Supreme Court Ruling Levels the Wine Field
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WASHINGTON – New Yorkers could soon be able to order wine over the Internet directly from out-of-state wineries thanks to a Supreme Court ruling yesterday that held state liquor regulations unconstitutional when they discriminate against out-of-state producers.
The 5-4 decision found that a New York law requiring out-of-state wineries to set up operations in the Empire State before they can market directly to consumers violates the constitutional protection of the free flow of interstate commerce.
The court rejected arguments by liquor regulators in New York and Michigan, which bars direct sales from out of state, who said imposing such hurdles is necessary to ensure adequate regulation of alcohol, to keep wine out of the hands of minors, and to ensure tax collection.
“It is evident that the object and design of the Michigan and New York statutes is to grant in-state wineries a competitive advantage over wineries located beyond the states’ borders,” Justice Kennedy wrote. He was joined by Justices Scalia, Breyer, Ginsburg, and Souter.
The decision allows states to continue to craft their own liquor regulations, but it requires that they be applied “even-handedly” to producers in and out of the state.
There are 26 states that allow interstate shipping of wine, and half of them have so-called reciprocity agreements that give shipping rights to states that offer the same.
Justice Kennedy said the “patchwork” of laws “is essentially the product of an ongoing, low-level trade war.”
Governor Pataki said he was not surprised by the decision, calling the ruling “something I’ve thought was the right policy for some time.”
“I think it will be a plus for the wineries of New York,” said Mr. Pataki, who has proposed in two budgets that the rules on interstate shipments be loosened. However, he told reporters he wants to put in place “safeguards” to ensure that wine will be shipped only to adults. New York is the second biggest wine market in the country.
Senator Clinton also praised the ruling as “a very positive step for New York’s wine producers and for the state’s economy,” noting that the restrictions on imports in other states put New York wine makers at a competitive disadvantage.
The case required the court to resolve a conflict between two sections of the federal Constitution, one protecting the free flow of interstate commerce and the other giving states the right to regulate alcohol sales.
The Commerce Clause states, “The Congress shall have Power … To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”
The mere existence of this federal commerce power has been interpreted by courts to restrict states from discriminating against or unduly burdening interstate commerce, a restriction known as the “Dormant Commerce Clause.”
But the Constitution also contains the 21st Amendment, which was passed in 1933 to repeal Prohibition, and it states that transportation or importation of “intoxicating liquors” into any state is prohibited if it violates the state’s laws.
Justice Kennedy wrote that the amendment allows states to maintain individual systems for controlling liquor by regulating its importation and use, but it does not permit states to discriminate against goods from other states.
For most wineries, the expense of establishing a physical distribution operation in one state, as required by New York’s regulation, let alone all 50, is “prohibitive,” he reasoned.
“It comes as no surprise that not a single out-of-state winery has availed itself of New York’s direct shipping privilege,” he wrote.
But four dissenters on the bench said that interpretation did not reflect the history and the plain text of the 21st Amendment, which they said placed alcohol in a “special category” that is not subject to the same Commerce Clause restrictions as other goods.
“Today’s decision may represent sound economic policy and may be consistent with the policy choices of Adam Smith, who drafted our original Constitution; it is not, however, consistent with the policy choices made by those who amended our Constitution in 1919 and 1933,” wrote Justice Stevens in a dissent joined by Justice O’Connor.
Justice Thomas, joined by Chief Justice Rehnquist, also wrote a lengthy dissent in which he analyzed the history of the 21st Amendment and concluded that the majority’s reading of its history was “questionable” and the majority opinion turned the amendment’s text “on its head.”
“Whatever the wisdom of that choice, the Court does this Nation no service by ignoring the textual commands of the Constitution and Acts of Congress,” wrote Justice Thomas, referring to a 1913 federal law known as the Webb-Kenyon Act, re-enacted in 1935, which also dictates that interstate liquor imports are prohibited where they violate state laws.
One of the wine consumers who brought the suit, Robin Brooks-Rigolosi, a 35-year-old Manhattan real estate entrepreneur, said she was thrilled with the ruling.
“This is the best day for wine-lovers since the end of Prohibition,” said Ms. Brooks-Rigolosi, who said she joined the lawsuit more out of principle than out of the pursuit of any particular bottle of wine. “This case has never been about liquor, and was always about liberty. Now Americans are a little bit more free.”
Advocates of free trade said the decision could have implications for other state regulations on Internet commerce.
“There are a number of products in which middlemen have been fighting for protectionist trade barriers – from contact lenses to automobile sales,” said the strategic counsel for the Institute for Justice, Clint Bolick. The institute represented two wineries in Virginia and California, and three wine consumers in New York.
“We believe this ruling will have implications for those kinds of laws as well,” he said.
Mr. Bolick said the impact on consumers will not be immediate, because the court remanded the case to federal district court for an order consistent with the ruling.
There are an estimated 3,000 wineries in the country, but most are very small, while a handful of large producers account for the bulk of the wine trade.The president and CEO of Wine.com, an online retailer, George Garrick, estimated that direct shipping to consumers is only 1% of the estimated $22 billion wine market. While wine retailers such as himself are not directly affected, he predicted in a statement yesterday that the publicity surrounding the case would “increase consumer awareness” of the ability to buy wine online.
The wineries that brought the lawsuits, Domaine Alfred and the Lucas Winery in California, and the Swedenburg Estate Vineyard in Virginia, argued that direct access to the national market is essential to their growth.
The majority decision noted that the number of wine wholesalers has been shrinking due to consolidation, and most wineries do not produce enough to supply them.
Michigan’s Liquor Control Commissioner, Nida Samona, said that in light of the ruling, she would ask state legislators to bar in-state wineries from directly shipping wine.
The Law Enforcement Alliance of America warned in a statement that state legislatures must not allow “unaccountable” sales of liquor.
“Home delivery services have shown that they are not up to the job of even doing basic ID checks,” the group, which represents law-enforcement professionals and crime victims, said in a statement.