United States: The Supreme Court’s Granholm v. Heald Decision: What it Means for Interstate Wine ShippingUnited States

Have you ever wanted to buy a bottle or case of wine from a charming little winery in Napa or Sonoma County you once visited while on vacation, only to have your hopes dashed when you visited the winery’s web site and learned that it couldn’t legally ship wine to your state? If so, you weren’t alone: Many individuals and wineries formed advocacy groups—Free the Grapes! is one well-known organization—working to remove the legal impediments that prevented (in many cases) direct shipment of wine to consumers.

The grapes may not yet be entirely free, but the U.S. Supreme Court just gave wine connoiseurs and aficionados, wineries, fans of the movie Sideways, and internet shoppers everywhere reason to pop a few corks: On May 16, 2005, the Supreme Court in Granholm v. Heald held that state laws permitting direct shipment of wine from in-state wineries, but prohibiting direct shipment from out-of-state wineries, are unconstitutional. After Granholm, it is possible that states will remove the discriminatory legal impediments to interstate wine shipping. But it also may mean that some states will cure the discrimination simply by imposing the same restrictions on wine shipments from their in-state wineries.

Before Prohibition, the Supreme Court had consistently held that state regulations discriminating against liquor imported from other states, or placing unreasonable burdens on interstate commerce in liquor, were unconstitutional. Why? Because, since the mid-19th century, the Supreme Court has held that the Commerce Clause has a "dormant" component that operates to protect the national economy against "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." In response to these rulings from the Supreme Court, Congress passed the Wilson Act and the Webb-Kenyon Act, together allowing states to regulate both the resale and the direct shipment of liquor.

Passage of the 18th Amendment (Prohibition) stopped the volleying between Congress and the Supreme Court briefly, until the 21st Amendment repealed Prohibition. Section 2 of the 21st Amendment provides that "[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of laws thereof, is hereby prohibited." The purpose of the 21st Amendment, and Section 2 in particular, was "to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use." Seizing upon this language, states passed numerous regulations controlling the interstate shipment of liquor, and (not coincidentally) many states did so on terms that favored its local liquor industries.

The Granholm case is actually three consolidated cases: Granholm v. Heald, Michigan Beer & Wine Wholesalers Assn. v. Heald, and Swedenburg v. Kelly. Granholm and Michigan Beer challenged Michigan regulations, while Swedenburg challenged a New York rule on interstate shipment of wine. The consolidated cases presented the same question: "Does a State’s regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of §2 of the Twenty-first Amendment?"

Under Michigan’s scheme, the vast majority of wine was sold through wholesalers. For Michigan’s 40 or so in-state wineries, however, a license could be obtained permitting direct shipment to Michigan consumers. Some licenses cost as little as $25. Out-of-state wineries paid more and faced heavier burdens: Their business licenses cost $300, and even then, the out-of-state wine could only be sold through wholesalers. Direct shipment was absolutely prohibited. The New York regulations permitted outside wineries to ship directly only if they established "a branch factory, office or storeroom within the state of New York."

Wineries challenged the schemes, which were defended by the states of Michigan and New York, as well as wine wholesalers and retailers. The wineries argued that both Michigan’s and New York’s statutes, which plainly discriminated between in-state and out-of-state wineries, violated the dormant Commerce Clause of the U.S. Constitution. The line of Supreme Court cases leading up to the 18th Amendment supported the wineries’ argument that regulation of liquor could not be achieved through discriminatory means. The states and retailers cited Section 2 of the 21st Amendment, arguing that the language and purpose of the Amendment removed the regulation of liquor from the Commerce Clause and allowed states to regulate as they wished, even if their regulation of liquor favored local interests and burdened out-of-state wineries.

By a 5-4 margin, the Supreme Court in Granholm held that both schemes "discriminate against interstate commerce in violation of the Commerce Clause" and that neither was permitted by the 21st Amendment. The voting lineup was quite unusual: Justice Scalia voted to overturn the state laws, while Justice Thomas voted to uphold them—even though both of them have stated in the past that they believe that "[t]he historical record provides no grounds for" the Commerce Clause’s implied ("dormant") restriction on discrimination.

The Commerce Clause. The Court first reiterated that the Commerce Clause, which is "essential to the foundation of the Union," prohibits the practice of protecting in-state economic interests by discriminating against out-of-state economic interests. This Clause reflects "a central concern of the Framers" that the Nation, in order to thrive, "would have to avoid the tendencies toward economic Balkanization." The Court found this "Balkanization" in the current laws regarding transportation of liquor, with some states absolutely prohibiting the shipment of liquor, others protecting their own interests against other states, and still others only permitting the shipment through reciprocity agreements with other states. These varying laws, the Court wrote, are "the product of an ongoing, low-level trade war" that has deprived "citizens of their right to have access to the markets of other States on equal terms."

Applying these principles, the Court had no trouble finding both regulations discriminatory in violation of the Commerce Clause. Michigan’s violation was "obvious"; only out-of-state wineries faced an absolute prohibition on direct shipping. The Court also had "no difficulty" finding the New York regulation unconstitutional. New York did not absolutely ban direct shipment by out-of-state wineries, but instead required an out-of-state winery to establish a physical presence in New York. The Court found this regulation impermissible because of the expense and burden of opening an office in New York—let alone in every state—making it "no surprise that not a single out-of-state winery has availed itself of New York’s direct-shipping privilege."

The 21st Amendment. The Court then addressed—and rejected—the states’ argument that Section 2 of the 21st Amendment gave the states absolute power to regulate the transportation of liquor, even through discriminatory means. The Court relied on the history of liquor regulation before Prohibition, notably the Wilson Act (which "authorized States to regulate only the resale of imported liquor") and the Webb-Kenyon Act (which empowered states "to forbid shipments of alcohol to consumers for personal use, provided that the State treated in-state and out-of-state liquor on the same terms"). Passage of the 18th Amendment, making production, transportation, or possession of liquor illegal, made the Wilson and Webb-Kenyon Acts unnecessary and obsolete. Upon passage of the 21st Amendment, however, the problems of interstate shipping reappeared. The Court therefore read Section 2 of the 21st Amendment as "restor[ing] to the States the powers they had under the Wilson and Webb-Kenyon Acts."

Consistent with its pre-18th Amendment readings of the Wilson and Webb-Kenyon Acts, the Court in Granholm listed three principles that can be distilled from modern Section 2 cases. First, "state laws that violated other provisions of the Constitution are not saved by the Twenty-first Amendment"—a state could not pass a regulation in violation of, for example, the First Amendment or the Due Process Clause, and claim it was protected by Section 2 of the 21st Amendment. Second, the 21st Amendment "does not abrogate Congress’ Commerce Clause powers with regard to liquor." Finally, and fatal to both states’ regulations, the Court noted its prior holdings "that state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause." While "[t]he Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system," the states must do so in a manner that is not impermissibly discriminatory.

The Discrimination Was Unjustifiable. Finally, the Court rejected the states’ efforts to save their discriminatory statutes on the asserted ground that they were necessary to advance a legitimate local purpose that could not also be advanced by even-handed laws. Both Michigan and New York argued that their schemes were aimed at preventing minors from obtaining alcohol as well as facilitating collection of taxes. The Court noted that none of the 26 states currently permitting direct shipping of wine reported any problems with minors obtaining alcohol. Further, states could condition the grant of shipping licenses on the wineries’ willingness to keep their books open and facilitate tax collection. The wineries would thus be permitted to ship directly while assisting the state in tax collection, which would further their asserted interests without discriminating against interstate commerce.

What the Court Did Not Hold in Granholm. Because the Michigan and New York cases did not challenge the three-tier distribution system used by several states, and because Michigan and New York do not have reciprocity laws, the Court’s decision did not directly affect those kinds of laws. But the Court did comment on both.

As to the three-tier distribution systems involving wholesalers and distributors or state-run outlets, the Court said that such three-tier systems are "unquestionably legitimate." As for reciprocal agreements, which permit direct shipment of wine from State A to State B as long as State B accepts directly shipped wine from State A, the Court was more dubious. At oral argument, Justices Kennedy and Stevens had asked whether all reciprocity laws would be invalid under the dormant Commerce Clause argument advanced by the wineries. In the majority opinion, Justice Kennedy wrote that "States do not need, and may not attempt, to negotiate with other States regarding their mutual economic interests," and that the "perceived necessity for reciprocal sale privileges risks generating the trade rivalries . . . the Commerce Clause was designed to avoid." Thus, while the language of the Court suggests that future challenges to reciprocal laws might result in those laws being struck down, those laws were not rendered unconstitutional by the Granholm decision, as the issue was not presented in that case.

When a state law is struck down as unconstitutionally discriminatory, states have to cure the impermissible discrimination. But they usually have some discretion in deciding how to cure it. Since the wrong in Granholm was treating in-state and out-of-state wineries differently, the states have to change their laws to treat those two classes the same. That means that everyone may be allowed to ship wine on the same terms, or no one may be allowed to do so. It is, of course, the hope of vintners and wine lovers alike that their state will decide to allow direct shipment of wine from all wineries. New York, among others, is considering this approach: Its legislature is currently considering a bill that would permit out-of-state wineries to ship directly to consumers, provided that they comply with licensing requirements similar to the requirements on in-state direct shipping.

Michigan and Indiana, however, appear to be heading the opposite direction. The Chairwoman of the State of Michigan Liquor Control Commission has recommended that all direct shipments of wine be banned by the state, including those in-state shipments permitted pre-Granholm. Likewise, on May 20, the Indiana Alcohol and Tobacco Commission informed more than 30 in-state wineries that in-state shipment is a misdemeanor, contrary to three decades of practice.

Right now, it appears that small wineries may have the most to gain from Granholm. For years, wine aficionados have found bottles in their local wineries that now may be exposed to the public nationwide. While not every state will permit direct shipment from out-of-state wineries, more certainly will. This will better allow smaller wineries to advertise and ship via the internet, greatly expanding their market. As these wines are discovered, the small wineries may start competing on a more national scale. These wineries should then be able to parlay their increased market into research, development, expansion, and (one hopes) better and more interesting wines. Even so, many larger winemakers in California and elsewhere have been making small-batch, limited edition wines that have not, to date, been available other than by direct sale at the winery, so Granholm’s promise of an expanded national marketplace may have benefits for them as well.

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