MEDIA

September 1, 2005

Legal Developments: Out-Of-State Wines Win

Published in: Federal Bar Council News | volume XIII, No. 1

In a long-awaited opinion delivered in May, the Supreme Court struck down statutes in Michigan and New York prohibiting or restricting out-of-state shipments of wine for individual in-state use.

Following that decision, in July the New York State Legislature passed a law allowing such shipments with some registration and reporting requirements. Vintners in California are pleased that the New York markets will be open to them, and New York wine consumers can hardly wait for the New York law to become effective.

Heald And Swendenburg

The Supreme Court, in Granhold v. Heald and Swendenburg v. Kelly, declared that the Michigan and New York statues effectively barring shipments of wine from out-of-state wineries explicitly discriminated against interstate commerce in violation of the Commerce Clause, and that the discrimination was neither authorized nor permitted by the Twenty First Amendment. Justice Kennedy delivered the opinion of the Court, joined by Justices Scalia, Souter, Ginsburg and Breyer. Justice Stevens filed a dissenting opinion, joined by Justice O'Connor, and Justice Thomas filed a dissenting opinion, joined by Chief Justice Rehnquist and Justices Stevens and O'Connor.

In the Court's opinion, Justice Kennedy first described the plight of the small wineries like plaintiffs from California and Virginia, who could not convince wholesalers to carry their products, and therefore relied on direct shipping to reach new markets. Twenty six states allow some direct shipping, but the states that prohibit or severely restrict direct shipments deprive consumers from access to the direct shipping market and prevent wineries from reaching those markets.

The Michigan direct-shipment law arose from Michigan's three-tier alcoholic beverage distribution system. Wine producers, in-state or out-of-state, could sell only to licensed in-state wholesalers, who then only could sell to in-state retailers. Licensed retailers then sold to consumers at retail locations and through home delivery. Although under Michigan law wine producers must distribute their wine through wholesalers, there was an exception for Michigan's in-state wineries, which could obtain "wine maker" licenses for $25 allowing them to ship directly to in-state consumers. In contrast, out-of-state wineries could apply for a $300 "outside seller of wine" license, which only allowed them to sell to in-state wholesalers. Plaintiffs were Michigan residents, joined by a San Luis Obispo, California winery. Defendants were the State of Michigan with the Michigan Beer & Wine Wholesalers as intervenors. The Sixth Circuit found that Michigan's law violated the Commerce Clause.

The New York licensing scheme also made exceptions to its three-tier system for in-state wineries. The statute allowed local wineries to make direct sales to consumers in New York, but prevented out-of-state wineries from doing so. Wineries that produced wine from 70 percent or more New York grapes could apply for a license allowing direct shipment to in-state consumers. An out-of-state winery could ship directly to New York consumers only if it became a licensed New York winery, by establishing a "branch factory, office or storeroom within the state of New York." Plaintiffs were Virginia and California wineries joined by three of their New York customers. Defendants were officials of New York's Alcoholic Beverage Control Law, with New York liquor wholesalers and representatives of New York liquor retailers as intervenors. Although District Judge Harold Baer granted summary judgment to the plaintiffs, the Second Circuit reversed.

Justice Kennedy discussed the basic principle of the Commerce Clause that if state laws mandate differential treatment for in-state and out-of-state economic interests in favor of in-state interests, they violated the Commerce Clause. Thus, laws like the ones here "deprive citizens of their right to have access to the markets of other States on equal terms." The Michigan law, Justice Kennedy observed, placed a complete ban on direct shipment, which increased the cost of the wines of out-of-state wineries. This cost differential, and the difficulty that small wineries had in obtaining wholesalers, operated to bar small wineries from the Michigan market. The New York regulatory scheme was more complex, but led to the same result by requiring out-of-state wineries to stablish a distribution operation in New York to obtain the privilege of direct shipment. No winery had established such an operation. As a result of this scheme, New York granted preferential access to the state's consumers to instate wineries and increased the costs of out-of-state wineries, in addition there were other obstacles which limited the type of license out-of-state wineries could obtain.

Justice Kennedy noted that prior to the passage of the Twenty First Amendment, none of the court decisions or statutes allowed states to place an impermissible burden on interstate commerce by discriminating against outof-state liquor producers. Thus, prior to the Eighteenth Amendment ban of all alcohol sales, states were prohibited from (1) barring sales of out-of-state liquor and (2) requiring licenses for liquor importers, but not in-state producers. States could prohibit the sale of all alcoholic beverages or the mail order sale of alcoholic beverages, as long as they did not discriminate between instate and out-of-state sales. Justice Kennedy described the purpose of the Twenty First Amendment "to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time."

Following the passage of the Twenty First Amendment, the Supreme Court reaffirmed the broad powers of the States to regulate the importation and sale of alcoholic beverages and in State Board of Equalization of California v. Young's Market Co., 299 U.S. 59, 62 (1936), stated that discrimination was allowed under the Twenty First Amendment. However, as Justice Kennedy noted, recent cases have confirmed that the Twenty First Amendment does not allow States to give a discriminatory preference to their own producers by holding: (1) that state laws that violate other provisions of the Constitution are not saved by the Twenty First Amendment; (2) that the Twenty First Amendment does not abrogate Congress' Commerce Clause powers with regard to liquor; and (3) state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause. Thus, while states may exercise complete control over whether to permit importation or sale of liquor and may structure the liquor distribution system by banning the sale and consummation of alcohol altogether or require sales through state-run outlets or funnel sales through a three-tier system, they may not discriminate against out-of-state producers in doing so.

Justice Kennedy rejected Michigan and New York's major justifications for restricting direct shipments from out-ofstate wineries: Keeping alcohol out of the hands of minors and facilitating tax collection. Justice Kennedy said that the 26 states that allow direct shipment reported no problems with minors because: (1) minors are more likely to consume beer, wine coolers and hard liquor, than wine; (2) minors can buy liquor more directly than ordering from out-of-state wineries; and (3) direct shipment does not provide the instant gratification minors want. Besides, Justice Kennedy noted, in Michigan and New York minors could order wine from in-state producers if they were so inclined. Finally, the Model Direct Shipping Bill developed by the National Conference of State Legislatures requires an adult signature on wine and liquor deliveries.

Concerning tax-collection, Justice Kennedy said that the Model Direct Shipping Bill provides for permitting with tax reporting and submission requirements as a condition for direct shipping.

Moreover, the United States Tax and Trade Bureau (formerly the ATF Bureau) has authority to revoke a violating winery's federal license if it violated state law.

The opinion concluded that states have broad power to regulate liquor under Section 2 of the Twenty First Amendment. This power, however, "does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms. Without demonstrating the need for discrimination, New York and Michigan have enacted regulations that disadvantage out-of-state wine producers. Under our Commerce Clause jurisprudence, these regulations cannot stand."

In his dissent, Justice Stevens discussed the historical context preceding and following the enactment of the Twenty First Amendment, and concluded that the States were intended to have plenary power to regulate the sale and importation of alcoholic beverages. Justice Thomas turned to the language of the Twenty First Amendment, concluding that it displaced the Commerce Clause as applied to regulation of liquor imports into a State.

New York Legislation

In response to Heald and Swendenburg, on July 12, 2005 the New York State Legislature passed a bill, effective 120 days after passage, allowing direct interstate wine shipments. Section 79-c of the Alcoholic Beverage Control Law provides for direct interstate wine shipments by the holder of a license of any other state to sell at retail or manufacture wine. The wine maker must obtain an out-of-state shipper's license to sell to New York residents who are at least twenty-one years old for personal use. To obtain an out-of-state shipper's license, the prospective shipper must submit a copy of its current license issued by another state and pay $125. The out-of-state shipper must comply with annual reporting requirements, including the name of the purchaser, along with his or her mailing address; the name, price and quantity of the wine purchased; the purchase date; the name and address of the transporter; and the signature of the person filing the report. Other responsibilities of the licensee include: (a) labeling the shipping container with the words: "CONTAINS WINE SIGNATURE OF A PERSON AGE 21 OR OLDER REQUIRED FOR DELIVERY"; (b) requiring the common carrier to obtain a signature from a person over 21; (c) reporting the total amount of wine shipped on an annual basis; (d) filing tax returns and paying appropriate taxes to New York; (e) maintaining all records for at least three years; (f) consenting to New York jurisdiction; (g) obtaining a statement from the purchasing resident that he or she has not exceeded the limitation on the quantity of wine that may be shipped to any New York resident (36 cases a year from any winery); and (h) obtaining a certificate of authority under the tax law. Wine deliveries are subject to New York State sales and excise taxes.

Bennette Deacy Kramer is a partner at Schlam Stone & Dolan.

[This article is reprinted with permission from the September/October/November 2005 issue of the Federal Bar Council News. Copyright © 2005 Federal Bar Council. All rights reserved. Further duplication without permission is prohibited.]