Important New Ruling For Wine and A New View of Alcohol Regulation

On September 3rd an important court ruling emerged out of a Federal Court in Illinois in the Case of  Anheuser Busch v. Schnorf
(Download Illinois ruling). The ruling reiterated a holding implied in the Granholm v. Heald Supreme Court case and made explicit in the Costco v. Hoen case: States may not bar out-of-state alcohol producers from selling directly to retailers and restaurants if the same states allows its resident producers to sell to in-state retailers and restaurants.

The case resulted from the Illinois Liquor Control Commission earlier this year barring Anheuser-Busch, a Missouri company, from purchasing an Illinois distributor, holding a distributor license and thereby becoming its own distributor in Illinois…essentially, self-distributing. A-B claimed that by banning it from self distributing but by allowing two in-state Illinois brewers to self distribute, the state was violating the Commerce Clause of the U.S. Constitution by discriminating against out-of-state interests.

In fact, A-B relied primarily on the Granholm v. Heald Supreme Court decision to make its case.

In his decision, Judge Robert M. Dow, Jr. wrote:

"The result of this discrimination against out-of-state brewers is to restrict the ability of out-of-state beer producers to market and sell their beer on equal terms with in-state beer producers. Under Granholm, a state may not permit an in-state producer to operate at more than one tier of the state’s alcohol beverage licensing system or to bypass one or more of those tiers, without according the same right to out-of-state entities."

What's interesting about Illinois is that where wine is concerned it has on the books a law that allows wineries in-state and out-of-state that produce less than 25,000 gallons to self distribute up to 5,000 gallons annually. This law left two Illinois wineries that produce more than 25,000 gallons annually and thousands of wineries across the country that produce more than 25,000 gallons only able to distribute to Illinois restaurants if they use a distributor. This cap is nothing more than protectionism for Illinois wholesalers and my hope is that it will be challenged in the future.

Still the latest ruling is a reconfirmation that states are not given carte blanch under the 21st Amendment to do whatever they desire and there is no indication that at any time Congress or the American people intended states to have carte blanche where alcohol laws are concerned.

Current laws concerning alcohol are very complex and have been built up over the past 70+ years largely in response to bureaucratic inertia and response to powerful commercial interests. Courts have been critical in both bringing down laws that protect specific interests as well as propping up anti-consumer, special interest laws. In this case, fairness and commonsense and the Constitution were the victors.

Yet, one fundamental problem exists concerning state alcohol laws: Their basic structure was created in an era that looked nothing liked today's world. The business, logistics and commercial outline of the 1930s bares no resemblance to the 2010s. As a result, the current set of alcohol laws in the 50 states rarely accommodate in anything close to efficiency the needs of the marketplace. There needs to be a fundamental re-interpretation of the role of alcohol regulation and laws. I have an idea on that issue.

In my view, the 21st Amendment must be understood today as it was understood at its creation: as a vehicle for allowing states to allow or disallow the sale of alcohol. To this end, a state should have the right to regulate the sale of alcohol ONLY inside its own jurisdiction: inside its borders. It should not have the right to regulate how wine is sold OUTSIDE its borders. The three-tier system should be considered "unquestionably legitimate" if it concerns alcohol that is sold inside its borders and not yet in the hands of consumers. But a state should not regulate the way consumers, who are not part of the three tier system, obtain their alcohol. This means a state should not have any jurisdiction over consumers who choose to obtain their alcohol from out-of-state producers OR retailers. Out-of-state retailers and producers are not part of a given state's three tier system. And if a state does not prohibit the consumption of alcohol, it has no interest in where consumers get their alcohol. If a consumer in Texas wants to buy a bottle of wine from a California producer or retailer then that transaction is the concern of California, where the purchase took place.

This is a departure from the current system of alcohol regulation that has no place for the rights or needs of consumers, but rather is concerned primarily with tax collection and protecting and ancient regulatory system that supports very specific special interests. 

The ruling in Illinois is a good one for a number of reasons. It reasserts the importance of the Commerce Clause in relation to the 21st Amendment, it give more impetus to the relatively novel practice of "self distribution" and it reminds lawmakers and players in the alcohol regulatory system that a level playing field is critical.

12 Responses

  1. Theresa - September 8, 2010

    What a well writen review of the situation! Thank you for taking the time to be so thorough.

  2. kc - September 8, 2010

    Tom, so the age old question as to where the sale occurs when purchasing goods via phone/internet…is it where the consumer is , where the product is, or where the seller is? From your perspective, it seems the latter 2 options would work in favor of your argument. But if it is where the consumer is, then the states by regulating the purchase of alcohol by the consumer, is actually acting within its borders. Also, i think that the prohibitionists who are alive and well, along with the distributors, are quite content with more states rights over alcohol, and always believe they can get more of their agenda accomplished at the state and local level then they ever would at the federal level, so they like to see the commerce clause trumped in favor of the 21st amendment and are likely supporting HR 5034.

  3. Tom Wark - September 8, 2010

    Currently, wineries and retailers, as you know, agree to consent to the jurisdiction of the state into which they are shipping. Where shipping is concerned, I don’t have a problem with that. However, in my view, the 21st Amendment should not give states the ability to block consumer access to products obtained via interstate commerce. Put another way, if a state allows its citizens to possess and consume alcohol inside their state, they have no business or right to restrict the way consumers obtain that alcohol outside the state.
    Yet I realize this view of the world has not quite emerged, primarily, as you say, because regulatory bodies and the favorite sons of the regulators and lawmakers, wholesalers, have no interest in seeing consumers and the constitution honored.

  4. Curious - September 8, 2010

    Tom – how do you feel about the positioning of an outfit like, who’s business model of having individual licenses in each state basically puts gem in opposition to 5034 as outlined by their support for the recent TX rulings. 5034 would basically allow them to dominate Internet sales if shipping across state lines is ended.

  5. Tom Wark - September 8, 2010

    I dont see how you get to where you went. Please explain further.

  6. phillywinefinder - September 9, 2010

    “And if a state does not prohibit the consumption of alcohol, it has no interest in where consumers get their alcohol.”
    But the states prohibit consumption by minors. Can’t the states argue that if they allow purchasing by mail or internet, for example, that they will not be able to stop minors from buying this way?

  7. Tom Wark - September 9, 2010

    Yes, they could make that argument. However, it’s important to remember that just because an argument can be made, that doesn’t make it a good argument. Such would be the case with this argument.

  8. phillywinefinder - September 9, 2010

    It would mean the states would have an interest in where consumers got their alcohol, which would defeat your argument.

  9. Tom Wark - September 9, 2010

    No member or law enforcement and no alcohol regulator anywhere in the country has ever said that the direct shipment of alcohol has created anything like a significant problem for them.
    This is no longer an argument for preventing direct shipment of wine.
    That said, when I say they have no interest in where the wine comes from, what I mean is a legal interest where regulating the source is concerned. I would have no problem with a state determining that all alcohol sold direct would need to come with an adult signature.

  10. Lindsey A. Zahn - September 9, 2010

    Great article on Anheuser Busch and nice interpretation of the 21st Amendment. I agree that the 21st Amendment should be interpreted today as it was interpreted or understood during its creation. The issues that arise with many of the articles and amendments in the US Constitution demonstrate that the original framers of the Constitution or the authors of amendments certainly could not foresee or predict the transformation of society in business, technology, and lifestyle during original formation. I think this is, as you pointed out, only reflected in many of the plights the alcoholic beverage system faces with respect to regulations and legislation today.

  11. Matthew Mann - September 9, 2010

    I think the answer to the question about where the sale occurs is available in most state statutes regarding the privileges held by licensed retailers. Most statutes require the sale to occur on the retailer’s licensed premises and do not permit licensed retailers to sell from any other location. A sale from a California retailer to an Oregon resident over the internet or by phone by necessity occurs in California and only California would have regulatory authority over the sale.
    Under most direct shipping permit programs, the receiving state gains authority because they require the permit applicant to concede jurisdiction in order to obtain the permit. The inconsistency under this set-up is that all state shipping permit programs should thereby be consumer importation permits rather than producer/retailer permits, because it is their resident consumer over whom they would have jurisdiction. I’m not advocating that, I’m just sayin’.

  12. Bill McIver - September 10, 2010

    Yes, Tom. And, as you know well because we worked together on the issue back in 1990s, the U.S. Supreme Court case was based on arguments that I started pushing in 1990 and joined with John Hinman in 1994-1995 to start Coalition for Free Trade in Licensed Beverages that first used the arguments in a lawsuit against the state of Florida and the state’s wholesalers.

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