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The wine wars make for singularly odd alliances. Where else can you find Kenneth Starr and Hillary Clinton together on one side and liquor distributors aligned with evangelical groups on the other? The U.S. Supreme Court will begin to sort this out at oral argument on Dec. 7 in three consolidated cases — Granholm v. Heald, Michigan Beer & Wine Wholesalers v. Heald, and Swedenburg v. Kelly — challenging the discriminatory bans on direct interstate shipments of wine to consumers in Michigan and New York. The cases are among the first to test the vitality of constitutional guarantees of interstate commerce in the Internet era. The underlying clash is as old as the American republic, pitting economic protectionism against freedom of commerce. Though the states will present oral argument, the liquor distributors, who seek to ensure that every drop of alcohol flows through their profit-taking grasp, are the tail that wags the proverbial dog. On the other side are small family-owned wineries, for whom direct shipping is a matter of economic survival. Because of the recent exponential growth in the number of wineries in the United States (now more than 3,000) and the severe contraction in the number of distributors, direct shipping is the only way that most small wineries can reach potential customers. Wishing to promote their own domestic wine industries and increase tax revenues — and recognizing that premium wine does not raise the same concerns about underage access as beer or hard liquor — a majority of states now allow limited and regulated direct shipping of wine to consumers. But a few states — including New York and Michigan — have chosen to regulate these direct shipments by two sets of rules: In-state wineries may freely ship to consumers, but out-of-state wineries may not. If they cannot find in-state distributors, which can handle only a fraction of the wines produced and take up to 30 percent of the price of each bottle, out-of-state wineries are shut out of the market. Indeed, New York consumers who travel to a California or Virginia vineyard cannot even lawfully ship wines back to themselves. A 2003 study by the Federal Trade Commission found that state bans on interstate direct shipping constitute “the single-largest regulatory barrier to expanded e-commerce in wine.” Ordinarily such discriminatory laws constitute virtually per se violations of the commerce clause. Interstate shipping bans have been struck down by the U.S. Courts of Appeals for the 4th, 5th, and 6th Circuits — the latter in the Michigan cases now before the Supreme Court. The question before the high court is whether the fact that the product involved is alcohol gives states the power to frustrate interstate commerce by discriminating against out-of-state wineries. PROTECTIONIST MISCHIEF In their briefs to the high court, the states and liquor distributors have largely retreated from attempting any serious policy justification for the discriminatory bans. Instead they simply invoke the language of the 21st Amendment, which confers upon states authority over “transportation or importation” of alcohol. Such language, they assert, confers “plenary” authority over alcohol or, as the 2nd Circuit put it in upholding New York’s ban in Swedenburg, the 21st Amendment creates a blanket “exemption” from the commerce clause. In that formulation, the case appears as a question of states’ rights. Except that there would have been no Constitution for the 21st Amendment to amend were it not for the prohibition against parochial trade barriers that motivated the creation of a national economic union in the first place. As the Court proclaimed in Gibbons v. Ogden (1824), “If there was any one object riding over every other in the adoption of the constitution, it was to keep the commercial intercourse among the States free from all invidious and partial restraints.” Hence, although states have persistently pressed the plenary authority argument since the 21st Amendment, the Court just as consistently has rejected it for 65 years. When New York made such an argument in 1964 in Hostetter v. Idlewild Bon Voyage Liquor Corp., the Court admonished that the notion that the 21st Amendment “has somehow operated to ‘repeal’ the Commerce Clause . . . [is] an absurd oversimplification.” Instead, the Court said that the 21st Amendment and the commerce clause are parts of the same Constitution, and that courts must consider “each in the light of the other.” Under that construct, states retain broad latitude to regulate alcohol. For instance, they can require (as most do) that alcohol be distributed through a three-tier system: from producer to distributor to retailer to consumer. But they must act evenhandedly; they cannot subject out-of-state alcohol to more-stringent rules than domestic products. As the Court held in Bacchus Imports v. Dias (1984), “one thing is certain: The central purpose of [the 21st Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition.” The Court in Bacchus found that a tax on alcohol, from which certain domestic products were exempted, violated the commerce clause and was not sheltered by the 21st Amendment. Under traditional commerce clause analysis, discrimination is the signal that protectionist mischief is afoot. As Justice Antonin Scalia put it in his concurring opinion in Healy v. Beer Institute (1989), a law’s “discriminatory character eliminates the immunity afforded by the Twenty-first Amendment.” Now the liquor distributors and a number of state amici have flatly called upon the Court to overturn Bacchus. The 2nd Circuit in Swedenburg simply dispensed with any effort to balance the two constitutional provisions. WINE ONLINE In addition to its neglect of the Bacchus precedent, one particular feature of the 2nd Circuit analysis deserves special attention because it bodes serious ramifications for Internet commerce far beyond wine: The court in Swedenburg reasoned that the New York ban is not discriminatory because an out-of-state winery can become a New York winery by opening a warehouse and a separate office in New York and then engage in direct shipping. But the point of the guarantee of free interstate trade (and of the Constitution’s privileges and immunities clause in Article IV as well) is that a person need not move to engage in commerce anywhere in the United States. As a result, such “physical presence” requirements routinely have been struck down. The 2nd Circuit’s reasoning comes from a tobacco case — Brown & Williamson Tobacco Corp. v. Pataki (2003) — in which the court ruled that the state can erect a physical presence requirement whenever its regulatory interests are implicated. Were the Supreme Court to uphold that rule, the states would be free to erect protectionist trade barriers against a wide variety of goods and services offered over the Internet, from automobiles to contact lenses to insurance. The vast promise of e-commerce would be extinguished. In the context of wine, the rule is equivalent to a ban. Take the Swedenburg Winery in Virginia. If a customer calls, Juanita Swedenburg answers the phone. A visitor will find her harvesting grapes, bottling wine, and hosting the tasting room. The notion that she could open a wholesaling operation in New York — or in 49 additional states if the rule is upheld — is preposterous. For that reason, no small winery even has tried. Besides, even with that supposed loophole, the New York regime is discriminatory. The easiest way to ship directly to New York consumers is to obtain a “farm winery” permit, which on its face is limited exclusively to wineries whose products are composed 100 percent of New York grapes. That law was adopted for overtly protectionist reasons. So was a 1970 law that eliminated direct interstate shipping, as was the veto of a 1995 law that would have allowed limited direct interstate shipping. CHABLIS KEGGERS? But, the states and liquor distributors maintain, there are legitimate reasons to discriminate: The states need authority to hold out-of-state wineries accountable, to protect against underage access, and to collect tax revenues. The simple answer to those concerns is that 26 states do allow direct interstate shipping. The FTC report (based on hearings and written testimony) found that states are able to satisfy their legitimate regulatory concerns without resorting to discriminatory treatment. The easiest way for states to enforce their regulations is to condition interstate shipping upon a permit. The 21st Amendment Enforcement Act — adopted at the behest of states and liquor distributors — already gives states authority to enforce their laws in their home federal courts against out-of-state wineries. The Tax and Trade Bureau (formerly the Bureau of Alcohol, Tobacco, and Firearms) can revoke a winery’s federal permit if it violates state laws. Out-of-state wineries risk their very survival if they fail to adhere to state laws. In terms of underage access, anyone who has any teenagers or has ever been one knows that minors obtain alcohol all too easily by faking identifications or persuading older friends to purchase it. Few buy premium wine in the first place. Those who do can find far less cumbersome ways than locating an appropriate Web site, producing adult identification at time of purchase, waiting an unspecified period of time for delivery of a parcel marked “Alcohol: Adult Identification Required,” arranging to accept delivery when a parent is not home, and at that time producing an adult identification once again. In New York, the numbers are compelling: 16,000 and zero. The first is the number of reported instances of underage access through the three-tier distribution system over a five-year period; the second is the number of reported cases of underage access through direct shipping outside the context of sting operations over the same period. That the state’s professed concerns in this regard are pretextual is revealed by the regulatory burden placed on in-state direct shipping of wine, which amounts to exactly nothing. As for tax revenues, states actually lose revenue by forbidding direct interstate shipping. Other, more-enlightened states — including Louisiana, New Hampshire, and Nevada — are collecting taxes remitted by wineries that ship to their residents. That revelation induced New York Gov. George Pataki, who vetoed the 1995 legislation that would have allowed limited direct shipping, to reverse course this year. Unfortunately, the powerful liquor distributor oligopoly squelched the legislation, as it has in other states. So for family winemakers and the people who would like to purchase their wine, the only recourse is the Supreme Court — as it has been for countless other small entrepreneurs who sought a level playing field in which David could take on Goliath. Our Constitution’s prescient framers recognized that the states’ protectionist proclivities could be curbed only with an ironclad rule of nondiscrimination. In the Internet era with its unbounded economic promise, adherence to that rule is more vital than ever. Clint Bolick is strategic litigation counsel for the Institute for Justice (www.ij.org) and represents the plaintiffs in the Swedenburg case.

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