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On May 16, the U.S. Supreme Court reaffirmed that “state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause.” The court struck down Michigan and New York laws that permitted in-state wineries to ship direct to consumers while prohibiting out-of-state wineries from doing so. This decision is a true catalyst. While wineries have been popping champagne corks, state regulators have been scratching their heads trying to figure out what Granholm v. Heald, 05 C.D.O.S. 4068, means for the regulatory system. In the week that followed, governors, regulators, legislators, lobbyists and lawyers mobilized to react to the Supreme Court’s holding. In short, the court’s decision confirmed that the 21st Amendment confers on each state the authority to regulate the importation and sale of alcohol, and the structure of its distribution system. However, that authority must be tempered by reference to the dormant Commerce Clause such that it is done in a nondiscriminatory way. A state may ban alcohol altogether, assume direct control over alcohol distribution through state-run outlets or require sales through a two- or three-tier system. A state may permit sales direct to consumers. However, the state must treat alcoholic beverages produced out of state the same as products produced in state. At this moment nothing has technically changed for direct shipping. A winery may ship to the 26 states that allow direct-to-consumer sales. Due to the procedural posture of the cases, one should not ship to New York or Michigan yet. It is still a felony to ship direct to consumers in a handful of states. This cautious reaction is prudent as wine is not like cheese or other consumer products. In the absence of legislation that would permit the direct shipment to a consumer, wine must be purchased under the existing state regulatory schemes. The Michigan Liquor Control Commission is working with Michigan Gov. Jennifer Granholm’s office to determine how that state will proceed. New York is evaluating its position as well. Based on the court’s decision the states have two options — ban all direct-to-consumer shipping (which is what the chair of the Michigan Commission has announced will be her recommendation to the governor) or permit all direct-to-consumer shipping. Lobbyists are urging interested parties to oppose or support enabling legislation in New York and Michigan. Other states with discriminatory consumer shipping laws are evaluating their options. In the past couple of weeks, suits were filed in Indiana and Kentucky alleging their laws favoring in-state wineries are unconstitutional. Pennsylvania remains a state to watch. It is a control state, meaning all alcohol is sold by the state in state-run stores to consumers. However, there is an exception that allows Pennsylvania wineries to ship direct to consumers and even allows the local wineries to avoid the 18 percent tax. The court stressed several principles in its decision that raise questions as to the viability of other current state laws. Reciprocal state laws were described as the product of an “ongoing low-level trade war.” California is one such state. The California Department of Alcoholic Beverage Control has been meeting with stakeholders to craft legislation to convert California to a permit state for direct-shipping privileges and establish volume limits applicable to all direct-to-consumer sales. Even as this moves forward, however, the concept of reciprocity (as opposed to permitting direct shipments even if the home state of the shipper does not reciprocate) should be re-examined. Elimination of this requirement could create some unusual results. For example, without a reciprocity requirement, a licensee in a state that completely bans direct shipments may be allowed to ship to consumers in a state that permits it. Another interesting twist on reciprocity that was never critical before now is that many states that permit direct shipping require the shipper to simply be a licensee in its home state. A licensed wholesaler in California that is prohibited from selling directly to consumers in California may be permitted to sell to consumers in another state. What does the case portend for beer and spirits? While the facts at hand involved a winery, the Granholmdecision made no such distinction in its language. The constitutional jurisprudence tends to regard beer, wine and spirits as one commodity: alcoholic beverages. Many state laws make distinctions in privileges afforded beer, wine and spirits, with the most liberal rules afforded to the predominant beverage manufactured in a given state. The court was silent on the extension of its holding beyond the supply tier. Does the decision stand for the proposition that a state may not allow an in-state retailer to ship direct to consumer if it forbids an out-of-state retailer from such sales? In California, for example, the Business & Professions Code permits off-sale retailers to deliver “any alcoholic beverages” (e.g. beer, wine or distilled spirits) ordered over the telephone. There are no restrictions on the mode or method of delivery. Under Granholmthe state may be prevented from stopping out-of-state retailers from doing the same thing. States also need to examine the exceptions or favorable treatment of in-state producers and other licensees in other contexts. For example, can California confer privileges through its winemaker license (the Type-02) that are not available to Oregon wineries? What about states with residency and physical presence requirements? The Supreme Court acknowledged that such requirements create substantial dormant Commerce Clause problems. Does this mean that the Texas residency requirement to hold a wholesale license is unconstitutional? Lawyers will be exploring these types of laws and testing whether Granholmprovides a wedge or a hammer to other aspects of the three-tier system. Many questions remain to be answered through litigation or legislation. This decision clearly resolves the immediate case before the court. However, it potentially opens up a number of other issues that were previously accepted as appropriate regulations. Maybe on the anniversary of this decision, pundits will be opining that dissenting Justice Clarence Thomas was right when he said that “the court does this nation no service.” Matthew Bottingand Susan Cagannare attorneys in the Beverage Alcohol Team in Nixon Peabody’s San Francisco office. They can be reached at [email protected] and [email protected]. • Practice Center articlesinform readers on developments in substantive law, practice issues or law firm management. Contact Associate Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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