Granholm v. Heald
The Supreme Court strikes down trade barriers against the direct sale of wine
In Granholm v. Heald (#03-1116, May 16, 2005), the Supreme Court struck down laws in Michigan and New York that barred out-of-state wineries from selling directly to consumers. The majority opinion written by Justice Kennedy viewed these laws as classic trade barriers that violated the Commerce Clause, exceeded state power under the 21st Amendment, and were not necessary to advance the states’ interests in preventing underage access and collecting revenue.
Most states regulate the sale of alcoholic beverages, including wine, through a three-tier distribution system. Separate licenses are required for producers, wholesalers, and retailers. The three-tier scheme is preserved by a complex set of overlapping state and federal regulations. No producer may sell and ship wine directly to a consumer. This prohibition on direct sales substantially limits consumer access to wine. There are about 3,000 wineries in the country, and only 150 have broad national wholesale distribution. Small wineries, especially new start-up businesses, cannot get wholesale distribution, but depend for their economic survival on direct shipping. Consumers who live in the 24 states that prohibit direct shipping simply cannot get much of the wine produced in the country, and must buy their wine locally.
In Michigan, wine from out-of-state producers can be distributed only through the State's three-tier system. Producers may sell only to licensed in-state wholesalers, who may sell only to in-state retailers, who resell the wine to consumers. However, wine produced by the approximately 40 in-state wineries may be sold directly to consumers without going through a wholesaler, and may be shipped to their homes. The Court held that this system discriminated against interstate commerce. Michigan allows in-state wineries to sell and ship wine directly to consumers, subject only to a licensing requirement. Out-of-state wineries, whether licensed or not, face a complete ban on direct sales. The differential treatment requires all out-of-state wine, but not all in-state wine, to pass through an in-state wholesaler and retailer before reaching consumers. These two extra layers of overhead increase the cost of out-of-state wines to Michigan consumers. The cost differential, and in some cases the inability to secure a wholesaler for small shipments, can effectively bar small wineries from the Michigan market.
New York's licensing scheme is somewhat different. It also channels most wine sales through the three-tier system, but it too makes exceptions for in-state wineries. As in Michigan, the result is to allow local wineries to make direct sales to consumers in New York on terms not available to out-of-state wineries. Wineries that produce wine only from New York grapes can apply for a license that allows direct shipment to in-state consumers. The New York law was unclear, but appeared to allow (at least on paper) an out-of-state winery to earn the right to sell and ship directly to consumers if it established a staffed branch office and storeroom within the state. Since the cost and regulatory burden would be prohibitive, the Court held that this was just an indirect way of subjecting out-of-state wineries to the three-tier system and granting in-state wineries access to the State's consumers on preferential terms. In any event, the Court noted that States cannot require an out-of-state firm to become a resident in order to compete on equal terms, citing Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 72 (1963).
The Court held in clear and powerful language that these schemes violated the Commerce Clause because they mandated differential treatment of in-state and out-of-state economic interests that benefitted the former and burdened the latter. The principle of free trade among states was “essential to the foundations of the Union.” States may not close its markets to nonresidents nor give competitive advantages to in-state businesses. Citizens have the right to have access to the markets of other States on equal terms. The Court brushed aside as “unproven” the States’ argument that banning direct shipments was necessary because of the risk of increased access by minors and tax evasion. The Court relied on a study by the FTC demonstrating such fears were unfounded.
The Court then addressed a Commerce Clause issue not before it the constitutionality of “reciprocity” laws. Some states allow direct shipping only from states that allow reciprocal direct shipping. The Court suggested that these laws, too, violated the Commerce Clause. The Commerce Clause does not permit states to negotiate with each other regarding favored or disfavored status for their own citizens nor join together into trade zones that exclude products from disfavored states.
The Court next turned to section 2 of the 21st Amendment. It extensively reviewed fifty years of legal and political history leading up to the repeal of Prohibition, and concluded that the aim of the Twenty-first Amendment was to allow States to create and maintain an effective and uniform system for controlling the distribution of liquor. It gave states power to require sellers of alcohol located outside the state to abide by the same rules as those within the state, but did not give state the authority to create nonuniform distribution rules that discriminated against nonresidents and favored in-state producers. The 21st Amendment cannot save a discriminatory law.
Justice Thomas wrote the main dissent, making two arguments: First, that the plain text of the 21st Amendment gave absolute power to states so that no interpretation was necessary; and second, that Congress had authorized discriminatory state laws when it passed the Webb-Kenyon Act, which has language substantially the same as the Amendment.
Justice Stevens wrote a short additional consent, which has an unusual element. He disagrees with the majority’s understanding of the history of the Amendment, and believes it was understood at the time as giving states absolute power over alcohol. He bases this on his own recollection (he was a young man at the time), rather than on the usual kinds of authority.
The Court’s 5-4 split was unusual, perhaps reflecting the fact that this case presented a constitutional controversy devoid of the usual partisan political overtones. The majority consisted of Justices Kennedy, Scalia, Souter, Breyer, and Ginsburg. The dissenters were Justices Thomas, Rehnquist, Stevens and O’Connor.
The opinion immediately affects only a few states whose laws explicitly discriminate concerning shipping, by allowing in-state but not out-of-state wineries to do so. However, the language of the opinion is broad and its implication is that all kinds of state laws regulating wine sales may violate the Commerce Clause if their practical effect is to burden interstate commerce and provide economic benefits to in-state wineries. If the lower courts apply the ruling in this way, then this will be a significant step in opening up the wine market throughout the United States. We might even be able to get some good wine here in Indiana some day.
The author, J. Alexander Tanford, J.D. Duke 1976, is a Professor of Law at Indiana University-Bloomington and was counsel of record for the Plaintiffs, Eleanor Heald, et al.
