Interstate Commerce

---

Supreme Court Overturns Ban on Interstate Wine Sales
Jeffrey S. Edelstein, Manatt, Phelps & Phillips, LLP, New York
E-mail: jedelstein@manatt.com

Introduction
The Supreme Court Decision—Granholm v Heald
Laws Outside Michigan and New York
The Majority Opinion
The Dissents
The Ramifications of the Decision


Introduction
In a decision being hailed by wine lovers, the Supreme Court has overturned longstanding state laws banning interstate wine sales. The decision has far reaching ramifications for other types of products.

The Supreme Court Decision — Granholm v Heald
In Granholm v Heald (Sup Ct, May 16, 2005, No-03-1116), the court invalidated, by a 5-to-4 vote, laws in New York and Michigan that gave preferential treatment to in-state wineries. Both states permitted in-state wineries to ship wine directly to consumers but restricted the ability of out-of-state wineries to do so. Michigan flatly prohibited direct shipments by out-of-state wineries, while New York permitted such shipments as long as the out-of-state wineries maintained a New York office and warehouse—a requirement that no out-of-state winery had met. The court found the New York requirement to be so financially burdensome that it amounted to a prohibition.

Laws Outside Michigan and New York
The decision throws into doubt laws in 22 other states prohibiting or restricting interstate wine sales. Some of those laws permit direct shipment by in-state wineries but restrict it for out-of-state wineries. Other states are “reciprocity” states, which permit direct sales only from wineries in states that permit out-of-state direct shipments. Other states prohibit all direct-to-consumer wine shipments. The court described “the current patchwork of laws” as “essentially the product of an ongoing, low-level trade war.”

The Majority Opinion
Justice Anthony Kennedy, who wrote the majority opinion, stated: “States have broad power to regulate liquor. 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 shipments of wine, it must do so on evenhanded terms.” Justice Kennedy’s opinion was joined by Justices Antonin Scalia, David H. Souter, Ruth Bader Ginsburg, and Stephen G. Breyer—an unusual coalition.

At issue was the 21st Amendment, which ended Prohibition in 1933 and granted states the authority to regulate alcohol sales. Nearly half the states subsequently passed laws requiring out-of-state wineries to sell their products through licensed in-state wholesalers, resulting in millions of dollars in state alcohol taxes. However, the Constitution’s Commerce Clause prohibits state laws that discriminate against out-of-state businesses. That led to the challenges to the Michigan and New York laws.

New York and Michigan defended their laws as necessary to prevent underage drinkers from buying wine without having to show proper proof of age, as well as to prevent tax evasion. The majority rejected these arguments, finding that the states “provide little concrete evidence for the sweeping assertion that they cannot police direct shipments by out-of-state wineries.” Justice Kennedy also said that the states’ concerns did not justify discrimination. “Minors are just as likely to order wine from in-state producers as from out-of-state ones.”

The Dissents
In a dissent, Justice Clarence Thomas argued that the decision unnecessarily strikes down long-established regulations aimed at protecting minors. The 21st Amendment grants the states clear authority to regulate alcohol as they see fit, he wrote. "The court does this nation no service by ignoring the textual commands of the Constitution and Acts of Congress," Justice Thomas stated. He was joined by Chief Justice William H. Rehnquist and Justices Sandra Day O'Connor and John Paul Stevens. 

Justice Stevens, who was joined by Justice O’Connor in his dissent, said that while the New York and Michigan laws “would be patently invalid under well-settled Commerce Clause principles if they regulated products other than wine, “our Constitution has placed commerce in alcoholic beverages in a special category” and exempted it from those principles.

The Ramifications of the Decision
The Supreme Court’s ruling gives a big boost to small wineries seeking to leverage the marketing potential of the Internet and mail. In recent years, the wine industry has boomed, but there also has been consolidation. Many smaller wineries struggle to make a profit, and say they can't compete with the big wineries unless they can sell directly to customers over the Internet or allow wine tourists to ship bottles home. Although the decision directly affects only wine sales, trade groups anticipate it will soon affect beer and other alcoholic beverages regulated through state-licensed wholesalers and retailers. The decision could also make it more difficult for states to restrict Internet sales of other regulated items, such as contact lenses and car insurance.

Back to top

Internet Law and Practice in California