FINE(ING) WINE: CHALLENGING DIRECT-SHIPMENT LICENSING FEES ON DORMANT COMMERCE CLAUSE GROUNDS.

• Author: Steiger, Alexander R.

INTRODUCTION 2108 I. LICENSING TO CHILL: THE CHILLING EFFECT OF STATE DIRECT-SHIPMENT LICENSING FEES ON DTC COMMERCE 2111 A. State Direct-Shipment Licensing Frameworks 2111 B. DtC Licensing Fees Are Prohibitively Expensive for Wine Producers 2113 II. LEGAL VINTAGES: CONSTITUTIONAL FRAMEWORKS GOVERNING DTC LICENSING 2115 A. The Twenty-First Amendment 2116 B. The Dormant Commerce Clause 2119 III. RED, RED FINE: DTC LICENSING FEES VIOLATE THE DORMANT COMMERCE CLAUSE 2125 A. Wine DtC Licensing Requires a "Heightened" Balancing Test 2126 B. Weighing State Interests 2129 IV. SOUR GRAPES: ADDRESSING COUNTERARGUMENTS 2132 A. Rationality Review 2132 B. DtC Licensing Fees as a Matter of State Policy 2134 CONCLUSION 2135 INTRODUCTION

"[W]ine," Thomas Jefferson once remarked, "[is] a necessary of life with me." (1) An avid wine consumer, Jefferson notoriously spent over $16,500 on imported wines during his presidency alone. (2) But imagine if, much to Jefferson's chagrin, he could not have had his favorite wines shipped directly to Monacello because the producer had not paid the Commonwealth of Virginia for a direct-to-consumer shipping license. (3) Jefferson's worst nightmare is a reality for Americans in most states today, where costly licensing fees hinder direct-to-consumer (DtC) shipping from out-of-state wine producers. (4)

Following the repeal of Prohibition in 1933, states were given broad discretion to control the production, distribution, and sale of alcoholic beverages. (5) Contemporary regulations vary greatly state-by-state, but many states have adopted frameworks encouraging domestic wine production by allowing wine producers to sell directly to consumers. (6) At the core of DtC regulations is the requirement that producers obtain a direct-shipment license. (7)

Since the Supreme Court's landmark ruling in Granholm v. Heald, which invalidated laws in New York and Michigan that permitted in-state wineries to ship wine directly to consumers but otherwise prohibited out-of-state wineries from doing the same, (8) most states have extended direct shipment benefits to both in-state and out-of-state wineries. (9) While the Granholm Court implied that states could police direct-shipment through "an evenhanded licensing requirement," (10) the reality is that producers are required to pay exorbitant licensing fees on a state-by-state basis if they wish to ship directly to consumers across the country. DtC licensing fees, "while in [the] aggregate are reasonable expenses for in-state wineries with significant volumes of direct sales, [are] prohibitively expensive" for out-of-state wineries. (11) Because DtC wine shipments have become an increasingly important part of the wine industry, (12) there are emerging concerns that state scrutiny of DtC wine shipping will be intensified. (13)

This Note advocates for a constitutional challenge to state DtC licensing fees, arguing that the licensing fees impose an undue burden on interstate commerce. To this end, this Note will apply the Supreme Court's dormant Commerce Clause jurisprudence to state DtC wine licensing fees. Under this framework, the Court has almost always invalidated state laws that discriminate against out-of-state interests absent a showing that the law is necessary to achieve a legitimate purpose other than economic protectionism. (14) If the state law is not found to discriminate against out-of-state interests, the Court balances the law's burdens on interstate commerce against its benefits, invalidating a law when the burden imposed on interstate commerce is "excessive in relation to the [law's] putative local benefits." (15)

There are two approaches to this balancing test. In balancing the law's burdens on interstate commerce against its benefits, some circuit courts require a heightened standard in which the government must prove that the asserted local benefits are both genuine and credibly advanced by the law; (16) other circuits accept any rational assertion of benefit by the state. (17) This Note argues that the heightened approach to balancing is appropriate with respect to DtC licensing fees because of concerns that states will prop up seemingly legitimate interests that are not truly advanced by the licensing fees. (18) Moreover, a rational basis standard ignores the unique climate conditions of particular states that affect the quality of wine production. (19) This Note will ultimately conclude that DtC licensing fees are unconstitutionally burdensome on interstate commerce.

Part I overviews state DtC wine shipment licensing frameworks and examines how the existing frameworks create a substantial burden on wine producers. Part II discusses the Twenty-First Amendment, the Commerce Clause, and the doctrinal framework relevant to DtC licensing. Part III applies the Court's dormant Commerce Clause framework to DtC licensing fees using a heightened balancing standard for weighing the asserted benefits of the licensing fees against the burdens on interstate commerce. Part IV anticipates and addresses potential counterarguments about the appropriate standard of review, as well as institutional concerns about the judiciary weighing in on state policy decisions relating to alcohol regulation.

1. LICENSING TO CHILL: THE CHILLING EFFECT OF STATE DIRECT-SHIPMENT LICENSING FEES ON DTC COMMERCE

   Before addressing the constitutionality of DtC licensing fees, it is necessary to overview state DtC wine shipment licensing frameworks. This Part briefly explains the structure of state regulatory frameworks and discusses the purposes served by direct-shipment licensing. It then discusses the pernicious effect that DtC licensing fees have on wine producers and illustrates how the existing frameworks create a substantial burden on interstate commerce.

   1. State Direct-Shipment Licensing Frameworks

      Following the repeal of Prohibition by the Twenty-First Amendment in 1933, states were given broad discretion to regulate the production, distribution, and sale of alcohol. (20) Most states adopted, and some states continue to enforce, (21) a three-tiered distribution system to control the alcohol industry. (22) In effect, the tiered system requires that licensed producers sell to licensed wholesalers, who in turn are required to sell to licensed retailers, who alone are authorized to sell to consumers. (23) A common component of this system is the requirement that each entity within each tier obtain a license. (24) The tiered system has long been justified as a means of "promoting temperance," collecting state tax revenue, and "ensuring orderly market conditions." (25)

      With the emergence of more efficient means of distribution, including ever-growing internet marketplace, states have become increasingly receptive to schemes in which wine producers are permitted to circumvent the traditional three-tiered system by obtaining a license to ship wine directly to consumers. (26) Direct shipping refers to when producers ship "wine directly to consumers outside the three-tier system, usually to their home or work via a package delivery company." (27) Although the three-tiered system is slowly becoming a relic of the past, (28) certain aspects have carried over to the newer DtC frameworks--most notably the licensing requirement. (29)

      Currently, forty-four states permit wine producers to ship directly to consumers. (30) Forty-one states require that wine producers obtain a license as a condition of shipping wine directly to consumers, and all but two of these states charge a fee for the shipping licenses. (31) In effect, this means that wine producers must pay for a direct-shipment license in every state where it is required if the producer wishes to distribute directly to consumers on a nationwide basis. Moreover, because most states' direct-shipment licenses expire annually, producers must pay the licensing fee each year to renew direct-shipment privileges in a given state. (32) There is great variance in the cost of DtC licensing state-by-state, but the annual cost of DtC licensing fees exceeds one hundred dollars in twenty-three states--a hefty financial burden for smaller producers. (33)

      It is important to note that federal law mandates that wine producers obtain a federal permit from the Alcohol and Tobacco Tax and Trade Bureau (TTB) as a condition of conducting business. (34) A winery cannot operate in any state without a federal license. (35) Ironically, there is no fee at the federal level to apply for or maintain a license to operate a winery. (36) The Federal Alcohol Administration Act, which mandates TTB licensing, is silent with respect to state licensing provisions. (37) As such, it is unclear whether the federal requirement that wine producers obtain a license preempts state DtC licensing requirements. (38) However, the question of whether federal licensing requirements preempt state DtC licensing requirements is beyond the scope of this Note.

   2. DtC Licensing Fees Are Prohibitively Expensive for Wine Producers

      While the cost of state DtC licensing fees may seem reasonable when viewed on a single-state basis, the costs of DtC licensing are striking when viewed in the aggregate. (39) The United States is the largest national wine market in the world, but from a marketing perspective it "is better considered as 51 different entities consisting of 50 states and the Federal District of Columbia." (40) DtC licensing fees in a single state may seem like an ordinary business expense for wine producers--and they might be for a winery with significant volumes of direct sales in a particular state--but the reality is that in the aggregate, the cost of DtC licensing fees is "prohibitively expensive for... out-of-state winer[ies] that [are] shipping only a few cases per month to a particular state." (41) As such, wineries end up spending several thousand dollars annually just to access consumers across the country. (42) The Federal Trade Commission (FTC) has stressed that...