-of-state retailers, because Granholm does not address application of the Commerce Clause to non-producing sellers.
Judge Leslie Southwick’s opinion in Steen does not shrink from the basic Granholm question: Does the state law facially and intentionally discriminate against out-of-state retailers relative to in-state retailers? Although he points out that Texas has not authorized circumvention of the three-tier system for local retailers and thus, he believes, cannot be discriminating when it prevents out-of-state retailers from circumventing the same system, Steen is about justifying location discrimination, not about whether it exists.
The justification Steen offers is that without excluding interstate retailing, the state could not maintain a mandatory three-tier system — thus elevating the form of regulatory structure to a constitutional principle outweighing Commerce Clause considerations. Does denial of Supreme Court review advance that position in the ongoing controversy over state barriers to interstate retailing and wholesaling?
When the Supreme Court Passes
It is a truism in the law that the Court’s denying review carries no implication that the decision in question was correct. Many considerations go into review decisions, and it is not difficult to justify excluding from a packed court calendar a case revisiting a difficult and divisive precedent that affects only a relatively small segment of the economy. As noted in previous blogs, I suspect it will require inconsistent rulings among the appellate circuits to drag the Court into confronting the internal contradictions of Granholm.
Nonetheless, even if denial of review is technically meaningless, it may add a bit of luster to the lower court opinion in the eyes of judges in other circuits and at least justifies a close look at where the Steen decision leaves us.
Before Granholm
Ironically, it was the 5th Circuit that presaged Granholm in the 2003 Dickerson case, by invalidating facially discriminatory Texas direct shipment laws. In Dickerson the 21st Amendment did not save the state statutes because they had been adopted for a protectionist purpose, rather than a recognized 21st Amendment objective such as temperance. Reasoning based on purpose followed straightforwardly from the 1984 Supreme Court decision in Bacchus.
In 2005, Granholm supplanted Dickerson as the definitive statement of Commerce Clause versus 21st Amendment jurisprudence on discrimination against out-of-state wineries relative to in-state wineries. Both cases dealt exclusively with the producing wineries’ direct sales and shipments to consumers.
While Dickerson was merely silent on application of the nondiscrimination principle to other tiers of distribution, Granholm contains the famous quotations from Justice Scalia’s one-judge opinion in a 1990 Supreme Court case that did not involve direct shipment to consumers, North Dakota v. U.S., “We have previously recognized that the three-tier system itself is ‘unquestionably legitimate’ . . . . The Twenty-first Amendment . . . empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.”
A Little Latin
Because Granholm involved no challenge to a state three-tier system itself, but dealt only with discriminatory application of a three-tier requirement, the above quotations play no role in the strict logic of the ultimate decision. They are, in legal parlance, “obiter dicta,” which means things said in passing — usually shortened to “dicta,” and sometimes seen in its singular form, “dictum.”
Portions of an opinion that are mere dicta, even coming from the Supreme Court, are not binding on lower courts. Lower courts are obliged to accept the Supreme Court’s determinations of matters of law that are pivotal to its decisions and to follow the doctrinal principles necessarily implied by how a Supreme Court case came out. That source of mandatory guidance is known as the “holding” of the case. The Commerce Clause principle of nondiscrimination that actually drove the Granholm result is part of its holding. Dicta are not part of the holding, and lower courts are entitled to give them as much or as little weight as they see fit in applying the Supreme Court precedent in which they appear.
The Court itself has been lax in distinguishing dicta from holdings. For example, the 1980 landmark Midcal opinion admits states have “virtually complete control” over fashioning their liquor distribution systems, but that observation could not be a holding, because Midcal overturned the California price posting system. Nevertheless, Granholm quotes the passage without labeling it as dicta. Similarly, Granholm says the Court “held” in North Dakota that “States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment,” although eight of the nine justices deciding North Dakota disagreed with that unqualified statement.
Because North Dakota is the primary source of current judicial defense of the three-tier system, it merits careful examination. There the conflict was between North Dakota’s distribution system and federal regulations that called for supplying spirits to armed services post exchanges at a price achievable only by direct distribution from distillers. The Court’s opinion, endorsed by four of the nine justices, declared that the state’s three-tier law survived a Supremacy Clause challenge for conflict with federal regulations (not a dormant Commerce Clause challenge) only because the state provided a workable alternative to three-tier distribution — i.e., requiring an identifying sticker on bottles distributed directly. Four other justices found the alternative too burdensome and would have overturned the state law.
The swing justice was Scalia, who wrote a separate opinion expressing the view that the practicality of the sticker alternative didn’t matter, because the state’s right to enforce three-tier distribution was absolute under the 21st Amendment. With five justices voting to uphold the law, the case resulted in a victory for the state, but with no majority view of the rationale and only one justice advancing the absolutist position. That one-judge concurring opinion is the sole source of the above quoted statements that famously appear as dicta in Granholm.
Making it Big
Some dicta fade into obscurity. The three-tier system dicta of Granholm have gone on to achieve prominence. Circuit Judge Richard Wesley in a New York retailer case, Arnold’s Wines, quoted the trial judge Richard Howell with reference to Scalia’s North Dakota assertions, “But if dicta this be, it is of the most persuasive kind.” The same text appears crucially in Steen.
Judge Howell’s subjunctive “if” clause is mere rhetorical flourish, for the text he quoted from Granholm is obviously and unquestionably a dictum. To find it compellingly persuasive, one must draw, from the fact that one justice in North Dakota found the state’s 21st Amendment right to a three-tier system weightier than a cost-saving Department of Defense liquor procurement regulation, the conclusion that the state right is also weightier than national consumer and merchant interests protected by the Commerce Clause. In reaching that conclusion, the Steen court reasoned that a state could not exercise its Granholm-sanctioned right maintain a mandatory three-tier system if retailers from outside the state, who presumably had not purchased from a “licensed in-state wholesaler,” were free to compete from local retailers for resident consumer trade.
Even if the quoted statements were authoritative, it is questionable whether they would sustain the Steen position. Although the Granholm majority states that in North Dakota the Court “recognized the three-tier system as ‘unquestionably legitimate,’” in context the North Dakota opinion recognized a three-tier system as legitimate, not “the” system in the sense of all instances of it:
“In the interest of promoting temperance, ensuring orderly market conditions, and raising revenue, the State has established a comprehensive system for the distribution of liquor within its borders. That system is unquestionably legitimate. [Here the Court cites two of its opinions, Young’s Markets, whose reasoning was essentially abandoned in Bacchus and given burial in Granholm, and a case allowing states to regulate bootleggers traveling through en route to another state.] The requirements that an out-of-state supplier which transports liquor into the State affix a label to each bottle of liquor destined for delivery to a federal enclave and that it report the volume of liquor it has transported are necessary components of the regulatory regime.”
Nothing in North Dakota deals with discrimination between a North Dakota retailer or wholesaler and an out-of-state retailer or wholesaler. It is at bottom not even a Commerce Clause decision, as it turns on the right of a state to compromise an express federal objective under the Supremacy Clause. Even if its rhetoric can be transferred to dormant Commerce Clause jurisprudence, it unambiguously legitimizes the North Dakota system on grounds of its pursuit of traditional aims (temperance, orderly markets and tax revenues), not for the sake of the system structure itself.
In Summary
Fifth Circuit law on interstate retailing now rests on the theory that because the legitimacy of the tiered distribution system in North Dakota (with its provision for circumvention by stickered goods) was unquestionable, any state law that is part of a tiered system, even one directly contravening the Commerce Clause, must be valid.
It is one thing to say tiered systems are legitimate distribution structures (“Texas may have a three-tier system”), quite another to say that they can be used to discriminate against interstate commerce in ways that fail standard Commerce Clause tests. On careful reading, the holding of Granholm (as Justice Thomas correctly observed in his dissent) amounts to taking the 21st Amendment out of cases of intentional protectionism favoring local sellers over interstate sellers; in such cases there is no special “saving” of liquor laws that would be invalid under general Commerce Clause nondiscrimination principles applicable to all goods. In contrast, what the Steen court refers to as “our read” of Granholm takes the North Dakota dicta as insulating anything that is an “inherent part” of the “traditional three-tier system” from Commerce Clause scrutiny.
Whether Granholm’s arguably radical application of the dormant Commerce Clause is limited to the top tier of wine distribution cannot be determined by parsing the text of that opinion. Rather, it is a policy choice between the Marshallian vision of a national market with only rare departures from free movement of goods across state lines and the Repeal era view of alcoholic beverages as disfavored articles of commerce over which states are given almost unlimited rights of regulation in consequence of their undoubted 21st Amendment right to control importation. Judges in cases yet to be presented will have to make that choice.
Meanwhile, Judge Howell’s bon mot about North Dakota dicta gains familiarity. The 2nd Circuit Arnold opinion in which it appears ultimately does not rely on it, but rather saves the state law on non-21st Amendment grounds, as pursuing a legitimate state purpose that cannot reasonably be achieved without discriminating against interstate commerce. The Steen decision goes farther by enshrining it as a primary basis for decision.
By R. Corbin Houchins, CorbinCounsel.com
