TCS Daily

World Wine Web

By Ben Lieberman - June 22, 2004 12:00 AM

It isn't exactly the Untouchables v. Al Capone, but there is a legal battle raging over the availability of alcoholic beverages. Internet wine sales have grown substantially in recent years, offering consumers both lower prices and greater product choice. But not everyone is happy about point-and-click connoisseurs having wine shipped directly to their homes, especially the old-economy liquor wholesalers and distributors. These middlemen have prevailed upon many state governments to limit or completely outlaw this new form of competition.

Fortunately, the tide is turning against e-prohibition. Several of the state bans have been challenged on Constitutional grounds, with more victories than defeats thus far. The controversy is now headed to the Supreme Court, which will hear conflicting decisions involving the direct shipping laws of Michigan and New York. A high court decision, expected in 2005, could have significant implications for the future of Internet commerce.

Last August, the United States Court of Appeals for the 6th Circuit struck down a Michigan law banning direct mail shipments of wine from out-of-state (but not in-state) wineries to in-state consumers. The court found that Michigan's law violated the Constitution's commerce clause, which has been interpreted to prohibit states from enacting measures that protect in-state interests from outside competition. The court concluded that any legitimate purposes of the law (ensuring tax collection of sales taxes, preventing purchases by minors) could be handled in ways less protectionist and discriminatory than a total ban on out-of-state direct shipments.

In contrast, a February 2004 decision from the US Court of Appeals for the 2nd Circuit upheld a similar New York law. Though mindful of the commerce clause, the court was swayed by the 21st Amendment that New York's law was constitutional. Although best known for repealing prohibition, the 21st Amendment also grants states considerable authority to regulate alcoholic beverages coming into their borders. The court found that New York's direct shipping restrictions fall within this authority. In effect, the court concluded that when it comes to alcohol, states have a wide berth under the 21st Amendment to enact measures that may otherwise violate the commerce clause.

In other states, including Virginia and North Carolina, federal court decisions favorable to direct shipping have prompted state legislatures to legalize such sales.

Each of these legal and legislative victories represents a setback for the alcoholic-beverage wholesalers and distributors trying to hold on to their state-sanctioned monopoly status and exorbitant markups. These well-heeled middlemen will now take their arguments, which were successful in Indiana as well as New York, to the Supreme Court. Against them are organizations representing small wineries that see Internet sales as perhaps their last best hope of survival - the increasingly concentrated ranks of big distributors rarely bother with such low volume vintages - as well as frustrated consumers living in the states unfriendly to e-commerce in wine.

Since the case involves two Constitutional provisions seemingly at odds with each other, as well as a split of judicial opinion amongst the lower federal courts, it is difficult to predict the Supreme Court's outcome.

Even teetotalers should take notice of this case. Though the 21st Amendment is unique to alcoholic beverages, a Supreme Court decision protecting interstate direct shipping of wine under the commerce clause could have consequences for Internet sales of other goods and services. Beyond wine, middlemen for motor vehicles, real estate and mortgages, contact lenses, medical supplies and pharmaceuticals are also exerting in-state political clout to restrict Internet competition. Commenting on a Federal Trade Commission report advocating an end to state restrictions on wine e-commerce, FTC Chairman Timothy Muris noted that "our findings in the wine industry suggest that anticompetitive state regulations may significantly harm consumers in many of these industries."

One troubling aspect of the New York decision is the court's acceptance of the state's argument that it does not technically discriminate against out-of-state wineries since they could conceivably move in-state and set up shop. Such arguments, if allowed to prevail, could provide fodder for all sorts of protectionist schemes against Internet sales of other products and services.

Thus, the outcome of the wine dispute could go a long way in shaping the future of Internet commerce.

Ben Lieberman is a Senior Policy Analyst with the Competitive Enterprise Institute, in Washington, DC.

Editor's note: See also Stephen Bainbridge's take on the World Wine Web.


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