Why the Supreme Court Was Asked To Hear Retailer Wine Shipping Case

Posted by Tom Wark on Nov 29, 2010

QUESTION:

Notwithstanding Granholm v. Heald, does the Twenty-first Amendment to the U.S. Constitution overrides its Commerce Clause and allows States to discriminate against out-of-state businesses in the sale of alcoholic beverages?

This is the question that the Specialty Wine Retailers Association (for which I serve as Executive Director) is asking the Supreme Court of the United States to decide. A Writ of Certiorari ( filed last week and downloadable here) asks the court to review a decision by the Fifth Circuit Court of Appeals that overturned a Texas Federal Court's decision that prohibiting out-of-state wine stores from shipping to Texans while allowing Texas-based stores to ship to Texans violated the Commerce Clause of the Constitution.

WHY IS THIS CASE IMPORTANT?
Today only 13 states allow out-of-state wine stores to ship wine to their residents, while 38 states allow out-of-state wineries to ship wine to their residents. This is the case despite the fact that there is no difference between the transaction or logistics involved in a winery selling to consumers and shipping wine to consumers on the one hand and a wine store selling wine to consumers and shipping wine to consumers on the other hand. More importantly, the arbitrary state bans on wine stores-to-consumer shipping means that consumers have far less access to wines than they could other wise. It means that many wine shops don't have access to the commercial revolution that other industries have experienced due to the Internet and highly efficient shipping methods.

From a Constitutional perspective, it means that if the Supreme Court does not overturn the decision of the Fifth Circuit Court of Appeals allowing Texas to discriminate against out-of-state wine stores, wine shops across the country will effectively have their rights under the Commerce Clause to be free of discrimination in interstate commerce stripped from them. This will be only the second time in the history of our country when a particular sector of the economy has seen this critical protection stripped from them.

Finally, from a consumer perspective, for too long consumers have seen their basic interests ignored for the sake of protecting the parochial, financial interests of a small band of extraodinarily powerful, well-connected and subsidized industry players. Simple and absurd arguments have been floated and embraced to protect the laws that protect these industry players. The archaic system of wine distribution that was designed to accommodate a 1930s world now exists to protect special interests that have erected cynical and self serving platitudes that take no account of history, free trade or any interests beyond their own. These special interests make outlandish and false claims against anyone who even suggests this archaic system governing the American wine industry be reformed. Laws and lawmakers are bought and sold by special interests to assure no measure of fairness invade the special regulatory cocoon that protects certain industry players. This lawsuit takes a tiny step in balancing what has become a truly unbalanced system that no longer even attempts to serve the needs of of American wine consumers.

THE ARGUMENT
The State of Texas, the Fifth Circuit Court of Appeals and wine wholesalers argue that when the Supreme Court wrote that the "three tier system is unquestionably legitimate" the High Court meant that any manifestation of the three tier system in any state was protected from having to comply with the Commerce Clause of the U.S. Constitution, which gives the federal government, not the states, the power to regulate interstate commerce among the various states. Only if there is an exception in the law to a state's general regulatory organization of the distribution of alcohol, such as letting wineries sell their wine at retail, is the state then required to comply with the Commerce Clause. Hence, when states allow their own wineries to sell direct to consumers and ship direct to consumers (something not historically allowed under three tier systems of alcohol distribution) they must comply with the commerce clause, meaning they may not get in the way of allowing out-of-state wineries to ship to their consumers. The 2005 Granholm v. Heald Supreme Court ruling made this clear.

However, the Supreme Court in that 2005 ruling never said that wine retailers were exempt from the protections against discrimination provided by the Commerce Clause of the Constitution. In fact, no Supreme Court ruling and no congressional law has ever suggested such a thing. In order for the federal government to give up its right to regulate interstate commerce in any industry and give that power to the state, the Congress must say so directly. That has never happened. In essence, the Fifth Circuit Court of Appeals has elevated the three tier system to quasi-Constitutional stats that outranks the Commerce Clause.

What's interesting is that in two cases concerning this issue that appeared in Federal appeals courts, justices have bemoaned the fact that they need Supreme Court to give guidance on this issue. The hope of specialty wine retailers and consumers across the country is that the Court will give that guidance.

The arguments the wholesalers give for the notion that retailers somehow have no protections under the Commerce Clause are weak. For example, At Alcohol Law Review, a website administered by wholesalers, the following was recently suggested:

"Once again they (specialty retailers) try to blur the lines and claim that retailers and wineries are the same entity.  They forgot to mention that the federal government doesn’t agree with that.  For example, the wineries need to be licensed at the federal level. Retailers do not."

At best, this is a non-sequitur. Neither Congress nor the Supreme Court has ever suggested that for a business to be granted protection from discrimination under the Commerce Clause it must receive a license from the federal government.

One of the reasons this issue of wine store-to-consumer shipping is so important is that it goes to the issue of the blatant protectionism that exists in the wine industry. I've yet to hear a reasonable argument as to why a winery ought to be able to ship into a state, but a wine store should not be allowed. When a reason is given, it often revolves around the notion that in-state wine stores are put at a disadvantage because out of state stores don't have the same taxes and fees to pay as in-state stores. But of course this argument is ludicrous. Taxes could be paid to the shipping state. Plus, the cost to ship the wine far outweighs any in-state fees a local store may have.

No, the reason that this kind of discrimination continues to occur is because it can and because neither lawmakers nor the wholesalers that control state legislatures have any desire to protect the interest of consumers in their states.

It will be a few months before the Supreme Court makes a decision as to whether or not to take up this case. In the mean time, the state of Texas and Texas wholesalers and many others will send briefs to the Supreme Court weighing in on whether or not the high court should take up this issue.

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