Notes on Wine Distribution v.32

The latest version of “Notes on Wine Distribution”, by R. Corbin Houchins, is now available. Release 32 includes updates on legislation, litigation and general discussions on available distribution channels for wine. This release includes substantial changes, including new sections on age and identity, facial neutrality, and logistical support services, as well as updates to state summaries in Arizona, Delaware, Kansas, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. Read about these and other updates that affect the way wine is sold and shipped within the United States.

If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading.  You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

Click Here to View NWD Release 32

High Fives in the First Circuit

Justified jubilation greeted the 14 January 2010 decision of the United States Court of Appeals for the First Circuit, which affirmed the federal district court decision of 19 November 2008 in Family Winemakers of California v. Jenkins, invalidating the Massachusetts “volume cap.” (see previous post “Huge win for wineries, but can I ship to Massachusetts now?” )

Oddly enough, the appellate ruling may be more important outside Massachusetts than within. There are two reasons, one quite straightforward, the other less so.

The simple reason is that the First Circuit decision merely leaves things within the state as they have been since 18 December 2008, when Judge Zobel enjoined application of the state’s maximum volume requirement to “small winery” shipping licenses, which are necessary for sales directly to consumers. Since that order, wineries of all sizes, with and without Massachusetts wholesalers[1], have been eligible for the license. Nevertheless, the state is not practically open to direct shipment, because the major interstate carriers find the delivery vehicle licensing requirement too burdensome and wineries have no reliable way to know whether an order would be the 27th case of direct shipment wine purchased in the year by that consumer, putting the shipper in violation of a 240-liter limit. (Those obstacles, which were not involved in Family Winemakers, are described in a previous post “Why can’t I have a Boston wine party?”)

A more subtle reason is that the First Circuit has articulated an analysis, arguably even more favorable to trade than the decision it affirmed, that may prove persuasive in other circuits with challenges to volume caps and to other so-called facially neutral features that operate to the detriment of interstate trade. That aspect of the decision is well worth a closer look –though it does require striding into a bit of a legal thicket.

Which Yardstick?

Stripped to essentials, Family Winemakers is about choosing the proper test for determining the constitutionality of a state law that burdens interstate commerce in wine.

Before getting into the technicalities of constitutional tests, a little context may be helpful: As the readers of these blogs know, state laws that disadvantage interstate trade raise issues under the Commerce Clause of the federal constitution, which gives Congress power to legislate regarding commerce among the states. In subject areas, like wine distribution, where Congress has not enacted legislation that serves as a comprehensive regulatory scheme, states have some room for regulation, even if it affects interstate trade to a degree. However, the fact that interstate commerce is within Congress’s power to regulate means that in subject matter where it has not acted (where, in other words, its regulatory power is “dormant”) certain unwritten principles inherent in the Commerce Clause nevertheless limit state regulatory power. State laws that exceed those limits are said to offend the “dormant Commerce Clause.” As a leading case puts it, “The modern law of what has come to be called the dormant Commerce Clause is driven by concern about economic protectionism –that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”

In Granholm, the Supreme Court famously invalidated Michigan and New York laws for violating the dormant Commerce Clause by reserving direct shipment privileges for home state wineries. Family Winemakers is one of the most promising among many lawsuits attempting to discern the core message of Granholm and apply it to different facts.

Why Granholm Doesn’t Provide All the Answers

Granholm dealt with laws whose “object and design” to discriminate against out-of-state wineries was “evident” from their text and which in fact did discriminate. The Court considered how the presence of those factors —intent to discriminate and effect of discriminating— affected the answers to two distinct questions.

The first question concerned the 21st Amendment and certain federal legislation, which, taken together, affirmed the right of states to regulate wine from outside the state as fully as wine produced in the state and declared it illegal to ship wine into a state in contravention of “any” its laws. Does that broad language, the Court asked, permit the states intentionally to discriminate against interstate commerce (as a literal reading might suggest)? After an extensive and somewhat controversial historical analysis of the federal statutes and the constitutional amendment, the Court answered “no,” concluding that the dormant Commerce Clause subjects alcoholic beverage regulation to the same tests of constitutionality as apply to laws governing other goods.

The second question was what test would apply. In Granholm’s analysis, the choice between the two relevant tests was obvious. As stated in a leading case:

[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected . . . . But where other legislative objectives are credibly advanced and there is no patent discrimination against interstate trade, the Court has adopted a much more flexible approach . . . .

Having caught the two states before it red-handed at economic protectionism, the Court had no trouble applying the strict test, which invalidates a law unless the state clearly demonstrates with “concrete” evidence that it is necessary for an essential state purpose and there is no workable less-discriminatory means of achieving the purpose. Neither defendant state even came close to meeting that standard, with the result we all know.

So, great: No 21st Amendment immunity and a flunked dormant Commerce Clause test; commerce wins, grapes are freed. But what if the law in question were not overtly discriminatory? What if it treated all wineries alike and only incidentally burdened interstate commerce? Would it then receive the “more flexible approach?”

Pretty Faces

On its face, the law invalidated in Family Winemakers took no account of whether a winery were in-state or out-of-state. It was, in the phrase popular with its proponents, “facially neutral” as between local and interstate sellers.

Defenders of volume caps and on-site requirements argue that facial neutrality has two profound effects: For alcoholic beverages, it invokes 21st Amendment immunity from dormant Commerce Clause challenge, which was repudiated in Granholm for facially discriminatory laws; and, even if there were no immunity, it would require application of the “more flexible” test of constitutionality, under which a statute will be upheld unless the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed local benefits, rather than the strict necessity test Granholm applied to facially discriminatory laws. Neither argument survived the First Circuit’s treatment of Family Winemakers.

Not a Vaccine

The district court judge had dismissed the immunity argument summarily, citing a passage in Granholm that actually refers to an extraterritoriality case in which the Court did not expressly reject immunity, but rather spoke of the need to “reconcile the interests protected by the two constitutional provisions” (i.e., the 21st Amendment and the Commerce Clause), and two post-Granholm decisions in other circuits that did not deal explicitly with the immunity issue at all. While her no-immunity conclusion seems sound, the opinion left room to argue that the lower court did not fully deal with the facial neutrality immunity argument.

The appellate opinion takes a different tack. First, the Court of Appeals articulates a more specific repudiation of a 21st Amendment immunity defense for all facially neutral laws, formulating a useful test: Even though the statute is “neutral on its face,” if its effect is to “change the competitive balance” between in-state and out-of-state wineries in a way that benefits local wineries and “significantly burdens” their out-of-state competitors, the result is the same as for facially discriminatory statutes in Granholm –no 21st Amendment immunity.

In reaching that conclusion, the First Circuit somewhat surprisingly begins by distinguishing[2] Granholm. That is, after admitting that Granholm dealt only with facially discriminatory statutes, the court set forth on its own to decide whether the 21st Amendment provided Massachusetts with immunity from dormant Commerce Clause challenge to a discriminatory statute everyone agreed was facially neutral. It nonetheless took guidance from Granholm in viewing the question as resolvable by historical context and in reading the 21st Amendment as preserving only the pre-Prohibition regulatory power Congress allows states under the Wilson Act and the Webb-Kenyon Act –i.e., the right to regulate out-of-state wine on the same basis as in-state wine, but not to discriminate against the former in favor of the latter.

By engaging in relatively extensive history-grounded analysis, the First Circuit has provided sound support for the proposition that Granholm’s no-immunity ruling applies to all discriminatory measures, whether overtly protectionist or facially neutral. Courts adjudicating laws that burden interstate commerce relative to local have in Family Winemakers well-expounded judicial authority for ignoring putative 21st Amendment immunity. On the other hand, extension of Granholm to different scenarios, no matter how persuasively reasoned, cannot forestall further argument over the “narrow Granholm” approach advanced by states and wholesalers, which would preserve pre-2005 law for every situation that does not exactly match Granholm’s facts.

Question and Answer

If immunity is out of the picture, the primary issue becomes how to test a statute under the dormant Commerce Clause –i.e., what questions should a court ask to determine whether a statute will be upheld or struck down? Family Winemakers follows prevailing Commerce Clause jurisprudence in recognizing the two possibilities noted above, a strict “per se” test requiring proven necessity or a more flexible balancing test.

The states and wholesalers argue that facial neutrality would, at least in the absence of proven intentional protectionism, automatically require the more flexible approach, known as the Pike test after the shortened name of the case that first formulated it[3]. However, the Pike test as developed in case law is not invoked by superficial characteristics.

As enunciated in Granholm and its progeny, the Pike test requires a two-stage inquiry. First, a court asks two questions: Does the challenged state law regulate “even-handedly” as between interstate commerce and local commerce? Is whatever burden it places on the former an “indirect” consequence of its pursuit of a legitimate local interest? Only if the answer is “yes” to both does one apply the balancing test, which asks whether the burden on interstate commerce is “clearly excessive” in relation to the legitimate state purpose. If the answer to that highly subjective third question is “no,” the state law stands. For none of those questions is the answer determined by facial appearance.

In the district court analysis, a law adopted for a protectionist purpose that has the intended effect of favoring in-state commerce relative to interstate cannot meet the even-handed regulation and indirect burden requirements for application of the Pike balancing test, and is thus subject to the strict necessity test employed in Granholm, irrespective of facial neutrality. Judge Zobel went on to buttress her ruling by declaring that that even if the law constituted even-handed regulation with only incidental burdens on interstate sellers, entitling it to application of the Pike test, it would still be invalid because it did not advance any local purpose (other than the illegitimate objective of protectionism). The court’s reasoning seems almost mathematical: As the Pike test preserves a statute only when its adverse impact on interstate commerce is not excessive in comparison to a legitimate local benefit, if its local benefit is zero, any burden is excessive, and Pike won’t save it.

Adding the “but even if” reference to Pike as insurance against reversal for applying the wrong test is de rigueur in the courts and good for the prevailing litigant in the case at hand. The district court approach does not, however, prevent argument that Family Winemakers is “really” a Pike balance decision because the statute’s “facial neutrality” should have averted application of the strict necessity test –i.e., the outcome is a simple failure of the state to make an adequate record of local benefit, correctible in future litigation.

Again, the Court of Appeals opinion has a slightly different slant. The appellate court regards application of the strict necessity test as unquestionable under Granholm when, as in that case, a statute is protectionist in both intent and effect. Probably the most significant aspect of the First Circuit opinion is the means by which it so classifies the Massachusetts law.

Put Away that Smoking Gun

If anything moderated pro-trade celebration of the district court decision in Family Winemakers, it was the concern that the record was so strong on protectionist purpose that the case might not serve as a highly useful precedent for other cases, whose records will mostly be at best ambiguous on legislative intent.

Judge Zobel placed great stress on what is by any standard a sensationally revealing legislative history. Senator Morrissey, who sponsored the legislation, is quoted at length in the district court opinion, but a short bite will serve here to illustrate the tenor: “[W]ith the limitations that we are suggesting in the legislation, we are really still giving an inherent advantage indirectly to the local wineries.” The court was also impressed by the fruit wine exemption, a product of lobbying whose sole purpose appeared to be shielding a large local winery from going over the cap by producing cider.

In the Court of Appeals, proof of protectionist purpose rests on a more broadly applicable base. The finding of discriminatory intent explicitly rests not on the “smoking gun” statements of legislators or lobbyists, which featured so prominently in the district court opinion, but on the appellate court’s reading of the statute itself. Close attention to the text revealed a volume cap at odds with prevailing industry classification of wineries as objectively large or small, or as able or unable to secure wholesaler distribution, as well as with the state’s own size demarcation for license fees. The court was particularly impressed by the facts that ultimately there was no winery size standard at all, given that non-grape wine volume would not be counted and that the fruit wine exemption allowed an over-30,000-gallon Massachusetts winery to enjoy “small” winery benefits. Revealing intent by a combination of textual analysis and reference to objective data should be applicable to other “facially neutral” restraints before other courts, without need for thrilling exposés.

Interestingly, the First Circuit’s discussion of what constitutes evidence of discriminatory intent includes the suggestion that putting forward palpably false claims of permissible purposes is itself evidence that the real purpose is impermissible. It would be charmingly ironic if the states’ and wholesalers’ practice of asserting that discriminatory statutes do not discriminate, were adopted to help small producers, and are indispensible for preventing a parade of horrible consequences resulted in judicial findings of protectionist purpose.

Objective data also underlie the First Circuit’s finding of burdensome effect. The court follows the approach of its petroleum product distribution decision, Exxon, when it says a statute is “plainly” discriminatory if its effect is to cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market –a demonstrable effect of the statute under consideration.

Once the statute was classified as discriminatory in purpose and effect, it became subject to the strict necessity test, with its “concrete record evidence” requirement, which the state did not attempt to meet. As the appellate court pointed out, the record revealed the opposite of necessity, i.e., the existence of a non-discriminatory means of helping wineries unable to secure wholesaler distribution –passing a direct shipment law based on the NCSL model bill, as he governor had urged– and no reason why that would have been unworkable.

Scaling Cherry Hill

The beneficial ruling from the First Circuit is all the more welcome in light of its earlier opinion in a failed suit challenging Maine’s on-site-only direct consumer sale law, Cherry Hill Vineyard v. Baldacci.

The Baldacci decision can be read in various ways and had been advanced by direct shipment opponents as recognizing a “no direct shipping market” defense to Commerce Clause challenge. In brief, the theory is that if no purchases in the state can be fulfilled by direct shipment, there is no market from which out-of-state wineries could be excluded or in which they could be disadvantaged, and therefore no discrimination. The Family Winemaker defendants claimed it supported the proposition that without “explicit” discrimination, a law would not violate the dormant Commerce Clause, or at worst would be judged under the Pike test.

In Judge Zobel’s view, Baldacci turned on the absence of evidence of indirect discriminatory effects and thus presented no obstacle to her decision in Family Winemakers, in which the plaintiffs had presented effects evidence. However, her argument for distinguishing Baldacci seems to consist of two conflicting lines of reasoning.

According to one branch of her analysis, it is possible to mount a Commerce Clause attack on “leveled down” systems that equally deny direct shipment to in-state and out-of-state wineries, provided the facts show that distant wineries are losing sales to locals because they cannot use the natural means of doing nationwide business, direct shipment. It follows that the result in Baldacci would have been different had the plaintiffs made the factual showing, a proposition consistent with statements in that opinion. Judge Zobel was able to cite extensive evidence of discriminatory effects in the record before her, supporting her decision not to reach the same result as in Baldacci. So far, so good; but judges have a tendency to pile on alternative rationales in distinguishing a difficult precedent.

The second branch of her reasoning explicitly adopts another aspect of Baldacci –that there was no discrimination in the Maine system because no winery was allowed to use direct shipment, while Massachusetts permitted it for wineries below the volume cap.

The “no direct shipping market” theory directly contravenes the district court’s first line of reasoning and is, I believe, fallacious, because the Commerce Clause protects commerce, not means of delivery. A Granholm issue arises if a state favors any local market in a line of goods, even one limited to on-site sales, by directly burdening interstate sellers who are compelled by economics to use a different distribution method. Whether leveling down to all face-to-face sales constitutes discrimination subject to the strict necessity test is a hotly contested question in current Granholm litigation.

The no-local market defense theory arises from Baldacci’s misapplying Exxon, where there was no local market, to a local market in which in-state wineries made on-site sales, protected from out-of-state competition. The First Circuit clarifies Exxon in Family Winemakers:

Exxon held that a law that restricts a market consisting entirely of out-of-state interests is not discriminatory because there is no local market to benefit. Exxon is not apposite where, as here, there is an in-state market and the law operates to its competitive benefit. Massachusetts cannot apply Exxon only to "large" wineries as distinct from "small" wineries; the wine market is a single although differentiated market, and § 19F’s two provisions [the statute in question] operate on that market together.

The First Circuit went on to distinguish its decision in Baldacci (which was submitted for decision on an agreed written fact statement) as dealing with an unsupported challenge:

That case involved a challenge to a Maine law that allowed wineries to sell to consumers only in face-to-face transactions. That challenge failed because plaintiffs did not introduce any evidence that the law benefitted Maine vineyards or harmed out-of-state wineries.

Baldacci only addressed the kind of showing required when a statute is challenged as discriminatory in effect but is concededly non-discriminatory in purpose. We did not address whether a lesser showing might suffice when a law is allegedly discriminatory in both effect and purpose. We do not reach this question because even under the standard in Baldacci, plaintiffs have shown § 19F is discriminatory in effect.

The First Circuit decision encourages examination of what has been regarded as a central tenet of Granholm jurisprudence, the “level field” model. It is a commonplace that protectionist discrimination can be cured by leveling up or down; it other words, that a state can comply with the Commerce Clause by permitting direct shipment for both in-state and out-of-state wineries or by denying it to both. Such a mechanistic approach, however, leads to uncritical acceptance of formalistically even-handed schemes like on-site-only laws, notwithstanding their disparate impact on nearby and distant wineries. Putting facial neutrality in perspective, as occurs in Family Winemakers, should support critical examination of other playing fields that are only superficially level.

You Can’t Have Everything

Welcome as it is, the First Circuit opinion in Family Winemakers does not answer all the questions the case raises. Following sound judicial practice, the court prudently made the most easily defensible ruling on the record before it. The opinion’s principal limitation is that on both 21st Amendment immunity and choice of test under the dormant Commerce Clause it deals with a statute convincingly shown to be effectively and intentionally discriminatory against interstate commerce.

Thus, Family Winemakers throws a spotlight on unsettled post-Granholm issues: What test applies if a state statute is discriminatory in effect but not intent? What if it was intended to discriminate, but fails to do so (assuming anyone has an interest in arguing about it in that instance)? If it is evenhanded, but would flunk the Pike balancing test on proof of the local interest pursued, could it be saved by using a lower standard for liquor? What, if anything, is left after Granholm of the concept that a state can balance “core 21st Amendment interests,” such as temperance, against the Commerce Clause?

#


[1] The law had required wineries producing more than 30,000 gallons annually of grape wine to forego any sales to wholesalers in the state if they sold directly to consumers.

[2] To “distinguish” an earlier case is lawyer jargon for finding a difference in recited facts or some other aspect that could justify reaching a different result in the case at hand.

[3] I don’t have a snappy name for the first alternative, sometimes referred to in this post as the “strict necessity test.” If named after a case it could be the Philadelphia test, the Dean Milk test or the Maine v. Taylor test, etc., but no commonly accepted moniker has developed.

Huge win for wineries, but can I ship to Massachusetts now?

First Circuit affirms District Court decision

On Thursday, January 14th, the United States Court of Appeals for the First Circuit affirmed the judgment of the District Court in the case of Family Winemakers of California v. Jenkins. The appellatte decision represents a major victory for wineries and may be the end of the case that was originally filed by Family Winemakers of California in September of 2006.

"We’re delighted with the decision on behalf of our members and all wineries across the U.S. We’re also glad that this court put its foot down about discriminatory laws, like production caps, not being able to withstand judicial scrutiny. Now it’s time to change Massachusetts law so that all wineries, not only in California but across the nation that produce more than 30,000 gallons will have an opportunity to fulfill the wine choices of Bay State residents," said Paul Kronenberg, President of Family Winemakers of California.

98% of domestic wine excluded

Massachusetts law allowed “small” wineries that produced less than 30,000 gallons per year to simultaneously ship wines directly to consumers with a “small winery shipping license” and to have their wines sold in traditional distribution through wholesalers. “Large” wineries (wineries that produce more than 30,000 gallons per year) did not have the same choices. They could either completely opt out of the three-tier system and ship wines to Massachusetts consumers with a “large winery shipping license”, or forego direct shipping to have their wines sold at wine retailers, restaurants and bars via traditional distribution.

According to the decision, the 637 wineries that qualified as “large” accounted for 98% of all wine produced in the United States in 2006. Of those 637, the top 30 producers accounted for 92% of the national market. The remaining 2% of U.S. wine production came from 4,713 “small” wineries, and 1,780 of those produced less than one gallon. In 2007, 100% of the 31 Massachusetts wineries produced less than 30,000 gallons per year.

Discrimination against interstate commerce

In November, 2008, the District Court ruled in that Massachusetts law had a discriminatory effect on interstate commerce. On Thursday, the First Circuit affirmed the judgment of the District Court. The decision states in relevant part:

The primary question before us is whether § 19F unconstitutionally discriminates against interstate commerce in light of both the Commerce Clause, Footnote art. I, § 8, cl. 3, and § 2 of the Twenty-first Amendment.

It is clear that § 2 of the Twenty-first Amendment does not protect state alcohol laws that explicitly favor in-state over out-of-state interests from invalidation under the Commerce Clause. Granholm v. Heald, 544 U.S. 460, 489 (2005). But § 19F is neutral on its face; it does not, by its terms, allow only Massachusetts wineries to distribute their wines through a combination of direct shipping, wholesaler distribution, and retail sales. Section 19F instead uses a very particular gallonage cap to confer this benefit upon "small" as opposed to "large" wineries.

We hold that § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts’s wineries and significantly burdens out-of-state competitors. Massachusetts has used its 30,000 gallon grape wine cap to expand the distribution options available to "small" wineries, including all Massachusetts wineries, but not to similarly situated "large" wineries, all of which are outside Massachusetts. The advantages afforded to "small" wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F’s statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative.

We further hold that the Twenty-first Amendment cannot save § 19F from invalidation under the Commerce Clause. Section 2 of the Twenty-first Amendment does not exempt or otherwise immunize facially neutral but discriminatory state alcohol laws like § 19F from scrutiny under the Commerce Clause. We affirm the grant of injunctive relief.

New legislation needed

As we posted about almost three years ago, the capacity cap was not the only troubling issue with the Massachusetts wine law. The consumer aggregate volume limit provision and, more importantly, the requirement that carriers obtain a permit for each of their delivery trucks have been in some ways just as problematic for wine consumers. After DHL pulled out of the business of delivering wine, FedEx and UPS are by far and away the major two carriers for interstate delivery.

Both FedEx and UPS have chosen to avoid interstate wine shipments to Massachusetts because of the delivery vehicle permit system. This will likely not change following this decision. Technically, Massachusetts is now open to any domestic winery that holds the appropriate permit, regardless of its use of middle-tier distribution. But, without FedEx and UPS, Bay State consumers will still be out of luck for now. New legislation that eliminates the consumer aggregate volume limit and changes the delivery vehicle requirements will likely be necessary to truly open the state for Massachusetts consumers. This decision may just provide the momentum to pass a new wine shipping bill.

We’ll post further analysis from R. Corbin Houchins in the coming days, so please stay tuned. Also, for more background, see our previous posts:

Massachusetts Still Question Mark for 30K-Gallon Wineries

Up and Running (So Far)

A Battle Well-Picked and Well-Fought 

Family Winemakers Court Win is Big for the Industry

Family Winemakers of California Making Headway in Massachusetts

Why Can’t I Have a Boston Wine Party?

“New Vintage” of Wine Litigation

A response to the Family Winemakers lawsuit

Family Winemakers sues Massachusetts over capacity cap

The broader effects of Costco

MA Congress overrides Romney veto, court challenge likely

Romney introduces new bill

Massachusetts Governor vetoes wine bill

 

Family Winemakers v. Jenkins

Massachusetts Still Question Mark for 30K-Gallon Wineries

On January 16, 2009, the state filed its notice of appeal in the 2006 Granholm-based federal suit, Family Winemakers of California v. Jenkins. The District Court had entered judgment on December 18, 2008, enjoining enforcement of a statute that prevents direct shipment by 30,000-gallon-or-more wineries that sell through Massachusetts wholesalers (a category exclusively out-of-state), while affording smaller wineries, a category for which all in-state wineries qualify, “unfettered access.”

On February 3, 2009 the District Court transmitted the record of the case to the Court of Appeals, the first step in a process that may take a couple of years. The state can move for a stay in the District Court and, if unsuccessful, apply again in the Court of Appeals. Thus, it is unknown at this point whether the appeal will, at least temporarily, reinstate the status quo ante.

Up and Running (So Far)

Happily for the plaintiffs, Judge Zobel’s final judgment in Family Winemakers of California v. Jenkins took the path that seemed most likely from the tone and content of her memorandum and order of 19 November 2008 and leveled up. The judgment entered 18 December 2008 orders the state “to permit wineries of all sizes to apply for licenses under Mass. Gen. Laws ch. 138, § 19F(b),” which does not contain the § 19F(a) disqualification of wineries that have sold to a Massachusetts wholesaler within six months of applying for the license, formerly applicable to all 30,000-gallon-and-over wineries. In her November opinion, the judge had noted that the “choice” to use direct shipment only after abandoning all sales through wholesalers for six months was, in effect, prohibition.

Final judgment does not settle the issue of a possible stay of the injunction pending appeal. The state has 30 days from entry of the judgment to file notice of appeal, which would be a prerequisite to moving for a stay in the trial court and, if unsuccessful there, in the Court of Appeals.

By R. Corbin Houchins, Attorney at Law

A Battle Well-Picked and Well-Fought

David does best when he can choose the right Goliath.

The Massachusetts volume cap on direct shipment, invalidated last week in Family Winemakers of Calif. v. Jenkins, was a good choice to challenge for at least three reasons. First, there was gold in the legislative record: a sponsor described the bill as “giving an inherent advantage indirectly to the local wineries,” and the cap was openly and carefully calibrated to fall just above anticipated production of the state’s largest winery. Second, the structure of the statutes permitted excising the cap without damaging the state’s basic regulatory system. Third, the statute had the additional feature of requiring wineries to choose between direct shipment and use of local wholesalers, permitting the suit to take a swipe at another dubious restriction deployed by three-tier defenders, with or without a volume cap.

Judge Zobel’s opinion proceeds from her observation that Granholm forbids both direct and indirect ways of subjecting out-of-state wineries, but not local ones, to mandatory use of a local middle tier. Granholm, however, follows precedent in drawing a distinction between state laws that openly (or “facially”) discriminate against interstate commerce and those that pursue some legitimate purpose with only an incidental disproportionate burden on interstate commerce. Courts apply a more stringent test of nearly automatic invalidity to the former, but for the latter give a state more latitude to balance its own objectives against the federal interest in free interstate trade.

Most of the court’s analysis is devoted to showing how the state law came about, which boiled down to a compromise between direct shipment proponents, who wanted a “straight” winery shipment law without a cap, and the wholesalers, who wanted no direct shipment. The middle ground was direct shipment for wineries defined as small, wherever located. If there were no more to it than that, the law could be regarded as facially neutral and therefore vulnerable only if its incidental adverse effect on interstate commerce outweighed whatever benefit the state sought in enacting the statute.

There was a great deal more to it, because the legislative history revealed an intent to set the cap so that no Massachusetts winery would fail to be categorized as small, leaving the producers of most wine sold in interstate commerce deemed large. Judicial principles governing the choice between the strict test , which applies to facially discriminatory statutes, and the more state-friendly balancing test applicable to incidentally discriminatory statutes, contain the interesting wrinkle that a statute whose purpose is shown to be protectionist is treated as facially discriminatory, even if its bare text does not reveal the discrimination. Thus, the intention revealed in legislative history put the Massachusetts statutes in the strict scrutiny category, which would require the state to prove that an important public policy objective could not have been met in any reasonable non-discriminatory way.

According to the state, its objective was to bring the blessings of direct shipment to small producers throughout the nation. Judge Zobel could not see how cutting out the larger wineries served that objective at all, and therefore flunked the statute under both the strict test for facial discrimination and the easier balancing test for upholding incidental discriminatory effects.

Invalidating the statute without requiring a finding of facial discrimination makes the case far more important in other states, where plaintiffs may not be so lucky as to find evidence of discriminatory intent leaping from the legislative record. It also makes the decision itself more robust on appeal, when the state and wholesalers argue that the sponsor’s statements quoted in the opinion were taken out of the context of a true benign intent.

Family Winemakers is also useful to pro-trade advocates in two less direct ways. (1) It explicitly rejects the defendants’ argument that the large wineries were not shut out of direct shipment because wineries of any size that had not sold wine to a wholesaler for six months could ship directly to consumers. While it might seem self-evident that forcing wineries of substantial size to abandon use of wholesalers as a precondition to using direct shipment is, in effect, denying them direct shipment privileges, in future litigation it’s much better to be able to point to a judge’s saying so. (2) In gauging effect on interstate commerce, it put the focus on the large volume of wine excluded or burdened by the statute, rather than (as the state urged) on the small number of producers who are responsible for it. That follows logically from judicial precedent, but again it’s advantageous to have it spelled out in a reported case.

Judge Zobel’s opinion is clear and impressively supported by citations to precedent, aided on both counts by the remarkably well-researched and well-argued case presented by the plaintiffs, but the suit is, of course, not yet over. The state and wholesalers will presumably move for reconsideration, which, in view of the forcefulness of the opinion, represents a dim hope for defendants. Other skirmishes may be more substantial.

What we have so far is an order granting judgment to the plaintiffs and identifying the statutes whose enforcement will be affected by the permanent injunction to be entered. The defendants will surely have much to say about how the injunction should be worded and whether it will be effective during the almost inevitable appeal.

It is important to note that the opinion of the court recognizes, as it must, that the state has the right simply to take the direct shipment statute containing the volume cap (§ 19F) off the books altogether, with the result of shutting down direct shipment for all wineries –i.e., level down. In their original complaint, plaintiffs had asked for a declaration that challenged statutes, including § 19F, were unconstitutional and an injunction against their enforcement. That left some uncertainty whether, in case the court agreed on unconstitutionality, it might grant the wish by invalidating § 19F altogether, leaving no winery with direct shipment, because of the general ban in §§ 2 and 18 on importation or transportation without specific dispensation.

In the summary judgment motion just granted, plaintiffs asked the court to enjoin enforcement of §§ 2, 18 and 19F “against any out-of-state winery engaged in direct shipping to consumers, regardless of the winery’s total annual production or affiliation with a Massachusetts wholesaler.” The court included all three statutes in its memorandum order, a clear indication that the final judgment and permanent injunction will level up by keeping the permissive and licensing parts of 19F in force and enjoining only denial of direct shipment privileges to larger wineries (including those that sell to Massachusetts wholesalers).

Less certain is the issue of a stay on appeal, which the court has discretion to grant or deny. The tenor of the opinion suggests that Judge Zobel will be reluctant to delay the effect of allowing larger wineries to use both wholesalers and direct shipment, though we can expect arguments from defendants that it will ruinously disrupt the orderly regulation of beverage alcohol in the Commonwealth. Moreover, denial of a stay in the district court does not mean the appellants would fail to obtain a stay from the Court of Appeals, which could take a couple of years to decide the case. Ultimately, the legislature can always take another cut at protecting wholesaler interests while appeals are going on, potentially rendering the ruling moot.

Even with questions about when it will become effective and the inability to predict with certainty what an appellate court or legislative assembly will do, Family Winemakers will ripple through all litigation dealing with indirect discrimination against interstate commerce. For pro-trade advocates, that’s cause to celebrate.