TCS Daily

Free the Grapes?

By Stephen Bainbridge - May 17, 2005 12:00 AM

Both oenophiles and constitutional law scholars eagerly awaited the Supreme Court's decision in Granholm v. Heald, in which the Court was expected to decide the constitutionality of state bans on direct-to-consumer shipments of wine (and other types of alcohol). On Monday of this week, the Court by a 5-4 vote narrowly invalidated these bans.

In my home state of California, I can hop on the internet and order wine directly from thousands of wineries or from the growing number of on-line retailers of alcoholic beverages, who would then ship my purchases directly to my home or office. Before Monday, the law in 24 states prohibited such direct-to-consumer sales. In those states, you were limited to licensed retailers who in turn had bought only from licensed wholesalers.

These laws were justified by an unholy alliance of liquor wholesalers, bricks-and-mortar retailers, and Prohibitionists as being necessary to keep booze out of the hands of minors. The argument was specious, of course. California and other free shipping states controlled sale to minors by requiring that the deliveryman obtain an adult signature before delivering the order.

Instead, these laws were an antiquated relic of Prohibition that remained on the books mostly because they benefited in-state wholesalers and retailers. As Ken Starr explained:

"Who could possibly support these discriminatory laws? Those who have the most to lose from repeal: the liquor distributors, known in the trade as the 'booze boys.' These distributors exact massive, and in many areas oligopolistic, profits from wineries as a price for distributing their products to retail stores -- and in some cases, refuse to distribute wine from smaller wineries at all. Like pirates exacting a ransom, they add no value. But they have a powerful incentive to keep the current system in place."

The prospect of online sales and direct-to-consumer shipments terrifies the "booze boys," because they would lose their local monopolies.

In contrast, it was clear that consumers would benefit from striking down these laws. A study of Virginia's direct-to-consumer sales ban by Alan Wiseman and Jerry Ellig found that "Virginia's direct shipment ban reduces the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online."

As I predicted, however, the Supreme Court did not strike these laws down on grounds that they were special-interest rent-seeking legislation. After all, whatever one makes of substantive due process arguments, the 21st amendment to the Constitution clearly authorizes the states to regulate alcohol sales as they see fit:

Section 2. The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

Instead, a five-justice majority (as I discussed on my blog, the lineup of justices in this case was highly unusual) struck down the direct-to-consumer bans on narrow Commerce Clause grounds.

The New York and Michigan direct-to-consumer sales bans challenged in the Granhold case were discriminatory and protectionist. In New York, for example, it was perfectly legal for in-state wineries to ship their products directly to consumers, but it is a crime for out-of-state wineries to do so. Obviously, this rule had trade protectionist consequences. The numerous wineries on Long Island and around the Finger Lakes were protected from direct-to-consumer competition by out-of-state wineries.

It was this discriminatory/protectionist effect that raised the most legitimate Constitutional issue in this case, by creating a conflict between the 21st amendment's seemingly sweeping grant or regulatory power to states and the negative implications of the Constitution's Commerce Clause. Under the so-called dormant Commerce Clause, inferred by the courts from the Clauses' negative implications, state laws that discriminate against out-of-state producers are subject to strict scrutiny and, in effect, a strong presumption of unconstitutionality.

As I predicted in an earlier TCS column, the majority in Granholm concluded that the 21st amendment did not trump the Commerce Clause and thus did not authorize states to discriminate in favor of local producers. As Justice Anthony Kennedy wrote for the majority:

States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses. This mandate "reflect[s] a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." Hughes v. Oklahoma, 441 U. S. 322, 325-326 (1979).

At least to that limited extent, in other words, the United States is a singular noun. As for whether the 21st amendment and related federal legislation was intended to trump the presumption against "economic Balkanization," candidly both the relevant legislative history and the older precedents are a mess. Even an ardent Originalist likely would end up having to flip a coin to choose between Justice Kennedy's version of the history and that advanced by Justice Thomas in his dissent. The modern precedents, however, clearly favor Kennedy's position. It would have been a significant break with stare decisis, both as to negative Commerce Clause and alcohol regulation precedents, for the Court to have reached any other result.

The narrowness of the Supreme Court's holding, however, suggests that Glenn Reynolds likely will not be able to enjoy the "better market for wine than Tennessee's rather protectionist setup has heretofore permitted" that he anticipated and that Ohioan Jonathan Adler still may not "be able to order wine direct from out-of-state."

If the states chose to change their laws so as to ban direct-to-consumer sales by both out-of-state and in-state wineries, those laws almost certainly would be upheld as within the states' powers under the 21st Amendment. Given the considerable power wielded in most of those 24 by the wholesalers and retailers who benefit from bans on direct-to-consumer shipments, as well as lingering Prohibitionist sentiment in some of the more Southern and rural of them, I expect many of the 24 will enact nondiscriminatory bans on direct-to-consumer shipments. At least now, however, their in-state wineries will be on the side of those who favor "freeing the grapes." In states like New York, where there is an important in-state wine industry to counter-balance the power of Ken Starr's "booze boys," direct-to-consumer sales may yet prevail.


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