How H.R. 5034 Can Save the Wine Industry

Posted by Tom Wark on Sep 20, 2010

In an age where goods are bought and sold in an instant, delivered overnight, and tracked with momentary precision, can many of the archaic regulations that overwhelm the state alcohol distribution systems and serve foremost to stifle consumer access to goods, really be considered “legitimate”.

The foundation of the arcane and archaic regulations that infect the alcohol industry can be traced back to the second section of the 21st Amendment to the U.S. Constitution:

“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.”

WHAT IS THE STATE POWER TO REGULATE ALCOHOL?
Ratified in 1933, more than 75 years ago in the year FM Radio was invented and Adolph Hitler was installed as Chancellor of Germany, the 21st Amendment gave rise to the single most complicated and lucrative system of government regulation the country has ever seen. The only aspect of the alcohol market that remains the same today is that there are buyers for alcohol and buyers that will both enjoy it and abuse it. Everything else has changed.

While the 21st Amendment gave the states the primary authority to regulate alcohol sales and distribution inside their borders, the scope of that authority has never been absolutely determined with any precision. What core state powers does the 21st Amendment authorize? Do those powers supersede Federal powers? When state and federal powers clash, what principles are used to harmonize the conflict? Did the framers of the 21st Amendment really mean to grant states the authority to regulate interstate commerce in alcohol?

These questions carry considerable importance today as society, industry and commerce have all changed radically since 1933. These changes, when set against the archaic provisions of the various state alcohol regulatory codes, have led to numerous lawsuits, political battles in every state and in Washington, DC, and so much uncertainty about the future of the alcohol beverage market as to stifle entrepreneurship and innovation.

TOWARD A MODERN UNDERSTANDING OF THE 21st AMENDMENT
A modern understanding of the states’ core powers to regulate alcohol under the 21st Amendment is necessary now, more than ever. It turns out that a vehicle currently working its way through Congress can, with a little amending, act to give clarity to the meaning of the 21st Amendment, better define the powers of the states to regulate alcohol, and to modernize the workings of the American alcohol beverage marketplace. That vehicle is H.R. 5034.

Although the extent of state powers under the 21st Amendment is a controversial subject, at least the following state powers are agreed by all to fall under the states’ jurisdiction under the 21st Amendment:

1. States may determine to be “wet” or “dry” in various degrees

2. States may legislate to effect temperance

3. States may collect various taxes on the sale of alcohol

4. States may act to assure an “orderly market” in alcohol.

The question that arises is if any of these commonly understood core powers also give the state the power to inhibit market access by licensed business or inhibit access to goods by consumers in states and localities where alcohol consumption is legal?

The legislative history of the adoption of the 21st Amendment suggest strongly that section two was not meant to grant states the ability to override Congress’ authority to regulate interest commerce. Rather, it appears most Senators and Representatives at the time understood section two of the 21st Amendment to give states that choose to remain “dry” a means of preventing any and all distribution of alcohol inside their borders.

The Supreme Court, in looking at this question, has generally determined that states may both inhibit market access by licensed businesses and inhibit access to goods by consumers as long as these inhibitions are not applied in a discriminatory way. The most recent and most famous of the Court’s rulings on this issue is Granholm v. Heald (2005) in which the court stated:

“Time and again this Court has held that, in all but the narrowest circumstances, state laws violate the Commerce Clause if they mandate differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. This rule is essential to the foundations of the Union.”

Here, in the most important Supreme Court decision on the powers of the states to regulate the sale of alcohol, we have a fundamental principle expounded by the court that should act as a guiding light for any fundamental and modern understanding of the states’ core powers to regulate alcohol under the 21st Amendment: Discrimination by the states in the regulation of commerce is antithetical and contrary to key principles of America’s founding principles.

At the founding of the United States there was good reason to insist that the various states should not and may not restrict commerce between the states. The Supreme Court itself, again in Granholm v. Heald, went on to explain why:

“This mandate reflects a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.”

In 2010, when there no longer exists any boundaries between consumers and markets based on proximity to goods, can it make any sense to retain alcohol regulations that inhibit consumer access to alcohol based on state borders?

Can it make sense for states to promote a balkanization of the American marketplace through regulations that inhibit business-to-business and business-to-consumer transactions for the sake regulatory convenience?

As long as states can efficiently collect taxes on alcohol, track the movement of alcohol within their borders and monitor instances of intemperate use of alcohol inside their borders, is there any reason to plague relations between buyers and sellers of alcohol?

Isn’t it possible in 2010, two hundred and twenty-three years after the Founders insisted we refrain from economic balkanization and seventy-seven years after the 21st Amendment repealed Prohibition, that we can devise an set of modern principles for an orderly market in alcohol that encourage entrepreneurship and consumer access, while still providing states with the ability to collect taxes and encourage temperance?

We can. And, again, the vehicle for doing so is H.R. 5034.

HOW H.R. 5034 CAN BE USED TO MODERNIZE THE WINE INDUSTRY
The current language in H.R. 5034 is devised to allow states to do exactly what the Founders hoped to avoid by creating the Commerce Clause: enact discriminatory laws that protect in-state business interests to the detriment and burden of out-of-state interests.

The current language does this first by allowing state to enact laws that discriminate against out-of-state producers through “non-facially” discriminatory laws—laws that on their face to do not discriminate against out-of-state producers of alcohol but do so in effect. Such laws have already been struck down by Supreme Court (see: Family Winemakers v. Jenkins—2010).

The current language of H.R 5034 also promotes discriminatory laws in even more profound way by excluding all other alcohol vendors (including retailers, restaurants and wholesalers) from any protection by the Commerce Clause’s principle of non-discrimination. The radical nature of this proposal can be seen in the fact that in the 223 years since the adoption of the Constitution and its Commerce Clause only one sector of the economy, insurance, has been stripped by Congress of its protection from state discrimination under the Commerce Clause.

To guard against the balkanization feared by the Founders, to bring equality, fairness and vitality to a modern system of alcohol regulation, and to install the principle of non-discrimination at the center of the meaning of the 21st Amendment, H.R. 5034 ought to be amended to remove any authorization for states to discriminate in the exercise of its 21st Amendment powers.

To that end, H.R. 5034 ought to be amended to read in the following way:

SECTION 1 SHORT TITLE:

(It should remain the same as currently written)

SECTION 2 PURPOSES
The purposes of this Act are—
(1) to recognize that alcohol is different from other consumer products and that it should be regulated effectively by the states and federal government; and
(2) to affirm that the states retain primary authority to regulate alcoholic beverages; and
(3) to affirm that the principles of non-discrimination inherent in the dormant Commerce Clause apply to all state regulations of alcohol.


SECTION 3. SUPPORT FOR CORE STATE ALCOHOL REGULATORY POWERS AND FOR NON-DISCRIMINATION IN THE EXERCISE OF THOSE POWERS

The act entitled “An Act divesting intoxicating liquors of their interstate character in certain cases”, approved March 1, 1913 (27 U.s. C. 122 et seq), commonly known as the “Webb-Kenyon Act” is amended by adding at the end the following:             

            “(a) Declaration Of Policy—It is the policy of Congress that each state or territory shall have the authority to 1) determine its own policy regarding whether alcohol shall be legally sold and consumed within its borders or within special localities within its borders, 2) determine policy effecting temperance, 3) to enact laws to collect taxes on the sale and import of alcohol within its borders, and 4) to enact laws creating an orderly market for the regulation of alcohol within its borders.             

            “(b) Construction of The Grant to States With The Power To Regulate Alcohol Within Their Borders—No part of this act shall be construed to grant states the authority to impose any barrier to the non-discrimination principle of the “dormant” Commerce Clause where their alcohol regulations are concerned, nor enact any laws that facially or effectively discriminate against out-of-state or out-of-territory businesses where alcohol regulations are concerned unless the state or territory can demonstrate that that the challenged law advances a legitimate local purpose that cannot be adequately served by reasonable non-discriminatory alternatives.”

By amending the current language of H.R. 5034 to read in the above way, it arguably achieves the stated goals laid out for the bill by its sponsor, Rep. Bill Delahunt (MA). In his September 13, 2010 letter to the Chairman of the House Judiciary Committee, Rep. Delahunt commented on his revised language for H.R. 5034 and laid out his reasons for sponsoring the bill. Those reasons can be paraphrased thusly:

1. Help insure every state’s ability to regulate alcohol as provided by the 21st Amendment.

2. Remove uncertainty about alcohol regulations that have led to lawsuits and uncertainly about state’s ability to regulate alcohol effectively.

3. Re-affirm congressional intent that states have primary authority to regulate alcohol within their borders .

4. Prevent states from engaging in anti-competitive behavior.

5. Protect societal interests in guarding against underage drinking

6. Limit access to alcohol by preserving the states’ right to require face-to-face identification checks.

7. Promote temperance and orderly markets

ASSURING STATE AUTHORITY TO REGULATE ALCOHOL AND INDUSTRY'S PROTECTION FROM DISCRIMINATION–ALL WITH HR 5034
The language in H.R. 5034 as newly imagined here continues to give states authority to determine whether it will be “wet” or “dry”, enact legislation to promote temperance, write laws that insist that face-to-face identification checks are undertaken at the point of delivery of alcohol to the buyer, create legislation that guards against underage drinking, clarify congressional intent with regard to discriminatory laws so as to attempt to avoid many of the types of lawsuits that have been generated by facially and effectively discriminatory state laws, and lesson the likelihood of discriminatory laws being passed by the states.

Just as important, this new H.R. 5034 language continues to allow states to institute tied house laws that create a strict separation of the three tiers: producer, wholesaler and retailer. Furthermore, states, under this new re-writing of H.R. 5034, may impose a three-tier system for alcohol that is destined to be sold in state retail and restaurant outlets without running afoul of the dormant commerce clause.

Also important, this new construction of H.R. 5034 upholds the original intent of the 21st Amendment, to allow states to protect their “dry” status if that arrangement is what they choose. It continues to give states the primary authority to regulate the sale and distribution of alcohol without, importantly, engaging in protectionist legislation that discriminates against out-of-state businesses for the purpose of protecting in-state interests.

Finally and most important, this new H.R. 5034 language would encourage the kind of fair and open national market in alcohol that the Supreme Court as described as “essential to the foundations of the Union” and would “avoid the tendencies toward economic Balkanization” toward which the current system of state alcohol sales has led.
It goes without saying that this newly written version of H.R. 5034 is not what America’s beer and wine wholesalers ordered. The principles of non-discrimination written into this version of H.R. 5034 would not appeal the shrinking number of wholesalers in the various states that have benefited mightily from discriminatory market access laws and who were responsible for the original version of H.R. 5034 that would enshrine in federal law a grant of authority to the states never intended by the authors of the 21st Amendment, but would provide wholesalers with legal cover to use their immense political power to push protectionist laws through state legislatures across the country.

Instead, a new, modernized vision of alcohol regulation is imagined here. Under this modernized framework consumers would have legal, yet well regulated access to wines sold by wineries and retailers in any state where alcohol production and sales are legal. Retailers and restaurants would have access to inventory provided by their in-state or out-of-state wholesalers via a modified three-tier system or directly from out-of-state producers and importers who choose to self-distribute.

In essence, H.R. 5034 can become the vehicle by which states retain their ability to carry out the will of the people regarding temperance and alcohol access, while providing a platform to accommodate the radically changed commercial landscape that has emerged since 1933.