Direct Shipment of Wine, The Dormant Commerce Clause and the Twenty-first Amendment: A Call for Legislative Reform
Many states prohibit out-of-state sellers of wine from shipping their product directly to consumers, but permit in-state wine producers to engage in such direct shipment. Recent lower federal court decisions have cast serious constitutional doubt upon the authority of a state to discriminate in this manner against wine producers and sellers from other states in favor of its own domestic wine industry. This issue appears headed for the Supreme Court of the United States in the near future. The outcome cannot be foreseen with certainty, but it is likely the Court will find this discrimination unconstitutional.
‘Twas not always so. Ratification of the Twenty-first Amendment to the U.S. Constitution in 1933 ended the era of nationwide Prohibition of the production, sale and transportation of alcoholic beverages in this country. It also prohibited the import of alcohol into any state in violation of that state's laws. For several decades after ratification, the U.S. Supreme Court afforded this provision a literal interpretation based upon its text and not subject to limitations imposed upon state authority by other constitutional provisions. Specifically, the Amendment was held to be “not limited by the commerce clause.” Under this view, although the Commerce Clause of the Constitution had long been construed as forbidding state discrimination against interstate commerce absent a compelling justification, this Amendment carved out a unique niche for alcohol: states had plenary authority to regulate imports of such products, regardless of the impact such regulation had on interstate commerce.
The era of literalism ended when the Court decided that it was “patently bizarre” to conclude that the Twenty-first Amendment had “repealed” the Commerce Clause; to say that the Amendment was “not limited” by the Commerce Clause would be to say that Congress had lost its authority to regulate interstate commerce in alcohol, at least to the extent that Congress lacked power to regulate such commerce in ways that were inconsistent with state regulation. Instead, the Court adopted a new position that the two constitutional provisions should be read in harmony with each other, not in opposition to each other. In order to reconcile the commands of the Twenty-first Amendment and the Commerce Clause, the Court fashioned a rule: state laws that discriminate against interstate commerce in alcohol are unconstitutional unless they are closely related to one of the powers reserved to the states by the Twenty-first Amendment.
As this legal evolution was occurring, forces of economic change were sweeping the country. After Prohibition ended in 1933, individual states enacted various forms of regulation of commerce in alcohol. The most common form of regulation is the “three-tiered” system, in which producers of alcohol cannot sell their products directly to consumers. They must sell their products to licensed wholesalers, which in turn must sell to licensed retailers, which sell to the consumer. In the early years after Prohibition ended, there was explosive growth in the number of wholesalers, resulting in vigorous competition at the wholesale tier. In recent decades, however, there has been massive consolidation in this industry and market power has become concentrated in relatively few firms. By contrast, the number of small, often family-owned wineries has skyrocketed. Individually, the production of these small wineries is small. The large wholesalers tend to lack interest in marketing such wines because they need large-volume sales in order to remain competitive. Some states enacted legislation allowing wine producers within the state to ship their products directly to consumers, in order to encourage a domestic wine industry. Lacking a satisfactory market for their wines in the three-tier system, small wineries turned to direct sales, not only to consumers within their own states, but also to consumers in other states that lacked their own high-quality wine industries. Such sales were facilitated by yet another economic change: the growth in telecommunications, especially the Internet. Now a wine lover in one state could simply pick up the telephone or hop on the Internet and purchase wine produced in another state. The producer could ship the wine directly to the consumer via common carrier. Indeed, retailers in wine-producing states jumped on the bandwagon and also shipped wine directly to consumers in other states.
Vested interests in the three-tiered systems, especially wholesalers, sensed that such direct shipment posed a threat to their market power and demanded that states enforce their laws that prohibited importation of alcohol, including wine, other than through licensed wholesalers. The wine industry reacted to this pressure with litigation seeking to overturn the ban on direct shipment to consumers in those states that prohibit direct shipment of wine by out-of-state producers but permit in-state wine producers to do so. As of this writing, lower federal courts, including five appellate circuits, have rendered conflicting rulings on the validity of such laws. Since there is already a conflict among the circuit courts of appeal on an important constitutional issue and there is no end in sight to this litigation, the direct shipment issue is a prime candidate for review by the Supreme Court.
The thesis of this Article is that states which presently prohibit direct shipment of wine to consumers from out-of-state sources but permit such direct shipment from in-state sources should now give serious consideration to repealing their bans on direct shipment of wine from out-of-state sources. The resolution of this issue by the Supreme Court cannot be predicted with certainty, but the Court's current Commerce Clause and Twenty-first Amendment jurisprudence weighs heavily in favor of the argument that differential treatment of direct shipments of wine from out-of-state and in-state sources violates the Commerce Clause and is not closely related to powers reserved to the States by the Twenty-first Amendment. Rather than facing the likely prospect of court-imposed remedies, state legislatures should craft reforms best suited to individual states' needs, such as tying repeal of the ban on direct shipment of wine from out-of-state sources to collection of state taxes on the transaction.
Part II of this Article describes the nineteenth century struggle between the Prohibition movement and the alcoholic beverage industry that fostered a complex history of court decisions limiting state authority in this area under the aegis of the Commerce Clause, and congressional attempts to abrogate these decisions. This struggle culminated in the adoption of the Eighteenth Amendment, which established a nationwide regime of Prohibition. Part III discusses the reasons why Prohibition was a failure, thus prompting adoption of the Twenty-first Amendment, and also traces the evolution of the Court's interpretation of that Amendment to the current approach, which seeks to accommodate its principles to the principles of the Commerce Clause. Part IV provides an account of the Court's general treatment of state laws that afford less favorable treatment to interstate commerce than to intrastate commerce. Part V canvasses the current litigation challenging direct shipment laws in various states, and the judicial decisions in those cases. Part VI provides an analysis of the arguments on both sides of the issue and contends that the Supreme Court is likely to hold such laws unconstitutional. The Article concludes that states with such laws should now begin the process of repealing their laws banning direct shipment of wine from out-of-state sources and replacing them with regulatory schemes that permit direct shipment but assure that applicable taxes are paid and other valid state interests are protected.
Lloyd C. Anderson, Direct Shipment of Wine, The Dormant Commerce Clause and the Twenty-first Amendment: A Call for Legislative Reform, 37 Akron Law Review 1 (2004).