Reference no: EM131674872

Question: BLACK STAR FARMS, LLC, ET AL. v. JERRY OLIVER, ARIZONA DEPARTMENT OF LIQUOR LICENSE AND CONTROL ET AL. U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

FACTS: Arizona generally requires all alcoholic beverages sold to consumers in the state to pass through a three-tier distribution system comprising producers, wholesalers, and retailers. However, Arizona has carved out two exceptions to its system that allow wineries under specifi ed circumstances to bypass the three-tier distribution system. First, all wineries that produce fewer than 20,000 gallons of wine per year-whether located in state or out of state-are allowed to ship an unlimited amount of wine directly to consumers, regardless of how the order is placed, and to sell directly to retailers. Second, all wineries-whether located in state or out of state-are allowed to ship two cases of wine per year directly to consumers who purchase wine while they are physically present at the winery Black Star Farms, a Michigan winery, produced approximately 35,000 gallons of wine in 2006. Thus, the small-winery exception was not available to Black Star Farms, and wholesalers would not handle its wine in a costeffective manner because it did not sell enough in the state. Nevertheless, the in-person exception did allow Black Star Farms to ship up to two cases per year to a consumer who purchased the wine while he or she was physically present at the winery in Michigan. Black Star Farms contended that these challenged exceptions to the three-tier system violated the dormant commerce clause, and sued the State Liquor Control Board because the winery could not ship directly to consumers who do not physically go to Michigan to purchase the wine.

They were joined in their action by a couple who wished to purchase Black Star Farms wine in Arizona without going to the Michigan winery. These consumer plaintiffs contended that it was economically and practically impossible for them to visit wineries located far from Arizona, including those in Michigan, Napa, and Oregon, to purchase wine in person and have it shipped home. Black Star Farms and defendants each fi led motions for summary judgment, and the district court denied Black Farms' motion but granted defendants' cross-motions for summary judgment, concluding that Black Star Farms failed to carry its burden of showing that the challenged statutory scheme discriminates against out-of-state wineries in practical effect. Black Farms appealed.

ISSUE: Do the exceptions to the state of Arizona's threetier distribution system violate the dormant commerce clause?

REASONING: For the purposes of the dormant commerce clause, discrimination means differential treatment of in-state and out-of-state economic interests that benefi ts the former and burdens the latter. If such discrimination is found, the court will apply strict scrutiny. The party challenging the statute must prove discrimination. This act at issue is intended to provide for a separate method of regulating only the sale and delivery of wine produced by small wineries and allowing small wineries to bypass the wholesalers. Before the changes to the law, the small-wineries exception applied only to small wineries at which 75 percent of the grapes used were grown within the state of Arizona, making that exception facially unconstitutional because it treated in-state and out-of-state wineries differently. The exception now applies to all small wineries regardless of where their grapes are grown, so the law is facially neutral. The in-person exception likewise applies to in- and out-of-state wineries and is also facially neutral; it thus appears facially constitutional. Although Black Star Farms Winery contends that the law is discriminatory in its effect, (1) there was no indication that the exception creates a system under which local goods constitute a larger share, and goods with an out-ofstate source constitute a smaller share, of the total sales in the market, and (2) more than half of all U.S. wineries can take advantage of the exception, and as of the time the case was heard, more out-of-state than in-state wineries had taken advantage of it. Further, there is no indication whatsoever that the in-person exception has any effect on the fl ow of interstate commerce. Thus, the law does not discriminate on its face or practically against interstate commerce.

DECISION AND REMEDY: The court of appeals concluded that Arizona's statutory exceptions to its three-tier distribution system, which treat similarly situated in-state and out-of-state wineries the same and impose no new impermissible burdens on out-of-state wineries, do not have the practical effect of favoring in-state economic interests over out-of-state interests. Therefore, the appellate court affi rmed the district court's decision.

SIGNIFICANCE OF THE CASE: The case illustrates how the court responds to a challenge to a state statute based on grounds that the law violates the dormant commerce clause.

CRITICAL THINKING: What different facts might have led the court to a different conclusion?

ETHICAL DECISION MAKING: Identify the primary stakeholders helped and hurt by the outcome of this case.