Untangling the complex world of wine direct shipping and compliance
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HR 1161: The Great Constitutional Head Fake

April 12th, 2011
By Wendell Lee, General Counsel, Wine Institute

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.

CONCLUSION:

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.

19 Responses to “HR 1161: The Great Constitutional Head Fake”

  1. [...] the ShipCompliant blog, Wendell Lee, the Wine Institute’s General Counsel, provides a detailed analysis of HR 1161. His  conclusion? HR 1161 “gives wholesalers a virtually open field to influence state alcohol [...]

  2. [...] SIPPED: discrimination Wendell Lee, general counsel at the Wine Institute, provides a further look into insidious nature of the apparent simplicity of HR 1161, a bill that would drastically affect wine shipping by reverting to regulations that pre-date Prohibition and supersede the Commerce Clause. [ShipComliant] [...]

  3. [...] SIPPED: discrimination Wendell Lee, general counsel at the Wine Institute, provides a further look into insidious nature of the apparent simplicity of HR 1161, a bill that would drastically affect wine shipping by reverting to regulations that pre-date Prohibition and supersede the Commerce Clause. [ShipComliant] [...]

  4. Mike Officer says:

    Wow! After reading the bill, I see it's even more insidious than I thought. It blows my mind that it's even made it this far in Congress. I wonder how many Representatives sponsoring the bill have actually read the language and understand the consequences? Not many I would think. I just don't see how any intelligent person with no financial interest in wholesaling could support this bill.

  5. Daniel says:

    Because politicians have a financial interest, as well. They collect donation checks to their campaign for supporting such drivel.

  6. Wendell Lee says:

    Thanks for reading through the article, Mike. Long, I know, but I hope it was worthwhile. HR1161 and its predecessor, HR5034, are easy reads but not easy to grasp without some background. I was hoping to provide some of that background here.

  7. Wendell Lee says:

    Daniel – thanks for your comment. Lawmakers are overwhelmed by the sheer number of bills they have to read and understand, and unfortunately at times support can come before understanding. We're counting on people like you to be our evangelists in opposing HR1161 by participating in the public debate, sending letters to legislators, and talking to consumers about why the bill is such a terrible idea. You can send Congress a message in opposition to HR1161 from the FreeTheGrapes.Org web site.

  8. Mark Norman says:

    Wendell…I am already seeing evidence that the wholesalers are being to lay the groundwork in specific states with state regulations to further their stranglehold on consumers. Currently, there is a bill being considered in Florida that would be at the state level to "kill any competition" to their 3-tier system.

    I have reached out to Tom Wark to see if he has heard of any more state level (wholesaler sponsored) bills being floated in other states!

    Whether or not it is their intent they are creating a battlefield and even if HR 1161 fails (and I'm sure they will continue to try even after that) I hope consumers realize that they need to start their own version of this war.

  9. Wendell Lee says:

    Mark – thanks for your comment and for slogging through the blog entry.

    While everyone should have a right to seek legislation, I think your point is that wholesalers are no strangers to state legislatures and have (for some time) been actively seeking state laws that protect the wholesale tier at the expense of consumers and others. In a way, you’re partially addressing the comment left by Matthew Mann (above), regarding the relative political power of the wholesaler tier in key state legislatures. That’s an issue that I'll leave to other bloggers and commenters to address.

    I think consumers understand the advantages to them of simpler and more direct access to goods and services generally. And since they vote, their voices can have a profound influence on the decisions of lawmakers in their state.

    Thanks again for your feedback.

  10. [...] SIPPED: discrimination Wendell Lee, general counsel at the Wine Institute, provides a further look into insidious nature of the apparent simplicity of HR 1161, a bill that would drastically affect wine shipping by reverting to regulations that pre-date Prohibition and supersede the Commerce Clause. [ShipComliant] [...]

  11. [...] SIPPED: discrimination Wendell Lee, general counsel at the Wine Institute, provides a further look into insidious nature of the apparent simplicity of HR 1161, a bill that would drastically affect wine shipping by reverting to regulations that pre-date Prohibition and supersede the Commerce Clause. [ShipComliant] [...]

  12. [...] to limit consumer choice. Consider two examples put forward by Wendell Lee of the Wine Institute last week: “State A passes a law that expressly taxes wine produced in State A at $.20 a gallon, but any [...]

  13. [...] Act, the Sequel. Since you’ve already gotten much of the background, (if you haven’t read the outstanding breakdown by Wendell Lee of Wine Institute, you should—it’s the best summary of the bill I’ve read to [...]

  14. dhonig says:

    Wendell,

    Nicely done. I wrote pretty much the exact same article last year evaluating 5034- http://palatepress.com/2010/04/wine/hr-5034-an-an… – and it seems they've not done any better the second time around.

  15. tomwjr says:

    Wendell – Thank you so much for taking the time to put this into layman's terms.

    I support the three-tier system as long as the producers who get ignored by them have the ability to reach the customers that desire their products. I can foresee, with the passing of this bill, many small productions wineries and brewers having to close their doors because they can no longer reach their customers. Some of my favorite wines and brews are only available through the D2C marketplace and it would be a real tragedy to see that channel cut off.

    Please keep clarifying these legal issues for those of us who don't have the background to understand them, it makes it that much easier for us to use our voices intelligently instead of emotionally!

    Cheers!

  16. [...] Wendell Lee correctly notes, H.R. 1161 does not overturn any laws or overturn any previous cases (contrary to [...]

  17. Wendell Lee says:

    David:

    Great article you wrote last year! Worth a read for anyone interested in deep background on the bill. You did a far more extensive treatise than I.

    Best-
    Wendell

  18. Wendell Lee says:

    Thanks, tomwjr, for your comments. I think your comments regarding the harm to consumers and small businesses that would result if HR 1161 is passed is directly on point and should be appreciated by anyone who purchases wine direct.

    Best-
    Wendell

  19. [...] Making a return to “The Bad” is HR 1161, this year’s version of the effort to restrict wine shipping that started with last year’s HR 5034. This post from the Ship Compliant blog gives some thoughts on the bill. [...]

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