Price Effects and the Commerce Clause: The Case of State Wine Shipping Laws
| Date | 01 June 2013 |
| Author | Alan E. Wiseman,Jerry Ellig |
| DOI | http://doi.org/10.1111/jels.12008 |
| Published date | 01 June 2013 |
Price Effects and the Commerce Clause:
The Case of State Wine Shipping Laws
Jerry Ellig and Alan E. Wiseman*
In the wake of Granholm v. Heald, numerous states passed new laws to regulate interstate
direct shipment of alcohol that would seem to contradict the spirit, if not the explicit
content, of the Commerce Clause. We build on existing scholarship analyzing the empirical
impacts of direct shipment barriers to identify how these new laws are likely to influence
local market conditions. Drawing on new data that measure posted winery prices and
aggregate production levels in 2002 and 2004, we demonstrate how many of these new laws
would be expected to effectively diminish, if not altogether remove, the benefits that would
normally accrue to consumers from legalized interstate direct shipment of wine. Although
empirical analysis of price effects currently plays a very limited role in dormant Commerce
Clause cases, our analysis suggests how price data can be used to ascertain whether a state
restriction constitutes discrimination against out-of-state economic interests.
The Commerce Clause forbids discrimination, whether forthright or ingenious.
Best v. Maxwell, 311 U.S. 455 (1940)
I. Introduction
1
The dormant Commerce Clause aims to prevent states from enacting barriers to interstate
commerce. A 2005 Supreme Court case, Granholm v. Heald (544 U.S. 460 (2005)), reaffirms
that the dormant Commerce Clause applies to alcohol, even though the 21st Amendment
gave states wide latitude to regulate alcohol. More specifically, Granholm clarified that states
cannot permit in-state wineries to ship directly to consumers while prohibiting out-of-state
wineries from doing so. Though the case involved wineries, the Court noted: “States may
not enact laws that burden out-of-state producers or shippers simply to give a competitive
advantage to in-state businesses” (544 U.S. 460 (2005), emphasis added). While the Court
ruled that state laws separating alcohol production, wholesaling, and retailing into three
separate tiers are “unquestionably legitimate,” states cannot regulate alcohol in a way that
discriminates against interstate economic interests.
*Ellig is Senior Research Fellow, Mercatus Center at George Mason University; Wiseman is Associate Professor of
Political Science and Law, Vanderbilt University.
The authors would like to thank Dennis Carlton, Brannon Denning, Michael Greve, Robert Mikos, Todd Zywicki,
and several anonymous referees for helpful discussions and comments on an earlier draft of this article; Michelle
Mullins for pointing out the Wines & Vines database that made this article possible; and Van Brantner, Sarah Harkavy,
Roman Ivanchenko, Kathryn Kelly, Marco Malimban, Brandon Pizzola, John Pulito, Johnny Shoaf, James N. Taylor,
and Young Eun Yoo for valuable research assistance.
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Journal of Empirical Legal Studies
Volume 10, Issue 2, 196–229, June 2013
196
Over the past seven years, the Granholm decision has spawned confusion and litiga-
tion as various segments of the alcohol industry have fought over which aspects of state
alcohol regulation are now discriminatory and which are “unquestionably legitimate.”
Indeed, most legal commentary on the post-Granholm wine cases has discussed their impli-
cations for the relationship between the Commerce Clause and the 21st Amendment (e.g.,
Perkins 2010; Slaybaugh 2011; Quigley 2011; Ohlhausen & Luib 2008; Tanford 2007).
Such analyses are important to study, but we focus on a different aspect of the “wine
wars”: the implications of post-Granholm direct wine shipping cases for the analysis of
discriminatory effects in Commerce Clause cases generally. The generic question we
address is how to assess, empirically, the effects of state laws that exclude some especially
strong out-of-state competitors from a market, while remaining arguably neutral because
they do not exclude all out-of-state competitors. We propose that direct assessment of price
effects can help reveal whether a purportedly discriminatory law actually alters marketplace
outcomes.
Courts sometimes take price effects into account when assessing whether a law
discriminates against interstate commerce. Major decisions that do so, however, usually
involve fairly straightforward examples like discriminatory taxes or fees (e.g., Best v. Maxwell,
v. Town of Houlton, 175 F.3d 178 (1999); C&A Carbone, Inc. v. Town of Clarkstown, 511 U.S.
383 (1994); West Lynn Creamery v. Healy, 512 U.S. 186 (1994)). These price effects result
from “facially” discriminatory laws for which empirical analysis of actual effects is not
necessary. Even in Granholm, where the Supreme Court’s majority decision extensively cited
a Federal Trade Commission (2003) staff study of direct wine shipment, the Court did not
cite the price effects identified in the FTC study.1Direct measurement of price effects does
not currently play a prominent role in Commerce Clause cases.
To demonstrate how price effects could inform Commerce Clause decisions, we
present an empirical analysis of two types of state laws that have been challenged subse-
quent to Granholm: restrictions on the size of wineries that may ship directly to consumers,
and laws that permit out-of-state wineries, but not out-of-state retailers, to ship alcohol
directly to consumers.2We expand on the data set employed in the FTC study and several
subsequent empirical studies so that our results are directly comparable to those in previ-
ously published research.
Our analysis demonstrates that exclusion of retailers and the imposition of produc-
tion caps on wines that can be shipped both have noticeable effects on price competition
in local markets, but in different ways. Prohibiting retailers from selling in certain states
1The majority relied heavily on the FTC report’s findings that states have less restrictive options available to prevent
underage access to alcohol and collect tax revenues.
2These are but two types of restrictions that have generated litigation after Granholm. Other restrictions include
in-person purchase requirements, volume limits that cap an individual seller’s direct shipments to a consumer or total
direct shipments into a state, fees for direct shipment permits that are prohibitively expensive for small sellers,
regulations that require wineries to deliver wine using their own vehicles rather than a common carrier, or require-
ments that common carriers must obtain separate state permits for each vehicle that might be used to deliver wine.
For summary and discussion, see Ohlhausen and Luib (2008) and Tanford (2007).
Price Effects and the Commerce Clause 197
mostly affects whether consumers in those states will have access to the greatest online price
savings. Because wineries usually charge higher prices than online retailers, excluding
out-of-state retailers limits the price savings that are available online. Production caps on
wineries can have different effects, depending on the scope of the production limit.
Relatively low caps are tantamount to banning direct shipment for most of the wines in our
sample, but even a relatively high cap effectively bans direct shipment of wines from larger
wineries, and we find that wines produced by these larger wineries are precisely the wines
for which legalized direct shipment narrows the price spread between online and bricks-
and-mortar sellers in local markets. Therefore, even though a high production cap allows
direct shipment of some wines, it protects bricks-and-mortar retailers from precisely those
competitors that are most likely to induce price cutting.
Besides providing insight about the empirical effects of a wide range of laws that were
passed in the wake of Granholm v. Heald, our approach may be useful in illustrating a method
by which courts might seek to ascertain whether a partial restriction on interstate competi-
tion is innocuous from a Commerce Clause perspective, or if it has a discriminatory effect.
Moreover, our findings also have implications for state legislators who might consider
advancing laws that affect consumers by disadvantaging some, or all, interstate competitors.
II. Commerce Clause Controversies3
In Commerce Clause jurisprudence, a state restriction is suspect if it discriminates against
out-of-state interests. The restriction might be discriminatory on its face, in its effects, or in
its intentions. Commerce Clause analysis typically starts by asking whether a challenged
restriction is “facially” discriminatory. If so, the restriction is unconstitutional, unless the
state can prove that no less restrictive means are available to accomplish a legitimate state
purpose. In only one case has the Supreme Court upheld a facially discriminatory state
If the restriction is not facially discriminatory, courts then ask whether it discrimi-
nates in its effects or its purpose. This type of inquiry requires some kind of evidence. For
example, in Family Winemakers of California v. Jenkins (592 F.3d 1 (2010)), the fact that the
Massachusetts production cap prohibited direct shipment by out-of-state wineries that
produced 98 percent of the nation’s wine was sufficient to demonstrate discriminatory
effects. Legislators’ avowed intention to exclude out-of-state wineries, while permitting all
in-state wineries to direct ship, was evidence of discriminatory intent. Evidence of effects
sometimes also supports a claim of discriminatory intent (Family Winemakers v. Jenkins, 592
F.3d 1). Analysis of price effects can provide a powerful tool to demonstrate the presence
or absence of discriminatory effects.
3For a more detailed explication, see Denning and Lary (2005) or Zywicki and Agarwal (2005).
4This case involved a ban on imported baitfish, intended to protect native fish from parasites. The Court found that
this purpose was legitimate and that no less restrictive means of accomplishing it existed.
198 Ellig and Wiseman
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