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DIRECT SHIPPING PART III:
THE SUPREME COURT STRIKES DOWN
BANS ON DIRECT SHIPPING AND
A STAUNCH SUPPORTER OF THE TWENTY-FIRST AMENDMENT RETIRES

In two previous columns we discussed the impact of a number of recent court cases on the continued viability of the three-tier system in relation to the perceived conflict between two Constitutional provisions, the Twenty-first Amendment and the Commerce Clause. Initially, we reviewed a number of decisions striking down State direct shipping statutes and concluded that while statutes that discriminated against out-of-state producers would never be sustained, neither the Twenty-first Amendment, nor the three-tier system, was in imminent danger. Next, we applauded the United States Second Circuit Court of Appeals for validating our view and supporting the Twenty-first Amendment in the Swedenburg case. Then, in the grand tradition of Joe Namath we boldly predicted that the Supreme Court would uphold the Second Circuit based upon the previous decisions of the current members of the Court.

One of the problems with writing articles is that they can be used against you at a later date; which we unashamedly do here. As you all know by now, the Supreme Court struck down the Michigan and New York statutes. They did so, however, by the narrowest of margins; 5-4. As it turned out, one of the Justices that we counted on as a historical supporter of States’ rights, Justice Scalia, sided with four other justices in striking the statutes in issue. The nerve of him! Didn’t he read our article? But wait, in striking down the statute the Supreme Court said exactly what we said in our previous article: statutes that discriminate between in-state and out-of-state interests do not pass constitutional muster. Accordingly, although we were wrong on the outcome we were dead right on the rationale. More importantly, that rationale and the language of the Supreme Court decision in Swedenburg supports our previous opinion that the three-tier system is alive and well.

In this column we will discuss the Supreme Court’s decision in Swedenburg and the impact it will have on the three-tier system’s continued viability. We will also discuss whether the recent retirement of Justice Sandra Day O’Connor and the imminent retirement of Justice William Rehnquist will alter the future course of the Court on this issue.

BACKGROUND ON THE SWEDENBURG CASES

In Swedenburg, the Supreme Court actually decided two related cases. One involved a challenge to Michigan’s ban on the direct shipment of wine to that States’ consumers. As a general matter, Michigan mandates that wine producers must distribute their wine through wholesalers. However, there was an exception to this requirement for Michigan’s approximately 40 in-state wineries, which were eligible for “wine maker” licenses allowing direct shipment to in-state consumers. While out-of-state wineries could also apply for a license, these licenses only allowed the out-of-state wineries to sell through in-state wholesalers.

The lower federal or “District” court sustained the Michigan scheme against a challenge by some Michigan residents, who were joined by a California winery. The Michigan Beer & Wine Wholesaler trade association intervened and successfully argued that the ban was a valid exercise of Michigan’s power under the Twenty-first Amendment. On appeal, the Sixth Circuit reversed the District Court and held that the scheme was unconstitutional, because the State failed to demonstrate that it could not meet its policy objectives through non-discriminatory means.

New York’s licensing scheme, although somewhat different from Michigan’s, was also challenged. New York allowed its in-state wineries to ship directly to consumers. Out-of-state wineries could also sell their product through New York wineries, but only if 75% of the grapes were grown in New York. Finally, an out-of-state winery could ship directly to New York consumers only if it became a licensed New York winery, requiring the establishment of a branch factory, office or storeroom within the State of New York.
Two small wineries in Virginia and some of their customers challenged the New York scheme as violative of the Commerce Clause. The District Court struck down the law as discriminatory and rejected the States’ claim that the ban implicated the States’ “core” concerns under the Twenty-first Amendment. As discussed in our column “Direct Shipping II,” the Second Circuit Court of Appeals reversed the lower court on appeal and upheld the licensing scheme as within “the ambit of the powers granted to the State by the Twenty-first Amendment.”

THE MAJORITY DECISION

Although our prediction that the Supreme Court would affirm the Second Circuit’s decision to uphold the New York scheme was slightly off base (the Second Circuit was reversed by the narrowest of margins, 5-4), our reasoning was proved correct and thus our opinions concerning the continued viability of the three-tier system have not altered.

Two themes emerge from the majority decision written by Justice Kennedy and joined by Justices Scalia, Ginsberg, Breyer and Souter. First, the Court concluded that “It is evident that the object and design of the Michigan and New York statutes is to grant in-state wineries a competitive advantage over wineries located beyond the States’ borders.” The majority continually focused on the discriminatory nature of the regulations, and found that such discrimination against out-of-state wineries was a direct and clear violation of the Commerce Clause. In general, regulations that violate the Commerce Clause “face a virtually per se rule of invalidity.”
The other theme emerging was that even though the majority struck down the regulations, they recognized that so long as regulations do not favor in-state producers over out-of-state producers, the States ability to mandate a three-tier distribution system under the

Twenty-first Amendment remains intact.

The Supreme Court noted that the aim of the Twenty-first Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation and use. However, the Amendment does not give States the authority to pass non-uniform laws in order to discriminate against out-of-state goods. Rejecting cases decided soon after the Amendment was passed, the majority confirmed that the Twenty-first Amendment does not supersede other provisions of the Constitution and, in particular, does not displace the rule that States may not give a discriminating preference to their own producers.
Significantly, however, the Supreme Court laid to rest any contention that the holding in Swedenburg called into question the Constitutionality of the three-tier system. In what can only be described as a passage extremely reassuring to beer wholesalers, the Court Stated:

The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system. A State which chooses to ban the sale and consumption of alcohol altogether could bar its importation; and as our history shows, it would have to do so to make its laws effective. States may also assume direct control of liquor distribution through State-run outlets or funnel sales through the three-tier system. We have previously recognized that the three-tier system itself is “unquestionably legitimate.” State policies are protected under the Twenty-first Amendment when they treat liquor produced out-of-state the same as its domestic equivalent.

In sum, the Court’s decision confirms our prior view that the three-tier system is protected as a valid exercise of the States’ powers under the Twenty-first Amendment, but that regulations which favor domestic over out-of-state producers nevertheless violate the Constitution.

THE DISSENTING OPINION

Lending further support to the continued viability of the three-tier system is the dissenting opinion of Justice Thomas, who was joined by Chief Justice Rehnquist and Justices Stevens and O’Connor. Indeed, these four members of the Court held that a statute enacted prior to prohibition, known as the Webb-Kenyan Act, negates any Commerce Clause related review of State liquor laws. In other words, according to these four Justices, the Twenty-first Amendment trumps the Commerce Clause.

Indeed, the dissent went so far as to say that the broad language conferring powers to the States under the Twenty-first Amendment, actually includes the power to enact discriminating State laws relating to liquor. Moreover, these Justices assert that cases decided soon after the Amendment was passed support the view that States may set up any system of alcoholic distribution it sees fit. Finally, the dissent contends that even under more recent precedent, the Michigan and New York laws pass muster because these regulations fall within the “core concerns” of the Twenty-first Amendment. Had Justice Scalia, a traditional “states’ rights conservative,” joined with these four Justices as we expected, not only would the Second Circuit’s decision in Swedenburg have been sustained, but more importantly, the states ability to regulate the distribution of alcoholic beverages within their borders would have been unassailable – even in the face of Commerce Clause challenges. Couldn’t one of you wholesalers taken Justice Scalia hunting before the decision came down? It worked for Vice President Cheney.

All joking aside, the decision was balanced and, in the larger scheme of things, a good one for beer wholesalers. Most significantly the ability of state legislatures to require a three-tier system of distribution is a given.

THE CHANGING FACE OF THE SUPREME COURT

As most of you probably know, Justice O’Connor recently announced that she was retiring from the Supreme Court. Moreover, Chief Justice Rehnquist is gravely ill. Unfortunately, Justice O’Connor and Chief Justice Rehnquist, both of whom dissented in Swedenburg, are strong believers in states rights in general and specifically that the states’ powers under the Twenty-first Amendment were virtually unlimited so long as the state was regulating the distribution of alcoholic beverages. In fact, in a dissent she wrote in 1987, Justice O’Connor Stated that the Twenty-first Amendment gives States “absolute control” over alcohol, even if such control has a damaging effect on interstate commerce. Clearly, both Justices Rehnquist and O’Connor were friends of those who make a living distributing beer. The question is, will their replacements be friendly as well?

Obviously only time will tell, however, it is unlikely that President Bush will appoint any Supreme Court Justice that does not have similar ideology to Justices Rehnquist and O’Connor - both of whom were appointed by conservative republican presidents (Nixon and Reagan, respectively). Accordingly, although we may have lost our best chance to have a wide-sweeping victory for the Twenty-first Amendment – one where the Supreme Court recognized the superiority of the Twenty-first Amendment to the Commerce Clause – at worst it appears that we will still have a Supreme Court that recognizes the wide-sweeping powers granted to the States under the Twenty-first Amendment, including the power to require three-tier distribution systems.

In the final analysis, the Swedenburg decision was relatively good for beer wholesalers. The Court made it clear that the three-tier distribution system is alive and well. So does that mean that you can all relax? Not by a long-shot! As long as there are folks out there with major dollars to spend who have an interest in making money from the way that you presently make money, you have to be willing to respond in kind; and believe us, they are out there. While there is a modicum of comfort provided by the decision, the battle is far from over. Be vigilant!