Questions abound regarding what HR 1161 would do if it became law. Published answers conflict, ranging from “merely clarify existing law” to “instantly terminate direct shipment.” Here’s my take on some frequently encountered queries.

If Granholm is a decision of the Supreme Court interpreting the federal constitution, how can Congress mess with it?

Although the question is not without complexities, there is a short answer: Granholm presupposes that Congress has not delegated to the states its constitutional power to regulate interstate commerce in the way the New York and Michigan laws in question regulated wine. Granholm is, in other words, a “dormant Commerce Clause” case, meaning that the power to regulate lay unexercised in the province of Congress, where, though dormant, it constituted a prohibition of state encroachment on congressional subject matter.

Dormant (or “negative”) Commerce Clause theory rests on a negative interpretation of the silence of Congress in a subject area –refraining from speaking equals reservation of the area to federal regulation. It does not operate if Congress explicitly delegates portions of its regulatory power to states, as it has done, for example, with the Bank Holding Company Act. In upholding that delegation, the Supreme Court remarked that such laws are “invulnerable to constitutional attack.” The same principle probably applies to HR 1161.

How would HR 1161 change the status quo?

First, one has to know what the status quo is.

Today, neither the states’ undoubted 21st Amendment right to prohibit all entry of alcoholic beverages or admit them under even-handed rules, nor their right under the Wilson Act and Webb-Kenyon Act to exercise jurisdiction equally over local and incoming alcoholic beverages, includes an unqualified right to give local wineries significantly greater direct access to local purchasers than is accorded out-of-state wineries. Granholm is less than clear at several points, but its ruling on intentional state discrimination against interstate commerce is unmistakable: The 21st Amendment does not even come into play in evaluating the constitutionality of laws that facially discriminate. Rather, they are judged under the standard applicable to commerce in all goods, which renders them invalid unless (a) they are demonstrably necessary to serve a legitimate state purpose than cannot reasonably be achieved by a less discriminatory method or (b) Congress has delegated regulation of the interstate commerce in question to the states in a manner that supports the discrimination. In Granholm the majority found that Wilson and Webb-Kenyon did not constitute the requisite Congressional delegation, and, as is well known, the states failed to meet the necessity test for the laws then before the Court.

State laws that do not facially or inevitably discriminate against interstate commerce and were not adopted with protectionist intent are judged under an easier standard. If a state statute regulates even-handedly to serve a legitimate state interest, and its effects on interstate commerce are only incidental, it will be upheld unless on balance the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed intrastate benefits. Because discrimination was evident on the faces of the statutes considered in Granholm, the balancing test didn’t apply, but it remains applicable where the facts support it. A statute that failed even that test could be saved by express congressional delegation of sufficient regulatory power, but no relevant delegation exists.

The status quo is, of course, subject to controversy on some significant points. For example, we do not know with certainty whether in-person purchase requirements constitute facial discrimination, and it remains unsettled whether maintenance of a three-tier distribution structure is a legitimate state purpose in itself or merely one means of achieving legitimate objectives such as reliable tax collection.

HR 1161 aims to correct the failure of the Webb-Kenyon Act to provide delegation of congressional regulatory power over interstate commerce in liquor to the states sufficient to overcome the antidiscrimination effects of the dormant Commerce Clause, and failure of the Wilson Act to authorize differential treatment of out-of-state liquor once it has arrived in a state, by amending both statutes. With an explicit expression of congressional delegation in the subject area, the dormancy goes away, and the states would be free to legislate consistently with the expressed intent of Congress.

Current text of HR 1161 begins with congressional intent that silence not be interpreted as creating a Commerce Clause barrier to whatever regulation of liquor a state wants. It then adds circumscribed restraints on state action that echo selected portions of present law. It is in the limited nature of those restraints, alongside the radically comprehensive delegation of regulatory power, that the significant changes are to be found.

If HR 1161 gives states a regulatory carte blanche and adds only limited restraints, what practical effects would it have?

Three appear clearly from the text:

1) Application of Granholm’s location neutrality principle to interstate retailers and wholesalers is fiercely contested . HR 1161 would resolve the issue by denying Commerce Clause protection for businesses other than producers.

2) Facially or intentionally discriminatory state law can now be invalidated if the state has a reasonable and less discriminatory alternative for achieving its purpose. HR 1161 would allow the law to stand except in the rarer situation where a nondiscriminatory law would have enabled the state to reach the same objective.

3) Laws with discriminatory effects that are not facially apparent are now subject to the balancing test for excessive burden on interstate commerce. Under HR 1161, all such laws, which constitute the majority of existing barriers to interstate trade in wine, would be exempt from Commerce Clause scrutiny, irrespective of differential burdens on out-of-state sellers.

Note that none of those features of HR 1161 has any effect on its own. They allow states to do things they cannot now do without inviting constitutional challenge, an important change, but one that depends on new or existing state legislation to make a practical difference.

Who Needs It?

It is entirely legitimate to advance one’s economic interests by legislation and to couch arguments for legislative measures in terms of general societal interest. Introduction and advocacy of HR 1161 is not an outrage, but it does deserve thoughtful critique.

Space considerations preclude Oxonian debate here. I hope it is not inappropriate to catalog some opinions, which may or may not provoke more extended discussion.

First, proponents imply that the nation, or at least the judicial system, needs more clarity with respect to the meanings of the Commerce Clause and § 2 of the 21st Amendment, and that the bill will provide it. Clarity is usually a virtue, and the law ordinarily benefits from it. However, no particular clarity crisis exists in the subject matter of HR 1161. The dormant Commerce Clause concept is criticized by some observers, notably Justice Thomas, as based on tenuous legal theory, but the doctrine itself is not unclear, difficult to apply, or surprising in its results. Granholm is not harder to understand and apply than the mine run of Supreme Court constitutional cases, and there is nothing unusual about the time it is taking for corollary issues to work their way through intermediate appellate courts.

Secondly, the bill has been touted as a judicial economy measure because it will reduce the grounds under which industry members can challenge state law. Obviously, societal cost-benefit analysis of potential lawsuits must take the subject matter into account. To me, the notion that litigation attempting to bring state laws into compliance with the constitution is an “end run” around beverage regulation is like saying that Brown v. Board was an end run around school administration. The national market envisioned by the authors and early judicial interpreters of the Commerce Clause is a fundamental American goal, one that has never been repudiated and, as we have known at least since 2005, one that is not trumped by the 21st Amendment. That amendment itself and related statutes give states ample power to fashion their methods of combating intemperance and other asserted evils of drink, without creating cartel distribution structures.

Finally, HR 1161 may indeed address a need for those who fear that after Granholm the legitimacy of state-mandated middle tier turnstiles in the stream of commerce may be contingent on their not excessively burdening interstate commerce. The bill certainly blunts constitutional inquiry in that regard. Some proponents meet the obvious question, why is burdening in excess of what’s required to achieve legitimate state goals a good thing, with the reply that the three-tier distribution system is in itself a goal of unquestioned legitimacy.

When debate over HR 1161 devolves to whether the three-tier system is a blessing compared to systems in which the roles and compensation of businesses are determined by the value of the services they provide, we enter areas of values where argument never ends. Proponents often seek to shorten the exchange by resort to passing remarks in Granholm that the three-tier system at issue in North Dakota v. U.S., which provided the alternative of direct distribution from outside the state, was valid, in hopes of morphing them into endorsement of a state right to enact whatever is needed to support any closed three-tier system. In fact, only one justice in North Dakota thought the direct distribution workaround was unnecessary for upholding state law. Nonetheless, the wholesalers have had considerable success with the contention that the North Dakota dicta constitute persuasive authority under present law and imbue three-tier systems with an aura of public value.

Interestingly, it is not clear that HR 1161 would have much effect on the three-tier preservation aspect of the debate, because there are few (if any) examples of mandated three-tier distribution laws that do not facially discriminate against interstate commerce or whose purported objectives could not reasonably be attained by nondiscriminatory means.

Denial of review leaves standing the 5th Circuit opinion, which reads Granholm to mean only that states giving their in-state manufacturers the right to circumvent the “three-tier system” cannot for protectionist purposes deny the same dispensation to out-of-state manufacturers. In that analysis, the state can allow its own retailers to deliver directly to Texas consumers while denying the same privilege to out-of-state retailers, because Granholm does not address application of the Commerce Clause to non-producing sellers.

Judge Leslie Southwick’s opinion in Steen does not shrink from the basic Granholm question: Does the state law facially and intentionally discriminate against out-of-state retailers relative to in-state retailers? Although he points out that Texas has not authorized circumvention of the three-tier system for local retailers and thus, he believes, cannot be discriminating when it prevents out-of-state retailers from circumventing the same system, Steen is about justifying location discrimination, not about whether it exists.

The justification Steen offers is that without excluding interstate retailing, the state could not maintain a mandatory three-tier system — thus elevating the form of regulatory structure to a constitutional principle outweighing Commerce Clause considerations. Does denial of Supreme Court review advance that position in the ongoing controversy over state barriers to interstate retailing and wholesaling?

When the Supreme Court Passes

It is a truism in the law that the Court’s denying review carries no implication that the decision in question was correct. Many considerations go into review decisions, and it is not difficult to justify excluding from a packed court calendar a case revisiting a difficult and divisive precedent that affects only a relatively small segment of the economy. As noted in previous blogs, I suspect it will require inconsistent rulings among the appellate circuits to drag the Court into confronting the internal contradictions of Granholm.

Nonetheless, even if denial of review is technically meaningless, it may add a bit of luster to the lower court opinion in the eyes of judges in other circuits and at least justifies a close look at where the Steen decision leaves us.

Before Granholm

Ironically, it was the 5th Circuit that presaged Granholm in the 2003 Dickerson case, by invalidating facially discriminatory Texas direct shipment laws. In Dickerson the 21st Amendment did not save the state statutes because they had been adopted for a protectionist purpose, rather than a recognized 21st Amendment objective such as temperance. Reasoning based on purpose followed straightforwardly from the 1984 Supreme Court decision in Bacchus.

In 2005, Granholm supplanted Dickerson as the definitive statement of Commerce Clause versus 21st Amendment jurisprudence on discrimination against out-of-state wineries relative to in-state wineries. Both cases dealt exclusively with the producing wineries’ direct sales and shipments to consumers.

While Dickerson was merely silent on application of the nondiscrimination principle to other tiers of distribution, Granholm contains the famous quotations from Justice Scalia’s one-judge opinion in a 1990 Supreme Court case that did not involve direct shipment to consumers, North Dakota v. U.S., “We have previously recognized that the three-tier system itself is ‘unquestionably legitimate’ . . . . The Twenty-first Amendment . . . empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.”

A Little Latin

Because Granholm involved no challenge to a state three-tier system itself, but dealt only with discriminatory application of a three-tier requirement, the above quotations play no role in the strict logic of the ultimate decision. They are, in legal parlance, “obiter dicta,” which means things said in passing — usually shortened to “dicta,” and sometimes seen in its singular form, “dictum.”

Portions of an opinion that are mere dicta, even coming from the Supreme Court, are not binding on lower courts. Lower courts are obliged to accept the Supreme Court’s determinations of matters of law that are pivotal to its decisions and to follow the doctrinal principles necessarily implied by how a Supreme Court case came out. That source of mandatory guidance is known as the “holding” of the case. The Commerce Clause principle of nondiscrimination that actually drove the Granholm result is part of its holding. Dicta are not part of the holding, and lower courts are entitled to give them as much or as little weight as they see fit in applying the Supreme Court precedent in which they appear.

The Court itself has been lax in distinguishing dicta from holdings. For example, the 1980 landmark Midcal opinion admits states have “virtually complete control” over fashioning their liquor distribution systems, but that observation could not be a holding, because Midcal overturned the California price posting system. Nevertheless, Granholm quotes the passage without labeling it as dicta. Similarly, Granholm says the Court “held” in North Dakota that “States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment,” although eight of the nine justices deciding North Dakota disagreed with that unqualified statement.

Because North Dakota is the primary source of current judicial defense of the three-tier system, it merits careful examination. There the conflict was between North Dakota’s distribution system and federal regulations that called for supplying spirits to armed services post exchanges at a price achievable only by direct distribution from distillers. The Court’s opinion, endorsed by four of the nine justices, declared that the state’s three-tier law survived a Supremacy Clause challenge for conflict with federal regulations (not a dormant Commerce Clause challenge) only because the state provided a workable alternative to three-tier distribution — i.e., requiring an identifying sticker on bottles distributed directly. Four other justices found the alternative too burdensome and would have overturned the state law.

The swing justice was Scalia, who wrote a separate opinion expressing the view that the practicality of the sticker alternative didn’t matter, because the state’s right to enforce three-tier distribution was absolute under the 21st Amendment. With five justices voting to uphold the law, the case resulted in a victory for the state, but with no majority view of the rationale and only one justice advancing the absolutist position. That one-judge concurring opinion is the sole source of the above quoted statements that famously appear as dicta in Granholm.

Making it Big

Some dicta fade into obscurity. The three-tier system dicta of Granholm have gone on to achieve prominence. Circuit Judge Richard Wesley in a New York retailer case, Arnold’s Wines, quoted the trial judge Richard Howell with reference to Scalia’s North Dakota assertions, “But if dicta this be, it is of the most persuasive kind.” The same text appears crucially in Steen.

Judge Howell’s subjunctive “if” clause is mere rhetorical flourish, for the text he quoted from Granholm is obviously and unquestionably a dictum. To find it compellingly persuasive, one must draw, from the fact that one justice in North Dakota found the state’s 21st Amendment right to a three-tier system weightier than a cost-saving Department of Defense liquor procurement regulation, the conclusion that the state right is also weightier than national consumer and merchant interests protected by the Commerce Clause. In reaching that conclusion, the Steen court reasoned that a state could not exercise its Granholm-sanctioned right maintain a mandatory three-tier system if retailers from outside the state, who presumably had not purchased from a “licensed in-state wholesaler,” were free to compete from local retailers for resident consumer trade.

Even if the quoted statements were authoritative, it is questionable whether they would sustain the Steen position. Although the Granholm majority states that in North Dakota the Court “recognized the three-tier system as ‘unquestionably legitimate,’” in context the North Dakota opinion recognized a three-tier system as legitimate, not “the” system in the sense of all instances of it:

“In the interest of promoting temperance, ensuring orderly market conditions, and raising revenue, the State has established a comprehensive system for the distribution of liquor within its borders. That system is unquestionably legitimate. [Here the Court cites two of its opinions, Young’s Markets, whose reasoning was essentially abandoned in Bacchus and given burial in Granholm, and a case allowing states to regulate bootleggers traveling through en route to another state.] The requirements that an out-of-state supplier which transports liquor into the State affix a label to each bottle of liquor destined for delivery to a federal enclave and that it report the volume of liquor it has transported are necessary components of the regulatory regime.”

Nothing in North Dakota deals with discrimination between a North Dakota retailer or wholesaler and an out-of-state retailer or wholesaler. It is at bottom not even a Commerce Clause decision, as it turns on the right of a state to compromise an express federal objective under the Supremacy Clause. Even if its rhetoric can be transferred to dormant Commerce Clause jurisprudence, it unambiguously legitimizes the North Dakota system on grounds of its pursuit of traditional aims (temperance, orderly markets and tax revenues), not for the sake of the system structure itself.

In Summary

Fifth Circuit law on interstate retailing now rests on the theory that because the legitimacy of the tiered distribution system in North Dakota (with its provision for circumvention by stickered goods) was unquestionable, any state law that is part of a tiered system, even one directly contravening the Commerce Clause, must be valid.

It is one thing to say tiered systems are legitimate distribution structures (“Texas may have a three-tier system”), quite another to say that they can be used to discriminate against interstate commerce in ways that fail standard Commerce Clause tests. On careful reading, the holding of Granholm (as Justice Thomas correctly observed in his dissent) amounts to taking the 21st Amendment out of cases of intentional protectionism favoring local sellers over interstate sellers; in such cases there is no special “saving” of liquor laws that would be invalid under general Commerce Clause nondiscrimination principles applicable to all goods. In contrast, what the Steen court refers to as “our read” of Granholm takes the North Dakota dicta as insulating anything that is an “inherent part” of the “traditional three-tier system” from Commerce Clause scrutiny.

Whether Granholm’s arguably radical application of the dormant Commerce Clause is limited to the top tier of wine distribution cannot be determined by parsing the text of that opinion. Rather, it is a policy choice between the Marshallian vision of a national market with only rare departures from free movement of goods across state lines and the Repeal era view of alcoholic beverages as disfavored articles of commerce over which states are given almost unlimited rights of regulation in consequence of their undoubted 21st Amendment right to control importation. Judges in cases yet to be presented will have to make that choice.

Meanwhile, Judge Howell’s bon mot about North Dakota dicta gains familiarity. The 2nd Circuit Arnold opinion in which it appears ultimately does not rely on it, but rather saves the state law on non-21st Amendment grounds, as pursuing a legitimate state purpose that cannot reasonably be achieved without discriminating against interstate commerce. The Steen decision goes farther by enshrining it as a primary basis for decision.

By R. Corbin Houchins, CorbinCounsel.com

A less predictable part of the 3rd Circuit ruling involved personal importation, a subject courts have not heretofore directly examined under Granholm. The Freeman opinion takes a straightforward nondiscrimination approach: If a state allows its resident wineries to sell directly to consumers without volume limits, it cannot impose significant volume limits on wine a consumer purchases at an out-of-state winery and brings into the state, without meeting the necessity test. To comply with Freeman, it appears that states must either fashion demonstrable proofs of necessity that will withstand close judicial scrutiny (as New Jersey failed to do) or choose between (a) imposing on their wineries’ tasting room sales the same, usually extreme, limits that apply to personal importation and (b) allowing consumers personally to import out-of-state on-site purchases with no more limits than apply to local tasting rooms.

Because the federal direct shipment law permits wineries to ship on-site purchases directly to consumers who could lawfully have carried it home as luggage under personal importation laws, independently of state direct shipment laws, invalidating state volume limits could in theory expand direct distribution geographically and make it available to wineries that do not hold shipping licenses. It seems highly unlikely, however, that states would by inaction permit creation of a significant market in untaxed personal importation of on-site sales.

Plaintiffs in Freeman also challenged the ban on all direct shipment, on the grounds that on-site laws, though not facially discriminatory, discriminate in effect by prohibiting out-of-state wineries from using the only method at hand to compete with local wineries, a visit to which by the local consumer is not as burdensome as a trip outside the state. (Non-facial discrimination is usually examined under a less stringent standard, whether the purported benefit to the state outweighs the harm to commerce, known as the Pike test.) Like most courts that have encountered it, the 3rd Circuit rejected the differential burden argument in conclusory terms, finding that the law “even-handedly forces all wine sales out of one channel and into other available channels” –i.e., no proven discrimination in effect. However, unlike some other courts, it held out the possibility that in another case the pro-commerce litigants might successfully prove differential burden by demonstrating economic loss because of the disproportionate travel requirement inherent in on-site laws. It also implied that future plaintiffs who could prove even modest economic loss to out-of-state producers might profitably argue that benefits from the non-facial discrimination are too slight to pass the Pike balancing test.

By R. Corbin Houchins, 12/23/2010, CorbinCounsel.com

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

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 27^th 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?

#

^[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.

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 21^st 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 10^th 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 21^st 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 21^st 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 21^st 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 21^st 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 21^st 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 21^st Amendment litigation.

by R. Corbin Houchins, CorbinCounsel.com

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

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

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

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.