Good history, good law (and by coincidence good policy too: Granholm v. Heald.

• Author: Nielson, Aaron

With the rise of the Internet has come the lucrative practice of online wine selling. Although in nearly every state over-the-counter alcohol sales are, by law, channeled through elaborate multi-tiered distribution schemes, many states have enacted less restrictive laws for online sales, making possible direct sales to consumers. (1) In passing these laws, many states did more than liberalize a producer's ability to sell alcohol online; states placed out-of-state producers in less advantageous positions than in-state producers. Last Term, in Granholm v. Heald, the Court held that the dormant Commerce Clause's antidiscrimination principle prohibits a state from treating in-state wine merchants more favorably than out-of-state sellers, the Twenty-First Amendment notwithstanding. (2) Although the decision advanced domestic free trade, a sound policy outcome, there may be reasons to fear that the case was incorrectly decided as a matter of law. Such fears, however, are unnecessary, as there is no conflict between the correct constitutional interpretation and freer trade.

Prior to Granholm, the circuits split in addressing discriminatory regulations of alcohol sales, with some striking down the laws as violating the dormant Commerce Clause's anti-discrimination principle, and others exempting these laws under Section Two of the Twenty-First Amendment. (3) The U.S. Supreme Court consolidated two of these circuit decisions and granted certiorari. The question before the Supreme Court in Granholm was thus whether Section Two gives States the power to discriminate against out-of-state wine merchants. The first case came from Michigan, where "approximately 40 in-state wineries ... [were] eligible for 'wine maker' licenses that allow[ed] direct shipment to in-state consumers" while "[o]ut-of-state wineries [could] apply for a $300 "outside seller of wine' license, but this license only allow[ed] them to sell to in-state wholesalers." (4) This meant, in effect, that out-of-state wineries were forbidden to ship directly to consumers in Michigan. The Sixth Circuit held that this regime was unconstitutional. (5)

The second case concerned New York's licensing system. There, an out-of-state wine maker could ship directly to in-state consumers, but New York law imposed heavy burdens on doing so. "Wineries that produce[d] wine only from New York grapes [could] apply for a license that allow[ed] direct shipment to in-state consumers" but an "out-of-state winery [could] ship directly to New York consumers only if it bec[ame] a licensed New York winery, which require[d] the establishment of a 'branch factory, office or storeroom within the state of New York.'" (6) Moreover, even if an out-of-state winery were to avail itself of that expensive option--none had (7)--it still would not have had the same opportunities available to in-state wineries: such "[o]ut-of-state wineries ... [were] ineligible for a "farm winery' license, the license that provides the most direct means of shipping to New York consumers ... [and could] apply only for a commercial winery license." (8) This was a less attractive license because "[u]nlike farm wineries ... commercial wineries [had to] obtain a separate certificate from the state liquor authority.... "(9) The Second Circuit held that though "the physical presence requirement could create substantial dormant Commerce Clause problems [for] a commodity other than alcohol," the Twenty-First Amendment enabled New York to "ensure accountability through presence" for wineries involved in "the importation and transportation of alcohol for use in New York." "(10)

Justice Kennedy, joined by Justices Scalia, Souter, Ginsburg, and Breyer, first found that these state licensing approaches violated the antidiscrimination principle of the dormant Commerce Clause. Justice Kennedy observed that Michigan's "complete ban on direct shipment" by out-of-state wineries made the "discriminatory character of the Michigan system ... obvious." (11) He then wrote that "New York's in-state presence requirement runs contrary to our admonition that states cannot require an out-of-state firm 'to become a resident in order to compete on equal terms," (12) and listed the additional burdens that a wine seller would face in establishing an in-state presence. (13)

The Court then addressed the larger question of whether the Twenty-First Amendment permitted such discrimination. Justice Kennedy offered an extended history lesson, beginning with the early state prohibition laws and the dormant Commerce Clause's original-package doctrine. That doctrine stifled democratically enacted prohibition laws by permitting the States to ban the local production of liquor but forbidding them to prohibit importation of liquor from out-of-state producers, so long as such liquor remained in its original package. (14) In response, Congress passed the Wilson Act, (15) which by its text returned to the States the ability to use their police powers to regulate liquor without being undermined by out-of-state retailers, but did not permit the States to discriminate against out-of-state retailers. The Court held in Scott v. Donald that the Wilson Act, although enabling the States to regulate liquor effectively within their respective borders, "did not allow States to discriminate against out-of-state liquor...." (16) In cases following Scott, however, the Court construed the Wilson Act to permit importation for personal use, undermining a state's ability to regulate liquor importation, (17) to which Congress responded with the 1913 Webb-Kenyon Act. (18)

Though admitting that the language of Webb-Kenyon was broad, Justice Kennedy interpreted the Act as solely closing the judicially created loophole for personal importation, not as eliminating the antidiscrimination component of the Wilson Act that was recognized in Scott. The Court reached this narrow interpretation by invoking a clear statement requirement for federal laws that would permit state discrimination against out-of-state retailers and by noting the historical context preceding the passage of the Webb-Kenyon Act and the cases that later construed it narrowly. (19) Justice Kennedy also emphasized that the Webb-Kenyon Act did not expressly repeal the Wilson Act and that repeals by implication are disfavored. (20) Thus when the Webb-Kenyon Act was passed, "States were required to regulate domestic and imported liquor on equal terms." (21)

Then came Prohibition with the Eighteenth Amendment, and the end of Prohibition with Section One of the Twenty-First Amendment, Section Two (22) of which would become the source of controversy in Granholm. The Supreme Court held in Craig v. Boren that Section Two incorporated into the Constitution the Wilson and Webb-Kenyon Acts, including their antidiscrimination principle. (23) Therefore, as with the Webb-Kenyon Act, under Section Two a state may choose to ban all online wine sales, but "[i]f a State chooses to allow direct shipment of wine, it must do so on evenhanded terms." (24) The majority, while acknowledging that some (but not all) of the early case law took a much more expansive view of Section Two, explained that this holding was in line with modern case law, and insofar as that early case law was contrary, it was abrogated. (25)

After establishing that the laws in question were discriminatory, and that Section Two provided no license for such discrimination, the Court addressed whether there were "reasonable nondiscriminatory alternatives" to advance the states' policy goals of protecting minors from alcohol and enabling easier collection of taxes. (26) The Court noted that there is little evidence that online alcohol sales pose a real threat to minors, and the paucity of evidence was insufficient to meet the requirement of "clearest showing," which is applied when a state seeks to defend a discriminatory law. (27) Furthermore, even if underage drinking from online wine sales did pose a threat, the states' laws did not eliminate this threat because in-state wineries could still ship directly. (28) Regarding taxation, the Court observed that there are ample ways for a state to ensure that taxes are collected that are far less burdensome on commerce. (29)

Justice Stevens, joined by Justice O'Connor, dissented. He recognized that but for the Twenty-First Amendment, these state laws would unquestionably be unconstitutional, but stressed that alcohol, because of the Twenty-First Amendment, is different, and that "those members of the younger generations who make policy decisions" fail to understand the significance of Section Two. Therefore, "[t]he views of judges who lived through the debates that led to the ratification of those [alcohol] Amendments are entitled to special deference." (30) Justice Stevens then cited cases that took a very expansive view of Section Two and listed state laws passed soon after the ratification of the Twenty-First Amendment that would be considered discriminatory but were still permitted, such as laws mandating that a state be "dry" or forbidding Sunday alcohol sales. (31)

Justice Thomas also issued a dissent, joined by Chief Justice Rehnquist and Justices Stevens and O'Connor, offering a novel and powerfully comprehensive take on the history of the alcohol statutes and Section Two. Justice Thomas first stated that the Webb-Kenyon Act permitted the state laws in question because it exempted...