Reference no: EM131914443

Problem: Granholm v. Heald 544 U.S. 460 (2005)

Justice Kennedy

These consolidated cases present challenges to state laws regulating the sale of wine from out-of-state wineries to consumers in Michigan and New York. The details and mechanics of the two regulatory schemes differ, but the object and effect of the laws are the same: to allow in-state wineries to sell wine directly to consumers in that state but to prohibit out-of-state wineries from doing so, or, at the least, to make direct sales impractical from an economic standpoint. 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.

I Like many other states, Michigan and New York regulate the sale and importation of alcoholic beverages, including wine, through a three-tier distribution system. Separate licenses are required for producers, wholesalers, and retailers. . . . We have held previously that states can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-First Amendment. As relevant to today's cases, though, the three-tier system is, in broad terms and with refinements to be discussed, mandated by Michigan and New York only for sales from out-ofstate wineries. In-state wineries, by contrast, can obtain a license for direct sales to consumers. The differential treatment between in-state and out-of-state wineries constitutes explicit discrimination against interstate commerce. This discrimination substantially limits the direct sale of wine to consumers. . . . From 1994 to 1999, consumer spending on direct wine shipments doubled, reaching $500 million per year, or 3 percent of all wine sales. . . . [T]he number of small wineries in the United States has significantly increased. At the same time, the wholesale market has consolidated. . . . The increasing winery-to-wholesaler ratio means that many small wineries do not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products. This has led many small wineries to rely on direct shipping to reach new markets. Technological improvements, in particular the ability of wineries to sell wine over the Internet, have helped make direct shipments an attractive sales channel. Approximately 26 states allow some direct shipping of wine, with various restrictions. Thirteen of these states have reciprocity laws, which allow direct shipment from wineries outside the state, provided the state of origin affords similar nondiscriminatory treatment. In many parts of the country, however, state laws that prohibit or severely restrict direct shipments deprive consumers of access to the direct market. The wine producers in the cases before us are small wineries that rely on direct consumer sales as an important part of their businesses. Domaine Alfred, one of the plaintiffs in the Michigan suit, is a small winery located in San Luis Obispo, California. . . . Domaine Alfred has received requests for its wine from Michigan consumers but cannot fill the orders because of the state's direct shipment ban. . . . Similarly, Juanita Swedenburg and David Lucas, two of the plaintiffs in the New York suit, operate small wineries in Virginia (the Swedenburg Estate Vineyard) and California (the Lucas Winery). Some of their customers are tourists from other states, who purchase wine while visiting the wineries. If these customers wish to obtain Swedenburg or Lucas wines after they return home, they will be unable to do so if they reside in a state with restrictive direct shipment laws. . . .

A We first address the background of the suit challenging the Michigan direct shipment law. Most alcoholic beverages in Michigan are distributed through the state's three-tier system. Producers or distillers of alcoholic beverages, whether located in state or out of state, generally may sell only to licensed in-state wholesalers. Wholesalers, in turn, may sell only to in-state retailers. Licensed retailers are the final link in the chain, selling alcoholic beverages to consumers at retail locations and, subject to certain restrictions, through home delivery. Under Michigan law, wine producers, as a general matter, must distribute their wine through wholesalers. There is, however, an exception for Michigan's approximately 40 instate wineries, which are eligible for "wine maker" licenses that allow direct shipment to in-state consumers. The cost of the license varies with the size of the winery. For a small winery, the license is $25. Out-of-state wineries can apply for a $300 "outside seller of wine" license, but this license only allows them to sell to in-state wholesalers.

B New York's licensing scheme is somewhat different. It channels most wine sales through the three-tier system, but it too makes exceptions for in-state wineries. As in Michigan, the result is to allow local wineries to make direct sales to consumers in New York on terms not available to out-of-state wineries. Wineries that produce only from New York grapes can apply for a license that allows direct shipment to in-state consumers. These licensees are authorized to deliver the wines of other wineries as well, but only if the wine is made from grapes "at least seventy-five percent the volume of which were grown in New York state." An out-of-state winery may ship directly to New York consumers only if it becomes a licensed New York winery, which requires the establishment of "a branch factory, office, or storeroom within the state of New York."

C We consolidated these cases and granted certiorari on the following question: "Does a state's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the Commerce Clause in light of Section 2 of the Twenty-First Amendment?"

II A Time and again this Court has held that, in all but the narrowest circumstances, state laws violate the Commerce Clause if they mandate "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." This rule is essential to the foundations of the Union. The mere fact of nonresidence should not foreclose a producer in one state from access to markets in other States. States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses. This mandate "reflects a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation."

Afterword Approximately 40 states and the District of Columbia now allow wineries to ship directly to residents, although those shipments are often limited to just a few cases or to small wineries, and the Granholm decision applied to wineries only so retailers, in most states, still cannot ship directly to consumers.20 The alcohol industry continues to resist an open market preferring instead the three-tier producer, wholesaler, retailer distribution system that has been in place for decades, in part, to restrict access by minors and to encourage a broader selection of products while affirming states rights. Despite Granholm, a maze of state rules continues to discourage online wine sales. Only about 5 percent of U.S. retail wine sales are achieved by direct shipment to consumers.21

Questions

1. a. Why did the Granholm court strike down the New York and Michigan laws?

b. What legal and practical justifications were presented by New York and Michigan in defense of their laws?

2. a. What choice faced the states affected by this decision?

b. What practical effect has this decision likely had on the wine industry?

3. In 1988, Oneida and Herkimer counties in upstate New York created a Solid Waste Management Authority and enacted a "flow control ordinance" requiring that all waste generated within their borders was to be delivered to the Authority's newly created waste processing facilities. In 1995, six waste haulers and a trade association sued the Authority and the counties claiming that the flow control ordinance and associated regulations violated the Commerce Clause by discriminating against interstate commerce. The plaintiffs provided evidence that they could dispose of the waste much less expensively at out-of-state facilities. How would you rule in this case? Explain. See United Haulers Assn., Inc. v. OneidaHerkimer Solid Waste Management Authority, 127 S.Ct 1786 (2007).

4. North Dakota rules required those bringing liquor into the state to file a monthly report, and out-of-state distillers selling to federal enclaves (military bases, in this instance) were required to label each item indicating that it was for consumption only within the enclave. The United States challenged those rules after sellers said they would discontinue dealing with the military bases or they would raise their prices to meet the cost of dealing with the two rules.

a. What were the constitutional foundations of the federal government's challenge?

b. What were the state's reasons for adopting the rules?

c. Decide. Explain. See North Dakota v. United States, 495 U.S. 423 (1990).

5. Premium Standard Farms, a large Missouri hog-raising operation, was pumping manure through a two-mile-long pipe into Iowa to be spread on a farm whose operator sought the manure for fertilizer. Iowa citizens objected and asked Attorney General Tom Miller to act. Could the Iowa attorney general stop the pumping? Explain.