In looking forward to what 2012 might bring the world of wine compliance and regulation, it is instructive to first look back at 2011. One thing we’ve learned after eight years in the world of wine compliance is that once movements gain momentum, it’s hard to slow them down.
The past year demonstrated the continuation of certain trends and the emergence of another that we believe will carry forward in 2012. The trend of more states opening their borders to the direct shipment of wine from other states continued steadily. Maryland and New Mexico both opened their borders to permit-based direct-to-consumer shipping in 2011, a continuation of a movement toward regulated consumer access to wine that began in 2005 with the Granholm v. Heald Supreme Court decision. Tennessee also saw a change in their law in 2011 that made the entire state “wet” for direct shipments from wineries.
The past 12 months also saw an increase in new “Third Party Providers” that help wineries market their products to a broader collection of consumers. Either as flash sites, wine product advertisements, or multi-offer marketplaces, these new entries into the wine market were helped along by a new California Department of Alcoholic Beverage Control (ABC) Advisory that set down specific rules as to how suppliers and non-licensed Third Party Providers can work together compliantly.
Finally, 2011 demonstrated that various forms of privatization of the sale and distribution of wine and spirits in control states are an important trend to watch. The passage of Initiative 1183 in Washington State that took the sale and distribution of spirits out of the hands of the Washington Liquor Control Board was the most tangible example of the privatization trend.
What To Expect in 2012
Winery-to-Consumer shipping laws will continue to be modernized in those now few states that continue to prohibit interstate shipping. We expect New Jersey, the most important wine consuming state currently outlawing interstate shipments, to pass legislation allowing some form of direct shipments to consumers. Currently, a bill working its way through the legislature would allow all wineries making up to 250,000 gallons annually to obtain a direct shipment permit. The capacity cap of 250,000 gallons will be a point of concern, but wineries should expect passage and should be prepared to ship to New Jersy consumers in 212. The bill, which has passed the senate, is expected to be voted on in the assembly before the close of session tomorrow, January 10th.
Massachusetts too has seen a number of direct shipment bills introduced over the past couple of years, but none have found their way to the Governor’s desk. Recently, however, Governor Deval Patrick put a spotlight back on the issue by saying in a radio interview that he would sign legislation that permitted direct-to-consumer wine shipments. 2012 may be the year that Massachusetts finally opens to direct-to-consumer shipping.
Finally, Pennsylvania, traditionally one of the states where alcohol sales and distribution is most tightly controlled, may see a move to allow direct-to-consumer shipping. As talk continues in that state to privatize wine sale and distribution, there has also been much talk and the introduction of bills to “modernize” the PLCB, including allowing direct-to-consumer shipping, opening up a state with big consumer potential for wineries.
Digital marketing in the wine industry has been behind the curve due primarily to the massive amount of regulations that govern the industry on a federal and state level. It’s unlikely that the wine industry will see significant deregulation. However, it appears that some clarity is coming to the issues that have historically deterred modern marketing methods.
Late in 2011 the California ABC issued an “Advisory” that spelled out the conditions under which non-licensed Third Party Providers (TPPs) and suppliers must arrange their relationships in order to work together. In a nutshell, the California ABC made clear that wineries and other licensed suppliers must always be in control of the transaction from approving each transaction to controlling the flow of funds. (Read our blog post that explains these new rules). While adhering to the new California ABC rules can be a complex task and require very specific actions and programming on the part of licensed suppliers and non-licensed TPPs such as flash sites and community buying sites, we believe this new clarity represents an important development for suppliers and marketers that will yield interesting developments in 2012
We expect to see a rise in the number of TPPs. In addition, we expect other states to follow California’s lead in issuing rules and regulations for how licensees and non-licensed marketers can work together to help market wine to consumers in innovative ways.
With Washington State paving the way in the realm of privatization of sales and distribution with the passage of Initiative 1183 in November, we predict the privatization trend to regain momentum in 2012. Most eyes are on Pennsylvania where serious discussions are underway concerning the privatization of the sale and distribution of wine in that highly controlled state. Virginia too has seen discussions in the past years concerning the merits of reforming its alcohol control system. Meanwhile, in Michigan a task force has been empowered to look at updating its alcohol beverage laws.
This slow moving trend toward privatization, if it continues and gains more momentum, could lead to significant changes in the area of wine sales and distribution and the compliance measures that suppliers must undertake.
Federal Action on Wine Sales and Distribution
In early 2011, with the introduction of H.R. 1161 (read our series on the CARE Act here) in the House of Representatives, it looked like supporters of federal legislation that would give states greater control over how they can regulate alcohol and overcome judicial rulings that have put limits on state powers, would push hard to see this bill passed. Yet, H.R. 1161 garnered fewer supporters in the House than a similar bill, H.R. 5034, gained in 2010. Furthermore, no hearing was held in the House Judiciary Committee on H.R. 1161 and no Senate sponsor was introduced.
This bill, opposed by all supplier organizations and by retailers, has another year to gain more support and move through the legislative process. Most in the industry are taking a wait and see attitude on H.R. 1161 to determine its fate, but it seems unlikely that the bill will move on to President Obama’s desk in 2012.
Finally, federal legislation is moving forward concerning the United States Postal Services, and it could have long-term effects on the wine industry. The new bill moving forward is the 21st Century Postal Service Act 2011. If enacted as currently written it would allow the United States Postal Service to deliver wine to consumers and compete with Federal Express and United Parcel Service.
As always, ShipCompliant will continue to watch the political and regulatory landscape throughout the coming year and will work to keep you up-to-date on important changes that impact your ability to market and sell wine.
Editor’s Note: The following is a guest post, written by Paul Pisano of NBWA, in our series on the CARE Act of 2011.
I would like to thank ShipCompliant for allowing me to offer a few thoughts about H.R. 1161.
“Constitutional Head Fakes” or Fake Constitutional Objections?
The debate over H.R. 1161, The Community Alcohol Regulatory Effectiveness (CARE) Act, has taken some odd detours, but perhaps none so odd, or disturbing, as the specious claim that H.R. 1161 is “unconstitutional.”
Frankly, I was disappointed to see the Wine Institute and other groups’ recent paid advertisements claiming that the “CARE Act is unconstitutional” and that it “violates the Commerce Clause.” Did their lawyers approve those statements? The claim may make for a pithy sound bite for lobbying purposes but, like most of the opposition to the bill, it is just plain wrong (see for example the related “the CARE Act bans direct shipping” falsehoods being spread by opponents). If enacted, H.R. 1161 would clearly be constitutional and, in fact, follows an approach that the Supreme Court has previously and repeatedly endorsed.
Readers of this blog are by now familiar with Article 1, Section 8 of the Constitution, commonly known as the Commerce Clause, which authorizes Congress to regulate Commerce among the several states. A dormant Commerce Clause was later recognized by the Supreme Court so as to prevent state trade barriers. At its heart, an issue subject to the dormant Commerce Clause is not created by the Constitution but rather it is created by congressional inactivity or silence. The claim by opponents of CARE that the law puts up “barriers” against the dormant Commerce Clause is not just unfounded, but incoherent.
Congress regularly passes a whole host of legislation under the Commerce Clause power. Federal law regulating commerce fills volumes of the United States Code. The pending health care debate is a high profile (and contentious) example of the exercise of the Commerce Clause power by Congress. Congress has regulated air bags, clean air and many other matters through the exercise of its Article 1, section 8 powers. Generally, unless Congress has spoken, states are not to erect so-called “trade barriers.” However, Congress has acted to clarify the application of dormant Commerce Clause issues on other subjects in the past. For example, one subject many readers are familiar with is state regulation of insurance. In 1945, Congress passed the McCarran-Ferguson Act which specifically authorizes states to regulate insurance and insulates such state regulation from challenge under the dormant Commerce Clause. Congress has the power to do this. (Again, the question of whether they should is a separate issue.) In addressing the power of Congress to pass a law that removes dormant Commerce Clause scrutiny in this manner, the Supreme Court has noted:
Our decisions do not, however, limit the authority of Congress to regulate commerce among the several States as it sees fit. In the exercise of this plenary authority, Congress may “confe[r] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy.” If Congress ordains that the States may freely regulate an aspect of interstate commerce, any action taken by a State within the scope of the congressional authorization is rendered invulnerable to Commerce Clause challenge.
Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648, 652-53, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981)
As recently as 2005, in reaction to nuisance lawsuits against the states similar to the alcohol litigation, Congress passed a law clarifying state rights to regulate hunting and fishing licensing. In bill language that tracks the language of H.R. 1161, Congress addressed the issue of the dormant Commerce Clause as related to state hunting and fishing regulation. In a subsequent challenge to this new federal clarification, the 10th Circuit said:
The essential element of a successful dormant Commerce Clause claim is congressional inaction, so when Congress does act, the dormancy ends, thus leaving the courts obliged to follow congressional will. Such is the case here.
Schutz v. Thorne, 415 F.3d 1128, 1132 (10th Cir. 2005)
Just as the hunting and fishing language was passed to clarify the parameters of state powers and end burdensome litigation against the states, so too the CARE Act recognizes that states must be empowered to regulate the unique product of alcohol free from endless dormant Commerce Clause lawsuits.
Congress cannot dictate to courts how to interpret the U.S. Constitution such as the 21st Amendment. Only the courts can interpret the Constitution. However, Congress does have its Article 1 powers to shape the scope of the Commerce Clause as H.R. 1161 does. Congress could even overturn the Granholm decision if it wanted to, but the language of H.R. 1161 does not. Instead the legislation tries to strike a balance.
Contrary to the critics’ claims, the Care Act is not inconsistent with the dormant Commerce Clause. Instead, it is impossible for congressional legislation to contradict the dormant Commerce Clause because that doctrine is simply a directive on how to interpret congressional silence, and its force is automatically dispelled if Congress speaks directly and affirmatively that it intends to allow the States to regulate. That is why I believe that the claim that the CARE Act puts up “barricades” against the dormant Commerce Clause is not just unfounded, but also incoherent.
The power to determine what is and what is not “dormant” rests with Congress, Congress has done this very thing in the past, most recently in 2005, and H.R. 1161 is of the same heritage of these previous clarifications of Congressional intent. In H.R. 1161, Congress is simply clarifying the Commerce Clause relationship to state alcohol laws as it has done in other matters. H.R. 1161 is clearly constitutional. It does not violate the dormant Commerce Clause.
Protecting States’ Rights to Pass Legitimate Alcohol Regulations
Will the above explanation on constitutionality end the attacks on the bill? Probably not, as muddying the waters and confusing people is a very effective opposition technique. The CARE Act would protect a state’s right to pass legitimate alcohol regulations. Although the thought of actually competing in a state-regulated industry may frustrate the business plans of some opponents, the plain language of the 21st Amendment provides for exactly that.
Everyone in this country benefits from alcohol regulations. Every person may have parts of the system he or she would change but, on balance, the American system works for the public and for industry. The tremendous excitement, choice and variety in the beer category is something NBWA members are very proud to be a part of developing in a responsible way, reflective of the public’s interest in effective regulation. The merits of the great American system are apparent when we look around the world and see the results of other alcohol regulatory systems. On issues such as public health, we need only look at the situation in the United Kingdom to understand the concerns over the failure to have a strongly regulated system. The daily public health concerns in the United Kingdom are very real and continuous as well as the concern over continued counterfeiting in other parts of the world. We are talking about alcohol here. Not shoes, not books, not the other examples used to justify no regulation of alcohol. The public’s interest in an orderly market and the appropriate control of a product whose characteristics are intoxicating are well served by state regulation. And it has also been good for the industry. Just last week, the Los Angeles Times noted the struggles of small Mexican brewers trying to compete in their own country due to the lack of effective alcohol regulation. No offense to ShipCompliant and its readers, but the debate about the CARE Act is much bigger and more important than the issue of direct shipping. I would urge all who are concerned about the public interest and a healthy alcohol marketplace to acknowledge the larger issues at play.
The CARE Act would help states defend a wide variety of laws that have been challenged, including physical presence requirements for retailers and differential treatment for small alcohol producers. A default position of wide latitude for state alcohol regulation is important for the state to pursue a variety of public policy goals and pass regulations needed to protect consumers and the public. The current litigation status only will lead to states abandoning their powers to protect the public interest. The CARE Act would help states preserve some of these powers by helping them defend against dormant Commerce Clause challenges.
So What Is Your Intent?
How did we get in this predicament? Why was CARE introduced? Why amend the Wilson Act? To answer that, another quick history lesson is needed. (A great summary is contained in Professor Stephen Diamond’s testimony to Congress last year. It is the best explanation, and I strongly recommend you read it to fully understand how we got where we are.)
Congress passed the Wilson Act in 1890, the Webb-Kenyon Act in 1913, the 21st Amendment in 1933 and re-passed the Webb-Kenyon Act in 1935. The clear intent of all these enactments was to empower states to effectively regulate alcohol. However, this intent and complex congressional history was overlooked or minimized by the Supreme Court in Granholm. The Granholm court focused almost exclusively on the Wilson Act, passed in 1890, and either ignored or misinterpreted the subsequent enactments in 1913 and 1935 of the Webb-Kenyon Act. This tortured legislative history lead to the states’ arguments in Granholm being diminished and placed in an impossible position to defend. The Court’s myopic focus on the Wilson Act and the related holding has led subsequent courts to expand Granholm. The CARE Act addresses this situation by clarifying congressional intent as to the authority of states to regulate alcohol.
As Wendell Lee correctly notes, H.R. 1161 does not overturn any laws or overturn any previous cases (contrary to some opponents’ claim that the CARE Act “would overturn Granholm”). The CARE Act must address that curious Wilson Act oddity in the Granholm opinion or risk a future court saying that Congress agreed with the backward reasoning of Granholm and elevating the Wilson Act over the CARE Act. As the critics note, the CARE Act would not overturn Granholm, but the Wilson Act language is needed to prevent the déjà vu moment of the CARE Act being ignored because of what the Supreme Court said in Granholm.
The General Counsel of Wine Institute expresses a misguided concern, however, that the CARE Act would “imprison” Granholm and be misinterpreted by the courts. It is not “imprisoning” a judicial decision to take the Supreme Court at its word. These fears and concerns are not well founded. The Act simply respects the balance that Granholm itself struck and made clear that states will be able to maintain their three-tier systems. The opponents’ analysis completely ignores Granholm’s ruling that the “three-tier system itself is ‘unquestionably legitimate.’” And I would suspect all the lawyers should agree with Judge Calebresi’s concurring opinion in Boyle about the current status of the law. He is not pro or anti-CARE Act. He is just a learned, neutral observer. He notes the present state of 21st Amendment law “can leave state legislatures and lower federal courts with no firm understanding of what the law actually is… we are all too frequently left to try to guess at the currently applicable rule from the Court’s evolving jurisprudence.” Congress can try to address Judge Calebresi’s concern, at least as to the Commerce Clause. This is freedom, not imprisonment.
The last fortress of opposition must lie then in the fears of the definition of “intent” and what is allowed or not allowed by H.R. 1161. With emotions so highly charged, it is the facts that must carry the day.
The CARE Act codifies the Supreme Court proscription against facial or intentional discrimination against producers. It does not change this holding of Granholm. So, what is lost from the critics’ perspective then? States requiring alcohol sellers to make sure they are selling only to those over 21 years old? Why can’t states use all the tools they have to make sure only those of legal drinking age are getting alcohol? Can states pass alcohol laws that treat big businesses differently than small businesses? There are numerous state and federal laws that do this. Is this only a bad thing with alcohol businesses? Or is it some unstated concern that future plaintiffs who want to weaken state control will lose an ability to launch an “effects” dormant Commerce Clause challenge to state laws? H.R. 1161 does insulate state alcohol laws from a “discrimination in effect” challenge, but as Professor Donald Regan of Michigan has noted, the Supreme Court has never overturned a state law purely because of perceived discriminatory effects. There has always been a concomitant finding either of facial or intentional discrimination. Again, no real loss to the goals of opponents by losing effects or is there some other unstated agenda?
Mr. Lee admits H.R. 1161 does not overturn Granholm but is uncomfortable because he feels fenced in despite explicit statutory protection. Despite the protections of Granholm and the language of the CARE Act, he wants more (whatever “more” is). What “more” really means is “less” – less state regulatory authority, less certainty for states operating under their powers to regulate alcohol, less regulation of alcoholic products despite the intoxicating characteristics of the products. This search by opponents of state alcohol regulation for “more” is why the CARE Act is needed to draw the line at Granholm to prevent its further expansion.
The CARE Act is constitutional. Although it could have, it does not overturn Granholm. It protects states’ rights to pass legitimate alcohol regulation which is broader than the narrow issue of direct shipping. Congress can and has done this type of legislation in the past when state rights were being impacted by federal court rulings. In the wake of 27 states being hauled into federal court since Granholm, the CARE Act strikes a balance. It balances a respect for the Supreme Court holding in Granholm about producer discrimination, yet provides certainty for states’ rights to regulate alcohol, including unquestionably legitimate three-tier systems. Providing clearer direction for all states and stakeholders on the intersection of the Commerce Clause and state powers should be welcomed by all, not fought. For more information please visit www.thecareact.org.
Paul Pisano is Senior VP and General Counsel for NBWA where he has worked since 2006.
Editor’s Note: The following is a guest post, written by Cary Greene of WineAmerica, in our series on the CARE Act of 2011.
Yes, I’m another one of those pesky lawyers in this exciting edition of The CARE Act, the Sequel. Since you’ve already gotten much of the background, (if you haven’t read the outstanding breakdown by Wendell Lee of Wine Institute, you should—it’s the best summary of the bill I’ve read to date), I figured I’d start in a somewhat different place.
Of course, I could do a case law analysis of the CARE bill that counters my Wine & Spirits Wholesalers of America colleague Karin Moore’s spirited defense of H.R. 1161. After all, I was quoted on this blog last year as saying about H.R. 5034, the virtually identical predecessor of H.R. 1161, that:
[t]here are many cases other than Granholm that elucidate how states can regulate interstate commerce in alcohol. As revised, [the CARE bill] would undermine or reverse dozens of court decisions. By scrambling settled case law, [CARE] will cause years of re-litigation to try and figure out exactly what the new limits are. The fact is courts have not done anything to jeopardize core Twenty-first Amendment powers. State laws run into Constitutional trouble when they try to do something underhanded like fix prices or give an unfair market advantage to certain licensees or products. [CARE] allows states to blatantly discriminate against out-of-state products without any concern for Twenty-first Amendment core purposes. From a policy standpoint, I’m not sure why that would ever be a good thing.
But I thought I’d make better use of your time by giving you an insider’s outside look. There’s been a lot written about alcohol regulation and the CARE bill this past year, and sitting through this long battle here in D.C., I’ve had the opportunity to read most of it. I thought I’d let you sift through some of the best evidence-based economic and legal reports that have implications for the CARE bill, and let them explain why it’s bad for American wineries (whom of course WineAmerica represents), bad for states, bad for the federal government, and bad for “we the people.”
In the last year, the Federal Trade Commission (“FTC”)—a federal agency charged with ensuring free and fair market competition—and the Office of the Comptroller for the State of Maryland—a state tax agency responsible for regulating alcohol beverages in Maryland—have issued comprehensive reports that: (1) show definitively that states are finding methods to regulate alcohol that enhance regulatory enforcement with respect to both tax payment and minor access; (2) show definitively that states are using these methods to make the regulatory system more fluid and consumer friendly; and (3) most importantly, that these evidence-based methods often have little to do with wholesalers or the mechanics of the three-tier and control systems.
In addition, a respected economist at the Mercatus Center of George Mason University analyzed the consumer impact of CARE and its likely negative effect on broader federal policymaking. If you’re interested in the debate over H.R. 1161, these three summaries are well-worth your time.
Federal Trade Commission Working Paper
Working with the first version of the CARE bill (it’s been through at least three iterations), FTC expressed serious doubts about the bill’s advisability. See http://www.ftc.gov/be/workpapers/wp304.pdf. Their basic argument boils down to the fact that state mandated wholesaler protections are anticompetitive and harm consumers:
There is a vast economics literature which explores the competitive effects of these state restrictions of alcohol distribution and of contractual relationships between alcohol producers and distributors. This literature provides evidence that generally supports the conclusion that these state regulations are associated with harm to consumers in the form of higher prices and reduced output.
FTC concludes that while wholesaler protections may reduce overall consumption, they do not promote temperance since such protections:
…have no measurable effect on drunk driving accidents and various measures of teen drinking. On the other hand, laws that directly target drunk driving and underage drinking appear to reduce these behaviors.
In other words, since the benefits of mandated wholesaler protections are minimal and largely theoretical and the harms to consumers are substantial and measurable—namely, higher prices and restrictions on availability—the CARE Act is a bad idea:
…constraining antitrust enforcement through the proposed legislation would result in lower consumer welfare for alcoholic beverage consumers with no offsetting reduction in social harms.
In FTC’s view, the basic purpose of the bill—to have the Twenty-first Amendment trump free markets—is fundamentally flawed since federal laws banning anticompetitive wholesaler practices should trump rhetorical regulatory justifications that aren’t supported by evidence:
…our results suggest a socially beneficial role for antitrust challenges to…anticompetitive state regulation; any policy that would make future challenges more difficult is likely to be harmful.
Maryland Comptroller’s Direct Wine Shipment Report
The Direct Wine Shipment Report issued by the Maryland Comptroller reveals several ineluctable facts: (1) state regulation of direct-to-consumer shipping is effective; (2) the safety protocols written into state direct shipping laws prevent deliveries to minors; and (3) bonding and reporting requirements give states the tools for effective tax collection on wine shipments.
You’ll notice, of course, that what this shows is that alcohol regulation can be simple, effective, consumer friendly, and far different than the traditional three-tier system.
As the Comptroller states, tax collection concerns can be addressed by requiring licensees to file “returns and tax payments…similar to other licensees and permittees who sell and deliver alcoholic beverages in the State.” As for the effect on minors: “[t]here is no evidence that underage drinking has increased or decreased as a result of direct wine shipment.”
This isn’t to say that states shouldn’t be concerned or mindful of minors, but they should only use tools that are effective in limiting availability. In the case of direct shipping, the Comptroller’s recommendations are common sense and utilize both technology and old fashioned human contact:
Best practices for preventing underage access are: (1) require a permit for a common carrier delivering wine…; (2) require both the direct wine shipper and common carrier to affix a shipping label…; (3) require a common carrier to obtain an adult signature using age verification procedures.
By using free market incentives and disincentives—follow our rules and you get to keep your license—the Comptroller’s report takes a practical approach to alcohol regulation.
To be sure, the Comptroller is somewhat hesitant to establish a precedent that could lead to further changes to the three-tier system, but it is to the report’s credit that it honestly assesses existing direct-to-consumer wine shipping laws, and sifts through the evidence to reach the conclusion that wine direct shipping can be safely regulated.
The report suggests the alternative to wholesaler fear mongering, i.e., H.R. 1161, is reason—offering evidence based policy and law that can more effectively reduce alcohol abuse and minor access, while at the same time making the system more consumer friendly. Hopefully, it will serve as a template for further studies.
Mercatus Center Testimony
Similar to the Maryland Comptroller’s report, the written testimony submitted to the Judiciary Committee prior to the H.R. 5034 hearing by respected economist Jerry Ellig, a senior research fellow at George Mason’s Mercatus Center and a former FTC official, offers a sober view of the major strides states have made over the last two decades, establishing targeted, evidence-based strategies that reduce underage and abusive consumption. See http://mercatus.org/publication/competition-consumer-welfare-and-state-alcohol-regulation. As the report explains, the Supreme Court’s Granholm v. Heald decision—holding that state direct-to-consumer shipping laws must respect the Constitution’s free market principles—did not change these trends. Mr. Ellig explains:
…it is clear that there has been no upsurge in underage access, drinking, or alcohol abuse since the Granholm decision in 2005. In fact, the percentage of affirmative responses on virtually all of the questions about alcohol use and abuse has fallen by several percentage points since 2005. In other words, the evidence shows that Granholm has not hurt state efforts to reduce abuse of alcohol.
Professor Ellig goes further to suggest that the drastic and unnecessary Commerce Clause exemption proposed by the CARE Act would establish bad precedent in other ways:
…the alcohol industry is hardly unique in believing that it can offer an important reason it should receive special treatment under the law. Creating such an exemption would likely open the door for many other special interest requests for exemptions from federal laws, the Commerce Clause, and perhaps other parts of the U.S. Constitution as well.
According to Professor Ellig, automobile, casket, contact lens, and legal service providers have all testified before FTC about the “uniqueness” of their products among consumer goods:
If Congress actually demonstrates its receptivity to such special pleading by passing a law making blanket exceptions to the Commerce Clause or federal laws for alcohol, it can expect a steady stream of requests from other industries for special treatment.
He sums up his findings as follows:
The argument that America faces a widespread and systemic problem that justifies a significant change in the federal legal standard applicable to state alcohol laws is nothing but an assertion. Underage drinking and alcohol abuse are declining, and they have continued to decline since the 2005 Granholm decision that is alleged to be the source of significant problems.
All this suggests that the CARE bill is the wrong signal at the wrong time. Markets in consumer goods have moved in favor of consumer choice and product specialization the last two decades and the alcohol beverage industry is no exception. The problem is that while underlying winery laws have been improved, and a market in direct-to-consumer wine shipping has been established, the broader alcohol beverage distribution system has barely adapted. The rift between law and market is becoming wider than ever, and, at least as suggested by H.R. 1161, it is this rift and the change it necessitates that wholesalers fear.
States should not be afraid of evidence-based modifications that can make their regulatory systems function more effectively and in line with market and consumer needs. The CARE bill, however, sends the signal that states should freeze their alcohol distribution laws in amber and pretend the market is as it was 30 years ago.
The evidence shows that Congress should not encourage this kind of special pleading.
Cary Greene is WineAmerica’s Chief Operating Officer and General Counsel. Prior to joining WineAmerica in 2008, Cary was an associate in the Washington, D.C. office of the law firm McDermott Will & Emery LLP. As a member of the firm’s Alcohol Beverages & Products Practice Group, he concentrated his practice on winery law and regulation as well as trade practice and distribution.
Cary got his start in the wine industry working in the tasting room of Jefferson Vineyards, a Virginia-based vineyard and winery. He previously worked for WineAmerica as a summer intern following his first year of law school.
A graduate of the Emory University School of Law, Cary is admitted to practice law in Georgia and the District of Columbia.
Editor’s Note: The following is a guest post, written by R. Corbin Houchins, in our series on the CARE Act of 2011.
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.
Editor’s Note: The following is a guest post, written by Wendell Lee of Wine Institute, in our series on the CARE Act of 2011.
In anticipation of all that you’ll be reading and hearing about HR 1161, I wanted to take this opportunity to propose something not always done in Congress, but something that will tremendously increase your understanding of the bill and help you better evaluate the coming predictions of necessity and/or doom associated with it: I’m going to ask you to read the bill in its entirety.
Sure, I could engage you in the chatter surrounding HR 1161, give you our bullet points and give you the wholesaler’s bullet points and drown you in a sea of diametrically opposed rhetoric and often confusing articles about what a bad / good idea the bill is and how much damage / good the bill would do if passed, but instead, I thought we’d just discuss the bill itself. This post is based on the premise that if you know what the bill says, you’ll be in a much better position to evaluate what other people say the bill says.
Here’s the good news Fortunately, HR 1161 is not very long, and you’ll be able to do it, even at a leisurely pace, in, say, about two minutes at the outside. In fact, you don’t need to read the first page – just sections 3 and 4. You can, however, get the full text of the bill here. The harder part is understanding what you just read, and applying what you understand to other situations.
Ready? Here is section 3 and 4 of HR 1161. Begin reading now:
SEC. 3. SUPPORT FOR STATE ALCOHOL REGULATION.
The Act entitled `An Act divesting intoxicating liquors of their interstate character in certain cases’, approved March 2, 1913 (27 U.S.C. 122 et seq.), commonly known as the `Webb-Kenyon Act’, is amended by adding at the end the following:
`SEC. 3. SUPPORT FOR STATE ALCOHOL REGULATION.
`(a) Declaration of Policy- It is the policy of Congress to recognize and reaffirm that alcohol is different from other consumer products and that it should continue to be regulated by the States.
`(b) Construction of Congressional Silence- Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the `Commerce Clause’) to the regulation by a State or territory of alcoholic beverages. However, State or territorial regulations may not intentionally or facially discriminate against out-of-State or out-of-territory producers of alcoholic beverages in favor of in-State or in-territory producers unless the State or territory can demonstrate that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.’
SEC. 4. AMENDMENT TO WILSON ACT.
The Act entitled `An Act to limit the effect of the regulations of commerce between the several States and with foreign countries in certain cases’, approved August 8, 1890 (27 U.S.C. 121), commonly known as the `Wilson Act’, is amended by striking `to the same extent’ and all that follows through `Territory,’.
Okay, it’s been a few minutes, you must be done by now. You probably have a few questions, but among them are probably these:
- What’s the Webb-Kenyon and Wilson Acts? What part of the Wilson Act is Section 4 striking out?
- What’s that deal about Congressional silence all about? And
- That section about preventing states from discriminating against producers sounds like a good thing. What could possibly be wrong with that?
Such very good astute questions cannot go unanswered. So let’s start with the Webb-Kenyon and Wilson Acts.
Webb-Kenyon and Wilson Acts
The Webb-Kenyon Act is a federal law that was passed in 1913. That’s right, long before Repeal, and long before Prohibition, and long before the 21st Amendment. Largely irrelevant today because, well, there’s the 21st Amendment, the Act made it a federal offense to ship or transport alcohol into a state in violation of state laws. The Act is, for the most part, a historic vestige, but if you’re looking to amend federal alcohol beverage laws, it’s a great place to try and do it, especially laws like the one proposed by HR 1161. At one point in the Granholm decision, Michigan and New York argued before the US Supreme Court that the Webb-Kenyon and Wilson Acts removed all barriers to state discrimination in alcoholic beverages. The US Supreme Court didn’t buy that argument.
If Congress’ aim in passing the Webb-Kenyon Act was to authorize States to discriminate against out-of-state goods then its first step would have been to repeal the Wilson Act. It did not do so. There is no inconsistency between the Wilson Act and the Webb-Kenyon Act sufficient to warrant an inference that the latter repealed the former.
If you thought the Webb-Kenyon Act is old, the Wilson Act is even older. It was passed in 1890, and like Webb-Kenyon, has been mostly superceded by the 21st Amendment except for one important thing. The Wilson Act still requires states to treat out-of-state alcohol as it would in-state alcohol. See the quote above regarding the Supreme Court’s view of the Wilson Act.
HR 1161 doesn’t repeal the Wilson Act, but it makes one significant change in it. Like the Grand Canyon, you just can’t appreciate HR 1161 without visually seeing what language HR 1161 deletes from the Wilson Act. Here’s how HR 1161 would change the Act:
§ 121. State statutes as operative on termination of transportation; original packages
All fermented, distilled, or other intoxicating liquors or liquids transported into any State or Territory or remaining therein for use, consumption, sale or storage therein, shall upon arrival in such State or Territory be subject to the operation and effect of the laws of such State or Territory enacted in the exercise of its police powers,
to the same extent and in the same manner as though such liquids or liquors had been produced in such State or Territory, and shall not be exempt therefrom by reason of being introduced therein in original packages or otherwise.
Notice the language that’s being deleted? It’s the words that require states to treat out-of-state products in the same manner as in-state products. If HR 1161 is passed, the Wilson Act would not be a bar to state discrimination, because Congress, in amending the Wilson Act, would be allowing states to treat out-of-state products differently from in-state products.
Congressional Silence: Switching Off the Dormant Commerce Clause
HR 1161 states that: “Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the ‘Commerce Clause’) to the regulation by a State or territory of alcoholic beverages.”
Silence, as the saying goes, is golden. Congressional silence, is too, because it means you’re afforded the full protection of the Dormant Commerce Clause. Wineries have, or should have, an appreciation for the principle of the Dormant Commerce Clause, because that’s what cases like Granholm are based upon. The “Dormant Commerce Clause” is a constitutional principle that the Commerce Clause prevents state regulation of interstate commercial activity or discrimination in interstate commerce even when Congress has not acted (i.e, remained silent) under its Commerce Clause power to regulate that activity. In other words, the Dormant Commerce Clause is “always on” to protect you from states discriminating between in-state and out-of-state wineries as long as Congress remains silent. HR 1161 breaks that silence and expressly turns off the automatic protection of the Dormant Commerce Clause. HR 1161 flips the switch so that states CAN discriminate in interstate commerce.
Placing Granholm in Quarantine
HR 1161, then, turns off the protections of the Dormant Commerce Clause for any state alcoholic beverage regulation, except in cases where there’s facial or “intentional” discrimination against producers. From HR 1161:
However, State or territorial regulations may not intentionally or facially discriminate against out-of-State or out-of-territory producers of alcoholic beverages in favor of in-State or in-territory producers unless the State or territory can demonstrate that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.
In Granholm, as in other Commerce Clause cases, a discriminatory state law can only be saved if the state can show that the law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. In Granholm, New York and Michigan weren’t able to prove this, and their failure of proof allowed the Supreme Court to find that the state laws violated the Dormant Commerce Clause and should be struck down. HR 1161 unnecessarily builds this legal test into law, but only to limit its applicability to facial or “intentional” discrimination against producers. By confining Granholm to these narrow instances, HR 1161 legalizes every other form of Commerce Clause discrimination other than for facial or “intentional” discrimination against producers.
By prohibiting only facial or “intentional” discrimination against producers alone, it allows states to pass laws that (1) nonfacially or “unintentionally” discriminate against producers, and (2) that openly and deliberately discriminate against anyone or anything that isn’t a producer regardless of whether the discrimination is facial or nonfacial. If you’re anyone or anything other than a producer, there are no limitations on the kind of discrimination that a state alcohol law can impose.
You will probably hear that HR 1161 “preserves” Granholm and “protects” wine direct shipment laws (none of which are being challenged now). When you find yourself being emotionally swayed by such arguments, go back to the provisions of the bill and match up what you’ve heard with what the bill does. The bill would allow states that currently don’t have limiters on direct shipment laws such as mandatory winery visits or capacity caps to re-legislate at the urging of the wholesalers and include such provisions into their laws and do so legally.
The one final section in HR 1161 that amends the Wilson Act is important. In order to give states the green light to discriminate, the Wilson Act cannot remain as it is. Currently, the Wilson Act requires that states treat out-of-state products in the same manner as they treat in-state products. The amendment of the Wilson Act in Section 4 of HR 1161 eliminates that requirement.
HR 1161 In One Sentence:
So you’ve read HR 1161 and you understand Congressional silence and the Dormant Commerce Clause. If one had to summarize HR 1161 in one sentence, this might be pretty accurate: HR 1161 turns off the automatic Constitutional protection of the Dormant Commerce Clause, allowing states to pass discriminatory alcohol laws in all instances except for those that facially or “intentionally” discriminate against producers.
Applying What You Know:
So just to see if you were paying attention, let’s take what you now know about HR 1161 and apply this to a couple of examples of state discrimination. Should HR 1161 become law, you only need to answer two questions to find out if a discriminatory state law should stand:
1. Does the state law discriminate against producers? If Yes, go to Question 2. If No, HR 1161 makes the discriminatory law valid.
2. If the law discriminates against producers, is this law facially or “intentionally” discriminatory? If the law is not facially discriminatory, then it’s a form of nonfacial discrimination. The law will stand unless you can show that the state “intentionally” discriminated.
I should add a comment here about how uncertain and ambiguous the “intent” language is. Facially neutral state laws aren’t found unconstitutional because of a state’s intent, but by its purpose and effect on interstate commerce. “The Commerce Clause forbids discrimination, whether forthright or ingenious.” West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994). HR 1161 substitutes the purpose-and-effect analysis with a more tentative and narrow inquiry into what state legislators “intended” at the time a state alcohol regulation was passed, which is highly speculative and can be extremely difficult to prove. Disrupting the current framework with HR 1161’s “intent” standard only introduces confusion into the judicial proceedings and additional litigation. So even if you can prove that a state alcohol law results in discrimination against producers, and even if a state agrees with the evidence that the effect of its law results in producer discrimination, the state law could still stand if the state can prove that it didn’t mean to discriminate against producers when it passed the bill.
So let’s test what you’ve learned so far with two examples.
EXAMPLE 1: Discriminatory Tax
State A passes a law that expressly taxes wine produced in State A at $.20 a gallon, but any wine that is not produced in State A at a rate of $3.00 per gallon.
HR 1161 turns off the Dormant Commerce Clause protections, allowing states to pass discriminatory alcohol laws except for those that facially or “intentionally” discriminate against producers. Your analysis goes something like this:
1. Does the state law discriminate against producers?
While the differing tax rates are clearly and facially discriminatory, they don’t discriminate against producers, but against products. The law discriminates against all out-of-state wine products, but because the law does not discriminate against producers, the law would be valid. You don’t even get to Question 2.
EXAMPLE 2: Capacity Caps
State A passes a law that allows wine producers that produce up to 30,000 gallons of wine, regardless of the state they’re in, to ship direct to consumers in the state. All of the wine producers in State A are under 30,000 gallons.
The capacity cap law is facially neutral because it applies to all wineries no matter where they’re located. This law can only be found invalid if the state “intentionally” passed the law.
1. Does the state law discriminate against producers?
Yes, the law discriminates against producers. Go to Question 2.
2. Is this law facially or “intentionally” discriminatory?
The capacity cap law is facially neutral. Your only hope is to prove that the state “intentionally” meant to discriminate against out-of-state producers. You’ll have to find legislators to testify that they meant to discriminate against out-of-state producers when they passed the bill. If you’re lucky, you might be able to win your case. And that’s the danger of HR 1161 – it is the wholesaler’s how-to manual for discriminating, avoiding the Commerce Clause, and unfairly protecting their interests.
HR 1161, like its predecessor, HR 5034, doesn’t repeal any laws or overturn any previous cases, but it gives wholesalers a virtually open field to influence state alcohol laws which would be immune from Dormant Commerce Clause scrutiny.
Two big things are happening with HR 1161: first, it imprisons Granholm and makes its findings limited only to instances where there’s facial or “intentional” discrimination against producers. At the same time, with that one small exception for facial or “intentional” discrimination against producers, the bill barricades state alcohol laws from nothing less than the Dormant Commerce Clause of the Constitution, so that states can, at the urging of the wholesalers openly violate the principles of a fair and open national market when it feels like doing so, without having to justify their reasons.
Thank you for sticking it out with me. My goal was to give you a tool to understand HR 1161, leaving the question of legislative motive to more eloquent future bloggers. Many pundits will talk about why the bill is needed or should be killed. Judge their statements by your own experience acquired here with HR 1161: you’ve sat behind HR 1161’s steering wheel, looked under its hood, kicked its tires, and took it for a test drive. You know how it runs, and you know that, depending on who and what you are, HR 1161’s mileage will most certainly and dramatically vary.
Wendell Lee is General Counsel to Wine Institute, the public policy advocacy group of more than 1,000 California wineries and affiliated businesses that represents 85 percent of U.S. wine production and 90 percent of U.S. wine exports. He has been with Wine Institute since 1980 and deals with all legal matters for the organization. Additionally, he oversees the Wine Institute web site, computer databases and technical support. For four years prior to joining Wine Institute, Lee was a criminal trial attorney serving in the Office of the District Attorney for the City and County of San Francisco. He is a graduate of Hastings College of the Law and the University of Hawaii and a member of the California Bar since 1977.
Editor’s Note: The following is a guest post, written by Karin Moore of WSWA, in our series on the CARE Act of 2011.
The intersection between the Commerce Clause and the 21st Amendment is about as clear as mud. The lack of clarity is a reason legal scholars and others find it fascinating–that and because it is alcohol we’re discussing. But this ambiguity has repercussions: it costs states millions of dollars to defend laws that have been debated and passed, at a time when they can ill afford the price. Litigation is being used as an end-run around the regulatory process, which should involve locally-elected officials and democratic procedures. The CARE Act is intended to clear the mud and underscore the fact that alcohol is different from other consumer goods.
The CARE Act itself is clearly constitutional. It is contentious to be sure. But unconstitutional? No. The Supreme Court has held on numerous occasions that Congress has clear authority to insulate state laws from dormant Commerce Clause challenges. “Our decisions do not, however, limit the authority of Congress to regulate commerce among the several States as it sees fit. In the exercise of this plenary authority, Congress may confe[r] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy.” Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 44 (1980); see also Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648 (1981); H. P. Hood & Sons, Inc. v. DuMond, 336 U.S. 525, 542-543 (1949); Schutz v. Thorne, 415 F.3d 1128 (10th Cir. 2005). You may disagree with the reasons for insulating state laws (or insulating them at all), but the fact that Congress can do so if it chooses is clear.
It has been over a decade since the Granholm case was first filed. And we are all clear on precisely who Granholm applies to. We just don’t all agree. All signs – and statements by the Plaintiff’s attorney in the recent certiorari denial –indicate that this issue will continue to be litigated. In Granholm v. Heald, 544 U.S. 460 (2005), the New York and Michigan statutes at issue treated of in-state producers differently than out-of-state producers and the Court found the statutes to be facially discriminatory (“facial discrimination” means that the language of the statutes in question discriminated “by their own terms” or on their face), see, e.g. 544 U.S. at 476. But the Court also said that facially discriminatory laws could be constitutional if the states could justify the disparate treatment, and it proceeded to analyze the states’ proffered justifications, id. at 489-93. New York and Michigan failed to meet this “exacting” burden, of course, id. at 493, but the Court still performed the analysis. The CARE Act embodies this exact balancing test.
I simply cannot embrace the argument that Granholm’s discussion of the three-tier system meant something other than to bless its channeling of liquor through in-state distributors (and, by extension, in-state retailers). Granholm was a case about discrimination. So, if the Court wasn’t talking about that aspect of the three-tier system, there would have been no need to mention it. Recall that the opinion quotes Justice Scalia’s concurrance in North Dakota v. United States: “The Twenty-first Amendment … empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler”. See 544 U.S. at 489 (quoting 495 U.S. at 447).
Will the CARE Act end all litigation? Of course not: it only focuses on one aspect of beverage alcohol litigation. The CARE Act won’t affect in any way preemption challenges (like the Washington Costco case, the Maryland TFWS case, or the current New Mexico USAirways case), equal protection challenges to state laws (current Kentucky Maxwell’s Pic Pac case), or even some ongoing dormant Commerce Clause challenges to state laws (current Illinois ABInBev case).
The CARE Act would also protect state laws that are not facially or intentionally discriminatory at the producer level, including direct-to-consumer shipping laws. The CARE Act would allow a state to pass a law which provides for differential treatment for small producers (size-based distinctions) as long as the law was evenhanded and thus applied equally to both in-state and out-of-state producers and was not intentionally discriminatory. And states could require that all sales be consummated in a face-to-face manner, once again, as long as the law was evenhanded and thus applied equally to sales by both in-state and out-of-state producers.
At the time of ratification, I’m certain that the authors of the 21st Amendment thought they were being crystal clear. In the words of Hugo Black, who lived through Prohibition and, while a United States senator, supported the enactment of the 21st Amendment, the purpose was to return “’absolute control’ of liquor traffic to the States, free of all restrictions which the Commerce Clause might before that time have imposed.” Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 US 324 (1964) (Black, J., dissenting). There was indeed clarity on the purpose of the amendment.
There are those of us who feel that purpose is still clear, while the Courts have made it less so. While Justice Thomas did not vote for the passage of the 21st Amendment, he did argue in a lengthy dissent in the 2005 Granholm decision that the plain meaning of Section 2 removed “any doubt regarding its broad scope, the Amendment simplified the language of the Webb-Kenyon Act and made clear that States could regulate importation destined for in-state delivery free of negative Commerce Clause restraints.” 544 U.S. 460, 514 (2005) (Thomas, J., dissenting). Despite the clarity at the time, Section 2 of the Amendment has been the source of every Supreme Court ruling directly addressing 21st Amendment issues. Section 2 of the 21st Amendment was clearly about WHO should make decisions regarding alcohol policy, not WHAT those policies should be. And that is what the CARE Act is about.
V.P. & Co-General Counsel
Wine & Spirits Wholesalers of America
Karin Moore has been with WSWA for three years. Prior to that she was an antitrust litigator for twelve years with O’Melveny & Myers LLP and the U.S. Federal Trade Commission. Karin received her J.D. from George Mason University School of Law, and her B.A. in economics from Hobart and William Smith Colleges.