News Analysis: Federal Court Blocks Wine Stores from Shipping into Michigan

Direct-shipping advocates see the case as a temporary roadblock on the path to legalizing wine sales across state lines

News Analysis: Federal Court Blocks Wine Stores from Shipping into Michigan
The three judge panel of the United States Court of Appeals for the Sixth Circuit, based in Cincinnati, Ohio, overturned a lower court ruling. (Alpha Stock / Alamy)
May 1, 2020

Michigan consumers looking to stock up on wine during the pandemic should not look to out-of-state stores, even if local shops don't carry the wines they want. A three-judge panel of the United States Court of Appeals for the Sixth Circuit ruled last week that a Michigan law allowing in-state retailers to sell wine online and ship to consumers while barring out-of-state merchants from doing the same is constitutional. The decision overturns a district court decision from 2018.

What was most striking was the court's strongly worded opinion defending states' rights to mandate that all wine pass through in-state wholesalers and stores.

"There is no silver lining in this decision," Tom Wark, executive director of the National Association of Wine Retailers (NAWR), which supports retailer shipping, told Wine Spectator. "It's simply a bad analysis of the legal principles at stake in the case, and while it is a momentary setback, we are confident it will be an anomaly going forward."

Direct-shipping opponents were elated by the ruling. "Last year's Supreme Court decision in Tennessee Wine & Spirits Retailers Association v. Thomas called into question the power of states' rights under the 21st Amendment, but this decision demonstrates clearly that states remain empowered to impose regulations on the sale of alcohol to protect their citizens," said Michelle Korsmo, president and CEO of Wine & Spirits Wholesalers of America (WSWA), in a statement.

Michigan has been a frequent battleground for direct shipping, one of two states in the 2005 Supreme Court decision Granholm v. Heald that struck down laws allowing in-state wineries to ship to consumers while forbidding out-of-state wineries from doing the same. Some wine retailers have argued since that they should be allowed to ship across state lines as well.

The 21st Amendment puts states in charge of alcohol sales within their borders, but the Constitution's Commerce Clause forbids discriminatory barriers to interstate commerce. Courts have ruled repeatedly that if alcohol laws conflict with the Commerce Clause, they must do so for a legitimate purpose, such as safeguarding public health. Direct-shipping advocates have filed multiple cases challenging bans on retailers shipping wine across state lines, insisting they represent economic protectionism.

Michigan amended its liquor laws in 2016 to allow in-state retailers to provide direct delivery to consumers, which prompted a lawsuit by Lebamoff Enterprises, a company in neighboring Indiana that owns several Cap 'n Cork wine stores. Their argument? If Michigan believes local retailers can ship wine to residents' doorsteps without endangering public health, why can't out-of-state stores do the same.

A federal district court judge found in Lebamoff's favor in 2018, ordering the state to allow licensing for out-of-state retailers. His ruling was stayed on appeal.

But the appeals court disagreed. U.S. Circuit Judge Jeffrey Sutton, writing a unanimous opinion for a three-judge panel, stated that while out-of-state entities are treated differently than those in Michigan, there is no discrimination that would violate the Commerce Clause.

"True, they both sell the same product to consumers. True also, retailers in northern Indiana and southern Michigan presumably compete with each other for those consumers," Sutton wrote. "But they also operate in distinct regulatory environments, the most notable distinction being that Michigan-based retailers may purchase only from Michigan wholesalers and must operate within its three-tier system and comply with its other regulations."

Where can you order wine from? Check out Wine Spectator's comprehensive guide to state shipping laws.

Sutton continued, "There is nothing unusual about the three-tier system, about prohibiting direct deliveries from out of state to avoid it, or about allowing in-state retailers to deliver alcohol within the state. Opening up the state to direct deliveries from out-of-state retailers necessarily means opening it up to alcohol that passes through out-of-state wholesalers or for that matter no wholesaler at all. That effectively eliminates the role of Michigan's wholesalers. If successful, Lebamoff's challenge would create a sizable hole in the three-tier system."

Sutton pointed to Michigan's price controls, which mandate that wholesalers charge certain amounts in order to keep drinking down. Indiana retailers sourcing wine from Indiana wholesalers would not be subject to the same pricing.

Setting up a future fight

Several legal analysts were struck by Sutton's strong opinion that neither Granholm nor last year's Supreme Court decision, Tennessee Wine & Spirits Retailers Association v. Thomas , in which the court found a state requiring alcohol store owners to live in the state was discriminatory and unconstitutional, applied to this case. Citing Tennessee, Sutton wrote, "So far, over 1,800 non-residents have gotten Michigan retail licenses. Lebamoff can do the same. There is no residency requirement, only the requirement that it set up a store within the state—a physical presence requirement that the U.S. Supreme Court and our court permit."

Direct-shipping advocates were disappointed, arguing that they believe the court did not demand Michigan provide evidence that its ban was justified. "Tennessee does not allow a state to justify a law based on unsupported assertions," Sean O'Leary, a Chicago lawyer who filed an amicus brief in the case, told Wine Spectator. "Under [Judge Sutton's] scenario, Indiana retailers could flood the market with cheap product, Michigan is powerless to stop it and then we have excess alcohol and a potential drinking problem. Problematically, he demonstrates no evidence in his opinion that this would happen or it has happened in other states that have allowed wine shipping."

O'Leary also argues that Sutton did not ask whether Michigan could achieve its goals without discriminating, by setting up a licensing system for out-of-state retailers and a system for enforcing its rules. "Remember, the Supreme Court states that you need to look at reasonable alternatives before you discriminate. License the retailers and you can hold them accountable, if they violate the terms of the license, then you can sanction them."

While the decision is a setback for the shipping advocates, they argue it's a temporary one. Multiple other cases are pending. Robert Epstein, a lawyer for Lebamoff and in several of the other cases, says they plan to file a request for a rehearing of the case before the entire sixth circuit next week. If that fails, he hopes another appellate court will rule differently, setting up a potential Supreme Court fight. "We have eight pending cases around the country," Epstein told Wine Spectator. "We would like to see this go to the Supreme Court."

News Direct Shipping Legal and Legislative Issues United States

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