Wine (and beer) lovers who want to order hard-to-get vintages online have benefited greatly from federal court decisions that say state alcohol laws cannot discriminate against out-of-state sellers. Federal legislation introduced last week could threaten electronic commerce as it further entrenches middlemen who normally profit from every bottle of alcohol that passes from producers to consumers.
To understand what’s going on, you have to know something about Commerce Clause litigation. I’m not a lawyer, though I once played the teetotaling William Jennings Bryan character in a high school production of Inherit the Wind. This proves my motives are pure. And since a lot of lawyers practice economics without a license, I figure I’ll return the favor.
The Commerce Clause of the US Constitution says that Congress, not the states, can regulate interstate commerce. A longstanding judicial interpretation, the “dormant” Commerce Clause, holds that if Congress has not chosen to regulate some aspect of interstate commerce, that means Congress doesn’t want the states to regulate it either. So, normally a state can regulate interstate commerce only if Congress has given explicit permission.
If state law discriminates against out-of-state sellers who compete with in-state sellers, the state is regulating interstate commerce. A state is not allowed to do this unless it can prove the discrimination is necessary to accomplish some clear state purpose that cannot be accomplished in some other way. States have to present evidence that proves these points, not just make arguments.
The 21st Amendment, which repealed Prohibition, gave states the right to regulate alcohol. Recent court cases involving direct wine shipment clarified that when states regulate alcohol, they must still obey the Commerce Clause. This makes good sense. Imagine if the 21st Amendment freed states from the rest of the Constitution when they regulate alcohol. The police could break into your house without warning if they imagined you might give your 20-year-old a beer, but they’d still need a search warrant if they thought you were cooking meth.
In Granholm v. Heald (2005), the Surpeme Court said that states could either allow in-state and out-of-state sellers to ship wine directly to consumers, or prohibit it for both, but states couldn’t ban direct shipment for out-of-state sellers and allow it for in-state sellers. In response, most states have liberalized their direct shipment laws rather than making them more restrictive. In Family Wine Makers of California v. Jenkins (2008), federal courts said that an ostensibly neutral law that had a discriminatory effect on out-of-state sellers was also unconstitutional. Massachusetts had enacted a law that allowed only wineries producing 30,000 gallons or less to ship directly to consumers; the production cap was large enough to allow all in-state wineries to direct ship but small enough to exclude 637 larger out-of-state wineries that produce 98 percent of all wine in the United States. The judge’s opinion essentially said, “By their fruits you shall know them,” and it reserved special grapes of wrath for the blatantly protectionist motives voiced by advocates of the law. Massachusetts appealed this decision to the First Circuit Court of Appeals, lost, and on April 12 decided not to appeal to the Supreme Court.
On April 15, Massachusetts Rep. Bill Delahunt introduced federal legislation that would turn alcoholic Commerce Clause litigation sideways. The legislation makes four big changes in the rules of the game:
- It says that states may not “facially discriminate without justification.” This standard might reverse Granholm, because the state laws were clearly discriminatory but the states offered justifications. It would likely reverse Family Wine Makers, because the law was “facially” neutral but had discriminatory effects. (Of course, if this thing passes, I’d be delighted to see a consumer or winery plaintiff prove me wrong.)
- It repeals the “dormant” Commerce Clause for alcohol by stating that congressional silence on interstate commerce in alcohol should not be interpreted as a prohibition on state regulation of interstate commerce in alcohol.
- It shifts the burden of proof by requiring that anyone challenging a state alcohol law must prove “by clear and convincing evidence” that the law is invalid. Normally, states have the obligation to present evidence that a discriminatory law accomplishes a state purpose and is no more discriminatory than necessary.
- Any state law that burdens interstate commerce or contradicts any other federal law (!) would be upheld unless the person challenging it proves that the state law has no effect on temperance, orderly markets, tax collection, the structure of the distribution system, or underage drinking. Since there’s plenty of economic evidence that state alcohol laws increase prices, a state could argue its laws reduce consumption and promote temperance, and the law would be upheld. In other words, any state alcohol law that harms consumers by increasing prices would automatically be OK, even if it blatantly conflicted with other federal laws (such as antitrust laws, which are intended to protect consumers from the high prices associated with monopoly) or the Commerce Clause.
Word on the street is that the biggest pushers of this legislation are the beer wholesalers. Since most of this litigation has involved wine, what’s going on here?
The real goal of this legislation is not harrassing wineries that want to ship a few bottles to out-of-state customers. The real goal is to preserve anti-competitive state laws that force brewers, wine makers, and distillers to market most of their product through beer, wine, and spirits wholesalers, instead of marketing directly to retailers and restaurants. The proposed legislation would effectively insulate these state laws from challenge under the Commerce Clause, federal antitrust laws, or any other federal laws that might give alcohol producers and consumers some leverage to break the wholesalers’ lock on the market.
Call it states’ rights kool-aid with a chaser of economic protectionism. A strange brew indeed.
The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.