On May 16, 2005, the United States Supreme Court struck down state laws in Michigan and New York, barring out of state wineries from selling directly to instate consumers, while allowing such sales by instate wineries. The laws were an unconstitutional discrimination against interstate commerce, in violation of the Commerce Clause of the Constitution. Granholm v. Heald, No. 03-1116 (May 16, 2005).1
Delivering the Court’s opinion for a five-member majority,2 Justice Kennedy rejected the states’ contention that the laws in issue were within the states’ authority under the Twenty-first Amendment,3 to regulate the sale of liquor within the states’ borders.
While the Court acknowledged that states have broad power to regulate the importation and distribution of liquor, the Twenty-first Amendment, which repealed the Eighteenth Amendment,4 protects only non-discriminatory state regulation. State laws that are offensive to other provisions of the United States Constitution, including the Commerce Clause, are invalid, and are not saved by the Twenty-first Amendment.
In espousing a consumer welfare analysis, and in determining that the discriminatory state laws were not the least restrictive alternative to regulate interstate wine sale to minors, or to facilitate tax collection, the Court cited with approval, a Federal Trade Commission Staff Report “Possible Anticompetitive Barriers to E-Commerce: Wine” (July 2003) (“FTC Report”).
The FTC Report noted that the Internet is transforming the nation’s economy, with local markets becoming national and international, as consumers have greatly enhanced search opportunities for demanded goods and services. Although the Internet provides consumers with important search economies, the FTC Staff acknowledges that online commerce may raise regulatory concerns.
However, the Michigan and New York regulatory laws relating to the sale and importation of wine through a three-tier system, requiring separate licenses for producers, wholesalers and retailers, constitute a significant barrier to entry and expansion by small wineries. In many cases, the FTC Report acknowledges, direct shipment by small wineries to other states is essential to the small wineries engaging in interstate commerce at all.
State law bans on interstate direct shipping represent the single largest regulatory barrier to expanded E-Commerce in wine. (FTC Report at 3). In addition the states that permit interstate direct shipping generally report few or no problems with shipment to minors. (FTC Report at 26,38). Most states have reported few, if any, problems with tax collection. The FTC Report argues, and the Supreme Court adopts, a conclusion that the three-tier licensing system regulating wine shipment in the states of Michigan and New York constitute explicit discrimination, and a burden upon interstate commerce. Accordingly, the laws are unconstitutional. As the state law requirements are not the least restrictive alternatives to promote legitimate state concerns over the internet purchase of liquor by minors, or the avoidance of tax by direct shipping wine sellers, the discriminatory provisions are not saved.
State law regulations that discriminate against interstate commerce will be upheld only when there is concrete evidence that non-discriminatory alternatives are inadequate. In Granholm, the states failed to show that their discriminatory regulatory scheme was necessary to guard against internet sales of wine to minors, or to prevent tax avoidance. The Court relied heavily on the consumer welfare analysis of the FTC Report.
Justice Thomas wrote a dissenting opinion, joined by Chief Justice Rehnquist, and Justices Stevens and O’Connor. The dissent argues that the Webb-Kenyon Act5 trumps the majority opinion’s analysis, as the Act gave states broad authority to “regulate all [liquor] importation, whether or not discriminatory.” The dissenting opinion would have upheld the Michigan and New York direct-shipment laws, as congressionally exempt from a non-discriminatory application of the Commerce Clause. While the dissent argued that its reading of Webb-Kenyon makes it unnecessary to interpret the Twenty-first Amendment itself, it argues that the state laws in issue would nevertheless be lawful under the plain meaning of Section 2 of the Twenty-first Amendment. The dissent points to Court precedent from the period immediately following the enactment of the Twenty-first Amendment in 1933, with citations to the approval of contemporaneous discriminatory state regulation.
In a separate dissent, Justice Stevens, joined by Justice O’Connor, suggests that while the majority opinion:
“may represent sound economic policy, and may be consistent with the policy choices of the contemporaries of Adam Smith who drafted our original Constitution, it’s not, however consistent with the policy choices made by those who amended our constitution in 1919 and 1933.”6
The majority opinion recognized that direct wine sales by small wineries constitute a significant growth industry, and that discriminatory protectionism by state legislation, including the three-tier distribution systems in place in Michigan and Texas, would make it uneconomic for small wineries to engage in direct selling at all. The effects on interstate wine sales would be not insignificant. Thus, the majority casts a strong vote in favor of consumer welfare enhancement, and unimpeded interstate commerce, where legitimate state regulatory goals are not the least alternative means to accomplish the state’s legitimate regulatory goals.7
- 544 U.S. _____ (2005).
- Joining in the Court’s opinion were Justices Scalia, Souter, Ginsberg, and Breyer.
- The Twenty-First Amendment, 47 Stat. 1625, was ratified on December 5, 1933. It provides:
- Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed.
Section 2. 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.
Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.
- Section 1. After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.
Section 2. The Congress and the several States shall have concurrent power to enforce this article by appropriate legislation.
Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.
- “The shipment or transportation, in any manner or by any means whatsoever, of any spiritous, vinous, malted, fermented, or other intoxicating liquor of any kind from one State, Territory, or District of the United States, or place noncontiguous to but subject to the jurisdiction thereof, into any other State, Territory, or District of the United States, or place noncontiguous to but subject to the jurisdiction thereof, or from any foreign country into any State, Territory, or District of the United States, or place noncontiguous to but subject to the jurisdiction thereof, which said spiritous, vinous, malted, fermented, or other intoxicating liquor is intended, by any person interested therein, to be received, possessed, sold, or in any manner used, either in the original package or otherwise, in violation of any law of such State, Territory, or District of the United States, or place noncontiguous to but subject to the jurisdiction thereof, is prohibited.” 27 U.S.C. §122.