2nd Circuit Upholds N.Y. Statute Barring Direct Sale of Wine

Mark Hamblett

New York Law Journal

A challenge from out-of-state wine retailers to New York state's prohibition on direct sales and delivery of wine to New Yorkers has been rebuffed by the 2nd U.S. Circuit Court of Appeals, which upheld the constitutionality of the state's laws.

Deciding a closely watched case that drew three intervenors and a number of amici, including The Beer Institute, the federal appeals court said New York's Alcoholic Beverage Control Law does not violate the commerce clause of the U.S. Constitution because it does not favor in-state sellers at the expense of out-of-state sellers.

The appeal in Arnold's Wines, Inc. v. Boyle, 07-4781-cv, was decided by Judges John M. Walker Jr., Guido Calabresi and Richard C. Wesley.

The suit was brought by an Indianapolis wine retailer and two New York residents who wanted to buy wine directly from out-of-state under 42 U.S.C. §1983. It sought a declaratory judgment that §§100(1), 102(1)(a) and 102(1)(b) of the Alcohol Beverage Control Law were unconstitutional.

New York's regulatory system is three-tiered, mandating that suppliers who are either manufacturers or importers sell to wholesalers who, in turn, sell to retailers.

The reason for the tiered system, the circuit explained, was "to preclude the existence of a 'tied' system between producers and retailers, a system generally believed to enable organized crime to dominate the industry."

Section 100(1) bars anyone from selling alcohol in the state without a license and §§102(1)(a) and (1)(b) make it illegal to ship alcohol to an unlicensed entity in New York.

Two licensed New York wholesalers, Eber Bros. Wine and & Liquor Corp and Charmer Industries, and an association of retailers, the Metropolitan Package Store Assoc. Inc., were allowed to intervene as defendants.

Southern District Judge Richard J. Holwell held in 2007 that the system was consistent with the authority given by §2 of the 21st Amendment, which states, "The transportation or importation into any State, Territory or possession of the United States for delivery or use therein of intoxicated liquors, in violation of the laws thereof, is hereby prohibited." (Arnold's Wines, Inc. v. Boyle, 515 F.Supp. 2d 401 (SDNY 2007).)

The plaintiffs appealed to the 2nd Circuit, where oral arguments were heard on Jan. 20.

Writing for the panel, Judge Wesley said the commerce clause normally prohibits states from passing "laws that discriminate against out-of-state economic interests unless those laws 'advance a legitimate local purpose that can not be adequately served by reasonable nondiscriminatory alternatives.'

"However, the Supreme Court has made clear that the Twenty-first Amendment alters dormant Commerce Clause analysis of state laws governing the importation of alcoholic beverages."

'EVEN-HANDED' STATE POLICY

The U.S. Supreme Court recognized in Granholm v. Heald, 544 U.S. 460 (2005), that §2 "grants the states virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system."

In Granholm, Judge Wesley explained, the Court struck down exceptions to three-tiered systems in New York and Michigan that allowed in-state wineries to ship directly to consumers, but prevented out-of-state wineries from doing the same.

"Granholm validates evenhanded state policies regulating the importation and distribution of alcoholic beverages under the Twenty-first Amendment," Judge Wesley said. "It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause."

Judge Wesley called the lawsuit "a frontal attack on the constitutionality of three-tier system itself," which he said the Supreme Court in Granholm found "unquestionably legitimate."

He said New York's law "treats in-state and out-of-state liquor evenhandedly," and "thus complies with Granholm's nondiscrimination principle."

The reason, he said, was that all liquor, whether in or out of state, must pass through the system.

"Alcohol sold by in-state retailers directly to consumers in New York has already passed through the first two tiers -- producer and wholesaler -- and been taxed and regulated accordingly," he said.

Judge Calabresi issued a 17-page concurring opinion "to emphasize the unusual nature of judicial interpretation of the Twenty-first Amendment, a constitutional provision that, over 75 years, has been defined and redefined to accommodate changing social needs and norms."

Howard Graff of Dickstein Shapiro represented Charmer Industries.

"I think this is an important clarifying decision that was extremely well-reasoned," Graff said. "This particular case is the first of its kind to be decided with an appellate court dealing with cross-border shipping by retailers."

Peter E. Seidman of Milberg LLP represented the plaintiffs.

Assistant Solicitor General Richard P. Dearing represented New York state.