April 12th, 2011
Editor’s Note: The following is a guest post, written by Wendell Lee of Wine Institute, in our series on the CARE Act of 2011.
In anticipation of all that you’ll be reading and hearing about HR 1161, I wanted to take this opportunity to propose something not always done in Congress, but something that will tremendously increase your understanding of the bill and help you better evaluate the coming predictions of necessity and/or doom associated with it: I’m going to ask you to read the bill in its entirety.
Sure, I could engage you in the chatter surrounding HR 1161, give you our bullet points and give you the wholesaler’s bullet points and drown you in a sea of diametrically opposed rhetoric and often confusing articles about what a bad / good idea the bill is and how much damage / good the bill would do if passed, but instead, I thought we’d just discuss the bill itself. This post is based on the premise that if you know what the bill says, you’ll be in a much better position to evaluate what other people say the bill says.
Here’s the good news Fortunately, HR 1161 is not very long, and you’ll be able to do it, even at a leisurely pace, in, say, about two minutes at the outside. In fact, you don’t need to read the first page – just sections 3 and 4. You can, however, get the full text of the bill here. The harder part is understanding what you just read, and applying what you understand to other situations.
Ready? Here is section 3 and 4 of HR 1161. Begin reading now:
SEC. 3. SUPPORT FOR STATE ALCOHOL REGULATION.
The Act entitled `An Act divesting intoxicating liquors of their interstate character in certain cases’, approved March 2, 1913 (27 U.S.C. 122 et seq.), commonly known as the `Webb-Kenyon Act’, is amended by adding at the end the following:
`SEC. 3. SUPPORT FOR STATE ALCOHOL REGULATION.
`(a) Declaration of Policy- It is the policy of Congress to recognize and reaffirm that alcohol is different from other consumer products and that it should continue to be regulated by the States.
`(b) Construction of Congressional Silence- Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the `Commerce Clause’) to the regulation by a State or territory of alcoholic beverages. However, State or territorial regulations may not intentionally or facially discriminate against out-of-State or out-of-territory producers of alcoholic beverages in favor of in-State or in-territory producers unless the State or territory can demonstrate that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.’
SEC. 4. AMENDMENT TO WILSON ACT.
The Act entitled `An Act to limit the effect of the regulations of commerce between the several States and with foreign countries in certain cases’, approved August 8, 1890 (27 U.S.C. 121), commonly known as the `Wilson Act’, is amended by striking `to the same extent’ and all that follows through `Territory,’.
Okay, it’s been a few minutes, you must be done by now. You probably have a few questions, but among them are probably these:
- What’s the Webb-Kenyon and Wilson Acts? What part of the Wilson Act is Section 4 striking out?
- What’s that deal about Congressional silence all about? And
- That section about preventing states from discriminating against producers sounds like a good thing. What could possibly be wrong with that?
Such very good astute questions cannot go unanswered. So let’s start with the Webb-Kenyon and Wilson Acts.
Webb-Kenyon and Wilson Acts
The Webb-Kenyon Act is a federal law that was passed in 1913. That’s right, long before Repeal, and long before Prohibition, and long before the 21st Amendment. Largely irrelevant today because, well, there’s the 21st Amendment, the Act made it a federal offense to ship or transport alcohol into a state in violation of state laws. The Act is, for the most part, a historic vestige, but if you’re looking to amend federal alcohol beverage laws, it’s a great place to try and do it, especially laws like the one proposed by HR 1161. At one point in the Granholm decision, Michigan and New York argued before the US Supreme Court that the Webb-Kenyon and Wilson Acts removed all barriers to state discrimination in alcoholic beverages. The US Supreme Court didn’t buy that argument.
If Congress’ aim in passing the Webb-Kenyon Act was to authorize States to discriminate against out-of-state goods then its first step would have been to repeal the Wilson Act. It did not do so. There is no inconsistency between the Wilson Act and the Webb-Kenyon Act sufficient to warrant an inference that the latter repealed the former.
If you thought the Webb-Kenyon Act is old, the Wilson Act is even older. It was passed in 1890, and like Webb-Kenyon, has been mostly superceded by the 21st Amendment except for one important thing. The Wilson Act still requires states to treat out-of-state alcohol as it would in-state alcohol. See the quote above regarding the Supreme Court’s view of the Wilson Act.
HR 1161 doesn’t repeal the Wilson Act, but it makes one significant change in it. Like the Grand Canyon, you just can’t appreciate HR 1161 without visually seeing what language HR 1161 deletes from the Wilson Act. Here’s how HR 1161 would change the Act:
§ 121. State statutes as operative on termination of transportation; original packages
All fermented, distilled, or other intoxicating liquors or liquids transported into any State or Territory or remaining therein for use, consumption, sale or storage therein, shall upon arrival in such State or Territory be subject to the operation and effect of the laws of such State or Territory enacted in the exercise of its police powers,
to the same extent and in the same manner as though such liquids or liquors had been produced in such State or Territory, and shall not be exempt therefrom by reason of being introduced therein in original packages or otherwise.
Notice the language that’s being deleted? It’s the words that require states to treat out-of-state products in the same manner as in-state products. If HR 1161 is passed, the Wilson Act would not be a bar to state discrimination, because Congress, in amending the Wilson Act, would be allowing states to treat out-of-state products differently from in-state products.
Congressional Silence: Switching Off the Dormant Commerce Clause
HR 1161 states that: “Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the ‘Commerce Clause’) to the regulation by a State or territory of alcoholic beverages.”
Silence, as the saying goes, is golden. Congressional silence, is too, because it means you’re afforded the full protection of the Dormant Commerce Clause. Wineries have, or should have, an appreciation for the principle of the Dormant Commerce Clause, because that’s what cases like Granholm are based upon. The “Dormant Commerce Clause” is a constitutional principle that the Commerce Clause prevents state regulation of interstate commercial activity or discrimination in interstate commerce even when Congress has not acted (i.e, remained silent) under its Commerce Clause power to regulate that activity. In other words, the Dormant Commerce Clause is “always on” to protect you from states discriminating between in-state and out-of-state wineries as long as Congress remains silent. HR 1161 breaks that silence and expressly turns off the automatic protection of the Dormant Commerce Clause. HR 1161 flips the switch so that states CAN discriminate in interstate commerce.
Placing Granholm in Quarantine
HR 1161, then, turns off the protections of the Dormant Commerce Clause for any state alcoholic beverage regulation, except in cases where there’s facial or “intentional” discrimination against producers. From HR 1161:
However, State or territorial regulations may not intentionally or facially discriminate against out-of-State or out-of-territory producers of alcoholic beverages in favor of in-State or in-territory producers unless the State or territory can demonstrate that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.
In Granholm, as in other Commerce Clause cases, a discriminatory state law can only be saved if the state can show that the law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. In Granholm, New York and Michigan weren’t able to prove this, and their failure of proof allowed the Supreme Court to find that the state laws violated the Dormant Commerce Clause and should be struck down. HR 1161 unnecessarily builds this legal test into law, but only to limit its applicability to facial or “intentional” discrimination against producers. By confining Granholm to these narrow instances, HR 1161 legalizes every other form of Commerce Clause discrimination other than for facial or “intentional” discrimination against producers.
By prohibiting only facial or “intentional” discrimination against producers alone, it allows states to pass laws that (1) nonfacially or “unintentionally” discriminate against producers, and (2) that openly and deliberately discriminate against anyone or anything that isn’t a producer regardless of whether the discrimination is facial or nonfacial. If you’re anyone or anything other than a producer, there are no limitations on the kind of discrimination that a state alcohol law can impose.
You will probably hear that HR 1161 “preserves” Granholm and “protects” wine direct shipment laws (none of which are being challenged now). When you find yourself being emotionally swayed by such arguments, go back to the provisions of the bill and match up what you’ve heard with what the bill does. The bill would allow states that currently don’t have limiters on direct shipment laws such as mandatory winery visits or capacity caps to re-legislate at the urging of the wholesalers and include such provisions into their laws and do so legally.
The one final section in HR 1161 that amends the Wilson Act is important. In order to give states the green light to discriminate, the Wilson Act cannot remain as it is. Currently, the Wilson Act requires that states treat out-of-state products in the same manner as they treat in-state products. The amendment of the Wilson Act in Section 4 of HR 1161 eliminates that requirement.
HR 1161 In One Sentence:
So you’ve read HR 1161 and you understand Congressional silence and the Dormant Commerce Clause. If one had to summarize HR 1161 in one sentence, this might be pretty accurate: HR 1161 turns off the automatic Constitutional protection of the Dormant Commerce Clause, allowing states to pass discriminatory alcohol laws in all instances except for those that facially or “intentionally” discriminate against producers.
Applying What You Know:
So just to see if you were paying attention, let’s take what you now know about HR 1161 and apply this to a couple of examples of state discrimination. Should HR 1161 become law, you only need to answer two questions to find out if a discriminatory state law should stand:
1. Does the state law discriminate against producers? If Yes, go to Question 2. If No, HR 1161 makes the discriminatory law valid.
2. If the law discriminates against producers, is this law facially or “intentionally” discriminatory? If the law is not facially discriminatory, then it’s a form of nonfacial discrimination. The law will stand unless you can show that the state “intentionally” discriminated.
I should add a comment here about how uncertain and ambiguous the “intent” language is. Facially neutral state laws aren’t found unconstitutional because of a state’s intent, but by its purpose and effect on interstate commerce. “The Commerce Clause forbids discrimination, whether forthright or ingenious.” West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994). HR 1161 substitutes the purpose-and-effect analysis with a more tentative and narrow inquiry into what state legislators “intended” at the time a state alcohol regulation was passed, which is highly speculative and can be extremely difficult to prove. Disrupting the current framework with HR 1161’s “intent” standard only introduces confusion into the judicial proceedings and additional litigation. So even if you can prove that a state alcohol law results in discrimination against producers, and even if a state agrees with the evidence that the effect of its law results in producer discrimination, the state law could still stand if the state can prove that it didn’t mean to discriminate against producers when it passed the bill.
So let’s test what you’ve learned so far with two examples.
EXAMPLE 1: Discriminatory Tax
State A passes a law that expressly taxes wine produced in State A at $.20 a gallon, but any wine that is not produced in State A at a rate of $3.00 per gallon.
HR 1161 turns off the Dormant Commerce Clause protections, allowing states to pass discriminatory alcohol laws except for those that facially or “intentionally” discriminate against producers. Your analysis goes something like this:
1. Does the state law discriminate against producers?
While the differing tax rates are clearly and facially discriminatory, they don’t discriminate against producers, but against products. The law discriminates against all out-of-state wine products, but because the law does not discriminate against producers, the law would be valid. You don’t even get to Question 2.
EXAMPLE 2: Capacity Caps
State A passes a law that allows wine producers that produce up to 30,000 gallons of wine, regardless of the state they’re in, to ship direct to consumers in the state. All of the wine producers in State A are under 30,000 gallons.
The capacity cap law is facially neutral because it applies to all wineries no matter where they’re located. This law can only be found invalid if the state “intentionally” passed the law.
1. Does the state law discriminate against producers?
Yes, the law discriminates against producers. Go to Question 2.
2. Is this law facially or “intentionally” discriminatory?
The capacity cap law is facially neutral. Your only hope is to prove that the state “intentionally” meant to discriminate against out-of-state producers. You’ll have to find legislators to testify that they meant to discriminate against out-of-state producers when they passed the bill. If you’re lucky, you might be able to win your case. And that’s the danger of HR 1161 – it is the wholesaler’s how-to manual for discriminating, avoiding the Commerce Clause, and unfairly protecting their interests.
HR 1161, like its predecessor, HR 5034, doesn’t repeal any laws or overturn any previous cases, but it gives wholesalers a virtually open field to influence state alcohol laws which would be immune from Dormant Commerce Clause scrutiny.
Two big things are happening with HR 1161: first, it imprisons Granholm and makes its findings limited only to instances where there’s facial or “intentional” discrimination against producers. At the same time, with that one small exception for facial or “intentional” discrimination against producers, the bill barricades state alcohol laws from nothing less than the Dormant Commerce Clause of the Constitution, so that states can, at the urging of the wholesalers openly violate the principles of a fair and open national market when it feels like doing so, without having to justify their reasons.
Thank you for sticking it out with me. My goal was to give you a tool to understand HR 1161, leaving the question of legislative motive to more eloquent future bloggers. Many pundits will talk about why the bill is needed or should be killed. Judge their statements by your own experience acquired here with HR 1161: you’ve sat behind HR 1161’s steering wheel, looked under its hood, kicked its tires, and took it for a test drive. You know how it runs, and you know that, depending on who and what you are, HR 1161’s mileage will most certainly and dramatically vary.
Wendell Lee is General Counsel to Wine Institute, the public policy advocacy group of more than 1,000 California wineries and affiliated businesses that represents 85 percent of U.S. wine production and 90 percent of U.S. wine exports. He has been with Wine Institute since 1980 and deals with all legal matters for the organization. Additionally, he oversees the Wine Institute web site, computer databases and technical support. For four years prior to joining Wine Institute, Lee was a criminal trial attorney serving in the Office of the District Attorney for the City and County of San Francisco. He is a graduate of Hastings College of the Law and the University of Hawaii and a member of the California Bar since 1977.