An Accident On The Way To Court

The February 26, 2008 decision by an Arizona federal district court in Black Star Farms LLC v. Oliver supports an in-person purchase requirement, one of the principal legislative attacks on the level-field principle enunciated in Granholm.

In-person purchase as a precondition to direct shipment solves a fundamental political problem for the middle tier. Although Granholm allows states to eliminate discrimination against interstate direct shipment by forbidding in-state shipment, pursuing that “level down” strategy requires extravagant expenditure of political capital, because it constitutes a death sentence for a significant fraction of local wineries. Thus, wholesaler trade associations are faced with reconciling survival of direct shipment for local wineries with the core objective of forcing wineries in other states to go through three tiers, a conceptual problem after Granholm.

The solution is the “accident of geography” theory, which contends that the impracticality of, e.g., an Arizona consumer’s visiting a Yakima Valley winery to place an order for a wine advertised on the Internet, compared to the convenience of visiting an Arizona winery for the same purpose, does not discriminate against interstate commerce. The Black Star court, like a New York federal district court in Buy Right, Inc. v. Boyle and a Tennessee federal district court in Jelovsek v. Bresden, appears to have bought the theory; federal district courts in the Kentucky case, Cherry Hill Vineyards, LLC v. Hudgins, and the Indiana case, Baud v. Heath, rejected it. Appeals are reportedly under way in the fourth, sixth and seventh federal circuits; if the plaintiffs appeal in Black Star, the ninth circuit will also be involved.

At first impression, the wholesalers’ argument does not seem logical. With respect to governmental restrictions, the Commerce Clause is supposed to provide equal access to markets for interstate commerce originating in any location. True, it does not require states to neutralize natural effects of geography, such as the greater cost of shipping from a distant point, but the trade restriction in question arises from the legislative pen, not from geography itself. For legislation, the Commerce Clause supports location parity by voiding state enactments with substantial discriminatory effects, including the effect of leveraging location advantages of local businesses against distant competitors.

Ironically, the court in Black Star appears to have recognized that aspect of the Commerce Clause, as it cited a 1994 Supreme Court case on the subject, C & A Carbone, Inc. v. Clarkstown, which invalidated a facially neutral city ordinance requiring all nonhazardous solid waste received and processed in the town to be deposited at the defendant township’s transfer station. The fatal flaw of the Clarkstown ordinance was that in practice it favored local waste management business to the exclusion of all non-local competition, which sounds pretty similar to a three-tier requirement for out-of-state businesses, but the Black Star court decided not to follow that precedent for reasons that are difficult to divine in its opinion.

There is, nevertheless, a solid basis for the anti-trade result in Black Star and other recent cases, which is widely (and perhaps erroneously) understood as endorsement of a geographic accident defense to Granholm-based suits. If there were only one message I’d want readers of these blogs and Notes on Wine Distribution to take away from discussion of Granholm, it would be the enormous evidentiary difference between a facial discrimination case like Granholm itself and a de facto discrimination case like Black Star. The latter category, which includes challenges to volume caps as well as to on-site limitations, requires much more extensive preparation, with economic expert testimony, to satisfy the plaintiffs’ substantial burden of proof. The Black Star judge underlines that point in refusing to reach the same result as Hudgins and Baude: “However, Plaintiffs proffer no evidence to suggest that such a limited exception, applicable to both in-state and out-of-state wineries, erects a barrier to Arizona’s wine market that in effect creates a burden that alters the proportional share of the wine market in favor of in-state wineries, such that out-of-state wineries are unable to effectively compete in the Arizona market.” Providing the kind of evidence the court would have to see before invalidating a facially neutral statute adds something like $150,000 on top of all the other costs of the litigation, which should be a sobering, but not surprising, fact for enthusiasts of law reform by litigation, and especially for those who think Granholm provides a lay-down slam in direct shipment cases.

Six Veils Out of Seven: Retailer Shipments Under Granholm

On January 14, 2008, a district court in Texas rendered a mostly pro-trade decision in Siesta Village Market, LLC v. Perry that clarified much, but danced around the hottest issue, leaving the final veil in place.

The case upholds the basic Specialty Wine Retailers contention that a state that allows its retailers to deliver to consumers must permit direct shipment by out-of-state retailers. It also has some important things to say about the meaning of Granholm’s less pellucid passages. In particular, it attempts to deal with the most significant internal tension of the Granholm majority opinion, viz., the difficulty of squaring the holding of the opinion, that states cannot require out-of-state wineries to become residents as a condition to reaching local markets, with a dictum-within-a-dictum quoted from a 1990 Supreme Court case, North Dakota v. United States, to the effect that the 21st Amendment empowers states “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm).

The Siesta Village decision and its implications merit further discussion, in particular on the following points:

1. Texas had a “citizenship” requirement of at least a year’s residence in the state for most licenses. It had already been declared unconstitutional when applied to newly arriving wholesalers with physical premises within the state. Siesta Village goes farther by analyzing the statute as a location requirement and holding it unconstitutional on Commerce Clause grounds, to the extent it prevented issuance of the requisite retailing licenses to out-of-state retailers.

2. The Siesta Village judge takes Granholm as a location parity case, and his opinion is explicit that physical presence requirements “plainly discriminate against interstate commerce.” However, like every analyst of Granholm, he had to deal with a key question posed by the quotation from North Dakota, noted above: If a state has the right to require all wine to “be purchased from a licensed in-state wholesaler,” how does one give effect to the Commerce Clause policy against location discrimination? One way of resolving the issue is to require the state to accept methods of consummating the purchase requirement that do not substantially burden interstate commerce relative to local, such as running the sale through the local middle tier without requiring the wine to take an economically disadvantageous logistical path when sold by an out-of-state retailer. Another is to declare that the quotation is dicta and therefore not binding in applying the Granholm holding to a different chain of distribution where its effect on commerce is more problematic –rather too bold a departure to expect in a district court opinion. In the event, the judge simply let the contradiction lie, holding that the retailers have to comply with Texas laws requiring a state retail license and purchase from a Texas-licensed wholesaler, a deferral that has been described as a ticket to the next round of litigation. Meanwhile, the Texas Alcoholic Beverage Control Commission has informally commented that it is not their problem.

3. Experts disagree on the extent to which Granholm was a “weak record case” that could have gone the other way had the states made a better showing of regulatory problems, for example in tax collection and averting deliveries to underage recipients. Siesta Village takes the opposite view, and granted summary judgment, which means the court decided Texas failed to show substantial likelihood that, if it were afforded a full hearing, it would present evidence on which a judgment in its favor could be based. To win in a direct discrimination case a state would have to show there is no reasonable alternative to discrimination for achieving legitimate regulatory objectives. The court reads Granholm to say that the availability of licensing and modern communications makes such an argument inherently implausible, and comes close to saying a state can never prevail on the proposition that interstate delivery is more likely to cause underage drinking than intrastate delivery.

4. Another point of controversy among lawyers is whether the Commerce Clause is indifferent to whether a court cures discrimination by leveling up or down. Siesta Village takes the side of those who argue that it makes no sense to level down in enforcing a constitutional provision intended to encourage interstate trade, at least in the absence of a clear legislative statement requiring termination of in-state privileges in case of invalidity of interstate prohibition. In constitutional law terms, the Siesta Village judge may have discovered a penumbra to the Commerce Clause that would prevent courts from taking such simplistic approaches as counting the number of lines of statutory text that would have to be rewritten and picking the smaller revision.

5. Although Siesta Village rejected the wholesalers’ strange argument that the discrimination arose not from Texas’s intent, but from the happenstance of the plaintiffs’ locations, it indulged in dicta indicating states can adopt on-site-only laws, in which case the “accident of geography,” and not state discrimination, would be responsible for excluding remote sellers. It appeared to accept the reasoning that because there is no “direct shipment market” in those states, the remote sellers are not excluded from anything by the prohibition, which is arguably a flawed argument under the Commerce Clause, whose policy extends to disproportionate burden as well as overt discrimination.

Appeals seem likely. Meanwhile, the parties in Knightsbridge Wine Shoppe, LTD v. Jolly, who agreed to extend Granholm, at least temporarily, to non-producing retailers selling to California consumers, will presumably take up their cudgels on application of the Siesta Village analysis, versus that of the New York case, Arnold’s Wines, Inc. v. Boyle on September 9, 2007. In Arnold’s Wines, the New York federal district court dismissed a retailer suit without an evidentiary hearing, on the grounds that the state had a 21st Amendment right to require all sales to go through an in-state wholesaler, a proposition suggested by the vexing dictum in the Granholm opinion.

The Arnold’s Wines decision seems to miss Granholm’s point that a state may have the right to require all wine to go through three tiers, but does not have the right to apply its rule with location discrimination unless it provides evidence that its discrimination against interstate sellers is required by a legitimate state objective that cannot be achieved through nondiscriminatory means. The Siesta Village judge expressly declined to follow Arnold’s Wines, which it plausibly characterized as putting the 21st Amendment above the Commerce Clause, precisely what Granholm forbids.

Six Veils Out of Seven: Retailer Shipments Under Granholm

On January 14, 2008, a district court in Texas rendered a mostly pro-trade decision in Siesta Village Market, LLC v. Perry that clarified much, but danced around the hottest issue, leaving the final veil in place.

The case upholds the basic Specialty Wine Retailers contention that a state that allows its retailers to deliver to consumers must permit direct shipment by out-of-state retailers. It also has some important things to say about the meaning of Granholm’s less pellucid passages. In particular, it attempts to deal with the most significant internal tension of the Granholm majority opinion, viz., the difficulty of squaring the holding of the opinion, that states cannot require out-of-state wineries to become residents as a condition to reaching local markets, with a dictum-within-a-dictum quoted from a 1990 Supreme Court case, North Dakota v. United States, to the effect that the 21st Amendment empowers states “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” (For an explanation of the difference between holdings and dicta, see the blog post, Discrimination Against Out-of-State Retailers After Granholm).

The Siesta Village decision and its implications merit further discussion, in particular on the following points:

1. Texas had a “citizenship” requirement of at least a year’s residence in the state for most licenses. It had already been declared unconstitutional when applied to newly arriving wholesalers with physical premises within the state. Siesta Village goes farther by analyzing the statute as a location requirement and holding it unconstitutional on Commerce Clause grounds, to the extent it prevented issuance of the requisite retailing licenses to out-of-state retailers.

2. The Siesta Village judge takes Granholm as a location parity case, and his opinion is explicit that physical presence requirements “plainly discriminate against interstate commerce.” However, like every analyst of Granholm, he had to deal with a key question posed by the quotation from North Dakota, noted above: If a state has the right to require all wine to “be purchased from a licensed in-state wholesaler,” how does one give effect to the Commerce Clause policy against location discrimination? One way of resolving the issue is to require the state to accept methods of consummating the purchase requirement that do not substantially burden interstate commerce relative to local, such as running the sale through the local middle tier without requiring the wine to take an economically disadvantageous logistical path when sold by an out-of-state retailer. Another is to declare that the quotation is dicta and therefore not binding in applying the Granholm holding to a different chain of distribution where its effect on commerce is more problematic –rather too bold a departure to expect in a district court opinion. In the event, the judge simply let the contradiction lie, holding that the retailers have to comply with Texas laws requiring a state retail license and purchase from a Texas-licensed wholesaler, a deferral that has been described as a ticket to the next round of litigation. Meanwhile, the Texas Alcoholic Beverage Control Commission has informally commented that it is not their problem.

3. Experts disagree on the extent to which Granholm was a “weak record case” that could have gone the other way had the states made a better showing of regulatory problems, for example in tax collection and averting deliveries to underage recipients. Siesta Village takes the opposite view, and granted summary judgment, which means the court decided Texas failed to show substantial likelihood that, if it were afforded a full hearing, it would present evidence on which a judgment in its favor could be based. To win in a direct discrimination case a state would have to show there is no reasonable alternative to discrimination for achieving legitimate regulatory objectives. The court reads Granholm to say that the availability of licensing and modern communications makes such an argument inherently implausible, and comes close to saying a state can never prevail on the proposition that interstate delivery is more likely to cause underage drinking than intrastate delivery.

4. Another point of controversy among lawyers is whether the Commerce Clause is indifferent to whether a court cures discrimination by leveling up or down. Siesta Village takes the side of those who argue that it makes no sense to level down in enforcing a constitutional provision intended to encourage interstate trade, at least in the absence of a clear legislative statement requiring termination of in-state privileges in case of invalidity of interstate prohibition. In constitutional law terms, the Siesta Village judge may have discovered a penumbra to the Commerce Clause that would prevent courts from taking such simplistic approaches as counting the number of lines of statutory text that would have to be rewritten and picking the smaller revision.

5. Although Siesta Village rejected the wholesalers’ strange argument that the discrimination arose not from Texas’s intent, but from the happenstance of the plaintiffs’ locations, it indulged in dicta indicating states can adopt on-site-only laws, in which case the “accident of geography,” and not state discrimination, would be responsible for excluding remote sellers. It appeared to accept the reasoning that because there is no “direct shipment market” in those states, the remote sellers are not excluded from anything by the prohibition, which is arguably a flawed argument under the Commerce Clause, whose policy extends to disproportionate burden as well as overt discrimination.

Appeals seem likely. Meanwhile, the parties in Knightsbridge Wine Shoppe, LTD v. Jolly, who agreed to extend Granholm, at least temporarily, to non-producing retailers selling to California consumers, will presumably take up their cudgels on application of the Siesta Village analysis, versus that of the New York case, Arnold’s Wines, Inc. v. Boyle on September 9, 2007. In Arnold’s Wines, the New York federal district court dismissed a retailer suit without an evidentiary hearing, on the grounds that the state had a 21st Amendment right to require all sales to go through an in-state wholesaler, a proposition suggested by the vexing dictum in the Granholm opinion.

The Arnold’s Wines decision seems to miss Granholm’s point that a state may have the right to require all wine to go through three tiers, but does not have the right to apply its rule with location discrimination unless it provides evidence that its discrimination against interstate sellers is required by a legitimate state objective that cannot be achieved through nondiscriminatory means. The Siesta Village judge expressly declined to follow Arnold’s Wines, which it plausibly characterized as putting the 21st Amendment above the Commerce Clause, precisely what Granholm forbids.

Reporting Madness

Hello and happy holidays from the ShipCompliant team! We’ve been a little quiet as we prepare to help all of our winery and retailer partners prepare for the big storm of reports that come due in January. Wineries that ship to all of the possible states for direct shipping can owe over 500 reports each year, depending on their filing frequencies with the state ABCs and Departments of Revenue. In January, all but one (for some reason, one of the New York reports is filed on a non-standard quarterly basis that starts on December 1st) of the reports come due. So, all other monthly, quarterly, semi-annual, and annual reports come due in January.

Tasting room, wine club, accounting, and compliance managers all get very busy just after the first of the year preparing their data for the annual reporting rush. A key to making this endeavor a success is to collect and maintain good, clean data from all of your direct to consumer order sources, including eCommerce, wine club, tasting room, and administrative orders. Many of the reports require copies of invoices or schedules of shipments that list order details. Also, remember that the three states that have abbreviations that end in the letter I (HI, MI, and WI) also require dates of birth on their reports.

Here’s to a happy new year and a successful reporting rush!

Wrong, but Not Surprising: A Loss in Extending Granholm to Shipments by Retailers

The recent decision in Arnold’s Wines, Inc. v. Boyle, Docket No. 06 Civ. 3357 (Southern District of NY, Sept. 9, 2007), which upholds New York’s requirement that retailers be located within the state to sell and ship to New York residents, illustrates the difficulty of separating dictum from holding in the Granholm case. (See the September 18th blog post for an explanation of the difference.)

My reading of the Arnold’s Wines opinion is that Judge Howell failed to put a famous statement from the 1990 North Dakota case, quoted in Granholm, in the context of the Granholm holding. The key quotation is that North Dakota had a 21st Amendment right “to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.” States and local licensee trade associations cite the statement as a fundamental principle of constitutional law, while out-of-state plaintiffs dismiss it as mere dictum and therefore incapable of serving as the decisional principle in discrimination cases. In Arnold’s Wines it appears each side was half right.

To determine whether the North Dakota reference in Granholm is controlling precedent, one must examine the latter opinion to see if it was necessary to the result. When one does that, it seems clear that New York has the right to require all wine to go through a three-tier system, but no right to require that any element of that system be located within the state of New York unless the discrimination against out-of-state sellers can be justified under the Commerce Clause.

Nothing in the Arnold’s Wines memorandum opinion suggests evidence of justification other than New York’s desire to have a three-tier system and the general objectives of states’ adopting such systems after Repeal. Three-tier systems are like any other exercise of regulatory power by the state; they are valid only if they either do not discriminate against interstate commerce relative to local or discriminate no more than necessary to serve a legitimate state purpose that cannot be achieved by available nondiscriminatory means. The burden is on the state to justify discrimination. However, the court decided that the defendants win as a matter of law, with no factual hearing. It looks to me as if the court wrongly deprived the plaintiff of its right to require the state to prove its case.

Free The Grapes! legislative update

Free the Grapes! recently provided an update on direct to consumer shipping legislation and litigation for 2007. As you can see below, many changes are likely to come this year.

LEGISLATIVE UPDATE

Wine Institute provided the following summary of direct shipping legislation around the country.

Alaska –House Bill 34 (Ledoux) would specifically allow in-state wineries to make DTC shipments to AK consumers, with a 5-gallon per shipment limit. Status: passed House 2/14/07 and moves to Senate Community and Regional Affairs and to Senate Labor and Commerce.

Arkansas – Senate Bill 592 (Whitaker), a positive bill, creates a DTC shippers permit for wineries. Provisions include: 24 cases annually, $10 permit application fee, sales and excise tax payments annually. Status: Introduced.

Connecticut — Senate Bill 1204 (Joint Committee on General Law) makes a change to the time period specified in the DTC shipping statute from 60 days to 2 months for the 5 gallon limit. Status: Passed out of General Law on 2/27/07.

Florida – Shipping into FL is currently legal. Senate Bill 126 (Saunders) and SB 2282 (Geller) would implement a version of the industry’s model direct shipping bill, but both bills include a discriminatory 250,000 gallon capacity cap opposed by consumers and wineries. Alternatively, House Bill 1217 (Bogdanoff) does not include a cap.

Georgia – House Bill 159 (Willard) and its companion Senate Bill 56 (Untermann) create a DTC shipping license for all wineries (and retailers in SB56), repealing existing law which prohibits wineries with a wholesaler from obtaining a license. Other provisions: $100 permit fee, 24-case annual limit, sales and excise taxes to be collected. This bill is getting industry support.

The wholesaler’s House Bill 393 (Stephens) includes a discriminatory 100,000 gallon capacity cap, creates a new “domestic farm winery” using at least 50% GA grapes, and a national “farm winery” definition of a winery under 100,000 gallons that uses at least 40% grapes from its state of domicile. Such wineries can obtain a DTC shipping permit to ship up to 20 cases of wine per consumer annually. Status: Favorably reported out of House Regulated Industries Committee on 2/21/07.

Hawaii – Two bills, House Bill 1093 (Say) and Senate bill 1019 (Taniguchi), appear to be dead in committee. They would have reduced consumer choice by limiting shipments under the existing DTC shipping permit to 6 cases annually per household from an aggregate of wineries (current system is 6 cases per winery).

Idaho – House Bill 11 would modify the permit legislation passed in 2006 to allow wholesalers and retailers in Idaho and other states to ship wine directly to consumers. Status: Referred to House Revenue and Taxation on 1/22/07.

Illinois – House Bill 429 (Acevedo) is similar to last year’s transition bill that creates a winery-only DTC shipping permit to replace the existing reciprocity law. Provisions include a tiered permit fee based on size of the winery from $150 to $1,000, 12 cases annually, with sales and excise tax collection. Free the Grapes! is encouraging inclusion of retailers in the bill. Status: Passed from House Consumer Protection Committee on 2/20/07 by vote of 11-0. There is also a similar bill in the Senate (SB123, Silverstein).

Iowa – ABC hearings were held on 2/24/07. The ABC recommended to legislators that the reciprocity statute be replaced with a DTC shipping permit system. Other proposals addressed at the hearing include changing the local winery preferential tax rate, changes in Iowa wine labeling rules for IA wineries, and changes to existing designation of 5% of wine tax revenues to Iowa Wine Development Board. Status: Awaiting action by legislature.

Maine – Senate Bill 54 (Bromley) creates DTC shippers permit for wine & beer. Winery or retailer obtains a COA and nonresident shipper’s license ($100 fee). Annual sales and excise tax payments required. Status: Introduced.

Missouri – House Bill 944 (Cooper) creates a DTC permit for wineries to ship 2 cases per month, and requires permit and tax collection. Carriers must obtain permit. Amendment to add retailers drafted on 2/26/07. Status: Introduced.

Montana – Senate Bill 524 (Wanzenried) proposes changes such as adding “purposely, knowingly or negligently” language to the connoisseur’s license, which does not currently work for consumers or wineries. Status: Reported “Do Pass” from Senate Business, Labor and Economic Affairs on 2/21/07.

New Mexico – House Bill 1018 (Silva) creates DTC shipping permit for wineries and retailers to replace reciprocity. Provisions: $50 fee, pay excise and Gross Receipts Tax, 24 cases annually. Status: Passed favorably on 9-1 vote from House Business & Industries Committee on 2/25/07. Companion bill is Senate Bill 1047 (Taylor).

New York – Interestingly, Assembly Bill 4345 (Destito) replicates the wine DTC shipping program for beer manufacturers and beer wholesalers. Free the Grapes! has no activities or campaigns concerning this bill because it deals with beer and not wine. Status: Introduced.

North Dakota – Senate Bill 2135 (Senate Finance and Taxation Committee) makes changes to existing DTC shipping statute. Provisions: increases amount of shipments to 3 cases per month (currently 1 case per month), removes “reciprocal” provision passed in 2005 but never implemented. Removed vague language that could have been interpreted to allow an in-state winery to also hold a wholesalers license – clarifies no self-distribution, which was believed to be the case by in-state industry at this time anyway. Status: Passed Senate 1/23/07 and now to House Finance and Taxation.

Oklahoma – Several bills in the House and Senate have been introduced, several of which request a voter referendum to allow OK consumers to receive DTC shipments from out-of-state wineries, but a permit system has not been outlined.

Oregon – House Bill 2171 (Minnis) transitions OR from a reciprocal DTC to a permit system. Would cover wineries only. Status: Introduced. This is the OLCC bill. House Bill 2488 (House Business and Labor Committee) is similar, allowing wineries, retailers and “associations” to obtain permits. $50 fee. Excise taxes to be paid. Unlimited shipments. Status: Introduced.

Pennsylvania – House Bill 255 (Godshall) is a positive DTC shipping permit bill with a $100 registration fee, 2 cases per month to any individual. Taxes collected. Status: Introduced.

Tennessee – House Bill 1850 (Todd) creates a DTC shipping permit for 2 cases annually. Provisions: $100 fee, annual reports, annual excise and sales tax payments. Status: Introduced. Companion bill in Senate (1977, Stanley).

Virginia – Senate Bill 984 (Edwards) creates an “internet wine retailer license” to allow sales by a retailer having no physical premise. Status: Passed both House and Senate and sent to Governor on 2/22/07.

West Virginia – Senate Bill 712 (Kessler) is an omnibus liquor bill, that among many provisions, includes creation of a DTC shipping permit for wineries, wholesalers and retailers. Provisions include: $150 permit fee, 2 cases per month, sales and excise tax payments. Removes self distribution privilege for instate wineries. Original 50% tax increase has been removed. Creates a “wine spa” license, a wine B&B license, and a “mini” winery license to replace farm winery permits.

LITIGATION UPDATE

Texas — The Specialty Wine Retailers Association (SWRA, www.specialtywineretailers.org) litigation in Texas to address that state’s discriminatory stance between in-state and out-of-state retailers is in its discovery phase. Until the case is decided, out-of-state retailers may continue to ship to Texas consumers.

Massachusetts — The Family Winemakers of California reports that its lawsuit against the State of Massachusetts seeking to overturn the 30,000 gallon production cap in the DTC law is still in the discovery phase. Once discovery is complete both sides will be preparing motions for summary judgment for later in the year.