Posts from the Litigation Category
New Jersey Poised to Open Up For Direct Shipping
January 11th, 2012
Late Monday night, in the final action of a marathon legislative session that closed out the year, the New Jersey Assembly passed S3172, a bill that, among other things, opens up the state for direct-to-consumer shipments. If signed by Governor Chris Christie as expected, it will allow wineries producing up to 250,000 gallons of wine annually to apply for licenses to ship wine directly to New Jersey consumers.
The bill also allows for both in- and out-of-state winery self-distribution and tasting rooms, two issues that New Jersey was compelled to address due to a 2010 lawsuit (Freeman v. Corzine) that ruled the state was acting unconstitutionally by allowing in-state wineries to sell wine through distribution methods unavailable to out-of-state wineries.
Direct Shipping Details:
Once S3172 is signed by the Governor, New Jersey, a state that has prohibited direct wine shipments, will join 38 other states in allowing limited amounts of wine to be shipped to its residents. The bill gives licensed Farm and Plenary wineries the ability to ship, and allows out-of-state wineries producing less than 250,000 gallons per year to apply for an “Out-of-State Winery License”. The fee for the Out-of-State Winery License is one of the most expensive direct shipping licenses in the country at $938 per year (the same annual fee paid by in-state wineries). All licensed wineries may ship up to twelve nine-liter cases to a New Jersey consumer per year. Sales and excise taxes must be paid.
Self-Distribution Details:
For an additional fee, New Jersey Farm, Plenary, and Out-of-State Winery licensees may self-distribute (sell wine directly to New Jersey retailers). After recent amendments to the bill, however, wineries are restricted from shipping to retailers via common carrier. It is yet unclear what this means for the self-distribution privilege, specifically for wineries that are not in close proximity to the state. The additional fee for self-distribution ranges from $100 to $1000 per year, depending on the production volume of the winery.
Tasting Room Details:
S3172 will allow out-of-state wineries to operate tasting rooms within New Jersey. Out-of-state wineries may operate up to 16 tasting rooms, while in-state wineries may operate up to 15 tasting rooms in addition to their licensed premise; Farm, Plenary, and Out-of-State Winery licensees must pay a $250 fee for each tasting room location. New Jersey wineries are currently able to operate tasting rooms and joint tasting rooms. The bill, however, removes the ability for wineries to operate joint tasting rooms, which is a disadvantage for out-of-state wineries.
The opening of New Jersey to direct wine shipments is a major accomplishment and will open up one of the last significant marketplaces that prohibit direct shipment of wine. Both New Jersey and out-of-state wineries are expected to benefit from the change in the law, as well as New Jersey wine consumers. If signed by the Governor, the law would go into effect on the first day of the fourth month following enactment (May 1, if enacted in January). When specific regulations concerning license applications and reporting are issued, ShipCompliant will notify its clients and the industry.
The Meaning of Silence
March 10th, 2011
Last Monday the U.S. Supreme Court declined review of the 2010 Court of Appeals decision in Wine Country Gift Baskets.com v. Steen, a Texas case refusing to apply Granholm’s antidiscrimination principle to wine sales by out-of-state non-producing retailers. (Previous blog posts have referred to the case as the Texas Siesta Village suit, using its original lead plaintiff name; for convenience, I will call it Steen here.)
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
Glimmer of Hope in Challenging On-Site Requirements
January 10th, 2011
On December 17th, the US Court of Appeals for the 3rd Circuit (Delaware, New Jersey and Pennsylvania) rendered its decision in Freeman v. Corzine (formerly known as Freeman v. Fischer and Freeman v. Governor of New Jersey). The case applies Granholm to several aspects of New Jersey law, which banned direct shipment by all wineries, but allowed direct-to-consumer sales only by in-state wineries. To no surprise, it concluded that the facial discrimination created by giving only its own wineries a sales route around the three-tier system violated the dormant Commerce Clause, absent proof of a legitimate state objective it cannot achieve without discriminating against the interstate seller (the necessity test, which no state has passed so far in Granholm litigation).
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
H.R. 5034 Update: Revision Reignites Debate, Important Hearing Set for Wednesday
September 28th, 2010
When H.R. 5034 (also known as the Comprehensive Alcohol Regulatory Effectiveness, or “CARE” Act) was introduced on April 15, 2010, the opposition responded quickly and forcefully. Supplier organizations were united in their opposition to the bill, referring to it as the “wholesalers monopoly protection bill”. Even the California State Legislature issued a resolution, SJR 34, that urged Congress not to pass H.R. 5034.
Proponents of the bill, including the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) claimed the proposed legislation was necessary to protect state-based regulatory systems from “attack” (i.e., legal scrutiny under the U.S. constitution), claiming that “25 states have faced challenges in federal courts to their authority to regulate alcohol and their ability to maintain a licensed system of alcohol controls” since 2005.
Following months of intense debate, heated rhetoric, and an incredible amount of public relations and lobbying activity on both sides, the House Judiciary Committee did not schedule the bill for a hearing until after the August congressional recess. During the recess, Representative Bill Delahunt, lead sponsor of H.R. 5034, sent a letter to House Judiciary Committee Chairman John Conyers Jr., introducing new text in an what he terms effort to “perfect the language”, following “concerns about unintended [sic] consequences of the language as written”.
To help clarify the changes from the original version of H.R. 5034, we put together a redline document that highlights the revisions. The main change is the removal of section 3c, which established the presumption of validity and shifted the burden of proof in legal actions involving the regulation of alcoholic beverages. Like the original bill, the new version would immunize state laws that effect non-facial discrimination, such as capacity caps and in-person purchase requirements, if the discrimination were not proved to be “intentional”.
To better understand the revisions and the corresponding responses, we spoke with individuals from each of the tiers (the “three-tier system” includes suppliers, wholesalers and retailers) that are on the front lines of the debate.
Wholesaler organizations laud the new version as meaningful change. “While the proposed changes to the legislation address a narrower set of deregulatory concerns than the original legislation, it is certainly a step in the right direction,” says Karin Moore, Vice President and Co-General Counsel at WSWA. “The new version clarifies that the Granholm holding prohibiting facial or intentional discrimination against out-of-state producers remains the law of the land by incorporating the exact language used by Justice Kennedy in that landmark decision. The new language clearly and unequivocally confines itself to dormant Commerce Clause challenges, and addresses many of the concerns raised by opponents of the bill.”
Cary Greene, Chief Operating Officer & General Counsel at WineAmerica, sees broader implications. “There are many cases other than Granholm that elucidate how states can regulate interstate commerce in alcohol. As revised, 5034 would undermine or reverse dozens of court decisions. By scrambling settled case law, 5034 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. 5034 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.”
“The problems with HR 5034 remain significant, despite the changes to the language,” says Tom Wark, Executive Director of Specialty Wine Retailers Association. “Discrimination against out of state products would still be allowed on a number of levels and consumers are bound to be hurt by this legislation. Significantly for retailers, HR 5034 would strip wine retailers and merchants everywhere in America of their protection under the Constitution’s Commerce Clause from discriminatory state laws. It has happened only one other time in American history that an entire industry lost its Constitutional guarantee of free and open markets based on the constitutional principle of non-discrimination. Wine merchants would be catastrophically disadvantaged by H.R. 5034.”
A hearing in the House Judiciary Committee will take place at 11:00 ET this Wednesday, September 29th. This is an important hurdle in the process of moving legislation through Congress. Expert witnesses will testify in front of the full committee on Wednesday, and many parties will also provide written testimony to debate both sides of the bill. Barring technical difficulties, the hearing should be available via live webcast. Click here to watch the webcast (RealPlayer required).
So, what are the chances that H.R. 5034 will pass? Well, it’s important to note that the bill has 146 (not an insignificant number) co-sponsors from both parties in the House. On the other hand, supplier organizations continue to be unified in their opposition (Click here to view the joint opposition letter issued by the Brewers Association, WineAmerica, Distilled Spirits Council of the United States, Wine Institute, Beer Institute, and National Association of Beverage Importers on the revised 5034). We hope to learn a lot more in the hearing on Wednesday.
If H.R. 5034 moves through both chambers of Congress (no companion bill having yet been introduced in the Senate) and is signed by President Obama, not much would change overnight. Despite numerous reports that it would mean the end of direct shipping, it would not change current state laws that allow direct shipping. It would likely be an uphill battle to completely repeal existing direct shipping laws in most states. However, H.R. 5034 would open the door in states like Florida, New Mexico, and Massachusetts, where the direct shipping laws are in flux because of court cases and Granholm issues, for new state laws that introduce non-facial discrimination such as caps on production capacity (proposed for the last several years in Florida and recently nullified as unconstitutional in Massachusetts) or in-person purchase requirements. It would also provide discriminatory options for the remaining holdout states, such as Maryland, if their resident consumers’ support for direct shipment should become effective. With potentially greater long-term significance, it would tilt the field decidedly against extension of Granholm’s nondiscrimination principle to interstate retailing by non-producing shippers and to interstate wholesaling.
Massachusetts Remains Elusive for Direct Shippers
September 16th, 2010
On 1/14/10 the First Circuit Court of Appeals in Boston ruled in favor the plaintiff in the Massachusetts FWC v. Jenkins litigation. The ruling affirmed the lower court’s order that struck down the capacity caps and wholesaler exclusions which are included in the Massachusetts direct-to-consumer shipping statute and prevented over half of the wineries in the United States from being eligible to ship to MA consumers. On 4/12/10 the state announced that they will not be seeking an appeal to the Supreme Court, thus leaving this decision as the final law in the 1st Circuit. Despite the favorable ruling, obstacles continue to make shipping to consumers in MA problematic.
One very serious problem with the existing law not addressed during the FWC v. Jenkins litigation is an aggregate volume limit of 240 liters (26.67 cases) per household per year. The 240 liter volume limit refers to the total amount of wine each household can receive from all licensed direct shipper each year. It is not possible for a winery to track the amount of a wine each household receives via direct-to-consumer shipments, yet the licensed shipper is liable for any shipments that cause a household to exceed the 240 liter volume limit. The Massachusetts Alcoholic Beverages Control Commission (ABCC) has not provided any guidance on how to comply with this rule.
The licensing requirements for common carriers (FedEx and UPS) pose a second problem for direct shipping to MA. MA has extremely onerous licensing requirements that are difficult for common carriers to comply with. At this time, NO common carriers have approved MA for INTERSTATE* direct-to-consumer shipping. Only FedEx Ground services MA on a limited basis, and has a license for INTRASTATE** direct-to-consumer wine shipments. The common carriers provide updates on their wine shipping status on the respective websites www.fedex.com/us/wine and www.ups.com/wine.
Legislation was drafted and introduced during the 2010 legislative session that to address the problems with common carrier licensing requirements and direct-to-consumer shipping. However the legislature was primarily focused on election year issues and adjourned without passing the bills. It is anticipated that similar legislation will be introduced in 2011.
*INTRASTATE -Commerce having an origin, destination and entire transportation within one state
**INTERSTATE-Commerce that involves transportation of goods from one state to another
–Annie Bones, State Relations – Wine Institute
