Author Archive
Siesta’s Over
January 27th, 2010
On January 26th, the Fifth Circuit Court of Appeals ended the puzzling status of interstate retailing in Texas created by the lower court’s decision in Siesta Village Market. The district court had ruled that out-of-state retailers had a Commerce Clause right to sell wine to Texas consumers, but only wine that had been purchased from a Texas-licensed wholesaler.
The decision is another example of uncertainties resulting from the principal unresolved Granholm question: How does one reconcile the location-neutrality principle with the infamous North Dakota dictum to the effect that states may discriminate against out-of-state wholesalers? The Fifth Circuit’s answer, like that of the Second Circuit, is that Granholm extended Commerce Clause protection to wineries, but not to wholesalers or retailers, because national markets in the lower tiers would make it impossible for a state to protect the “traditional three-tier system.” As the Court of Appeals judge said about setting aside fundamental economic policy embodied in the dormant Commerce Clause to follow a judicial aside that was not part of the Granholm holding, “That language may be dicta. If so, it is compelling dicta.”
Post-Granholm litigation shows clearly enough that judges, though not bound to follow dicta, will elevate it to persuasive precedent when it coincides with their value systems. The values question is whether states’ asserted 21st Amendment right to maintain a privileged middle tier trumps the Commerce Clause policy against differential treatment of in-state and out-of-state economic interests. All one can say at this point is, “to be continued.”
by R. Corbin Houchins, CorbinCounsel.com
High Fives in the First Circuit
January 26th, 2010
Justified jubilation greeted the 14 January 2010 decision of the United States Court of Appeals for the First Circuit, which affirmed the federal district court decision of 19 November 2008 in Family Winemakers of California v. Jenkins, invalidating the Massachusetts “volume cap.” (see previous post “Huge win for wineries, but can I ship to Massachusetts now?” )
Oddly enough, the appellate ruling may be more important outside Massachusetts than within. There are two reasons, one quite straightforward, the other less so.
The simple reason is that the First Circuit decision merely leaves things within the state as they have been since 18 December 2008, when Judge Zobel enjoined application of the state’s maximum volume requirement to “small winery” shipping licenses, which are necessary for sales directly to consumers. Since that order, wineries of all sizes, with and without Massachusetts wholesalers[1], have been eligible for the license. Nevertheless, the state is not practically open to direct shipment, because the major interstate carriers find the delivery vehicle licensing requirement too burdensome and wineries have no reliable way to know whether an order would be the 27th case of direct shipment wine purchased in the year by that consumer, putting the shipper in violation of a 240-liter limit. (Those obstacles, which were not involved in Family Winemakers, are described in a previous post “Why can’t I have a Boston wine party?”)
A more subtle reason is that the First Circuit has articulated an analysis, arguably even more favorable to trade than the decision it affirmed, that may prove persuasive in other circuits with challenges to volume caps and to other so-called facially neutral features that operate to the detriment of interstate trade. That aspect of the decision is well worth a closer look –though it does require striding into a bit of a legal thicket.
Which Yardstick?
Stripped to essentials, Family Winemakers is about choosing the proper test for determining the constitutionality of a state law that burdens interstate commerce in wine.
Before getting into the technicalities of constitutional tests, a little context may be helpful: As the readers of these blogs know, state laws that disadvantage interstate trade raise issues under the Commerce Clause of the federal constitution, which gives Congress power to legislate regarding commerce among the states. In subject areas, like wine distribution, where Congress has not enacted legislation that serves as a comprehensive regulatory scheme, states have some room for regulation, even if it affects interstate trade to a degree. However, the fact that interstate commerce is within Congress’s power to regulate means that in subject matter where it has not acted (where, in other words, its regulatory power is “dormant”) certain unwritten principles inherent in the Commerce Clause nevertheless limit state regulatory power. State laws that exceed those limits are said to offend the “dormant Commerce Clause.” As a leading case puts it, “The modern law of what has come to be called the dormant Commerce Clause is driven by concern about economic protectionism –that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”
In Granholm, the Supreme Court famously invalidated Michigan and New York laws for violating the dormant Commerce Clause by reserving direct shipment privileges for home state wineries. Family Winemakers is one of the most promising among many lawsuits attempting to discern the core message of Granholm and apply it to different facts.
Why Granholm Doesn’t Provide All the Answers
Granholm dealt with laws whose “object and design” to discriminate against out-of-state wineries was “evident” from their text and which in fact did discriminate. The Court considered how the presence of those factors —intent to discriminate and effect of discriminating— affected the answers to two distinct questions.
The first question concerned the 21st Amendment and certain federal legislation, which, taken together, affirmed the right of states to regulate wine from outside the state as fully as wine produced in the state and declared it illegal to ship wine into a state in contravention of “any” its laws. Does that broad language, the Court asked, permit the states intentionally to discriminate against interstate commerce (as a literal reading might suggest)? After an extensive and somewhat controversial historical analysis of the federal statutes and the constitutional amendment, the Court answered “no,” concluding that the dormant Commerce Clause subjects alcoholic beverage regulation to the same tests of constitutionality as apply to laws governing other goods.
The second question was what test would apply. In Granholm’s analysis, the choice between the two relevant tests was obvious. As stated in a leading case:
[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected . . . . But where other legislative objectives are credibly advanced and there is no patent discrimination against interstate trade, the Court has adopted a much more flexible approach . . . .
Having caught the two states before it red-handed at economic protectionism, the Court had no trouble applying the strict test, which invalidates a law unless the state clearly demonstrates with “concrete” evidence that it is necessary for an essential state purpose and there is no workable less-discriminatory means of achieving the purpose. Neither defendant state even came close to meeting that standard, with the result we all know.
So, great: No 21st Amendment immunity and a flunked dormant Commerce Clause test; commerce wins, grapes are freed. But what if the law in question were not overtly discriminatory? What if it treated all wineries alike and only incidentally burdened interstate commerce? Would it then receive the “more flexible approach?”
Pretty Faces
On its face, the law invalidated in Family Winemakers took no account of whether a winery were in-state or out-of-state. It was, in the phrase popular with its proponents, “facially neutral” as between local and interstate sellers.
Defenders of volume caps and on-site requirements argue that facial neutrality has two profound effects: For alcoholic beverages, it invokes 21st Amendment immunity from dormant Commerce Clause challenge, which was repudiated in Granholm for facially discriminatory laws; and, even if there were no immunity, it would require application of the “more flexible” test of constitutionality, under which a statute will be upheld unless the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed local benefits, rather than the strict necessity test Granholm applied to facially discriminatory laws. Neither argument survived the First Circuit’s treatment of Family Winemakers.
Not a Vaccine
The district court judge had dismissed the immunity argument summarily, citing a passage in Granholm that actually refers to an extraterritoriality case in which the Court did not expressly reject immunity, but rather spoke of the need to “reconcile the interests protected by the two constitutional provisions” (i.e., the 21st Amendment and the Commerce Clause), and two post-Granholm decisions in other circuits that did not deal explicitly with the immunity issue at all. While her no-immunity conclusion seems sound, the opinion left room to argue that the lower court did not fully deal with the facial neutrality immunity argument.
The appellate opinion takes a different tack. First, the Court of Appeals articulates a more specific repudiation of a 21st Amendment immunity defense for all facially neutral laws, formulating a useful test: Even though the statute is “neutral on its face,” if its effect is to “change the competitive balance” between in-state and out-of-state wineries in a way that benefits local wineries and “significantly burdens” their out-of-state competitors, the result is the same as for facially discriminatory statutes in Granholm –no 21st Amendment immunity.
In reaching that conclusion, the First Circuit somewhat surprisingly begins by distinguishing[2] Granholm. That is, after admitting that Granholm dealt only with facially discriminatory statutes, the court set forth on its own to decide whether the 21st Amendment provided Massachusetts with immunity from dormant Commerce Clause challenge to a discriminatory statute everyone agreed was facially neutral. It nonetheless took guidance from Granholm in viewing the question as resolvable by historical context and in reading the 21st Amendment as preserving only the pre-Prohibition regulatory power Congress allows states under the Wilson Act and the Webb-Kenyon Act –i.e., the right to regulate out-of-state wine on the same basis as in-state wine, but not to discriminate against the former in favor of the latter.
By engaging in relatively extensive history-grounded analysis, the First Circuit has provided sound support for the proposition that Granholm’s no-immunity ruling applies to all discriminatory measures, whether overtly protectionist or facially neutral. Courts adjudicating laws that burden interstate commerce relative to local have in Family Winemakers well-expounded judicial authority for ignoring putative 21st Amendment immunity. On the other hand, extension of Granholm to different scenarios, no matter how persuasively reasoned, cannot forestall further argument over the “narrow Granholm” approach advanced by states and wholesalers, which would preserve pre-2005 law for every situation that does not exactly match Granholm’s facts.
Question and Answer
If immunity is out of the picture, the primary issue becomes how to test a statute under the dormant Commerce Clause –i.e., what questions should a court ask to determine whether a statute will be upheld or struck down? Family Winemakers follows prevailing Commerce Clause jurisprudence in recognizing the two possibilities noted above, a strict “per se” test requiring proven necessity or a more flexible balancing test.
The states and wholesalers argue that facial neutrality would, at least in the absence of proven intentional protectionism, automatically require the more flexible approach, known as the Pike test after the shortened name of the case that first formulated it[3]. However, the Pike test as developed in case law is not invoked by superficial characteristics.
As enunciated in Granholm and its progeny, the Pike test requires a two-stage inquiry. First, a court asks two questions: Does the challenged state law regulate “even-handedly” as between interstate commerce and local commerce? Is whatever burden it places on the former an “indirect” consequence of its pursuit of a legitimate local interest? Only if the answer is “yes” to both does one apply the balancing test, which asks whether the burden on interstate commerce is “clearly excessive” in relation to the legitimate state purpose. If the answer to that highly subjective third question is “no,” the state law stands. For none of those questions is the answer determined by facial appearance.
In the district court analysis, a law adopted for a protectionist purpose that has the intended effect of favoring in-state commerce relative to interstate cannot meet the even-handed regulation and indirect burden requirements for application of the Pike balancing test, and is thus subject to the strict necessity test employed in Granholm, irrespective of facial neutrality. Judge Zobel went on to buttress her ruling by declaring that that even if the law constituted even-handed regulation with only incidental burdens on interstate sellers, entitling it to application of the Pike test, it would still be invalid because it did not advance any local purpose (other than the illegitimate objective of protectionism). The court’s reasoning seems almost mathematical: As the Pike test preserves a statute only when its adverse impact on interstate commerce is not excessive in comparison to a legitimate local benefit, if its local benefit is zero, any burden is excessive, and Pike won’t save it.
Adding the “but even if” reference to Pike as insurance against reversal for applying the wrong test is de rigueur in the courts and good for the prevailing litigant in the case at hand. The district court approach does not, however, prevent argument that Family Winemakers is “really” a Pike balance decision because the statute’s “facial neutrality” should have averted application of the strict necessity test –i.e., the outcome is a simple failure of the state to make an adequate record of local benefit, correctible in future litigation.
Again, the Court of Appeals opinion has a slightly different slant. The appellate court regards application of the strict necessity test as unquestionable under Granholm when, as in that case, a statute is protectionist in both intent and effect. Probably the most significant aspect of the First Circuit opinion is the means by which it so classifies the Massachusetts law.
Put Away that Smoking Gun
If anything moderated pro-trade celebration of the district court decision in Family Winemakers, it was the concern that the record was so strong on protectionist purpose that the case might not serve as a highly useful precedent for other cases, whose records will mostly be at best ambiguous on legislative intent.
Judge Zobel placed great stress on what is by any standard a sensationally revealing legislative history. Senator Morrissey, who sponsored the legislation, is quoted at length in the district court opinion, but a short bite will serve here to illustrate the tenor: “[W]ith the limitations that we are suggesting in the legislation, we are really still giving an inherent advantage indirectly to the local wineries.” The court was also impressed by the fruit wine exemption, a product of lobbying whose sole purpose appeared to be shielding a large local winery from going over the cap by producing cider.
In the Court of Appeals, proof of protectionist purpose rests on a more broadly applicable base. The finding of discriminatory intent explicitly rests not on the “smoking gun” statements of legislators or lobbyists, which featured so prominently in the district court opinion, but on the appellate court’s reading of the statute itself. Close attention to the text revealed a volume cap at odds with prevailing industry classification of wineries as objectively large or small, or as able or unable to secure wholesaler distribution, as well as with the state’s own size demarcation for license fees. The court was particularly impressed by the facts that ultimately there was no winery size standard at all, given that non-grape wine volume would not be counted and that the fruit wine exemption allowed an over-30,000-gallon Massachusetts winery to enjoy “small” winery benefits. Revealing intent by a combination of textual analysis and reference to objective data should be applicable to other “facially neutral” restraints before other courts, without need for thrilling exposés.
Interestingly, the First Circuit’s discussion of what constitutes evidence of discriminatory intent includes the suggestion that putting forward palpably false claims of permissible purposes is itself evidence that the real purpose is impermissible. It would be charmingly ironic if the states’ and wholesalers’ practice of asserting that discriminatory statutes do not discriminate, were adopted to help small producers, and are indispensible for preventing a parade of horrible consequences resulted in judicial findings of protectionist purpose.
Objective data also underlie the First Circuit’s finding of burdensome effect. The court follows the approach of its petroleum product distribution decision, Exxon, when it says a statute is “plainly” discriminatory if its effect is to cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market –a demonstrable effect of the statute under consideration.
Once the statute was classified as discriminatory in purpose and effect, it became subject to the strict necessity test, with its “concrete record evidence” requirement, which the state did not attempt to meet. As the appellate court pointed out, the record revealed the opposite of necessity, i.e., the existence of a non-discriminatory means of helping wineries unable to secure wholesaler distribution –passing a direct shipment law based on the NCSL model bill, as he governor had urged– and no reason why that would have been unworkable.
Scaling Cherry Hill
The beneficial ruling from the First Circuit is all the more welcome in light of its earlier opinion in a failed suit challenging Maine’s on-site-only direct consumer sale law, Cherry Hill Vineyard v. Baldacci.
The Baldacci decision can be read in various ways and had been advanced by direct shipment opponents as recognizing a “no direct shipping market” defense to Commerce Clause challenge. In brief, the theory is that if no purchases in the state can be fulfilled by direct shipment, there is no market from which out-of-state wineries could be excluded or in which they could be disadvantaged, and therefore no discrimination. The Family Winemaker defendants claimed it supported the proposition that without “explicit” discrimination, a law would not violate the dormant Commerce Clause, or at worst would be judged under the Pike test.
In Judge Zobel’s view, Baldacci turned on the absence of evidence of indirect discriminatory effects and thus presented no obstacle to her decision in Family Winemakers, in which the plaintiffs had presented effects evidence. However, her argument for distinguishing Baldacci seems to consist of two conflicting lines of reasoning.
According to one branch of her analysis, it is possible to mount a Commerce Clause attack on “leveled down” systems that equally deny direct shipment to in-state and out-of-state wineries, provided the facts show that distant wineries are losing sales to locals because they cannot use the natural means of doing nationwide business, direct shipment. It follows that the result in Baldacci would have been different had the plaintiffs made the factual showing, a proposition consistent with statements in that opinion. Judge Zobel was able to cite extensive evidence of discriminatory effects in the record before her, supporting her decision not to reach the same result as in Baldacci. So far, so good; but judges have a tendency to pile on alternative rationales in distinguishing a difficult precedent.
The second branch of her reasoning explicitly adopts another aspect of Baldacci –that there was no discrimination in the Maine system because no winery was allowed to use direct shipment, while Massachusetts permitted it for wineries below the volume cap.
The “no direct shipping market” theory directly contravenes the district court’s first line of reasoning and is, I believe, fallacious, because the Commerce Clause protects commerce, not means of delivery. A Granholm issue arises if a state favors any local market in a line of goods, even one limited to on-site sales, by directly burdening interstate sellers who are compelled by economics to use a different distribution method. Whether leveling down to all face-to-face sales constitutes discrimination subject to the strict necessity test is a hotly contested question in current Granholm litigation.
The no-local market defense theory arises from Baldacci’s misapplying Exxon, where there was no local market, to a local market in which in-state wineries made on-site sales, protected from out-of-state competition. The First Circuit clarifies Exxon in Family Winemakers:
Exxon held that a law that restricts a market consisting entirely of out-of-state interests is not discriminatory because there is no local market to benefit. Exxon is not apposite where, as here, there is an in-state market and the law operates to its competitive benefit. Massachusetts cannot apply Exxon only to "large" wineries as distinct from "small" wineries; the wine market is a single although differentiated market, and § 19F’s two provisions [the statute in question] operate on that market together.
The First Circuit went on to distinguish its decision in Baldacci (which was submitted for decision on an agreed written fact statement) as dealing with an unsupported challenge:
That case involved a challenge to a Maine law that allowed wineries to sell to consumers only in face-to-face transactions. That challenge failed because plaintiffs did not introduce any evidence that the law benefitted Maine vineyards or harmed out-of-state wineries.
Baldacci only addressed the kind of showing required when a statute is challenged as discriminatory in effect but is concededly non-discriminatory in purpose. We did not address whether a lesser showing might suffice when a law is allegedly discriminatory in both effect and purpose. We do not reach this question because even under the standard in Baldacci, plaintiffs have shown § 19F is discriminatory in effect.
The First Circuit decision encourages examination of what has been regarded as a central tenet of Granholm jurisprudence, the “level field” model. It is a commonplace that protectionist discrimination can be cured by leveling up or down; it other words, that a state can comply with the Commerce Clause by permitting direct shipment for both in-state and out-of-state wineries or by denying it to both. Such a mechanistic approach, however, leads to uncritical acceptance of formalistically even-handed schemes like on-site-only laws, notwithstanding their disparate impact on nearby and distant wineries. Putting facial neutrality in perspective, as occurs in Family Winemakers, should support critical examination of other playing fields that are only superficially level.
You Can’t Have Everything
Welcome as it is, the First Circuit opinion in Family Winemakers does not answer all the questions the case raises. Following sound judicial practice, the court prudently made the most easily defensible ruling on the record before it. The opinion’s principal limitation is that on both 21st Amendment immunity and choice of test under the dormant Commerce Clause it deals with a statute convincingly shown to be effectively and intentionally discriminatory against interstate commerce.
Thus, Family Winemakers throws a spotlight on unsettled post-Granholm issues: What test applies if a state statute is discriminatory in effect but not intent? What if it was intended to discriminate, but fails to do so (assuming anyone has an interest in arguing about it in that instance)? If it is evenhanded, but would flunk the Pike balancing test on proof of the local interest pursued, could it be saved by using a lower standard for liquor? What, if anything, is left after Granholm of the concept that a state can balance “core 21st Amendment interests,” such as temperance, against the Commerce Clause?
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[1] The law had required wineries producing more than 30,000 gallons annually of grape wine to forego any sales to wholesalers in the state if they sold directly to consumers.
[2] To “distinguish” an earlier case is lawyer jargon for finding a difference in recited facts or some other aspect that could justify reaching a different result in the case at hand.
[3] I don’t have a snappy name for the first alternative, sometimes referred to in this post as the “strict necessity test.” If named after a case it could be the Philadelphia test, the Dean Milk test or the Maine v. Taylor test, etc., but no commonly accepted moniker has developed.
Up in the Air
October 20th, 2009
On September 30, a federal district judge in a New Mexico suit brought by US Airways to free it from state regulation of beverage service ruled that the 21st Amendment prevents the federal government from preempting state regulation of alcoholic beverage service aboard federally regulated carriers. The decision leaves New Mexico regulators free to treat airliners in their airspace as if they were local taverns with respect to licensing, server training and over-service.
Although the case does not deal directly with wine distribution, it is a significant addition to the “weak Granholm” viewpoint, which lends support to trade barrier proponents in the second wave of wine access litigation now in the lower federal courts.
Supremacy
Judge Armijo’s opinion in US Airways, Inc. v. O’Donnell introduces some legal elements that may be unfamiliar to industry observers, but it represents a reading of 21st Amendment jurisprudence that is well worth examining. Examination will involve a little more detail about the Supremacy Clause of the federal constitution than has appeared to date in most public discussion of Granholm issues, but that will be unavoidable as post-2005 beverage law develops.
In the subject area of access by wine sellers to consumers and retailers in other states –that is, the development of a national market in direct distribution and direct retail sales and shipment– the recurring theme has been alleged incompatibility of state-imposed restraints with the Commerce Clause, which famously forbids permitting in-state wineries to sell and ship directly to consumers while denying that privilege to out-of-state wineries. That principle is said to arise under the “dormant” Commerce Clause, because it operates in an area, interstate commerce, where Congress holds exclusive power to legislate and has elected not to exercise it, thereby leaving the area federally unregulated and off-limits to state statutory restraints.
Supremacy Clause cases address the non-dormant side the Commerce Clause coin, where Congress has in fact exercised its power to legislate over a subject within its constitutional authority. A key question in Supremacy Clause litigation is whether existing federal legislation occupies the field being regulated, thereby invoking the Article VI declaration that laws passed by Congress “shall be the supreme Law of the Land … any Thing in the Constitution or Laws of any state to the Contrary notwithstanding,” to invalidate (i.e., “preempt”) the challenged state enactment. The answer is found by ascertaining the intent of Congress from the text of the statute.
Federal statutes may be found preemptive in more than one manner. The principal division is between (1) express preemption, i.e., a direct statement in the federal statute, denying states concurrent jurisdiction to legislate on the subject, and (2) implied preemption, i.e., a clear implication of that intent arising from the statutory text as a whole. Implied preemption further subdivides into “field preemption,” when the scope of the federal statutory scheme displays an intent fully to occupy the particular subject area, and “conflict preemption,” when regulated persons cannot comply with both the federal statute and the state law in question. The New Mexico case involves questions of express preemption and field preemption in the subject area of alcoholic beverage service on federally regulated air carriers.
In US Airways the federal legislation under consideration was the 1978 Airline Deregulation Act, which charges the Federal Aviation Administration with the duty to prescribe “regulations and minimum standards for other practices, methods, and procedure the Administrator finds necessary for safety in air commerce and national security.” Pursuant to that directive, the FAA adopted a regulation stating that no carrier under its jurisdiction “may serve any alcoholic beverage to any person aboard any of its aircraft who … [a]ppears to be intoxicated.”
The state had adopted a far more extensive set of regulations, including requirements for licensure and server training and penalties for over-service. Following a collision on a New Mexico highway involving multiple fatalities and a driver who was allegedly over-served on a US Airways flight to the state, the regulatory authorities ordered the airline to cease serving alcoholic beverages to passengers on flights arriving in or departing from locations within the state, without licensing as a retail outlet and compliance with regulations applicable to retail licensees.
Simple Question, Different Answers
The Airline Deregulation Act expressly provides that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of [a federally regulated] air carrier.” Thus, the square one question was whether the suit were a simple case of express preemption, taking beverage service to be a “service” of US Airways.
As the meaning of “service” in the Act controls the outcome of the case, it is not surprising that the parties advanced different definitions. The state’s position was that the sentence in which the term appears deals with transportation services, so the term must be restricted to things like frequency of flights. That is a conclusion reached by one of the five federal appellate courts in separate circuits that had interpreted the Act (none of them the 10th Circuit, where New Mexico is located).
An alternative reading begins with observing that the statutory phrase is equivalent to “a price, a route or a service,” because the introductory indefinite article is placed to modify each of the following nouns. The implication of “a service” is that there are various services and that the express preemption applies to all of them. The reading urged by US Airways, in which the sentence applies to food and beverage service, is supported by the other four appellate decisions.
All five Circuit Court opinions apply recognized principles of statutory construction and dissect the text with well-sharpened scalpels. There is, however, a cleaver at hand.
Cutting Through Complexity –or Not
What makes US Airways worthy of discussion here is its use of the 21st Amendment to resolve a Supremacy Clause issue.
Rather than come to a conclusion as to which of the other circuits had reasoned correctly, Judge Armijo declared that the choice is forced, because interpreting the Act to apply to alcoholic beverage service would render it unconstitutional as a limitation on states’ rights preserved by § 2 of the 21st Amendment. Section 2 is, of course, the constitutional provision declaring unlawful the importation of intoxicating liquor into a state contrary to the state’s laws. Granholm adds the proviso that the state law claimed to trump a federal interest be “valid,” opening the floor to debate over how one tests for validity.
At the heart of the validity issue is the question whether parts of the constitution other than the 21st Amendment operate on state liquor laws in the same way as on state laws regulating ordinary goods. If they do, then the § 2 states’ right to venture into interstate commerce far enough to control wine importation at their borders applies only to laws that first pass muster under, e.g., the dormant Commerce Clause prohibition of discrimination against interstate commerce (as Granholm says) and under the Supremacy Clause (which US Airways ultimately excludes in the case at hand).
In finding state regulation valid, US Airways presents a somewhat convoluted syllogism, in which Congress did not intend to regulate liquor service because it could not constitutionally do so, but the federal statute might preempt the subject of liquor service anyway, if (a) the court found the federal interest in regulating liquor service outweighed the state’s interest in regulating the same subject and (b) the state laws had a significant impact on Congress’s objectives.
Imbalance
Judge Armijo implied that her decision was based in part on inadequate presentation of the airline’s case.
On how Supremacy Clause interests weigh in the balance, she wrote that US Airways “makes no argument and presents no evidence” that the state laws violate specific parts of the federal constitution, thus taking application of Granholm beyond the dormant Commerce Clause off the table. On the element of impact, she noted that the airline had not shown the state regulation “would have an adverse effect on competition and airfare.” She characterized the plaintiff’s contentions on effect as “speculative” and as taking too little account of unspecified “judicial and administrative relief under New Mexico law.”
Summing Up
After thus disposing of express preemption, the court might have had little to say about implied preemption; if the 21st Amendment would invalidate express preemption in a given subject area, it should also preclude inferring preemption in that area from Congressional occupancy of the field. However, in ruling against implied preemption, the opinion goes on to articulate two points that may prove controversial.
First, the court appears to view field preemption as requiring Congressional intent specifically to occupy a field consisting of the very subject addressed by the regulation in question, rather than to occupy a field broad enough to encompass that subject. Ascertaining implied intent is inevitably a process of divination with considerable discretion in the trial court, but the standard in US Airways may be unduly restrictive.
More significant is the second point, with which the opinion closes. The court declares that even if the subject requires “an extensive and uniform system of federal regulation,” a state may nevertheless assert a 21st Amendment right to exercise “virtually complete control” over how to structure distribution of liquor, entitling it to apply its panoply of retail licensee regulation to the federal carrier. It would be difficult to fashion a clearer expression of pre-Granholm law. The question is whether, in contexts that are not exact duplicates of the facts of Granholm, it is also a statement of current law.
Those who have followed this subject will recognize the “virtually complete control” phrase as part of a dictum from Midcal, quoted by Scalia in North Dakota v. U.S., where it was also dictum, and quoted again in Granholm, where it was dictum yet again and, as a dissenter correctly saw, incompatible with the holding. Ironically, the US Airways court cites Granholm for the control point. (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm.) Some dicta prove more substantial than the decisions that transmit them; whether that will be true of this one is the central question of current 21st Amendment litigation.
by R. Corbin Houchins, CorbinCounsel.com
Has the Price Posting Bunny Run Down?
July 21st, 2009
For the fourth time in the same case, TFWS, Inc. v. Franchot, a federal Court of Appeals has told the state of Maryland and its wholesaler-package store cohort that their price posting system conflicts with the Sherman Act, the nation’s premier antitrust law. As a federal enactment, the Sherman Act preempts inconsistent state law, pursuant to the Supremacy Clause of the federal constitution, absent a specific exception.
Maryland had indefatigably marched on, beating the drum for a 21st Amendment exception to federal antitrust law since 1999, when the suit began as TFWS, Inc. v. Schaefer. The latest rebuff, on 15 July 2009, repeats the teaching of the previous three appeals: “Not proved.” That ruling does not change the status of price posting in Maryland, because an earlier district court ruling to the same effect was not stayed on appeal. Presumably, the qualified abandonment of posting announced by the state in a 2007 bulletin continues in force.
TFWS is, however, more than a simple failure of proof. Deeper issues remain unresolved, at least one of which might, in theory, support an attempt by the unsuccessful appellants to obtain Supreme Court review.
To understand what is at stake, one has to consider three aspects of antitrust challenges to state restraints of trade in general and to the particular alcoholic beverage regulatory restraint known as “post and hold.”
First, it is basic antitrust law that a group of manufacturers or wholesalers who agreed among themselves to publish their price lists, to sell at no other prices, and to keep the list unchanged for 30 days would be violating the federal Sherman Act if they had any effect on interstate commerce. (Almost all wine business meets the interstate commerce requirement, and most states have “little Sherman Acts” without that requirement, so we can ignore the commerce issue.)
Second, it has been accepted antitrust law since the 1940s that states, acting in their sovereign capacities, are immune from federal antitrust law, on the rationale that our federal system could not operate if the central government could enjoin state exercise of governmental functions.
Thus, federal antitrust law allows a state to mandate conduct that, if done by individuals without involvement of the state, would land them in the federal pen. Maryland could, if it wanted, specify the prices at which wine is to be sold and require those prices to be posted and held in force for any period. That is “sovereign immunity,” and its failure as a defense in TFWS is an important aspect of the ruling to which we will return in a moment.
Third, if sovereign immunity is unavailable, the TFWS court recognized an independent potential defense, viz., that § 2 of the 21st Amendment (forbidding importation of wine contrary to the laws of the state) would have allowed the state to admit wine on the condition that it be sold in a manner contrary to federal antitrust law, if the state had proven certain preconditions. Its recognition of a 21st Amendment defense is, technically, dicta –i.e., commentary that is not required to support the decision, and therefore not binding as precedent on other courts. In other words, the outcome would have been the same if there were no 21st Amendment defense: the state lost.
So if price posting was state law, why did Maryland not have a good sovereign immunity defense?
Price posting laws are not pure state action because the parties setting the posted prices are private actors, not the state. If wholesalers set the price, and the state merely enforces adherence to it, the TFWS court, like courts that have looked at other price posting laws, classifies it not as state action, but rather as a “hybrid” of state and private action. Hybrid restraints of trade are subject to special rules in Sherman Act cases, as established by the Midcal decision in 1980.
The 4th Circuit applied the familiar two-prong Midcal test to Maryland’s system. One prong asks whether the substitution of regulating pricing in place of competition is an articulated state policy. The other asks if the state adequately supervises the prices posted to assure that the system does not deteriorate into simple private price-fixing. If the answer is no to either, it’s not state action, and no immunity applies. Like most cases applying Midcal to posting systems, TFWS found inadequate supervision and didn’t have to consider the policy articulation prong.
I have great fondness for the Sherman Act and cheer when it sweeps away restraints on trade in wine. Still, I have to admit uneasiness about the lack of post-Midcal explication by the Supreme Court on the boundaries of hybrid status. In the Midcal case itself, the state law required the private actors to engage in conduct that was necessarily an independent violation of the Sherman Act (resale price-fixing, at the time considered always illegal). It is not obvious that a posting system that requires each private actor only to select a price and post it is requiring an always-illegal act. On the other hand, that factor may not be necessary, as Midcal’s reasoning does not expressly limit the decision to systems that inevitably produce an independent Sherman Act violation on the part of the private actors.
Other courts, notably in the Miller case from Oregon, have bridged the gap by noting the opportunity for collusion, citing anticompetitive effects on the market, or (perhaps metaphysically) joining unilateral private acts with the known coercive power of the state to form the equivalent of a conspiracy. The recent Costco case in Washington State followed TFWS in picking up that approach, which seems reasonably well established, but thus far hasn’t been given a Supreme Court imprimatur.
A risk in an appeal in TFWS would be frontal attack on the Miller-Costco line of cases, with the objective of narrowing the prevailing understanding of Midcal and reviving the validity of posting laws like Maryland’s under the sovereign immunity doctrine. There is language in one post-Midcal decision supportive of that line of argument. Litigating the point would invite the long shot countermeasure of questioning the breadth of sovereign immunity itself, whose logical underpinnings in the Supreme Court’s 1943 Parker decision are of imperfect clarity, but which is deeply settled law, if for no other reason than age. It would be an intellectually stimulating debate, but one I’d readily forego for the sake of leaving the antitrust approach of Miller, Costco and TFWS undisturbed.
Entirely separate is the question of a 21st Amendment antitrust defense. As conceived by parties defending price posting, the defense would allow a state that failed to achieve sovereign immunity because of lack of active supervision nevertheless to maintain a hybrid system that turns private parties loose to violate antitrust law if the purpose is a recognized objective of liquor regulation, such as promotion of temperance.
One of the Midcal Court’s famous statements is that it was not deciding when “if ever” the states’ rights policy behind the 21st Amendment could outweigh the federal policy for competition expressed in the Sherman Act, which the Court has termed the Magna Carta of our economic liberties. It could duck that question because the state’s factual support for the law on those grounds had already been found wanting in a related case.
Thus, Midcal marks the beginning of a judicial snipe hunt for a defense that may not exist. To say that no 21st Amendment interest could be sufficient to justify direct contravention of fundamental competition policy embodied in the Sherman Act would be a profoundly controversial development in Supremacy Clause jurisprudence. It’s much less daring to rule repeatedly that the defense requires proof that is missing in the case at bar.
One of the unfortunate consequences of the Fourth Circuit’s recurring tutelage of the Maryland district court on the standard of proof is that prolonged disinclination to address the more fundamental question tends to lodge the idea that there must be a defense more firmly in the judicial mind. Formulation of the evidentiary requirements in TFWS has produced a kind of standard incantation for use by judges before invalidating a pricing law on Sherman Act grounds –wholeheartedly adopted, for example, in Costco.
As expressed in TFWS dicta, a 21st Amendment defense can be established if the evidence shows:
1) The state’s purpose is one of those protected by the Amendment.
2) The challenged law is effective in carrying out that purpose.
3) The state’s interest in the law, to the extent it is effective in carrying out the purpose, outweighs the federal interest in promoting competition.
Maryland maintained that the purpose of price posting was to make liquor more expensive, thereby promoting the objective of temperance. The court agreed that temperance is a legitimate 21st Amendment objective, and checked off item 1.
Most of TFWS was about item 2, effectiveness, and concerned how to measure relative prices between Maryland and neighboring states that did not use posting. Ten years of litigation failed to produce a sustainable finding that post and hold had a significant effect on temperance. Thus, the TFWS court did not have to reach the unwieldy issue of whether a temperance issue outweighed the policy of the Sherman Act (an area into which one may assume it had no wish to venture). The implication is that if the law had been effective, the district court would have had to receive and weigh some kind of evidence of the social importance of reduced liquor sales versus the public’s Sherman Act right to competitively determined pricing, a nightmarish prospect for all but the most fearless lower court judges.
One should not ignore opportunities to compliment one’s adversaries. In that spirit, I express continuing admiration of defenders of price posting for their ability to maintain a straight face while asserting that its purpose is temperance. Post and hold requirements are simply another method of reducing competition and thereby padding private profits, primarily in the middle tier. If a state wished to reduce problematic alcohol consumption by raising prices, it would increase its excise tax on frequently abused products, not throw a prize to industry members by attempting to grant them a spurious exemption from antitrust law. None of the states whose price posting laws have been invalidated has attempted to replace the stricken law with a system providing sufficient state supervision to meet the Midcal test or to return to court with proof of effectiveness under the TFWS test, and none has reported a resulting surge of intemperance.
If the “21st Amendment defense” to Sherman Act challenge remains in the realm of dicta, with its underlying factual requirements never proven, it may devolve to the status of mythical animal, doing no harm to protection of competition. Even so, however, the chimera would muddy analysis of our most important antitrust law and invite protracted judicial charades like TFWS. It would be a service if some judge somewhere would switch the bunny off for good.
by R. Corbin Houchins, CorbinCounsel.com
Still Looking for Granholm’s Limits
July 3rd, 2009
Anyone hoping the intermediate appellate court reversed in Granholm had become pro-commerce would have been disappointed by the July 1st decision of the Second Circuit in Arnold’s Wines, Inc. v. Boyle.
At issue was whether a state permitting its local retail licensees to ship directly to consumers might constitutionally deny out-of-state retail licensees equivalent access. The Court of Appeals reached the less than crystalline conclusion that discrimination against interstate sellers is permissible under the 21st Amendment “insofar as it requires that all liquor sold within the State of New York pass through New York’s three-tier regulatory system.”
Judge Wesley, writing for an essentially undivided three-member panel, asserts that the locals-only licensing system “allows the state to oversee” (1) financial relationships among manufacturers, wholesalers, and retailers,” which relate to state tied-house statutes limiting vertical integration, and (2) the prices and other terms of sale, which the state purports to regulate with the objective of averting overconsumption and disorderly marketing. He also notes that New York claims the system allows the state to collect taxes more efficiently than with alternative systems and to prevent sales to minors.
One cannot accurately maintain that the challenged licensing system “allows” those regulatory objectives in the sense of being necessary to achieve them. It is even less defensible to assert that location discrimination in applying a licensing system is necessary to oversee financial relationships and sales terms, to collect taxes with acceptable efficiency, or to prevent underage purchases. Thus, the court cannot escape the question whether less discriminatory means exist –unless it takes the discrimination entirely out of Granholm’s analysis of discriminatory laws. Most of the opinion is an attempt to do just that.
To circumvent the nondiscriminatory means issue, Judge Wesley articulates the “narrow Granholm” 21st Amendment-Commerce Clause theory: “It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause.” His opinion recognizes (or carves) an exception to the equal access principle, based on the famous North Dakota statement that the 21st Amendment “empowers [a state] to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler (emphasis supplied),” even though that text appears in Granholm only as a “see also” citation that is not part of the Granholm holding and is also dictum in North Dakota itself. He does not overtly consider whether Granholm’s undoubted assertion of the legitimacy of three-tier systems includes the qualification (arguably inherent in the Granholm holding) that such systems may not employ location discrimination unless it is necessity-justified by some purpose other than perpetuation of the system itself. Without inclusion of that qualifier, it is easy to stop analyzing the Granholm opinion for effects on tiered distribution when one reaches its quotation from North Dakota.
Thus, Arnold’s Wines puts us squarely into the fundamental uncertainty about Granholm: Are only what the majority calls “valid” or “generally applicable” (i.e., location-nondiscriminatory) restrictions permissible, even in areas of traditional state’s rights under the 21st Amendment, as Justice Thomas says disapprovingly in his dissent, or is there something special about passage of title through a wholesaler that provides ipso facto legitimacy to location discrimination between in-state and out-of-state resellers of the product?
Clearly in the second camp, the Arnold’s Wines majority opinion advances two propositions as rationales for its decision:
1. The “three-tier system” means goods physically moving through all three tiers, the lower two of which are located in the same state as the consumer who purchases the goods. A ruling requiring equal access to the same consumers by out-of-state retailers is therefore an attack on the three-tier system, which would not be consistent with Granholm, because the majority in that case said the three-tier system is unquestionably legitimate.
2. New York’s law “treats in-state and out-of-state liquor evenhandedly” once it is in the state’s three-tier system, and “thus complies with Granholm’s nondiscrimination principle.” Equal treatment of products by allowing them all, regardless of original site of manufacture, to pass through the three-tier system, satisfies Commerce Clause requirements, even if the law prohibits interstate sellers to reach the same consumers as local sellers. The dormant Commerce Clause protects goods, not merchants.
In a concurring opinion, Judge Calabresi agrees with his colleagues’ reasoning, but adds an eloquent originalist plea for judicial caution in “updating” constitutional provisions that (unlike, e.g., due process of law) are not drafted loosely with an implied invitation to reinterpret them as society changes. One has the impression he wishes he could have restrained the impetuosity of the Granholm majority. He was, in any event, determined not to extend that opinion’s 2005 update of the 21st Amendment beyond his panel’s delimited reading.
Relatively short in comparison to the complexity of the issues, the majority opinion does not address a number of questions raised by its stated rationales.
In the first place, it is not at all clear that Judge Wesley’s three-tier system is the same thing as the three-tier system declared legitimate in Granholm. The Granholm majority unmistakably implies there are such things as constitutional systems funneling all wine sales through local wholesalers, but is silent (to the exasperation of Justice Thomas) on how they would operate without producing impermissible favoritism toward local versus interstate commerce. One court has already attempted to resolve the conundrum by preserving a state requirement that sales go through a locally licensed wholesaler, but requiring the state to process retail license applications without location discrimination. If one adds drop shipment to that scenario, it becomes possible to run all sales through an in-state distributor (who would presumably also be responsible for tax and price reporting) and avoid location discrimination in access to local consumers.
Ultimately, the first rationale rests on the court’s pronouncement that unequal access to customers by retailers is “part of the three-tier licensing structure” (vice distribution system) established in New York. When the court concludes that exemption of unequal access from Commerce Clause scrutiny is established by that proposition, it is committing what a logician would call a mereological fallacy. That is, assuming the state’s licensing structure could be part of a three-tier system, it does not follow that special exempted status accorded three-tier systems applies to each part of it. That logical gap would exist even if the North Dakota dictum were established law, and even if one further assumed that all members of the class “three-tier systems” were exempt from the dormant Commerce Clause.
With respect to the second rationale, the Court of Appeals may have made a bold departure from the conceptual underpinnings of Commerce Clause jurisprudence in its attempt to diminish Granholm’s scope. Most judges and commentators have assumed that the Commerce Clause is intended to protect commerce, not merely choice of manufacturing site. It is, of course, entirely proper for a court to attempt to limit a disliked precedent to its specific facts, but drawing the line at products, excluding protection of downstream merchants, seems extreme.
Judge Wesley may have been forced to an extreme position to support his assertion that the facts before him were in “stark contrast” to those of Granholm. Viewed from another angle, the distance between the cases does not appear so great. Mrs. Swedenburg’s wines and those of the other Granholm plaintiffs had equal rights with New York wines to direct delivery to New York consumers from bricks-and-mortar locations within New York. That may not be so easy to distinguish from the Arnold’s Wines plaintiffs’ equal right to sell to New York consumers through bricks-and-mortar wholesalers and retailers within New York. One need not read Granholm very broadly to conclude that if the former was invalid, the validity of the latter is at least questionable.
Because the court seems to believe no nondiscriminatory means inquiry is necessary, its reference to state purposes may be only a makeweight. However, it is worth noting that the listed objectives themselves are not all necessarily legitimate. If the purpose of tied-house laws is to prevent supplier interests in New York retailers, regulation of sales by those retailers within New York is sufficient. Only if New York’s objective is to prevent such interests in retailers located in other states is it necessary to “oversee” the financial relationships of those sellers. That objective, however, raises significant issues of extraterritoriality. In a 1989 beer pricing case, the Supreme Court enunciated limits on state legislation, 21st Amendment notwithstanding, short of regulating conduct that occurs entirely outside the state (which would appear to include financial relationships among entities in another state, whether or not one of them sells into the state) or causing a patchwork of different requirements for businesses engaged in interstate commerce (as seems the case, given the widely differing requirements of state tied-house laws). Those limitations suggest that tied-house oversight of out-of-state sellers is a not legitimate purpose that can be advanced to justify discrimination. Worse, extraterritorial effect of state laws is ordinarily considered not merely discrimination against, but direct state regulation of, interstate commerce –an unconstitutional invasion of the federal sphere that cannot be rendered legal by laudable purpose.
In sum, Arnold’s Wines is a forceful formulation of the narrow Granholm position, with a forthright end run around less-discriminatory-means analysis. Its clarity emphasizes the developing differences among federal circuits in understanding that landmark case. While it is doubtful the Supreme Court has much appetite for revisiting Granholm, divergent interpretations at the intermediate level slowly increase the probability of high court review.
by R. Corbin Houchins, CorbinCounsel.com
Maine Event, At Last
June 13th, 2009
After years of trying, wine commerce proponents succeeded in adding Maine to the list of license states for direct shipment. Governor Baldacci signed HP 696/LD 1008 on June 12th.
After the Bureau of Liquor Enforcement adopts regulations and licensing procedures, the law will permit out-of-state and Maine farm wineries alike to ship wine (but not wine coolers!) directly to consumers by common carrier, subject to the same taxes as if sold locally. Meanwhile, the on-site provisions summarized in previous releases of Notes on Wine Distribution appear to remain available.
by R. Corbin Houchins, CorbinCounsel.com
Labeling Sotomayor
June 2nd, 2009
Although I don’t believe anyone has found a beverage law opinion by Judge Sonia Sotomayor, there’s a good deal of blog traffic related to the fact she did not dissent from Circuit Judge Wesley’s opinion in Swedenburg v. Kelly, a Second Circuit decision famously reversed by the Supreme Court in Granholm v. Heald. As Justice Souter was in the Granholm majority, some wholesalers have already publicly rejoiced that his putative replacement may help swing the balance toward limiting Granholm’s reach.
To understand the significance of Judge Sotomayor’s participation in Swedenburg, it is helpful to examine the context. First, Swedenburg was decided in February 2004, following the law of the circuit as it then existed. The Second Circuit is the source of Battipaglia and other conservative 21st Amendment rulings; precedent strongly supported Judge Wesley’s conclusions. It should be no surprise to an industry that rightly hails Granholm as an innovative stroke profoundly readjusting the balance between the commerce clause and the 21st Amendment that a lower court decision two years earlier did not reach the same result. Second, the Swedenburg decision was pro-commerce in its consideration of the First Amendment issue raised by the New York statutory scheme, striking down a provision that prohibited importation of information about availability of wine at out-of-state wineries, even for lawful purchase. The other two judges on the three-judge Swedenburg panel might have gone along with the result without necessarily holding “strong 21st Amendment” positions or endorsing every aspect of Judge Wesley’s analysis.
As Tom Wark said in his blog, it will be interesting to see if confirmation hearings put direct shipment in the legal news again. It will be even more interesting to see how Justice Sotomayor comes down on implications of Granholm for the second wave of commerce cases.
On-Site Requirements: Still Standing in the Heartland
May 19th, 2009
Last August, the Seventh Circuit Court of Appeals in Baude v. Heath invalidated an Indiana statute that made most out-of-state wineries ineligible for the “direct wine seller’s permit,” which the law would have limited to in-state wineries and to wineries in the few states that do not grant them local wholesaling privileges. However, the opinion upheld the requirement that a consumer’s first purchase from each winery occur on the winery premises, a ruling that led the plaintiffs to seek review in the Supreme Court by petitioning for a writ of certiorari, based on de facto discrimination against distant wineries.
On May 18, 2009, the Supreme Court denied the plaintiffs’ petition without opinion. The consequence is that the Circuit Court opinion remains the last word on the subject, at least among the federal courts of Illinois, Indiana and Wisconsin. (The case does not address a subsequent statutory change disqualifying wineries with Indiana wholesaler relationships from direct shipment, but a similar Massachusetts provision that fell disproportionately on out-of-state wineries was invalidated in Family Winemakers of California v. Jenkins.)
Denials of certiorari carry no legal weight as to the merits of the issues, but the ruling illustrates the propositions that Granholm does not “open the states” to direct shipment (in case there is anyone who hasn’t yet gotten that message) and that clarification of Granholm is probably not a high priority for the Court. For the near term, Granholm’s many unanswered questions will continue to leave lower courts considerable freedom in deciding how much a state may burden cross-border wine commerce. If conflicts among the circuits develop over time, chances of Supreme Court review will improve.
Two Steps Forward, A Couple Back (or Maybe Sideways)
May 18th, 2009
“Tied House” laws contain two categories of restrictions on licensed beverage businesses not found in other industries.
One is general prohibition of beverage suppliers’ furnishing things of value to retailers, with certain exceptions (notably goods the retailer has paid for). The other is general prohibition of ownership or investment by a supplier company or its investors in a retailing company and vice versa, again with certain exceptions. Details vary by state, and there is an overlay of federal tied house law, most of which kicks in only if the prohibited act to some degree excludes a competitor from trade.
Originally, tied house laws were intended to prevent return upon Repeal to the vertical integration, primarily brewery-saloon, that was a prime target of the Prohibition movement. As economic relations have evolved since the early 1930s, the purpose has shifted toward protecting interests of the middle distribution tier, and especially toward countering the growing influence of large chain retailers which, but for tied house legislation, would treat alcoholic beverages in the same stringent cost-reducing manner as other grocery items.
On May 15, 2009 the Washington governor signed a bill that has been loudly touted as loosening that state’s highly restrictive tied house law. Purported reforms permit some trade practices claimed to have been previously forbidden and introduce the possibility of investment and outright ownership between tiers, which had previously been limited to extremely narrow circumstances. However, a close reading reveals that the supposed relaxation is in large part illusory and may net out to tightening Washington’s tied house restrictions.
For a skeptical view of the bill’s particulars, go to the “Legal Developments” page at www.CorbinCounsel.com and click on the link to HB 2040.
Massachusetts Still Question Mark for 30K-Gallon Wineries
February 8th, 2009
On January 16, 2009, the state filed its notice of appeal in the 2006 Granholm-based federal suit, Family Winemakers of California v. Jenkins. The District Court had entered judgment on December 18, 2008, enjoining enforcement of a statute that prevents direct shipment by 30,000-gallon-or-more wineries that sell through Massachusetts wholesalers (a category exclusively out-of-state), while affording smaller wineries, a category for which all in-state wineries qualify, “unfettered access.”
On February 3, 2009 the District Court transmitted the record of the case to the Court of Appeals, the first step in a process that may take a couple of years. The state can move for a stay in the District Court and, if unsuccessful, apply again in the Court of Appeals. Thus, it is unknown at this point whether the appeal will, at least temporarily, reinstate the status quo ante.
Up and Running (So Far)
December 19th, 2008
Happily for the plaintiffs, Judge Zobel’s final judgment in Family Winemakers of California v. Jenkins took the path that seemed most likely from the tone and content of her memorandum and order of 19 November 2008 and leveled up. The judgment entered 18 December 2008 orders the state “to permit wineries of all sizes to apply for licenses under Mass. Gen. Laws ch. 138, § 19F(b),” which does not contain the § 19F(a) disqualification of wineries that have sold to a Massachusetts wholesaler within six months of applying for the license, formerly applicable to all 30,000-gallon-and-over wineries. In her November opinion, the judge had noted that the “choice” to use direct shipment only after abandoning all sales through wholesalers for six months was, in effect, prohibition.
Final judgment does not settle the issue of a possible stay of the injunction pending appeal. The state has 30 days from entry of the judgment to file notice of appeal, which would be a prerequisite to moving for a stay in the trial court and, if unsuccessful there, in the Court of Appeals.
By R. Corbin Houchins, Attorney at Law
A Battle Well-Picked and Well-Fought
November 23rd, 2008
David does best when he can choose the right Goliath.
The Massachusetts volume cap on direct shipment, invalidated last week in Family Winemakers of Calif. v. Jenkins, was a good choice to challenge for at least three reasons. First, there was gold in the legislative record: a sponsor described the bill as “giving an inherent advantage indirectly to the local wineries,” and the cap was openly and carefully calibrated to fall just above anticipated production of the state’s largest winery. Second, the structure of the statutes permitted excising the cap without damaging the state’s basic regulatory system. Third, the statute had the additional feature of requiring wineries to choose between direct shipment and use of local wholesalers, permitting the suit to take a swipe at another dubious restriction deployed by three-tier defenders, with or without a volume cap.
Judge Zobel’s opinion proceeds from her observation that Granholm forbids both direct and indirect ways of subjecting out-of-state wineries, but not local ones, to mandatory use of a local middle tier. Granholm, however, follows precedent in drawing a distinction between state laws that openly (or “facially”) discriminate against interstate commerce and those that pursue some legitimate purpose with only an incidental disproportionate burden on interstate commerce. Courts apply a more stringent test of nearly automatic invalidity to the former, but for the latter give a state more latitude to balance its own objectives against the federal interest in free interstate trade.
Most of the court’s analysis is devoted to showing how the state law came about, which boiled down to a compromise between direct shipment proponents, who wanted a “straight” winery shipment law without a cap, and the wholesalers, who wanted no direct shipment. The middle ground was direct shipment for wineries defined as small, wherever located. If there were no more to it than that, the law could be regarded as facially neutral and therefore vulnerable only if its incidental adverse effect on interstate commerce outweighed whatever benefit the state sought in enacting the statute.
There was a great deal more to it, because the legislative history revealed an intent to set the cap so that no Massachusetts winery would fail to be categorized as small, leaving the producers of most wine sold in interstate commerce deemed large. Judicial principles governing the choice between the strict test , which applies to facially discriminatory statutes, and the more state-friendly balancing test applicable to incidentally discriminatory statutes, contain the interesting wrinkle that a statute whose purpose is shown to be protectionist is treated as facially discriminatory, even if its bare text does not reveal the discrimination. Thus, the intention revealed in legislative history put the Massachusetts statutes in the strict scrutiny category, which would require the state to prove that an important public policy objective could not have been met in any reasonable non-discriminatory way.
According to the state, its objective was to bring the blessings of direct shipment to small producers throughout the nation. Judge Zobel could not see how cutting out the larger wineries served that objective at all, and therefore flunked the statute under both the strict test for facial discrimination and the easier balancing test for upholding incidental discriminatory effects.
Invalidating the statute without requiring a finding of facial discrimination makes the case far more important in other states, where plaintiffs may not be so lucky as to find evidence of discriminatory intent leaping from the legislative record. It also makes the decision itself more robust on appeal, when the state and wholesalers argue that the sponsor’s statements quoted in the opinion were taken out of the context of a true benign intent.
Family Winemakers is also useful to pro-trade advocates in two less direct ways. (1) It explicitly rejects the defendants’ argument that the large wineries were not shut out of direct shipment because wineries of any size that had not sold wine to a wholesaler for six months could ship directly to consumers. While it might seem self-evident that forcing wineries of substantial size to abandon use of wholesalers as a precondition to using direct shipment is, in effect, denying them direct shipment privileges, in future litigation it’s much better to be able to point to a judge’s saying so. (2) In gauging effect on interstate commerce, it put the focus on the large volume of wine excluded or burdened by the statute, rather than (as the state urged) on the small number of producers who are responsible for it. That follows logically from judicial precedent, but again it’s advantageous to have it spelled out in a reported case.
Judge Zobel’s opinion is clear and impressively supported by citations to precedent, aided on both counts by the remarkably well-researched and well-argued case presented by the plaintiffs, but the suit is, of course, not yet over. The state and wholesalers will presumably move for reconsideration, which, in view of the forcefulness of the opinion, represents a dim hope for defendants. Other skirmishes may be more substantial.
What we have so far is an order granting judgment to the plaintiffs and identifying the statutes whose enforcement will be affected by the permanent injunction to be entered. The defendants will surely have much to say about how the injunction should be worded and whether it will be effective during the almost inevitable appeal.
It is important to note that the opinion of the court recognizes, as it must, that the state has the right simply to take the direct shipment statute containing the volume cap (§ 19F) off the books altogether, with the result of shutting down direct shipment for all wineries –i.e., level down. In their original complaint, plaintiffs had asked for a declaration that challenged statutes, including § 19F, were unconstitutional and an injunction against their enforcement. That left some uncertainty whether, in case the court agreed on unconstitutionality, it might grant the wish by invalidating § 19F altogether, leaving no winery with direct shipment, because of the general ban in §§ 2 and 18 on importation or transportation without specific dispensation.
In the summary judgment motion just granted, plaintiffs asked the court to enjoin enforcement of §§ 2, 18 and 19F “against any out-of-state winery engaged in direct shipping to consumers, regardless of the winery’s total annual production or affiliation with a Massachusetts wholesaler.” The court included all three statutes in its memorandum order, a clear indication that the final judgment and permanent injunction will level up by keeping the permissive and licensing parts of 19F in force and enjoining only denial of direct shipment privileges to larger wineries (including those that sell to Massachusetts wholesalers).
Less certain is the issue of a stay on appeal, which the court has discretion to grant or deny. The tenor of the opinion suggests that Judge Zobel will be reluctant to delay the effect of allowing larger wineries to use both wholesalers and direct shipment, though we can expect arguments from defendants that it will ruinously disrupt the orderly regulation of beverage alcohol in the Commonwealth. Moreover, denial of a stay in the district court does not mean the appellants would fail to obtain a stay from the Court of Appeals, which could take a couple of years to decide the case. Ultimately, the legislature can always take another cut at protecting wholesaler interests while appeals are going on, potentially rendering the ruling moot.
Even with questions about when it will become effective and the inability to predict with certainty what an appellate court or legislative assembly will do, Family Winemakers will ripple through all litigation dealing with indirect discrimination against interstate commerce. For pro-trade advocates, that’s cause to celebrate.
Appeals Court Calls for More Facts in Challenge to Tennessee On-site Law
October 27th, 2008
The October 24th decision of the Sixth Circuit Court of Appeals in Jelovsek v. Bredesen has been widely reported as upholding face-to-face on-site purchase requirements for winery sales to consumers. There is, however, an interesting disconnect between what the district court said when it dismissed the complaint and what the appellate court said in partly affirming the dismissal.
In March 2007 the district court judge upheld a statutory scheme he understood as an exception to the otherwise mandatory three-tier system, allowing Tennessee residents to buy wine at a Tennessee winery that used a certain proportion of Tennessee fruit and to transport the purchase in quantities of up to three gallons, while limiting transportation of out-of-state wine purchases to one gallon. The circuit judge, speaking for a three-judge appellate court, clearly upheld laws requiring both in-state and out-of-state wineries to use Tennessee’s three-tier system and clearly reversed the district court’s upholding the exception. The appellate opinion does not, however, say that Tennessee may continue allowing Tennessee wineries to sell at their premises to consumers so long as the transportation quantities are equalized.
What the opinion appears to leave open is the fundamental question in the lawsuit: whether Tennessee can prohibit direct shipment to its residents by out-of-state wineries while allowing in-state wineries to sell out of their tasting rooms. The first line of attack on that proposition is that on-premises sale requirements, though literally neutral, so obviously favor nearby wineries over more distant ones that they should be analyzed as facially discriminatory against interstate commerce, putting the burden on the state to demonstrate that the differential is indispensable for carrying out a legitimate state objective. The second line is that, even if we read on-site requirements as facially neutral, the harm to interstate commerce from the difference in access to the market outweighs any benefit the differential may confer on the state; under that analysis, the plaintiffs, rather than the state, have the burden of factual proof. The main line of defense is that the differential is a mere “accident of geography” without Commerce Clause significance. Lower courts in other cases have disagreed on which view is correct.
The Sixth Circuit held that discrimination in favor of Tennessee wineries would have to end and noted that good arguments in principle exist for leveling up and for leveling down. In the absence of a sufficient record for choosing one or the other, it remanded the case to the district court for further proceedings. The opinion provides no instructions on how much change would be required to achieve a level playing field if the district court decides to extend equivalent benefits to out-of-state wineries, rather than reduce privileges of in-state wineries. Thus, it looks as if the plaintiffs have an opportunity on remand to provide support for their proposition that leveling up requires allowing direct shipment.
Hold the Toasts in Michigan
October 13th, 2008
On October 6th, 2008, the judgment in Siesta Village Markets LLC v. Granholm was stayed by agreement of the parties, to give the state time to appeal and, if the appeal is taken, to leave the current law in force for the duration of the appellate process. It seems almost certain the defendants will appeal.
That means the law in Michigan has not yet changed and, depending on the outcome on appeal, may not change as contemplated by the district court opinion. Reports that Wine.com will begin shipping in reliance on the original judgment appear premature.
Granholm, the Sequel
October 1st, 2008
On September 30, 2008, a federal district court ordered Michigan to give out-of-state retailers access to Michigan consumers to whom local retailers could sell wine. The reasoning in Siesta Village Market LLC v. Granholm closely parallels that of the landmark Supreme Court decision, Granholm v. Heald, in effect rendering Governor Jennifer Granholm a serial violator of the dormant Commerce Clause.
Judge Hood found laws requiring differential treatment of local and interstate commerce to be discriminatory on their face, thereby assuring their invalidity in the absence of showing by the state that there was no less discriminatory way to pursue its legitimate regulatory objectives. She further found that, as in the original Granholm case, the state had not met its evidentiary burden.
The “Granholm II” order enjoins the governor and other state officials from prohibiting selling, delivering and shipping wine through interstate commerce directly to consumers by out-of-state wine retailers, but allows the state to collect taxes on wine sales and to require licenses and permits for direct interstate sales and deliveries, so long they do not discriminate against out-of-state wine retailers. The state and its wholesaler allies are expected to move for a stay pending appeal, though the forcefulness of the court’s opinion puts the result of a motion in doubt. However, the licensing and tax-collecting provisions of the injunction provide opportunities for delays in compliance without a formal stay.
A Little Knowledge Is Not Enough: Evidentiary Burdens In On-Site Cases
August 10th, 2008
The August 7th decision of the Court of Appeals for the Seventh Circuit in Baude v. Heath has been characterized as a loss in the fight against on-site purchase requirements. Indeed, the opinion leaves Indiana’s initial personal visit requirement in place. That is not, however, the whole story.
It’s important to keep in mind in reading the opinion that the Court of Appeals is affirming the lower court’s granting of summary judgment against the state on one point and reversing it on another. That is, the district court had decided no trial was necessary because uncontested facts established the unconstitutionality of both the wholesale licensee ban and the initial on-site visit requirement. The appellate court agreed with the former conclusion and disagreed with the latter.
Statutes that openly discriminate against out-of-state wineries are almost always unconstitutional and provide fit subjects for summary judgment. Statutes without openly discriminatory provisions, but whose effect in practice is to impose a greater burden on out-of-state wineries than on local wineries, may be unconstitutional, depending (in the locution of the leading case) on whether the burden is “clearly excessive in relation to the putative local benefits.”
That determination of excess is at the heart of the 7th Circuit opinion. The appellate court had little trouble in concluding that the kinky ban on shipment by wineries that had direct distribution rights anywhere provided virtually no benefits, except to wholesalers, and was substantially burdensome. Because uncontested facts in the district court demonstrated exclusion of a substantial number of out-of-state sellers, the plaintiffs had met their burden of showing discriminatory harm to interstate commerce, shifting the obligation to produce evidence to the defendants. The state and wholesalers had offered only one intelligible counterargument –the claim that requiring commerce to go through a local middle tier makes it easier to monitor sales and collect state excises. We can keep Baude v. Heath in the column of cases that do not consider that claim a substantial justification for demonstrated burdens on commerce.
In the other (and more important) half of the 7th Circuit opinion, the same burden-benefit analysis reached a different conclusion with respect to the supposed economic consequences of Indiana’s requirement that the consumer travel to the winery site before receiving the first direct shipment order. Faced with a contention that such a burden is inherently excessive, the chief judge offered some unvarnished advice to plaintiffs’ counsel: “It is impossible to tell whether a burden on interstate commerce is [excessive] without understanding the magnitude of both burdens and benefits. . . . . Exact figures are not essential (no more than estimates may be possible)[,] and the evidence need not be in the record if it is subject to judicial notice, but it takes more than lawyers’ talk to condemn a statute . . . .” In other words, you can’t litigate a burdening case as if it were a case of overt facial discrimination. See Notes on Wine Distribution, pages 8-10, for my discussion of that point and of Cherry Hill Vineyard (which was cited in Baude) and similar cases.
Regarding judicial notice (which occurs when a court accepts something, such as a tide table, as true from published sources, without live testimony), courts seldom take notice of controversial facts. That point came up when the chief judge, sounding a bit offended by plaintiffs’ argument that there was no point in having a face-to-face screening system because determined underage purchasers would defeat or circumvent it, declined to take judicial notice of propositions they advanced in support. Plaintiffs cited some studies and attempted to use an on-line ID check provider’s advertising to show on-site screening is unnecessary. The appellate court wasn’t having it and noted that “it would be awfully hard to take judicial notice that in-person verification with photo ID has no effect on wine fraud and therefore flunks the interstate commerce clause.”
Thus, although delivery requirements involve face-to-face proof of age, Baude stands for the proposition that plaintiffs would have to prove that carrier screening undercuts the enforcement benefit of the initial winery site requirement. The appellate opinion refers to Rowe v. New Hampshire Motor Transport Ass’n, a case involving a specific tobacco-regulating statute, as forbidding states to require carriers to check age of persons receiving intoxicating liquor. That is, I believe, an egregiously wrong reading of the case (see blogging on both sides of the issue here), but the opinion does not rely on it. Rather, it describes the face-to-face transaction between carrier employee and recipient of the shipment as facially inferior to age screening at a winery, to a degree that allows the state to treat the former as inadequate. As with economic effects, plaintiff evidence was, in the court’s view, simply absent on the efficacy of at-delivery age screening: “Given the state of this record, and the state of the empirical literature, we know very little.” The take-away is that before you can knock down a duly enacted state statute, you need to know –and show– rather a lot about its discriminatory effects.
The primary importance of Baude is to add weight to an already substantial body of judicial opinion that suits based on a facially neutral law’s burdensome effects on interstate commerce relative to local commerce have to be tried quite differently from suits like Granholm, which was based on overt and explicit discrimination against interstate commerce. The case does not say that the face-to-face law would prove constitutional in a properly presented case, only that it was wrong to conclude that its unconstitutionality was so clear as to require no presentation of quantitative evidence on its burdens.
Reversing a grant of summary judgment does not require that the lower court enter summary judgment for the other side. Rather, it provides guidance to the district court as to evidentiary requirements if the case goes on to trial, and leaves the statute in place if there are no further proceedings below. The plaintiffs’ burden of proof in Baude is substantial but not unsupportable. It ain’t necessarily over.
An Accident On The Way To Court
March 25th, 2008
The February 26, 2008 decision by an Arizona federal district court in Black Star Farms LLC v. Oliver supports an in-person purchase requirement, one of the principal legislative attacks on the level-field principle enunciated in Granholm.
In-person purchase as a precondition to direct shipment solves a fundamental political problem for the middle tier. Although Granholm allows states to eliminate discrimination against interstate direct shipment by forbidding in-state shipment, pursuing that “level down” strategy requires extravagant expenditure of political capital, because it constitutes a death sentence for a significant fraction of local wineries. Thus, wholesaler trade associations are faced with reconciling survival of direct shipment for local wineries with the core objective of forcing wineries in other states to go through three tiers, a conceptual problem after Granholm.
The solution is the “accident of geography” theory, which contends that the impracticality of, e.g., an Arizona consumer’s visiting a Yakima Valley winery to place an order for a wine advertised on the Internet, compared to the convenience of visiting an Arizona winery for the same purpose, does not discriminate against interstate commerce. The Black Star court, like a New York federal district court in Buy Right, Inc. v. Boyle and a Tennessee federal district court in Jelovsek v. Bresden, appears to have bought the theory; federal district courts in the Kentucky case, Cherry Hill Vineyards, LLC v. Hudgins, and the Indiana case, Baud v. Heath, rejected it. Appeals are reportedly under way in the fourth, sixth and seventh federal circuits; if the plaintiffs appeal in Black Star, the ninth circuit will also be involved.
At first impression, the wholesalers’ argument does not seem logical. With respect to governmental restrictions, the Commerce Clause is supposed to provide equal access to markets for interstate commerce originating in any location. True, it does not require states to neutralize natural effects of geography, such as the greater cost of shipping from a distant point, but the trade restriction in question arises from the legislative pen, not from geography itself. For legislation, the Commerce Clause supports location parity by voiding state enactments with substantial discriminatory effects, including the effect of leveraging location advantages of local businesses against distant competitors.
Ironically, the court in Black Star appears to have recognized that aspect of the Commerce Clause, as it cited a 1994 Supreme Court case on the subject, C & A Carbone, Inc. v. Clarkstown, which invalidated a facially neutral city ordinance requiring all nonhazardous solid waste received and processed in the town to be deposited at the defendant township’s transfer station. The fatal flaw of the Clarkstown ordinance was that in practice it favored local waste management business to the exclusion of all non-local competition, which sounds pretty similar to a three-tier requirement for out-of-state businesses, but the Black Star court decided not to follow that precedent for reasons that are difficult to divine in its opinion.
There is, nevertheless, a solid basis for the anti-trade result in Black Star and other recent cases, which is widely (and perhaps erroneously) understood as endorsement of a geographic accident defense to Granholm-based suits. If there were only one message I’d want readers of these blogs and Notes on Wine Distribution to take away from discussion of Granholm, it would be the enormous evidentiary difference between a facial discrimination case like Granholm itself and a de facto discrimination case like Black Star. The latter category, which includes challenges to volume caps as well as to on-site limitations, requires much more extensive preparation, with economic expert testimony, to satisfy the plaintiffs’ substantial burden of proof. The Black Star judge underlines that point in refusing to reach the same result as Hudgins and Baude: “However, Plaintiffs proffer no evidence to suggest that such a limited exception, applicable to both in-state and out-of-state wineries, erects a barrier to Arizona’s wine market that in effect creates a burden that alters the proportional share of the wine market in favor of in-state wineries, such that out-of-state wineries are unable to effectively compete in the Arizona market.” Providing the kind of evidence the court would have to see before invalidating a facially neutral statute adds something like $150,000 on top of all the other costs of the litigation, which should be a sobering, but not surprising, fact for enthusiasts of law reform by litigation, and especially for those who think Granholm provides a lay-down slam in direct shipment cases.
Another Rowe to Hoe
February 25th, 2008
There’s been a lot of silliness lately about the Maine cigarette case, with some observers declaring that the recent Supreme Court opinion in Rowe v. New Hampshire Motor Transport Ass’n prevents states from regulating carrier deliveries of interstate wine shipments. Whether honest mistake or disinformation, that assertion might seem plausible from a superficial reading of news reports on the decision, so it’s worth looking into.
This Rowe is a straightforward federal preemption case, affirming a Court of Appeals decision (itself based on a well-known 1992 Supreme Court decision) that a federal statute with a specific preemption clause does just what it says. Enacted in 1994, the motor carrier statute provides: “[A] State . . . may not enact or enforce a law . . . related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.” The Maine law struck down as inconsistent with the federal statute attempted to prevent shippers from using interstate motor carriers lacking controls to prevent delivering cigarettes to minors, an objective the justices found worthy, but within the exclusive province of the federal congress.
Why doesn’t that knock out state laws restricting delivery of wine to minors? In the first place, there is a more specific federal statute dealing with alcoholic beverages, which provides: “The shipment or transportation … of any … intoxicating liquor … from one State … into any other State … intended … to be received … in violation of any law of such State … is prohibited.” In other words, federal law specifically authorizes state laws regulating deliveries of wine and adds federal weight to their enforcement. One cannot argue that the liquor statute, passed in 1935, is impliedly repealed by the 1994 motor freight legislation, because they do not exhibit the kind of irreconcilable conflict that evinces congressional intent to repeal the older statute. Well-settled principles of statutory construction in cases of conflict prohibit implied repeal if reconciliation is possible and provide that facially conflicting statutes can be reconciled by allowing the more specific to govern over the general in its particular subject area. Thus, if we had only the two statutes to consider, rules of statutory construction would require that the 1935 act remain in force as a subject matter exception to the more general 1994 enactment. One could quibble about the extent to which states are authorized to dispense with an intent requirement, but there’s no doubt that the federal statutory scheme leaves room for state laws controlling wine deliveries.
It is not, however, merely a matter of two statutes. The second problem with the Chicken Little reading of Rowe is a clincher. The U.S. Constitution states, “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” There is no need to resort to implied congressional intent. The Supremacy Clause says that the U.S. Constitution itself and the laws of the United States shall be the supreme law of the land, a provision that is interpreted to mean, “in that order.” Thus, the same clause that underlies preemption of the Maine cigarette delivery law by a federal statute absolutely prevents preemption of a state wine delivery law by that congressional enactment, provided the state law does not violate some other constitutional provision, e.g., by discriminating against wine produced by persons of a certain race or religion –or by a winery outside the state.
Costco Asks Court of Appeals to Think Again
February 21st, 2008
On February 19, 2008, Costco Wholesale filed a petition for rehearing in the Ninth Circuit Court of Appeals, asking the original panel to reconsider a three-judge panel’s decision of January 29th, which upheld the ruling of a federal district court in Seattle that Washington’s price posting requirement is invalid under federal antitrust law, but reinstated other parts of the price posting statute the district court had struck down as part of the invalid statutory scheme, as well as the ban on central warehousing. The petition also asks that the entire appeals court hear the case if the original panel does not grant Costco’s request, in view of the importance of the antitrust issues, the inconsistency of the result with those in an earlier Ninth Circuit case and a recent Fourth Circuit case, and the necessity to interpret a leading Supreme Court opinion. The petition offers a clue to how an appeal to the Supreme Court might be structured.
Six Veils Out of Seven: Retailer Shipments Under Granholm
January 30th, 2008
On January 14, 2008, a district court in Texas rendered a mostly pro-trade decision in Siesta Village Market, LLC v. Perry that clarified much, but danced around the hottest issue, leaving the final veil in place.
The case upholds the basic Specialty Wine Retailers contention that a state that allows its retailers to deliver to consumers must permit direct shipment by out-of-state retailers. It also has some important things to say about the meaning of Granholm’s less pellucid passages. In particular, it attempts to deal with the most significant internal tension of the Granholm majority opinion, viz., the difficulty of squaring the holding of the opinion, that states cannot require out-of-state wineries to become residents as a condition to reaching local markets, with a dictum-within-a-dictum quoted from a 1990 Supreme Court case, North Dakota v. United States, to the effect that the 21st Amendment empowers states “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm).
The Siesta Village decision and its implications merit further discussion, in particular on the following points:
1. Texas had a “citizenship” requirement of at least a year’s residence in the state for most licenses. It had already been declared unconstitutional when applied to newly arriving wholesalers with physical premises within the state. Siesta Village goes farther by analyzing the statute as a location requirement and holding it unconstitutional on Commerce Clause grounds, to the extent it prevented issuance of the requisite retailing licenses to out-of-state retailers.
2. The Siesta Village judge takes Granholm as a location parity case, and his opinion is explicit that physical presence requirements “plainly discriminate against interstate commerce.” However, like every analyst of Granholm, he had to deal with a key question posed by the quotation from North Dakota, noted above: If a state has the right to require all wine to “be purchased from a licensed in-state wholesaler,” how does one give effect to the Commerce Clause policy against location discrimination? One way of resolving the issue is to require the state to accept methods of consummating the purchase requirement that do not substantially burden interstate commerce relative to local, such as running the sale through the local middle tier without requiring the wine to take an economically disadvantageous logistical path when sold by an out-of-state retailer. Another is to declare that the quotation is dicta and therefore not binding in applying the Granholm holding to a different chain of distribution where its effect on commerce is more problematic –rather too bold a departure to expect in a district court opinion. In the event, the judge simply let the contradiction lie, holding that the retailers have to comply with Texas laws requiring a state retail license and purchase from a Texas-licensed wholesaler, a deferral that has been described as a ticket to the next round of litigation. Meanwhile, the Texas Alcoholic Beverage Control Commission has informally commented that it is not their problem.
3. Experts disagree on the extent to which Granholm was a “weak record case” that could have gone the other way had the states made a better showing of regulatory problems, for example in tax collection and averting deliveries to underage recipients. Siesta Village takes the opposite view, and granted summary judgment, which means the court decided Texas failed to show substantial likelihood that, if it were afforded a full hearing, it would present evidence on which a judgment in its favor could be based. To win in a direct discrimination case a state would have to show there is no reasonable alternative to discrimination for achieving legitimate regulatory objectives. The court reads Granholm to say that the availability of licensing and modern communications makes such an argument inherently implausible, and comes close to saying a state can never prevail on the proposition that interstate delivery is more likely to cause underage drinking than intrastate delivery.
4. Another point of controversy among lawyers is whether the Commerce Clause is indifferent to whether a court cures discrimination by leveling up or down. Siesta Village takes the side of those who argue that it makes no sense to level down in enforcing a constitutional provision intended to encourage interstate trade, at least in the absence of a clear legislative statement requiring termination of in-state privileges in case of invalidity of interstate prohibition. In constitutional law terms, the Siesta Village judge may have discovered a penumbra to the Commerce Clause that would prevent courts from taking such simplistic approaches as counting the number of lines of statutory text that would have to be rewritten and picking the smaller revision.
5. Although Siesta Village rejected the wholesalers’ strange argument that the discrimination arose not from Texas’s intent, but from the happenstance of the plaintiffs’ locations, it indulged in dicta indicating states can adopt on-site-only laws, in which case the “accident of geography,” and not state discrimination, would be responsible for excluding remote sellers. It appeared to accept the reasoning that because there is no “direct shipment market” in those states, the remote sellers are not excluded from anything by the prohibition, which is arguably a flawed argument under the Commerce Clause, whose policy extends to disproportionate burden as well as overt discrimination.
Appeals seem likely. Meanwhile, the parties in Knightsbridge Wine Shoppe, LTD v. Jolly, who agreed to extend Granholm, at least temporarily, to non-producing retailers selling to California consumers, will presumably take up their cudgels on application of the Siesta Village analysis, versus that of the New York case, Arnold’s Wines, Inc. v. Boyle on September 9, 2007. In Arnold’s Wines, the New York federal district court dismissed a retailer suit without an evidentiary hearing, on the grounds that the state had a 21st Amendment right to require all sales to go through an in-state wholesaler, a proposition suggested by the vexing dictum in the Granholm opinion.
The Arnold’s Wines decision seems to miss Granholm’s point that a state may have the right to require all wine to go through three tiers, but does not have the right to apply its rule with location discrimination unless it provides evidence that its discrimination against interstate sellers is required by a legitimate state objective that cannot be achieved through nondiscriminatory means. The Siesta Village judge expressly declined to follow Arnold’s Wines, which it plausibly characterized as putting the 21st Amendment above the Commerce Clause, precisely what Granholm forbids.
