U.S. Supreme Court Overturns Wine-Shipping Bans

This morning, the U.S. Supreme Court ruled that states cannot ban out-of-state wineries from shipping wine directly to consumers while allowing in-state wine producers to do so. The decision, which was hailed as a major victory for wine lovers and small wineries, could make it easier for residents of Michigan and New York, as well as other states with similar discrepancies in their laws, to order wine via the Internet, phone or mail.

The high court's 5-4 ruling determined that Michigan and New York's regulatory systems discriminate in favor of local businesses without justification and therefore violate the U.S. Constitution's Commerce Clause.

"States have broad power to regulate liquor under the 21st Amendment," wrote Justice Anthony Kennedy, who was joined in the majority opinion by Antonin Scalia, David Souter, Ruth Bader Ginsburg and Stephen Breyer. "This power, however, does not allow states to ban, or severely limit, the direct shipping of wine while simultaneously authorizing direct shipment by in-state producers. If a state chooses to allow direct shipment of wine, it must do so on evenhanded terms. Without demonstrating the need for discrimination, New York and Michigan have enacted regulations that disadvantage out-of-state wine producers. Under our Commerce Clause jurisprudence, these regulations cannot stand."

"This has been a long time in coming," said attorney Clint Bolick of the Institute for Justice, who represented the consumers and wineries who sued New York state over its shipping ban. "The result is every bit as good as we could have hoped."

While the court's decision means that Michigan and New York could join the 27 other states that now allow direct-to-consumer wine shipments, it will not have an immediate sweeping impact on shipping laws across the country. Of the 23 states that currently ban interstate shipments, not all of them will be affected by the ruling because some of them also ban in-state shipments. Michigan, New York and any other states that are affected by the decision will have to change their laws to come into compliance; they would have the option of either allowing all wineries to ship or of banning all shipments.

Michigan Liquor Control Commission chairwoman Nida Samona wants the legislature to opt for the latter. "My recommendation would be to tighten the rules, to create more control," she said. She would like to require that all wine sales--in fact, all alcohol distribution--"would have to be done on a face-to-face basis, not through the Internet, phone or mail order. That's the best way to ensure that minors do not have access to alcohol."

The New York State Liquor Authority has not yet issued any response to the Supreme Court's opinion. But Gov. George Pataki would be likely to support opening up the New York market to out-of-state wineries, as he included a direct-shipping provision in his budget proposal this year.

For the time being, winery trade organizations are recommending that their members not ship yet to customers in Michigan or New York.

There are at least six other states that are candidates for a change in laws, including Florida, Connecticut, Indiana, Massachusetts, Ohio and Vermont, according to Tracy Genesen, legal director for the Coalition for Free Trade. The nonprofit group helped coordinate the winery industry's shipping litigation efforts in the federal courts, including the Supreme Court. "These are the states we have looked at most directly," she said, explaining that these have the most prominent examples of discrepancies in how out-of-state and in-state wineries are treated. "We have not done an exhaustive comprehensive analysis yet, but we plan to."

The decision could even affect the 13 states, including California, Oregon and Washington, that have allowed direct shipping for some time under what are known as "reciprocity" laws. These laws allow wine shipments only from other states that allow out-of-state wineries to ship to their residents. The argument could be made that these states discriminate against wineries in nonreciprocal states, Bolick noted, and thus they would have to open their markets even further. Genesen suggested that the winery industry would work with the legislatures to replace the reciprocal laws with the permit laws that are in place in many other states; these systems allow shipments from any winery that purchase a wine-shipping permit, files reports with the state and pays state taxes.

As far as the 15 other states that ban wine-shipping, Bolick said there is no wording in the court's decision that would legally affect them, but it "provides further momentum for the legislative efforts and it really discredits the explanations that states offer for forbidding direct shipping."

The major winery advocacy groups, including the Wine Institute, WineAmerica and Family Winemakers of America, now plan to work with legislators in the affected states to encourage them to pass pro-shipping laws. Free the Grapes!, a coalition of wineries and roughly 300,000 wine lovers, is asking its members to write to their legislators to encourage them to support bills to allow direct-to-consumer shipments.

Winery groups are optimistic that the states will lean toward opening their markets, said Bobby Koch, president of the San Francisco-based Wine Institute, which has 840 California wineries as members. "We've seen a track record [in the other 27 states] that this is overall a good and healthy thing for the wine industry," he said, adding that shipping can increase business for everyone, including wholesalers and retailers, by building a stronger interest in and market for wine. But he stressed that it is important for local wineries and wine lovers to make their voices heard.

"Ending direct shipping is a terrible way to turn back the clock to a time when there was no outlet for small wineries in Michigan," said Coalition for Free Trade counsel Ken Starr, in response to the Michigan Liquor Control Commission's proposal. Starr, who helped direct the CFT's Supreme Court efforts, added, "I would like to think that kind of initiative would be rebuffed."

Indeed, that's what happened in North Carolina in 2003 when the Fourth Circuit Court of Appeals ruled that the state's shipping laws were unconstitutional, but it could address that by banning the local wineries from shipping. Within a couple of months, after hearing the concerns of North Carolina's growing wine industry, legislators instead enacted a law establishing a permit system for out-of-state wine shipments.

The battle over direct shipping of wine has been going on since the 1980s, when California became the first state to allow direct shipments, and heated up in the 1990s, when consumers became used to the convenience of ordering via the Internet.

On one side are consumers, who want to be able to join winery mailing lists and order hard-to-find wines no matter where they live. They are joined by the thousands of small wineries around the country who want to be able to expand their businesses outside their immediate region, but cannot afford the expense of working with wholesalers or are too small to be worth the attention of most distributors. Consolidation has swept across alcohol-beverage wholesalers in recent years, leaving fewer, and larger, distributors. At the same time, the number of wineries, particularly small, family-owned producers, has increased, to more than 3,700, according to WineAmerica, a Washington, D.C.-based trade organization of U.S. wineries.

"The only way that most small wineries can survive economically is to open up new markets and that means shipping directly to consumers," said Paul Kronenberg, president of Family Winemakers of California.

On the other side are the wholesalers, through whom the majority of wine in this country must pass. They have teamed with state liquor authorities to argue that the existing three-tier systems are essential to collect state taxes and prevent minors from buying alcohol. Many of their anti-shipping campaigns have focused on the supposed ease with which teenagers could order wine online.

Retailers may fall into either camp. Many wine stores--particularly the larger ones or those who specialize in certain collectible wines--want to take advantage of direct shipping to do business with consumers across the country. Others, particularly smaller stores that can't compete on a national scale, fear that direct shipping will cut into their sales.

Through the 1980s and '90s, winery trade organizations worked with state legislatures, encouraging them to pass laws that would allow home delivery of wine, with protections in place. The industry's current "model" bill limits the amount that can be shipped to an individual consumer each month, provides for the collection of state taxes and requires the package carrier to obtain the signature of an adult upon delivery.

The Wine & Spirits Wholesalers of America and local wholesaler organizations, powerful lobbying groups, countered by trying to convince states to make it a felony to ship wine to residents. They also got the U.S. Congress to pass a law allowing states to turn to the federal court to prosecute violators.

Frustrated by the pace of legislative progress, consumers and wineries took their cases to the federal courts. In 1998, after Indiana passed a wine-shipping ban with felony penalties, a group of wine lovers sued the state to try to overturn the law. Other suits soon followed, in Texas, Florida, New York, Michigan, Virginia and North Carolina.

The premise was that the shipping bans impeded free trade among the states, thereby violating the Commerce Clause of the U.S. Constitution. After losing the case in Indiana, winery-consumer advocacy groups concentrated on states that allowed local wineries to ship and banned only interstate shipments. They argued that this amounted to economic protectionism and brought in small wineries to testify about how much business they were losing by not being able to serve the out-of-state customers who visited their tasting rooms.

A string of appeals-court victories for consumers, as well as a couple of setbacks, set the stage for the U.S. Supreme Court to take up the issue and address the disagreements among the circuit courts. It decided to consolidate and hear two cases, one in which an appeals court overturned Michigan's shipping ban in 2003, and another in which a different appeals court upheld New York's shipping ban in 2004.

The key theme in today's ruling, Starr said, "is the principle of nondiscrimination based on geographic origin"--the re-enforcement of the idea that all the states are "part of a national economic union."

There were two dissenting opinions issued, one from Clarence Thomas and Chief Justice William Rehnquist, the other written by John Paul Stevens. Both were joined by Sandra Day O'Connor. The four justices felt that the states should have been allowed to maintain their existing regulatory systems. They argued that the 21st Amendment, which gave states control over alcohol sales within their borders after Prohibition was repealed, should take precedence over the Commerce Clause.

All of the parties involved in the lawsuits stressed that the ruling does not overturn states' authority--it simply requires them to treat all producers the same--and that the three-tier system remains intact. "The 21st Amendment is alive and well, and continues to be a useful tool for states to reasonably regulate the interstate sale of wine," said Genesen. "But according to the court's ruling, the 21st Amendment can no longer be used as a pretext for economic protectionism."

But the wholesalers appear unwilling to concede defeat or find a way to compromise. "The court today affirmed a state's right to regulate the sale and distribution of alcohol and said in doing so they must treat in-state, out-of-state and presumably out-of-country producers all the same," said WSWA president and CEO Juanita Duggan in a statement. "That means states have a choice between supporting face-to-face transactions by someone licensed to sell alcohol or opening up the floodgates."

Indicating that the battle in the legislatures is likely to continue to be fierce, Duggan continued: "WSWA supports state efforts to strengthen--not weaken--alcohol laws by making all producers play from the same set of rules that ensure accountable, responsible alcohol sales. Face-to-face ID checks by those licensed to sell alcohol are the best way to do that."

Although wineries and consumers still face a long road before wine shipping is permitted in the vast majority of the country, Free the Grapes! is calling for a national toast this evening to celebrate the ruling. "We're asking everyone who loves wine to participate--consumers, winemakers, retailers, restaurateurs, brokers and wholesalers," said executive director Jeremy Benson. "There are no losers today. Today's historic ruling will benefit each tier of the wine industry."