The Expanded Concept of Facial Discrimination in the Dormant Commerce Clause Doctrine

• Publication year: 2022

40 Creighton L. Rev. 497. THE EXPANDED CONCEPT OF FACIAL DISCRIMINATION IN THE DORMANT COMMERCE CLAUSE DOCTRINE

Creighton Law Review

Vol. 40

DAVID S. DAY(fn*)

I. INTRODUCTION

The dormant Commerce Clause doctrine is one of the main instruments in American Constitutional Federalism.(fn1) Since at least 1970, the doctrine has been a two-tiered interpretative model.(fn2) On the upper tier, the State regulatory schemes, which are considered "discriminatory," are evaluated at a very high level of scrutiny; some decisions, in fact, call this a "per se" level of scrutiny.(fn3) On the second tier of this doctrine, State regulatory schemes, which are considered to be "nondiscriminatory," are evaluated under a standard less than strict scrutiny.(fn4) The second tier standard is the "undue burden" standard, which is most frequently identified with the Pike v. Bruce Church, Inc.(fn5) decision from 1970.(fn6) While there are certainly doctrinal controversies about the exact level of scrutiny on the two tiers, there also does not appear to be any serious dispute that the undue burden standard is more than a rational basis standard.(fn7)

The last term of the Rehnquist Court had a doctrinally significant dormant Commerce Clause case. Granholm v. Heald(fn8) turned out to be a very close case; it was decided on a five-to-four basis. Much of the commentary on Granholm will focus on the argument that the Twenty-first Amendment conferred upon the States the power to discriminate against interstate commerce regarding alcohol.(fn9) As interesting as this argument may be, it is not the major concern here. This Article will focus on the Court's decision that the regulatory schemes at issue constituted "facial" discrimination against interstate commerce. This Article is a review of Granholm and particularly an examination of its analysis of the facial discrimination holding. The Granholm decision is an expansive example of the facial discrimination doctrine, and it reflects the continuing tension between judicial protection of interstate commerce and the pro-State jurisprudence of the Rehnquist Court.(fn10)

This Article will provide, in Part II, an overview of the Granholm decision.(fn11) Then, in Part III, this Article will review the recent history of the discrimination tier.(fn12) In Part IV, this Article will discuss the place of Granholm in the discrimination tier doctrine.(fn13) In Part V, this Article will discuss some of the implications of the Granholm decision for dormant Commerce Clause doctrine generally.(fn14)

II. THE "DIRECT WINE SALES" CASE: THE BACKGROUND

A. THE DEVELOPMENTS IN THE AMERICAN WINE INDUSTRY

As in any dormant Commerce Clause case, an understanding of the case requires careful consideration of the State regulatory scheme being challenged and the nature of the economic activity being regulated.(fn15) Most States regulate the sale or importation of wine through a three-tiered system, requiring separate licenses for producers, wholesalers, and retailers.(fn16) In recent years, however, the American wine industry has undergone a significant change in at least two respects. First, the number of wineries, especially small wineries, has exploded. There are now over 3,000 wineries in the United States.(fn17) A second simultaneous development is that the wholesale market for wine has greatly consolidated in recent years. The number of licensed wholesalers under the three-tiered licensing scheme has dropped from 1600 to 600.(fn18) The "increasing winery-to-wholesaler ratio" was economically problematic for many of the small wineries since they did not produce enough wine, nor have sufficient consumer demand for their new wines, to make it economical for the now smaller number of wholesalers to carry their products.(fn19) In these economic circumstances, many small wineries started to "rely on 'direct shipping' to reach new markets."(fn20) The increasingly common resort to e-commerce on the Internet was also a factor underlying the Granholm v. Heald(fn21) case.(fn22) At the time of the Granholm decision, twenty-six States allowed "direct shipping of wine with various restrictions."(fn23) Thirteen of the twenty-six States had "reciprocity laws," which allowed direct shipment from the wineries outside the State to consumers, as long as the State of origin provided similar nondiscriminatory treatment to wines from the reciprocal State.(fn24)

B. THE MICHIGAN AND NEW YORK REGULATORY SCHEMES

The Michigan and New York statutory schemes regulated direct wine sales to consumers. The State statutory schemes shared many common features. In general terms, both Michigan and New York allowed in-state wineries to make direct sales to in-state consumers, but they did not allow out-of-state wineries to make direct sales to in-state consumers.(fn25)

There were, however, a number of differences between the Michigan and New York schemes. The Michigan statutory scheme was a complete ban, but it provided an "exception" for the forty in-state wineries.(fn26) Because of this exception, in-state wineries were able to make direct shipments to Michigan consumers, but out-of-state wineries could not.(fn27) Michigan's discriminatory treatment against out-of-state wineries was, for a dormant Commerce Clause case, unusually transparent.

While the New York regulatory system also treated out-of-state wineries differently than in-state wineries, New York had a slightly different regulatory scheme than Michigan's complete ban. The primary means in New York for an out-of-state winery to engage in direct sales was for the out-of-state winery to establish a "branch factory, office, or storeroom within the state of New York."(fn28) This was known as the "physical presence" requirement. The physical presence provision was, in effect, an "exception" to New York's ban on direct sales to in-state consumers. An out-of-state winery could sell directly to New York consumers (the nation's second largest wine market) only if it were to establish an in-state facility. The problem, of course, was that establishing an in-state facility was prohibitively expensive for many small wineries.(fn29)

III. DORMANT COMMERCE CLAUSE DOCTRINE: THE CONSTITUTIONAL BACKGROUND

Because the judicial scrutiny on the discrimination tier is substantially more severe than the nondiscrimination tier, the crucial inquiry in a dormant Commerce Clause case is whether a particular State regulatory scheme constitutes "discrimination."(fn30) In determining whether the State regulation is discriminatory, the Court has recognized three basic types of discrimination.(fn31) First, a State regulation can be facially discriminatory.(fn32) Second, a facially neutral regulation may be discriminatory in purpose.(fn33) Finally, as a third form, a State regulatory scheme may be discriminatory in effect.(fn34) While any of the three forms is sufficient, there is a significant advantage to a facial discrimination theory. The Court's leading critic of the dormant Commerce Clause doctrine - Justice Scalia - will accept the doctrine's limitation on State authority only when he finds that the State regulation is facially discriminatory.(fn35) Thus, to capture Justice Scalia's vote, the Court must use a facial discrimination theory.

Besides these types of discrimination, the dormant Commerce Clause doctrine has recognized at least four different modes of discrimination: (1) tariff-type regulations;(fn36) (2) protectionist regulations;(fn37) (3) isolationist regulations;(fn38) and (4) State regulations imposing an extraterritorial effect.(fn39) Regulations with characteristics fitting any of these modes can give rise to a judicial determination of "discrimination." For present purposes, these modes are not immediately significant because the Michigan and New York regulations were obviously protectionist.

IV. THE DISCRIMINATION TIER AND THE GRANHOLM DECISION

In Granholm v. Heald,(fn40) both the New York and Michigan regulatory systems were challenged on dormant Commerce Clause grounds.(fn41) The lower courts actually split on the dormant Commerce Clause issues.(fn42) The cases were consolidated at the U.S. Supreme Court level. In a five-to-four decision, the Supreme Court struck down both of the State regulatory schemes.(fn43)

A. AN OVERVIEW OF THE GRANHOLM DECISION

The Granholm decision has three basic parts. The first part - and the focus here - addressed the issue whether the State regulatory schemes would be considered "discriminatory."(fn44) The Court's analysis of the discrimination issue was the predicate for the other basic parts of the Granholm decision. The second part of the majority's opinion focused on the question of whether the Twenty-first Amendment gave the States the authority to discriminate against interstate commerce in the liquor industry.(fn45) Since the Granholm majority concluded that the scope of the Twenty-first Amendment did not permit regulatory discrimination, the third part of the decision addressed the issue of whether the regulatory schemes could satisfy the standard applied under the discrimination tier of the doctrine.(fn46) The Court concluded that, even though the States may have had legitimate safety concerns, they failed the discrimination tier standard because various nondiscriminatory alternatives were available.(fn47)

B. THE GRANHOLM COURT'S "DISCRIMINATION" ANALYSIS

The Granholm Court's...