Untangling the complex world of wine direct shipping and compliance
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    The Commerce Clause, the CARE Act, and Clarity

    April 6th, 2011
    By Karin Moore, V.P. & Co-General Counsel, WSWA

    Editor’s Note: The following is a guest post, written by Karin Moore of WSWA, in our series on the CARE Act of 2011.

    The intersection between the Commerce Clause and the 21st Amendment is about as clear as mud. The lack of clarity is a reason legal scholars and others find it fascinating–that and because it is alcohol we’re discussing. But this ambiguity has repercussions: it costs states millions of dollars to defend laws that have been debated and passed, at a time when they can ill afford the price. Litigation is being used as an end-run around the regulatory process, which should involve locally-elected officials and democratic procedures. The CARE Act is intended to clear the mud and underscore the fact that alcohol is different from other consumer goods.

    The CARE Act itself is clearly constitutional. It is contentious to be sure. But unconstitutional? No. The Supreme Court has held on numerous occasions that Congress has clear authority to insulate state laws from dormant Commerce Clause challenges. “Our decisions do not, however, limit the authority of Congress to regulate commerce among the several States as it sees fit. In the exercise of this plenary authority, Congress may confe[r] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy.” Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 44 (1980); see also Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648 (1981); H. P. Hood & Sons, Inc. v. DuMond, 336 U.S. 525, 542-543 (1949); Schutz v. Thorne, 415 F.3d 1128 (10th Cir. 2005). You may disagree with the reasons for insulating state laws (or insulating them at all), but the fact that Congress can do so if it chooses is clear.

    It has been over a decade since the Granholm case was first filed. And we are all clear on precisely who Granholm applies to. We just don’t all agree. All signs – and statements by the Plaintiff’s attorney in the recent certiorari denial –indicate that this issue will continue to be litigated. In Granholm v. Heald, 544 U.S. 460 (2005), the New York and Michigan statutes at issue treated of in-state producers differently than out-of-state producers and the Court found the statutes to be facially discriminatory (“facial discrimination” means that the language of the statutes in question discriminated “by their own terms” or on their face), see, e.g. 544 U.S. at 476. But the Court also said that facially discriminatory laws could be constitutional if the states could justify the disparate treatment, and it proceeded to analyze the states’ proffered justifications, id. at 489-93. New York and Michigan failed to meet this “exacting” burden, of course, id. at 493, but the Court still performed the analysis. The CARE Act embodies this exact balancing test.

    I simply cannot embrace the argument that Granholm’s discussion of the three-tier system meant something other than to bless its channeling of liquor through in-state distributors (and, by extension, in-state retailers). Granholm was a case about discrimination. So, if the Court wasn’t talking about that aspect of the three-tier system, there would have been no need to mention it. Recall that the opinion quotes Justice Scalia’s concurrance in North Dakota v. United States: “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”. See 544 U.S. at 489 (quoting 495 U.S. at 447).

    Will the CARE Act end all litigation? Of course not: it only focuses on one aspect of beverage alcohol litigation. The CARE Act won’t affect in any way preemption challenges (like the Washington Costco case, the Maryland TFWS case, or the current New Mexico USAirways case), equal protection challenges to state laws (current Kentucky Maxwell’s Pic Pac case), or even some ongoing dormant Commerce Clause challenges to state laws (current Illinois ABInBev case).

    The CARE Act would also protect state laws that are not facially or intentionally discriminatory at the producer level, including direct-to-consumer shipping laws. The CARE Act would allow a state to pass a law which provides for differential treatment for small producers (size-based distinctions) as long as the law was evenhanded and thus applied equally to both in-state and out-of-state producers and was not intentionally discriminatory. And states could require that all sales be consummated in a face-to-face manner, once again, as long as the law was evenhanded and thus applied equally to sales by both in-state and out-of-state producers.

    At the time of ratification, I’m certain that the authors of the 21st Amendment thought they were being crystal clear. In the words of Hugo Black, who lived through Prohibition and, while a United States senator, supported the enactment of the 21st Amendment, the purpose was to return “’absolute control’ of liquor traffic to the States, free of all restrictions which the Commerce Clause might before that time have imposed.” Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 US 324 (1964) (Black, J., dissenting). There was indeed clarity on the purpose of the amendment.

    There are those of us who feel that purpose is still clear, while the Courts have made it less so. While Justice Thomas did not vote for the passage of the 21st Amendment, he did argue in a lengthy dissent in the 2005 Granholm decision that the plain meaning of Section 2 removed “any doubt regarding its broad scope, the Amendment simplified the language of the Webb-Kenyon Act and made clear that States could regulate importation destined for in-state delivery free of negative Commerce Clause restraints.” 544 U.S. 460, 514 (2005) (Thomas, J., dissenting). Despite the clarity at the time, Section 2 of the Amendment has been the source of every Supreme Court ruling directly addressing 21st Amendment issues. Section 2 of the 21st Amendment was clearly about WHO should make decisions regarding alcohol policy, not WHAT those policies should be. And that is what the CARE Act is about.

    Karin Moore
    V.P. & Co-General Counsel
    Wine & Spirits Wholesalers of America

    Karin Moore has been with WSWA for three years. Prior to that she was an antitrust litigator for twelve years with O’Melveny & Myers LLP and the U.S. Federal Trade Commission. Karin received her J.D. from George Mason University School of Law, and her B.A. in economics from Hobart and William Smith Colleges.

    18 Responses to “The Commerce Clause, the CARE Act, and Clarity”

    1. Tom Wark says:

      Karin:

      First, why didn't WSWA get upset and start introducing legislation when wholesalers challenged state alcohol laws in TX, KS and IN that were, according to you, "an end-run around the regulatory process, which should involve locally-elected officials and democratic procedures." It appears to me WSWA has no principle when it comes to denigrating the legitimate use of the Federal Court System. It seems to me they are only concerned with challenges to state laws when the results don't favor wholesalers.

      Second, you know full well that the citation in Granholm concerning the Three Tier System and the North Dakota ruling was dicta and not a HOLDING of the court. And dicta is not binding on lower courts.

      Third, you likely also know that piece of dicta from the North Dakota case came from an challenge involving the Supremacy Clause, not the Commerce Clause.

      Fourth, the dicta in Granholm about the Three Tier System being "unquestionably" legitimate" came from a concurring opinion by one justice (Scalia), a concurrence with which none of the other 8 justices joined.

      To put it bluntly, this notion that the Three Tier System has been "blessed" by the courts is a notion sitting on very thin ice. And I think you know this. If the Granholm court wanted to make the extraordinary and unprecedented statement that producers are protected by the Commerce Clause but non-producers are not, they surely would have spelled this out in their decision. But of course they did not do this.

      Where wine retailers are concerned, there is no legitimate argument that can be made for facially discriminating against out-of-state retailers that want to ship that would stand up to a commerce clause analysis. Any analysis on Commerce Clause grounds would see a court deliver a judgment identical to Granholm.

      The fact that different courts have come to different decision is no reason to take the extraordinarily radical step of stripping an entire industry of their Commerce Clause protections…particularly when it is all for the sake of in-state protectionist measures…exactly the thing that our founders created our Constitution to protect against. And this is exactly what the CARE act does. It hurts an entire tier, hurts consumers and remove the veil, if there ever was one, as to the interest wholesalers have in legitimate consumer access to wine.

      Knowing all this, as you do, your defense of the CARE act is disappointing.

    2. Daniel says:

      Karin

      What do you like to drink? Do you drink wine? If so, can you share with us, some of your favorite wines, and the specific vintages that you have enjoyed?

    3. Karin Moore says:

      Tom –
      Despite an awareness that we will never agree on this issue, I’d like to respond briefly to some of your comments. On your points two through four, you appear to be taking me to task for the “unquestionably legitimate” quote of the Supreme Court that I didn’t even use in my post (surprising, I know!). The first use of “unquestionably legitimate” language was in the opinion of the Court in the North Dakota case(Stevens, J.) (“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.”) 495 U.S. 423, 432. And yes, you are certainly correct that it was a Supremacy Clause case, but they were still talking about the three-tier system. Your arguments about those words being dicta were raised at the 2nd, 5th and (I believe) 7th Circuit courts of appeals, and were not persuasive to those courts. As the 2nd Circuit indicated in the Arnold’s decision, quoting the district court judge below: “if dicta this be, it is of the most persuasive kind.”

    4. Karin Moore says:

      Daniel–
      Luckily, WSWA hired me for my legal mind and not for my palette. With that said, I rarely buy anything over $20 because I’ve found some really good quality wines under that price point. I grew up in the Finger Lakes region of New York (Watkins Glen), and go to the wineries whenever I’m up there (love Chateaux Lafayette Reneau’s Dry Riesling – 2009 I think). I'm also married to a guy from New Zealand, so the fridge usually contains a NZ sauvignon blanc or two. Thanks for asking!

    5. Tom Wark says:

      Karin: I appreciate your response. I think you and I can agree that we are unlikely to agree. And that's one agreeable step toward agreement, don't you agree?

      Tom Wark

    6. Josh says:

      "The CARE Act would also protect state laws that are not facially or intentionally discriminatory at the producer level, including direct-to-consumer shipping laws….And states could require that all sales be consummated in a face-to-face manner, once again, as long as the law was evenhanded and thus applied equally to sales by both in-state and out-of-state producers."

      "facial discrimination” means that the language of the statutes in question discriminated “by their own terms” or on their face"

      Facial discrimination is a legal term with a specific meaning to be sure, so I'm hoping you can clarify your position for me.

      Is the argument that as long as a law states that out of state wineries are afforded the ability to hop on a plane and fly out to visit a direct customer at their home to consummate a sale placed online, for instance, the law has been fairly written and is not discriminatory to out of state wineries? Would this, in your view, be evenhanded?

      Thanks Karin.

    7. Josh says:

      Thanks for the quick reply. Your was helpful and appreciated.

    8. Very clearly written post, Karin. Rare when parsing through required legalese in most articles regarding the Commerce Clause, Granholm, and the Care Act. One thing I would add is that small local wineries (read not California wineries or online retailers), craft distillers, and small brewers often benefit from state laws which exempt them from specific provisions of their state alcohol code, usually through a gallonage cap, such as allowing small producers to self-distribution, lower excise tax rates, direct to consumer shipping, and carve outs from franchise laws — which helps these small producers survive. The Care Act would seemingly protect those laws from Commerce Clause scrutiny as long as they're not facially discriminatory. It surprises me that these small producers are largely still opposed to the Care Act. Or am i wrong in my supposition. Thanks.

    9. Karin Moore says:

      Thanks, Harry, and you are right on both counts: the CARE Act would protect laws that differentiate based on the size of the producer (so long as it was even-handed between in-state and out-of-state), and I believe you are also right that small producers are still opposed to the CARE Act, possibly due to the misinformation that it will somehow do away with direct shipping by producers to consumers. It would actually protect direct shipping (meaning producer direct to consumer) laws that are on the books again, so long as they treat in-state and out-of-state producers the same.

    10. Matthew Mann says:

      Harry, I would suggest that laws similar to the laws that benefit small producers in their home state prevent them from reaching customers in other states, and that this is what concerns these small producers. I would submit that they may have the foresight to look beyond their own backyard. and that some may, in fact, have business plans that anticipate selling to more than merely their neighbors.

    11. Mike Officer says:

      So let me see Karin… The CARE Act, aka HR 1161, is essentially HR 5034, a bill admittedly written by the National Beer Wholesalers Association (NBWA). Are you actually implying that beer wholesalers got together and said, “We’re really concerned about states’ rights and the litigation they’re facing. Let’s try to get a law passed to help these states out”? Sorry but I’m not buying that the NBWA and WSWA are that altruistic.

      So what is the real reason wholesalers are so eager to see this legislation pass? If I had to venture a guess, I suspect the CARE Act is phase one of a two-part strategy by large wholesalers to further protect their monopoly and profits. If the CARE Act passes, challenges to state alcohol law will become more difficult. That’s something you indicated above. Phase two will be for the NBWA and WSWA to lobby state-level Representatives for favorable legislation, for example, as you suggested, legislation that requires direct sales to be consummated face-to-face. As an owner of a winery with no tasting room and in business only because of our direct sales, face-to-face consummation for a sale would likely be the end of us. There are many other wineries in a similar situation. Over time, state by state, lobbying efforts by the NBWA and WSWA will erode the recent progress made in providing consumers with freedom of choice.

      The CARE Act seems to benefit no one but wholesalers. With all the issues our country faces, do we really want elected officials spending time on this? I certainly hope not.

    12. Tom Wark says:

      Harry, the reason small producers don't support HR 1161 for the reasons you suggest is because they don't want special protections from competition. In addition, they know that protections they receive might easily turn into discriminatory laws in other states the keep them from those markets.

      What goes unmentioned by supporters of HR 1161 is that this is truly radical legislation. Supporters of HR 1161 don't mention that it would strip wine retailers of all their commerce clause protections. And for no good reason other than to protect lazy in-state retailers and the wholesalers that are incapable of serving consumers who want a greater selection of wines than wholesalers are able or willing to provide to local retailers. When consumers are banned from buying wine from out of state retailers they are left with a selection of imported wines that often represents only a tiny percentage of the imported wines that would be available to them if they could buy direct from out of state retailers.

      Wholesalers are notoriously ignorant and dismissive of consumer desires and needs.

      Both your comments, Harry, as well as Karin's response make crystal clear that the benefits of HR 1161 come only as a results of the protectionist legislation that the law would allow. My hope is that this clear indication of the motivations behind this law as described here will make their way to lawmakers considering HR 1161.

    13. Tom Wark says:

      Mike,

      If WSWA or NBWA were really concerned about states maintaining their right to regulate alcohol as they see fit, then these associations would have been screaming bloody murder when WHOLESALERS sued states, as they have in TX, KS and IN.

      However, not a peep of contempt for these lawsuits surfaced from WSWA or NBWA as they do now when the suits are brought by wineries and retailers.

      One more indication that principle and states' rights are not the motivation behind HR 1161. Profit and self protection is what motivates wholesalers. They like lawsuits when they benefit them. They don't like lawsuits when they aren't benefiting from them.

    14. Mike Officer says:

      The old red herring was "we have to protect minors from alcohol". When direct shipping didn't lead to a surge of 15 year-olds ordering their favorite Chardonnays and Pinot Noirs for home delivery, wholesale lobbyist had to come up with a new red herring. Et voila! States' rights!

    15. J Noldes says:

      Ms. Moore is a cretinous shill for the wholesalers, simple as that. Who can take her seriously? When this is over she'll move on to the next highest bidder. There are two words for people who do that, one of them is "lawyer".

    16. PAWineGuy says:

      Godspeed to Craig Wolf on his deployment to Afghanistan.

    17. [...] the CARE bill that counters my Wine & Spirits Wholesalers of America colleague Karin Moore’s spirited defense of H.R. 1161. After all, I was quoted on this blog last year as saying about H.R. 5034, the [...]

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