Author Archive
A Little Knowledge Is Not Enough: Evidentiary Burdens In On-Site Cases
August 10th, 2008
The August 7th decision of the Court of Appeals for the Seventh Circuit in Baude v. Heath has been characterized as a loss in the fight against on-site purchase requirements. Indeed, the opinion leaves Indiana’s initial personal visit requirement in place. That is not, however, the whole story.
It’s important to keep in mind in reading the opinion that the Court of Appeals is affirming the lower court’s granting of summary judgment against the state on one point and reversing it on another. That is, the district court had decided no trial was necessary because uncontested facts established the unconstitutionality of both the wholesale licensee ban and the initial on-site visit requirement. The appellate court agreed with the former conclusion and disagreed with the latter.
Statutes that openly discriminate against out-of-state wineries are almost always unconstitutional and provide fit subjects for summary judgment. Statutes without openly discriminatory provisions, but whose effect in practice is to impose a greater burden on out-of-state wineries than on local wineries, may be unconstitutional, depending (in the locution of the leading case) on whether the burden is “clearly excessive in relation to the putative local benefits.”
That determination of excess is at the heart of the 7th Circuit opinion. The appellate court had little trouble in concluding that the kinky ban on shipment by wineries that had direct distribution rights anywhere provided virtually no benefits, except to wholesalers, and was substantially burdensome. Because uncontested facts in the district court demonstrated exclusion of a substantial number of out-of-state sellers, the plaintiffs had met their burden of showing discriminatory harm to interstate commerce, shifting the obligation to produce evidence to the defendants. The state and wholesalers had offered only one intelligible counterargument –the claim that requiring commerce to go through a local middle tier makes it easier to monitor sales and collect state excises. We can keep Baude v. Heath in the column of cases that do not consider that claim a substantial justification for demonstrated burdens on commerce.
In the other (and more important) half of the 7th Circuit opinion, the same burden-benefit analysis reached a different conclusion with respect to the supposed economic consequences of Indiana’s requirement that the consumer travel to the winery site before receiving the first direct shipment order. Faced with a contention that such a burden is inherently excessive, the chief judge offered some unvarnished advice to plaintiffs’ counsel: “It is impossible to tell whether a burden on interstate commerce is [excessive] without understanding the magnitude of both burdens and benefits. . . . . Exact figures are not essential (no more than estimates may be possible)[,] and the evidence need not be in the record if it is subject to judicial notice, but it takes more than lawyers’ talk to condemn a statute . . . .” In other words, you can’t litigate a burdening case as if it were a case of overt facial discrimination. See Notes on Wine Distribution, pages 8-10, for my discussion of that point and of Cherry Hill Vineyard (which was cited in Baude) and similar cases.
Regarding judicial notice (which occurs when a court accepts something, such as a tide table, as true from published sources, without live testimony), courts seldom take notice of controversial facts. That point came up when the chief judge, sounding a bit offended by plaintiffs’ argument that there was no point in having a face-to-face screening system because determined underage purchasers would defeat or circumvent it, declined to take judicial notice of propositions they advanced in support. Plaintiffs cited some studies and attempted to use an on-line ID check provider’s advertising to show on-site screening is unnecessary. The appellate court wasn’t having it and noted that “it would be awfully hard to take judicial notice that in-person verification with photo ID has no effect on wine fraud and therefore flunks the interstate commerce clause.”
Thus, although delivery requirements involve face-to-face proof of age, Baude stands for the proposition that plaintiffs would have to prove that carrier screening undercuts the enforcement benefit of the initial winery site requirement. The appellate opinion refers to Rowe v. New Hampshire Motor Transport Ass’n, a case involving a specific tobacco-regulating statute, as forbidding states to require carriers to check age of persons receiving intoxicating liquor. That is, I believe, an egregiously wrong reading of the case (see blogging on both sides of the issue here), but the opinion does not rely on it. Rather, it describes the face-to-face transaction between carrier employee and recipient of the shipment as facially inferior to age screening at a winery, to a degree that allows the state to treat the former as inadequate. As with economic effects, plaintiff evidence was, in the court’s view, simply absent on the efficacy of at-delivery age screening: “Given the state of this record, and the state of the empirical literature, we know very little.” The take-away is that before you can knock down a duly enacted state statute, you need to know –and show– rather a lot about its discriminatory effects.
The primary importance of Baude is to add weight to an already substantial body of judicial opinion that suits based on a facially neutral law’s burdensome effects on interstate commerce relative to local commerce have to be tried quite differently from suits like Granholm, which was based on overt and explicit discrimination against interstate commerce. The case does not say that the face-to-face law would prove constitutional in a properly presented case, only that it was wrong to conclude that its unconstitutionality was so clear as to require no presentation of quantitative evidence on its burdens.
Reversing a grant of summary judgment does not require that the lower court enter summary judgment for the other side. Rather, it provides guidance to the district court as to evidentiary requirements if the case goes on to trial, and leaves the statute in place if there are no further proceedings below. The plaintiffs’ burden of proof in Baude is substantial but not unsupportable. It ain’t necessarily over.
An Accident On The Way To Court
March 25th, 2008
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.
Another Rowe to Hoe
February 25th, 2008
There’s been a lot of silliness lately about the Maine cigarette case, with some observers declaring that the recent Supreme Court opinion in Rowe v. New Hampshire Motor Transport Ass’n prevents states from regulating carrier deliveries of interstate wine shipments. Whether honest mistake or disinformation, that assertion might seem plausible from a superficial reading of news reports on the decision, so it’s worth looking into.
This Rowe is a straightforward federal preemption case, affirming a Court of Appeals decision (itself based on a well-known 1992 Supreme Court decision) that a federal statute with a specific preemption clause does just what it says. Enacted in 1994, the motor carrier statute provides: “[A] State . . . may not enact or enforce a law . . . related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.” The Maine law struck down as inconsistent with the federal statute attempted to prevent shippers from using interstate motor carriers lacking controls to prevent delivering cigarettes to minors, an objective the justices found worthy, but within the exclusive province of the federal congress.
Why doesn’t that knock out state laws restricting delivery of wine to minors? In the first place, there is a more specific federal statute dealing with alcoholic beverages, which provides: “The shipment or transportation … of any … intoxicating liquor … from one State … into any other State … intended … to be received … in violation of any law of such State … is prohibited.” In other words, federal law specifically authorizes state laws regulating deliveries of wine and adds federal weight to their enforcement. One cannot argue that the liquor statute, passed in 1935, is impliedly repealed by the 1994 motor freight legislation, because they do not exhibit the kind of irreconcilable conflict that evinces congressional intent to repeal the older statute. Well-settled principles of statutory construction in cases of conflict prohibit implied repeal if reconciliation is possible and provide that facially conflicting statutes can be reconciled by allowing the more specific to govern over the general in its particular subject area. Thus, if we had only the two statutes to consider, rules of statutory construction would require that the 1935 act remain in force as a subject matter exception to the more general 1994 enactment. One could quibble about the extent to which states are authorized to dispense with an intent requirement, but there’s no doubt that the federal statutory scheme leaves room for state laws controlling wine deliveries.
It is not, however, merely a matter of two statutes. The second problem with the Chicken Little reading of Rowe is a clincher. The U.S. Constitution states, “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” There is no need to resort to implied congressional intent. The Supremacy Clause says that the U.S. Constitution itself and the laws of the United States shall be the supreme law of the land, a provision that is interpreted to mean, “in that order.” Thus, the same clause that underlies preemption of the Maine cigarette delivery law by a federal statute absolutely prevents preemption of a state wine delivery law by that congressional enactment, provided the state law does not violate some other constitutional provision, e.g., by discriminating against wine produced by persons of a certain race or religion –or by a winery outside the state.
Costco Asks Court of Appeals to Think Again
February 21st, 2008
On February 19, 2008, Costco Wholesale filed a petition for rehearing in the Ninth Circuit Court of Appeals, asking the original panel to reconsider a three-judge panel’s decision of January 29th, which upheld the ruling of a federal district court in Seattle that Washington’s price posting requirement is invalid under federal antitrust law, but reinstated other parts of the price posting statute the district court had struck down as part of the invalid statutory scheme, as well as the ban on central warehousing. The petition also asks that the entire appeals court hear the case if the original panel does not grant Costco’s request, in view of the importance of the antitrust issues, the inconsistency of the result with those in an earlier Ninth Circuit case and a recent Fourth Circuit case, and the necessity to interpret a leading Supreme Court opinion. The petition offers a clue to how an appeal to the Supreme Court might be structured.
Six Veils Out of Seven: Retailer Shipments Under Granholm
January 30th, 2008
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.
Dulling the Cutting Edge
January 30th, 2008
Yesterday’s decision of the Ninth Circuit Court of Appeals rejected almost everything about the trial court’s decision in Costco Wholesale Corp. v. Hoen that was innovative under federal antitrust law, turning the case into an expression of conservative deference to state law.
Appellate judges did not even throw Costco the scrap of a favorable word about the Granholm portion of the judgment, on which the state had already acquiesced by changing its statutory scheme to eliminate discrimination against out-of-state manufacturers. A small mitigating factor for trade in wine is that the Ninth Circuit did not attempt to expand the effect of the 21st Amendment , leaving in place both the district judge’s definition of the supposed Section 2 defense and her finding that it had not been proved.
The immediate effect of the decision, once a mandate is issued to the district court, will be threefold: (1) Washington will have to stop requiring suppliers to post prices and hold them unchanged for 30 days without actively supervising them for reasonableness, a practice the court agreed constitutes a per se violation of federal antitrust law. (2) The state may nevertheless enforce other restraints that have operated as part of the price posting scheme, i.e., the bans on quantity discounts and credit, the minimum 10% markup and the requirement that suppliers charge all retailers in the state the same price, irrespective of the point of delivery. (3) The state may also continue the two challenged restraints of trade operating only indirectly on price, the bans on central warehousing and on sales between retailers. It seems likely the mandate will take effect in due course, as there is no reason to expect the Court of Appeals to entertain a request for rehearing, and the odds are against the Supreme Court’s accepting the case for review, should a party attempt to appeal.
Practical compliance with the opinion will raise interesting administrative issues on which the Court of Appeals offered no guidance. The first unanswered question is, assuming the state wishes to retain the allowed price restraints, how it could operate a price posting system without the illegal “hold” requirement? Would some hold period significantly shorter than 30 days be legal? If not, how could one administer an instantly revisable posting? If there is can be no mandated time period for holding a price, can a uniform price rule apply to any transactions that are not exactly contemporaneous? Assuming posting is out for practical reasons, liquor price law enforcement would be mostly on the same footing as enforcement of trade laws generally, requiring investigation and often relying on competitor’s complaints, a scenario that invites cost-benefit analysis of interfering in a marketplace that is already regulated under general antitrust and fair competition laws.
All those uncertainties arise at a time when the Washington State Liquor Control Board is considering freer trade policies and some wholesalers are becoming less ardent in their support of post-and-hold price restraints. The state legislature is in a short session currently, with relatively little opportunity for profound and controversial changes in a major regulatory scheme, but the anomalies created by the Costco case suggest an attempt at a legislative fix, possibly including consideration of jettisoning the posting-related laws the Court of Appeals said the state could keep.
What were they thinking?
January 10th, 2008
Naturally, there is another side to the story, which deserves analysis because of the policy issues it raises for liberalization of wine distribution laws, a goal nearly every commentator embraces.
First, Wine.com’s own justification: Wine Spectator Online for January 8th quotes CEO Richard Bergsund, who declared, “We’d like to see markets open up, and we’d like to see fair competition. There are two ways to try and make change in a law you don’t like: One is operating within the law, and one is ignoring the law. We’ve chosen the former. We just believe that we’re at an enormous disadvantage if we’re the only one paying the high cost of compliance.” A lengthier explanation, signed by Mr. Bergund and Wine.com founder Mike Osborn, can be found in the Wine Spectator forums here. In case anyone would like to follow the fracas in greater detail, Wine.com also responded on 01.06.08 at 3:56 PM and on 01.04.08 at 4:06 PM to the Vinography blog post, receiving two supportive posts (on 01.04.08 at 7:38 PM and on 01.08.08 at 5:04 PM) among numerous flames and a sensible suggestion of how they might have advanced their interests without all the blowback, posted by Winemonger.com on 01.09.08 at 11:50 AM.
The issues that stand out for me involve the legal and ethical obligations of persons harmed by laws of dubious validity. For the record, here is the “devil’s advocate” perspective on the blogs thus far:
1) If a state is allowing Wine.com to deliver wine to its residents from a local retail-licensed facility, then under Granholm a serious question arises regarding its legal power to do so while prohibiting the same deliveries from a similarly licensed location outside the state. Wine.com can decide for various reasons not to raise that question, accepting the contingency that its business model would have to change if the laws were leveled up or down.
2) Until such time as a court with jurisdiction in one of the approximately 37 states that prohibit retailer direct shipment issues a final judgment of invalidity that becomes effective (not, for example, stayed on appeal), locally licensed businesses there have a right to operate in a market that complies with the applicable law. Those of us who think the law is invalid have a right to challenge it. The outcome of the challenge could, equally consistently with Granholm, either continue the interstate ban and end Wine.com’s in-state shipments or permit both in-state and out-of-state retailers to ship.
3) The right to force a state to make that choice does not logically imply a right to violate current law to the detriment of a complying competitor. It is ludicrous and crass to compare making an illegal wine shipment in contravention of an arguably invalid law to nonviolently resisting overt racial discrimination in the civil disobedience phase of the civil rights movement. It was, by widely accepted ethical standards, wrong for authorities to enforce segregation, even before those laws were formally invalidated. No comparable moral opprobrium attaches to enforcing commercial laws that foolishly limit consumer choice and serve the interests of a narrow segment of the economy. Good reasons for repealing a law are not a free ticket to ignore it.
4) Not incidentally, anyone outraged by passage of bad special interest legislation should be a partisan of campaign finance reform. The specialty retailer folks were quite right in pointing out the gross expenditures of wholesaler trade associations as part of the problem. If you were in a business that depended upon legislation, rather than only the value of your services, for profitability, wouldn’t you want to be pals with the lawmakers?
5) That leaves the question of the alternatives available to a business in Wine.com’s position, assuming it decides to exercise its undoubted right to seek the aid of the state in responding to illegal competition. Some commentators question whether Wine.com has the legal right to stimulate orders resulting in illegal shipments. One would have to know more about the details of the sting operation than has been made public to ascertain whether it was executed without violating any laws. Even if it did involve violations, authorities would probably exercise their discretion to overlook them if they were done with no benefit to Wine.com other than their contribution to deterring illegal transactions. Commentator fulminations notwithstanding, it is entirely proper for a business to act on the profit motive in bringing competitor violations to light. Some of the “natural” alternative responses raise legal problems. A prudent lawyer would not, for example, let her client call up a competitor who was beating him on price by stepping outside the law with a message that it would be reported unless the competitor knocked it off. (The antitrust and accessory liability counseling issues are beyond the scope of this post.) One blogger suggested that before doing the stings Wine.com could have made a public statement that it intended to compile evidence of illegal shipments and turn it over to authorities, a method that would certainly be less hazardous than direct communication with competitors. If the program were to start after a certain announced date, to give competitors a chance to get into compliance, it might have reduced criticism. Criticism, at least from the sources of the linked blog posts, would presumably also have been reduced if Wine.com had merely borne the injury. Probably it would have been reduced further if Wine.com had supported the specialty retailers’ legislative programs. Those are, of course, public relations, rather than a legal, considerations. Wine.com has no obligation to avert criticism. Commentators have no way of knowing whether their protests have any negative effect on its business, and no discernible basis for offering public relations advice in the first place.
6) Regarding the separate issue of legislative strategy, Wine.com has introduced the issue of “credibility” of a lobbying organization that, according to Wine.com, does not claim to represent a membership dedicated to legal competition. It is far too early to tell what difficulties, if any, pro-trade groups will encounter in their battles with the wholesalers because of pervasive lawbreaking in their ranks. However, whatever one’s evaluation of the legislative front, lobbying cannot credibly be advanced as a substitute for state help in keeping competition legal under existing law. No one is against effective lobbying; the question is how to define one’s obligations while that process is under way.
Wrong, but Not Surprising: A Loss in Extending Granholm to Shipments by Retailers
October 5th, 2007
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.
Discrimination Against Out-Of-State Retailers After Granholm
September 18th, 2007
Imminent revision of Illinois direct shipment law is producing much heated comment about retailer shipping rights, some trenchant and some off the mark, but all of significance beyond one state.
Illinois House Bill 429, sent to the governor for signature on August 8th, conforms to the all but universally held belief that Granholm condemns treating wineries differently depending upon the reciprocity or non-reciprocity of their states’ direct shipment laws. Ending reciprocity is not in itself controversial, and there is nothing particularly unusual about the way Illinois is going about it -conversion to a licensed shipper system with a volume cap (for both sales to consumers and direct distribution to retailers). One can argue about the constitutionality of volume caps, but that has not been the main issue in public media discussions lately.
Most attacks on the new law involve its allegedly unconstitutional exclusion of retailers (including those positioned as “virtual wineries”) from licensed shipment. The big question is whether Granholm prevents states from allowing deliveries to consumers from a bottle shop across town, but not from one across the state line.
I was recently misquoted in a trade magazine as saying the retailers might prove “unjust discrimination.” If injustice were enough to invalidate discriminatory liquor laws, statutes would be falling like drosophila in a gin bottle. It’s unjustified discrimination against interstate commerce relative to local commerce that condemns a law under the Commerce Clause, and justifying means only showing the discrimination is necessary to preserve certain state interests.
Exactly what those interests are remains subject to differences of opinion. Granholm is the most profound statement on the subject in many years. It is not, however, among the easiest Supreme Court opinions to encapsulate.
To understand Granholm, one must observe a distinction lawyers make between the essential rationale, or “holding,” of the case and incidental statements of judges. The holding is binding precedent and, if the case is a Supreme Court decision, pretty much determines what the federal constitution means in all subsequent cases decided by all other courts. Everything in the opinion not essential to the result is considered “said in passing” -obiter dicta in Latin, or “dicta” for short. Dicta may give important insights into judges’ reasoning and help predict their future decisions in other cases on appeal, but dicta don’t control the outcome of cases in lower courts. (An example of significant dicta is the proposition that reciprocal shipment laws are unconstitutional because they create trade zones, contrary to the purpose of the Commerce Clause. The Court was not deciding a case about reciprocity, so what it said on the subject was not essential to the result.)
Separating holdings from dicta is an exercise of judgment. For Granholm, a reasonable reading begins with the formulation of the Supreme Court in its decision to grant review of the lower court decisions and picks up the facts the Court seemed to regard as dispositive. That produces a line of reasoning: “The Commerce Clause forbids overt discrimination favoring local commerce relative to interstate commerce, except in very limited circumstances. A state that allows its own sellers to ship directly to consumers but restricts out-of-state sellers in shipping directly to the same consumers is overtly discriminating. No relevant exception applies because (1) historical and constitutional analysis shows that the supposed 21st Amendment right of states to discriminate in favor of in-state producers when they regulate direct shipment of wine does not, in fact, exist, (2) as with any other article of commerce, the burden of justifying discrimination is on the states, and (3) neither state proved it needed to engage in discrimination to advance a legitimate local purpose that could not be adequately served by other means. Therefore, the discriminatory laws are invalid under the Commerce Clause.”
From the rationale of the case and the key facts noted in the opinion, one can extract the holding, which is in effect a decisional algorithm lower courts must apply unless the Supreme Court modifies it in a subsequent opinion. Put in the form of a conditional statement, a permissible interpretation of the Granholm holding might look like this:
If:
- Law 1 of a state authorizes businesses resident in the state to sell and ship wine directly to consumers within the state.
- Law 2 of the same state either prohibits, or renders economically impractical, wine shipments from out-of-state businesses.
- The state claims the discrimination is justified because it is necessary for preventing sales of wine to minors, for collecting excise taxes on wine, facilitating orderly markets, protecting public health and safety, and ensuring regulatory accountability.
- Out-of-state wine sellers face the loss of state and federal licenses if they fail to comply with state law regarding sales to minors and payment of taxes.
- There is no reason to believe direct shipment by out-of-state sellers would cause more access by minors than direct shipment by in-state sellers.
- Out-of-state wine sellers have a history of complying with tax reporting and payment procedures associated with distribution through three tiers.
- The state’s objectives related to orderly markets, public health and safety and accountability can be achieved with ordinary licensing requirements and modern means of transmitting information, without discrimination based on licensee location.
- The TTB can revoke the out-of-state wine seller’s federal basic permit for violation of the state’s laws, resulting in inability to sell in any other state.
- The state does not demonstrate that, notwithstanding the above factors, its legitimate objectives can be achieved only by discriminating against interstate commerce.
Then:
Law 1 and Law 2 cannot constitutionally coexist. The state has to change one of them, to treat in-state and out-of-state sellers on evenhanded terms.
Different observers will put different lists of “if-clauses” in the holding, depending on what facts they conclude were essential. If I were arguing the pro-commerce case, I’d like to take items 4 through 8 out of the holding, demoting them to “makeweight” statements that support the outcome but weren’t essential to it. The states and their allies would, of course, like to expand the list.
The differences are important, because parties wanting a pro-regulation response in a Commerce Clause case will have to find an essential if-clause unsatisfied. There are two traditional routes to that. Pointing out factual distinctions that prevent checking off a necessary condition is known as “distinguishing” a case. Expanding the list of if-clauses to embrace so many facts that the decision would be repeated only in a precisely identical case is called “limiting the case to its facts,” a step just short of overruling. Post-Granholm litigation involving industry members other than wineries or licensed beverages other than wine is going to be all about making and parrying attempts to distinguish the Granholm decision or limit it to its facts.
One blogger on the Illinois issue described fanciful attempts to distinguish famous civil and criminal rights cases on irrelevant fact differences (school segregation of Hispanics versus African-Americans, etc.), arguing that it would be equally silly to distinguish Granholm on the basis of retailer versus winery. Rights cases like Brown and Miranda, however, contain no suggestion that they turn on such peripheral differences. By contrast, Granholm makes explicit reference to features of wineries, established in the record of lower court proceedings, that support the majority decision.
Three glaring differences between the two producer cases decided in Granholm and the impending retailer cases make the outcome of the latter problematic. First, wineries have a track record of filing shipment reports, excise tax returns, and other compliance documents in multiple states, without creating collection problems. Second, a federal layer of winery regulation means that punishment for violations can be nationwide loss of access to markets, not merely loss of the state whose laws were violated, by action against the basic permit. Retailers do not hold federal basic permits. Third, it seems likely the states will have some factual ammunition to bolster the argument that interstate retailing will present them with sellers that are both much more numerous and less demonstrably law-abiding than wineries.
In Granholm the states relied heavily on a free pass to discriminate when the goods are liquor, with a very sketchy presentation on the need for of discriminatory treatment to achieve regulatory ends. Now that everyone knows location discrimination will have to be justified by demonstrated necessity, the states may make a better factual record. Justification is not easy, but it is certainly not impossible. The Granholm court noted, as an example, Maine’s right to discriminate directly against out-of-state game fish to protect its piscine population against exotic species. The various interests advanced by the states in Granholm were not dismissed as spurious, only as not demonstrably unprotectible by nondiscriminatory means.
So where does that leave non-Illinois retailers wishing to ship to Illinois residents?
There is plenty of comfort for the pro-trade retailer position among the Granholm dicta, but to win a lawsuit simply by citing Granholm, the retailers will have to meet the conditions of the if-clauses the courts see as part of its holding. Failing that, they will have to persuade the courts not merely to apply Granholm, but to extend the holding beyond its facts. In that endeavor, they would be aided by dicta in Granholm, which, though not binding, might encourage judges to take a more expansive view. In particular, the statement that citizens have a right of access to the markets of other states on equal terms contains an echo of lofty principle.
There is no ordained outcome. The next round will depend on how well the parties play the litigation game and the predilections of human beings who decide cases.
Tea Leaves & One Fact
March 18th, 2007
Some historians say the origin of foretelling the future from tea leaves is an ancient Greek practice of reading wine sediment patterns in the drinking vessels.
Wine-related or not, the lawyer’s pastime of seeking clues to future judicial decisions from what judges say during oral argument is about equally reliable. Nonetheless, it’s difficult to resist a comment or two, following the hearing of the Costco appeal in the Ninth Circuit.
First, the hard news: The Ninth Circuit Court of Appeals granted a stay of the trial court’s judgment that significant chunks of Washington liquor law are invalid, pending rendition of the appellate ruling. Because the case has already been argued and has priority status, the Ninth Circuit stay will not keep those rulings in limbo very long, although a further appeal to the Supreme Court could extend it.
The background: The appellate issues in Costco are based on antitrust law, not directly on the Commerce Clause. Thus, the questions raised will be resolved in the light of Sherman Act cases, not Granholm (except as to what that case may have to say about 21st Amendment defenses generally). Of those questions, the most important is to what extent price-affecting rules that would be clearly illegal under the Sherman Act if adopted by collusion among private parties are also Sherman Act violations when imposed on the private parties by state law, with no evidence of collusion. That question divides into three categories of conduct, one in which the state makes and enforces a price rule but leaves it to the private parties (in this case, wholesalers) to say what a price that will be held for a specified time is to be (e.g., price posting), another in which the rules simply eliminate a form of competition (such as quantity discounts), without inviting the private parties to set a specific price, but facilitate anticompetitive conduct in the first category, and a third, in which the rule is just a rule, and any anticompetitive result from obeying it is unrelated to category one. The trial judge found price posting, quantity discounts, uniform pricing to all retailers, prohibition of charging separately for goods and delivery, and prohibition of taking delivery at retailer warehouses for sub-distribution to individual stores all illegal, both as a group (readily understandable) and individually (a somewhat avant-garde view); she put the prohibition on retailers selling to retailers in the third category and did not rule that part of the law invalid.
Now the speculation. Although the Washington price posting law had recently been changed in an effort to reduce its antitrust vulnerability, the judges seemed reluctant to accept it as significantly different from the Oregon law previously struck down by the same court (though not the same judges) and appeared to accept the reasoning of a subsequent case on Maryland price posting, relied on by the Costco trial judge. The “post-and-hold” part of Washington’s price posting law still looks dead. The same statutory scheme also forbids quantity discounts and requires that the same delivery-included price be charged to all retailers, but the judges appeared receptive to the possibility that without post-and-hold, those restrictions might be OK –in effect, move from category two to category three. On the other hand, they could defer to the trial judge’s implicit determination that the legislature’s integrating them into the price posting system meant they were intended to be part of it, and therefore stand or fall with post-and-hold. Jump ball; my guess is they will affirm the trial court, but may provide some guidance to the legislature on what parts of the law could be reenacted. No perceptible clues appeared on central warehousing, which is the most creative part of the trial court judgment. Net impression: The judges aren’t convinced the Sherman Act condemns non-price rules that aren’t clearly ancillary to price rules, might reverse on central warehousing, and almost certainly won’t reverse on retailer-to-retailer sales. On the 21st Amendment, this panel seems as puzzled as nearly every other court before which a state has claimed the defense as to what it would look like if proven. Prediction: They won’t declare the 21st Amendment snipe hunt over, but won’t report seeing a snipe, either. More significantly, they appeared to doubt it would add anything to the existing immunity defense that applies to state action generally, not just liquor. That defense applies both to states acting unilaterally in their sovereign capacities and to hybrid systems like price posting, in which states and individuals play roles, but in the latter case requires a degree of state supervision the trial court found lacking. The appellate panel did not seem inclined to question her finding on that point or to accept the state’s contention that Costco had the burden of proving inadequate supervision. Thus, the big imponderable remains not whether there is immunity for antitrust violations, but how much of Washington law is an antitrust violation in the first place.
News from Kentucky
February 7th, 2007
The headline said, “State drops out of wine suit: Small operators can ship directly,” but the reported change in direct shipment rights occurred in December of last year. What’s new is that the state has abandoned its appeal, leaving the wholesaler trade association to continue alone in attempting to persuade the Court of Appeals to reverse the pro-commerce part of the Huber/Cherry Hill ruling. (The ruling is not entirely favorable; see the current revision of Wine Distribution Notes for details.) The practical effect is that whatever chance the wholesalers may have had to get a stay from the Court of Appeals, to render the lower court decision ineffective during the appeal, is vastly reduced by the acquiescence of the state in the December judgment.
Results from Federal District Court in Kentucky
December 27th, 2006
It was pretty good, though it could have been better.
Yesterday, Judge Charles R. Simpson III reaffirmed his analysis of last August in the Cherry Hill case, finding that on-site only requirements in the direct shipment law effective on January 1 are unenforceable because they unduly burden interstate commerce relative to in-state direct shipments. The ruling, which has direct effect only in Kentucky, deprives anti-commerce elements of a frequently employed rear guard tactic against Granholm –the introduction of illusory equality by requiring both in-state and out-of-state wineries to sell only from orders placed by the buyer in person at the winery site.
Other aspects of the new law remain in place, including the right of out-of-state wineries to hold “small farm winery” licenses. The winery and consumer plaintiffs had also challenged two restrictions on small farm winery licensees, (1) that the license is available only to wineries producing no more than 50,000 gallons annually [~21,000 cases], and (2) that wineries may ship no more than two cases in a single order. While there is no doubt that many out-of-state wineries and no Kentucky wineries are affected by the volume cap, or that small order requirements are more onerous for longer distance deliveries, the court decided both restrictions were constitutionally permissible because the inequities arose from “mere geographic happenstance.” Where one draws the line between geographic happenstance and an impermissibly protectionist system remains to be decided another day. (The same opinion also upholds a peculiar part of the new law that creates state funding for zero-markup distribution of small farm wines by distributors, if any, who choose to participate, on the grounds that it will be available to all farm wineries, wherever located.)
The pro-commerce part of the opinion rests on the court’s finding “that each winery’s products are distinctive,” a principle of potentially far-reaching significance. If wholesalers and their governmental allies cannot impose on-site requirements, they are left with either accepting direct shipment or achieving the politically challenging objective of cutting it off for their own state’s wineries. As Judge Simpson put it,
“The principal problem faced by the defendants herein is that the legislature chose to permit direct shipment of alcohol. The choice to do so has thus taken us down the current road.”
Where the current road leads will be the subject of appeals in the 6th Circuit. The state’s and wholesalers’ appeal from the August ruling has been parked in the Court of Appeals, pending today’s judgment. Their appeal from both will doubtless now go forward. At this point, it is unknown whether the plaintiffs will cross-appeal on the volume cap and maximum order quantity issues.
Update: An unanswered practical question is how the two-case limit will be applied in the absence of an on-site requirement. Unless the Court of Appeals stays it, the December 26th order simply snips the in-person ordering requirement out of the statute. It makes no change in the two parts of the statute that provide, “The amount of wine shipped is limited to two (2) cases per customer per visit.” Even if the state must substitute “order” for “visit” in practice, the opinion seems to leave room for banning cost-saving measures like consolidating orders for shipment.
Terroir II: Another Word Soon from the Court that Decided All Wines Aren’t Alike
December 22nd, 2006
A new ruling is expected before the end of the year in the Granholm-based lawsuit that challenges the states’ and wholesalers’ “on-site only” strategy for resisting direct shipment. That line of defense argues it’s equal treatment to restrict all wineries, near and far, to the same limitation of in-person orders (which seems true in the same sense that a stew is equal parts horse and rabbit if made from one rabbit and one horse.)
On August 22, 2006, in the case then known as Huber Winery v. Wilcher but subsequently renamed Cherry Hill Vineyards, LLC v. Hudgins, a federal district court in Kentucky enjoined the state from prohibiting direct shipment to Kentucky consumers by out-of-state wineries of a certain maximum size that are properly licensed in their own states. See the initial report of the case here and further analysis here for perspective on its potential long-range importance.
The district court judge adopted a far-reaching analysis in rejecting the state’s argument that it could eliminate discrimination by applying the same on-site-only rule to all wineries, noting the real-world discrimination against a much larger number of wineries in states far from Kentucky than in neighboring states and the unique nature of wine, which supports a right in consumers to purchase from distant producers. His August order removed the instate location and fruit production requirements from licensing a “farm winery,” which is the category of producer entitled to retail to Kentucky consumers, but did not remove the requirement that licensees be located on a “farm with a producing vineyard” or the 25,000-gallon annual production cap. The order also enjoins application of the criminal penalty statute against out-of-state wineries that ship to consumers, if they qualify as small farm wineries.
The motion for judgment on the pleadings that produced the August opinion and order did not require the court to rule on the constitutionality of enacted Senate Bill 82, which is now the subject of further summary judgment motions. If not blocked by the court, the bill will be effective on January 1, 2007, purporting to reinstate the on-site requirement and raise the production cap to 50,000 gallons.
The rationale of the August 2006 opinion would invalidate the new law’s on-site limitation, but the ruling of current motions could be differently reasoned after the extensive briefing that has taken place. If the judge rules consistently with the previous order and is sustained on appeal, the case will represent a significant advance for freer interstate trade by banning the level-down prohibitionist strategy of a uniform on-site only rule.
In a December 20, 2006 ruling, the court granted the intervening wholesaler trade association until December 22, 2006 to file its reply brief to the plaintiff winery’s response to the wholesalers’ motion for summary judgment, rather than January 2, 2007, as the intervenor had requested, and an attorney for the plaintiff has reported that the judge intends to rule by December 31st. The December 20th ruling also disposed of various procedural rulings. Another substantive motion in the district court, to stay or suspend the August injunction, is also pending and will likely be decided (or dismissed as moot) in the year-end ruling, but stays in the appellate court remain a possibility.
Additional information regarding Pennsylvania’s Limited Winery Permit
December 20th, 2006
Important caveat on Pennsylvania in particular and “Notes on Wine Distribution” in General. The recent development posted on 12/14 regarding direct shipment to Pennsylvania residents in that the state, is that the Liquor Control Board, which has known since November 2005 that it lost the Cutner case and therefore may not prohibit direct shipment from outside the state, as least so long as Pennsylvania wineries are free of the requirement to ship through state stores, has stated that direct shipment from out-of-state is permissible for holders of the “limited winery permit.” That statement, which is expressly “non-binding”, does not include procedural guidance on obtaining the license, although the Cutner injunction would prevent imposition of procedures or delays rendering it practically unavailable.
The Wine Institute continues to advise wineries not to ship directly to Pennsylvania consumers, and neither of the major carriers has added the state to its interstate shipment list. The Notes for Pennsylvania point out both that there are unanswered procedural questions and that carriers are making only in-state deliveries. Reportedly, trade associations have been trying for some time to obtain information from Pennsylvania on how to make a lawful shipment under Cutner. The absence of guidance is hardly surprising, as the state has no obligation to provide it to anyone other than its own officials, the legal personnel who affirm that the license is required are not responsible for nuts-and-bolts administrative matters, and the people who are doubtless hope the legislature will make the issue go away in the next session. All releases of “Notes on Wine Distribution” in their opening paragraph refer the reader to other sources for guidance on what is presently practicable, including the Wine Institute site
Costco appeal on fast track
December 2nd, 2006
The case is moving along very rapidly, the Ninth Circuit Court of Appeals having taken the initiative in a November 30, 2006 order by designating the appeal as expedited and setting a very prompt date for argument (March 2007). The defendants’ motion before the Court of Appeals for an indefinite stay was denied, but can be renewed at oral argument. The timing adds uncertainty to the legislative process, as the session is scheduled to end in late April, and the cut-off date for introducing new laws will probably occur before there is a ruling on the extended stay. The stay now in place, which was entered by the trial court, expires on May 1, 2007, a schedule intended to prompt the legislature to act if it wants to revise the liquor laws in light of the Costco judgment, which unless stayed by the Court of Appeals would then become effective, rendering a sizeable chunk of Washington liquor regulation unenforceable.
Click here for a description of the effects of the judgment.
The second wave of the Granholm tsunami
November 7th, 2006
Two states now have court cases that illustrate the second wave of the Granholm tsunami. Explicit discrimination in favor of local wineries relative to out-of-state wineries is, in theory at least, already washed away. We now see another crest on the horizon, aspiring to wipe out de facto discrimination –where the formal text of the challenged regulatory scheme is non-discriminatory, but the result disadvantages interstate commerce. The first case of that category to render a dispositive ruling was Huber Winery v. Wilcher, noted in a previous post.
On October 10, 2006 a federal district court in Tennessee consolidated two cases before it. One is the 2006 S.L. Thomas Family Winery suit, in which both parties have moved for judgment on the pleadings, the plaintiff relying on Granholm, and the state asserting inherent 21st Amendment powers. The state contends that its laws deny direct shipment equally to all wineries, making the suit a de facto discrimination case based on differential inconvenience, similar in that respect to Huber, in which the court rejected the state’s proposed leveling down to on-site sales for all wineries because of the greater burden of visiting a California winery relative to a local winery.
The other case is Jelovsek v. Bredesen, a consumer action filed about a month after the Granholm decision in 2005. In June 2006, the court denied the defendants’ motion to dismiss in Jelovsek, which had argued that a consumer, as distinct from a winery licensee, does not suffer the kind of harm to an interest required for judicial relief. That argument (challenging a plaintiff’s to “standing to sue”) seems unlikely to succeed in a properly conducted Commerce Clause discrimination case, in view of the Granholm opinion’s reference to a consumer right of access to national markets. In any event, the defendants appear to concede that the standing issue has been taken out of the S.L. Thomas Family Winery case by consolidation with Jelovsek.
Terroir in Court
October 2nd, 2006
For the first time in post-Granholm legal maneuvering, a court has recognized the geographic distinctiveness of wine as a factor in applying the “level playing field” requirement.
Kentucky is one of about eight states that responded to Granholm by authorizing only on-site sales. The argument by the wholesalers and their allies in favor of that approach was that applying the on-site requirement to all wineries, local and out-of-state, constituted equal treatment for Commerce Clause purposes.
The Granholm opinion had, of course, rejected New York’s argument that all wineries were treated equally because out-of-state sellers were, like local producers, entitled to rent warehouses and maintain offices in the state. Thus, we already knew a state could not adopt facially equal provisions that introduce substantial impracticalities for interstate sellers not shared by local wineries. The question was whether an on-site-only law was such a provision.
In Huber Winery v. Wilcher, a federal court in Kentucky ruled that Granholm forbids laws that allow residents to purchase wine at wineries in all locations, noting that the effect is to foreclose a larger number of wineries in the major producing states, while imposing only a minor inconvenience on consumers who travel to wineries in Kentucky and adjacent states. The opinion is important because (1) it applies the “strict scrutiny” test, which is standard for overt discrimination, to the de facto discrimination before it, and (2) it recognizes that practical availability of wine from one growing region does not compensate for denying practical access to the greater variety of wines from others –i.e., that “interstate commerce” is not all the same. In reaching the latter conclusion, the court agreed with the plaintiffs that “each winery’s products are distinctive,” expressly declaring that the consumer rights to interstate commerce recognized in Granholm are not satisfied by Kentuckians’ ability to purchase Tennessee and Indiana wine on-site, to the exclusion by travel distance of the products of California, Oregon and Washington.
An Exchange on Central Warehousing
July 10th, 2006
A reader reports a recent email from the Oregon Liquor Control Commission (OLCC) that begins, “[Y]our statement that [central warehousing] is not directly prohibited by law is not correct. There are several statutes that provide the basis for this prohibition.” That assertion could as well have been directed to me, as in a previous posting I classified Oregon as a state where the prohibition is based on policy, not statutory necessity.
The basis of the prohibition matters, because the time and resources required for a change differ greatly. Regulatory policies can change at the stroke of a pen (although it usually requires lobbying and a bit of luck to move agencies off their initial positions). Statutory rules, especially those favoring wholesalers, are likely to change only after an expensive and protracted lawsuit.
Listed below are the OLCC emailer’s justifications for prohibiting central warehousing, coupled with commentary. The dialog is important, because we can expect similar arguments in other states, varying in detail because of textual differences among statutes.
1. OLCC: “A retail off-premises licensee may not conduct the activities relating to central wholesaling . . . because that license does not include the necessary privileges of importing, storing, transporting or distributing of alcoholic beverages; it only allows the sale of alcohol.” That interpretation is required because other license statutes specifically allow manufacturers and wholesalers to “store” wine. COMMENT: Interestingly, the agency recasts warehousing as “wholesaling,” though of course no sale takes place. The argument seems to be that because a central retail warehouse involves “transporting” or, in a broad sense, “distributing,” it represents a license privilege that exists only if explicitly stated. However, numerous things done by retail licensees without regulatory objection are not listed in the retail license statute, including storing wine and other items in the back room. (The retail license statute does not authorize use of computers, or even electricity, but agencies typically do not object to unauthorized conduct of that type because it does not resemble an activity for which a non-retail license exists.) The argument that everything not expressly permitted is forbidden derives from the early Repeal days, when governments began relaxing total Prohibition bit by bit. More recent cases may narrow the distinction between liquor and other goods, making more room for the counter-theory that governmental permission to engage in a business includes all the ancillary activities needed to conduct it efficiently, if they are not expressly prohibited. In any event, basing a prohibition on absence of express permission looks very much like a statutory interpretation that the agency could, without fear of violating the law, reverse if it chose to.
2. OLCC: “[T]he tied house provisions in ORS 471.394 preclude a retail licensee from owning or having an interest in a wholesale licensee.” COMMENT: No one is talking about a wholesale license. There is no tied house prohibition against a retailer’s having an interest in itself. The agency seems to say that moving inventory around among stores is so much like distributing that they would require the company doing it to have a wholesaling license, which of course could not be issued because of the tied house laws. Again, an interpretation that is not compelled by statute.
3. OLCC: “[A] retailer may not receive deliveries of wine or beer at a central warehouse because ORS 471.305 prohibits a wholesale malt beverage and wine licensee or a brewery licensee from delivering to other than a licensed premises.” COMMENT: A central warehouse is not necessarily unlicensed. A leading model for legal central warehousing is to combine the facility with a retail store, in effect just another retail outlet, but with a large “back room” from which goods can be moved to sister stores as need be.
4. OLCC: “ORS 471.404 provides that only a wholesale licensee may import alcoholic beverages into Oregon. Therefore a retailer’s warehouse may not import alcohol directly from out of state manufacturers.” COMMENT: Importation is not directly at issue in the central warehousing debate, because the state opposes internal distribution by retailers even if the importation is handled by a wholesale licensee. However, importation is on the table in Granholm-based litigation. Oregon wineries can sell directly to retail licensees. If the recently announced suit against the OLCC follows Costco’s application of Granholm, Oregon will be put to a choice of ending direct distribution by its own wineries or allowing retailers to import directly, because of a Commerce Clause prohibition against discriminating against interstate commerce relative to in-state sales by the same class of supplier. Whether or not that happens, central warehousing remains a separate issue, because large chain retailers and consumers would benefit from it even without direct distribution from out of state.
Costco-Granholm battle lines forming in Ohio
July 9th, 2006
Ohio wineries selling to state residents operate under a mandatory 33.3% markup system, whether distributing directly or through a wholesaler.
Under past law, wineries outside the state could not sell to Ohio consumers at all. To comply with Granholm, the state accepted a consent decree permitting consumers to purchase directly from out-of-state wineries, beginning in July 2005. The decree makes no provision for minimum markups, and shipments are authorized so long as the parties comply with pre-existing § 4307.08 of the statutes and § 4301:1-1-23 of the regulations and use the new form at www.liquorcontrol.ohio.gov/1516pdf.pdf.
Although the Commerce Clause may not prohibit Ohio’s treating interstate commerce more favorably than local commerce (the reverse of local protectionism condemned by Granholm), the current system could be interpreted as favoring in-state wineries by shielding them from local price competition. More immediately significant is the political problem arising from competitive pricing by out-of-state sellers, to the detriment of Ohio wholesalers and retailers.
Governor Taft’s response has been to propose legislation applying the mandatory markup to out-of-state sellers. A rival proposal would limit all direct selling to wineries producing no more than 150,000 gallons annually. State legislative hearings are likely this fall.
Both proposals raise significant legal issues. Minimum markups were invalidated under federal antitrust law in Costco, a result consistent with earlier cases in Kentucky and Kansas. Volume caps are problematic, with court challenges now in early stages. Invalidity under Granholm is possible, if a court finds the threshold, which is typically just above the largest home state winery, a de facto discrimination against interstate commerce relative to local commerce. Otherwise, the law will be evaluated under an “unreasonable burden” test, in which the regulatory interest of the state is weighed against disadvantage to out-of-state sellers, with a less certain outcome than in cases of outright protectionist discrimination.