A Post- Granholm Analysis of Iowa's Regulatory Framework for Wine Distribution
| Author | Jessica R. Reese |
| Position | J.D. Candidate, The University of Iowa College of Law, 2009; B.A. & B.B.A., The University of Iowa, 2006. A very special thanks to my parents, Barry & Kayla Reese, for their steadfast support of my academic endeavors. |
| Pages | 01 |
Page 667
The state best known for rolling fields and rows of corn has a budding niche in hilltop chateaus and vines of grapes. Iowa's wine industry has experienced significant growth in the past decade, with vineyards and wineries taking root in nearly all of the state's ninety-nine counties.1Between 1999 and 2006, the number of vineyards in Iowa jumped from 15 to more than 325; the number of wineries from 13 to 63; and the number of acres dedicated to grape-growing from 63 to more than 650.2
This growth comes during a tumultuous time for wine-distribution laws across the country. In 2005, the Supreme Court struck down Michigan and New York laws regulating the direct shipment of wine to consumers as violations of the dormant Commerce Clause in Granholm v. Heald.3 The Court held that if states allow the direct shipment of wine to consumers, they cannot discriminate against out-of-state wineries in favor of in-state wineries.4The decision prompted many states to reconsider how they regulate out-of-state wineries' and retailers' access to in-state consumers; to this day, the nation's dockets continue to fill with litigation challenging the constitutionality of state wine-distribution laws.5
Granholm illuminated the complex legal and policy dynamics at play in state wine-distribution laws. At Granholm's core was a tension between two constitutional doctrines: the dormant Commerce Clause, which prohibits states from enacting laws that place an undue burden on interstate commerce,6 and Section 2 of the Twenty-first Amendment, which addresses states' power to regulate alcohol within their borders.7 From a policy perspective, wine-distribution laws implicate many strongly held interests: Page 668 oenophiles want to buy otherwise-inaccessible wine via the Internet, while states worry that direct shipment increases the risk of underage drinking; small wineries want to reach geographically remote customers, while the business of alcohol wholesalers depends on wine traveling through the three-tier system and not directly to consumers.8
This Note addresses two Iowa wine statutes that are potential litigation targets in light of Granholm and its aftermath: Iowa's reciprocal-shipment statute and Iowa's native-wine statute. To contextualize the analysis of the two statutes, Part II provides an overview of u.s. wine distribution and the Commerce Clause before tracing state alcohol regulation from its pre-Prohibition roots to the Court's 2005 decision in Granholm. Part III begins with a synopsis of wine regulation in Iowa and continues with the statutory and constitutional analysis of the native-wine and reciprocal-shipment laws. This Note determines that certain provisions of each statute are likely unconstitutional in light of Granholm. Part IV recommends that the Iowa legislature consider redacting certain provisions of the native-wine statute and institute a direct-shipment permit system to regulate the direct shipment of wine to Iowa consumers.
The majority of states, including Iowa, regulate the licensing and distribution of alcoholic beverages through a "three-tier" system.9 The three-tier system is comprised of manufacturers, wholesalers, and retailers.10 Wine distribution generally proceeds as follows: licensed wine manufacturers (i.e., vintners) sell their products to licensed wholesalers; wholesalers pay excise taxes and deliver wine to licensed retailers; retailers then sell directly to the public and collect sales taxes where applicable.11 state and federal "tied-house" restrictions prohibit vertical integration between the tiers-for example, manufacturers and wholesalers normally cannot make retail sales.12 Page 669
Wine direct-shipment laws regulate whether entities may bypass the three-tier system by shipping wine directly to consumers.13 States have generally taken one of three approaches in regulating wine direct shipment: (1) prohibition, (2) limited importation, and (3) reciprocity.14
Approximately fifteen states prohibit the direct shipment of wine to their residents.15 Some of these "closed" states make the direct shipment of wine a misdemeanor, while others make it a felony.16 states prohibit direct shipment to maintain full control over alcohol distribution, justifying the laws as necessary to promote temperance, collect taxes, and dissuade underage drinking.17
Approximately thirty-three states employ a limited-importation system, allowing wine manufacturers to ship wine directly to residents, subject to various restrictions.18 state law may require shippers to obtain a permit, to pay fees, and to use special shipping labels.19 Other restrictions include on-site purchase requirements and caps on the volume of wine that residents may import annually.20
Reciprocity systems permit consumers to receive wine directly from shippers in another reciprocity state while restricting or prohibiting direct shipments from nonreciprocity states.21 The use of this system has declined precipitously in just the past five years: in 2003, thirteen states employed Page 670 reciprocity systems;22 as of late 2008, only Iowa and New Mexico have reciprocity statutes.23 The reciprocity model came into force in the 1990s and was intended to level the playing field for small wineries by allowing them to bypass the three-tier distribution scheme and take advantage of Internet commerce to make sales to out-of-state consumers.24 As this Note explores below, the Supreme Court's 2005 decision in Granholm v. Heald has prompted almost all of the former reciprocity states to shift to permit-based systems.25
As the distribution laws above indicate, the issue of how states regulate out-of-state wineries' access to in-state consumers is an issue of interstate commerce. The Commerce Clause empowers Congress to "regulate commerce with foreign nations, and among the several States."26 The dormant Commerce Clause is the negative corollary to this affirmative grant of power and prevents states from discriminating against out-of-state commerce absent a substantial, nonprotectionist interest.27 The Court's modern dormant Commerce Clause analysis is driven by "concern about 'economic protectionism-that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.'"28
The Supreme Court uses a two-tiered approach to analyze state economic regulation under the dormant Commerce Clause.29 A state law faces a virtual per se rule of invalidity when it "directly regulates or discriminates against interstate commerce, or when its effect is to favor in- Page 671 state economic interests over out-of-state interests."30 A law in this first tier is subject to strict scrutiny and the Court will uphold the law only if it "'advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.'"31 If a state economic regulation has only "incidental" effects on interstate commerce, the Court employs intermediate scrutiny and will uphold the law unless "the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits."32 As discussed below, the litigation over the constitutionality of wine-distribution laws is grounded in the intersection of the dormant Commerce Clause with the Twenty-first Amendment.
Contemporary wine-distribution laws are much more than isolated statutory exercises in logistics; they are the products of an ongoing debate regarding U.S. alcohol regulation that is as old as the nation itself. Understanding how states historically have regulated alcohol provides the necessary context to understand current litigation over wine-distribution laws.
State alcohol regulation dates back to the nineteenth century, when the temperance movement prompted many states to pass laws restricting or banning the manufacture and sale of alcoholic beverages within their borders.33 In initial challenges, the Supreme Court upheld such laws as valid exercises of states' police powers.34 However, the Court was less solicitous when the state law in question regulated the importation of out-of-state alcohol for in-state delivery.35 Iowa, in fact, took center stage in the Court's pre-Prohibition invalidations of state regulations on imported alcohol.36 Page 672
In Bowman v. Chicago & Northwest Railway Co., the Court struck down an Iowa statute that prohibited common carriers from bringing intoxicating liquors from any other state into Iowa without a permit.37 Just two years later, the Court invalidated Iowa's ban on the sale of imported liquor in Leisy v. Hardin.38 In both cases, the Court struck down the regulations under the original-package doctrine, which immunized interstate goods from state regulation if they remained in their original packages.39 While the Court has since abandoned the original-package doctrine, these initial cases are notable for the subsequent legislation that they prompted from Congress.
Congress passed the Wilson Act in 1890 in response to the regulatory bind in which the states found themselves following the Court's initial decisions: states could ban production of domestic...
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