The legacy of Granholm v. Heald: questioning the constitutionality of facially neutral direct-shipping laws.

• Author: Thompson, Alexandra

So I dreamed: Wouldn't it be terrific if I could be the heroine who stems the tide, slows the overwhelming production of hormonally overblown or sanitized wines--the ones that the world's most famous wine critic is credited with championing? If only I could stop the proliferation of four-square wines with utterly no sense of place or minerality that reflect nothing about where they come from. (1)

APERITIF

The wine industry is bifurcating. On the one hand, producers are consolidating and creating more similar-tasting wines. In 2007, approximately eleven percent of U.S. wineries produced ninety-eight percent of U.S. wine. (2) In fact, half of the total wine market consists of just twenty-two brand names. (3) Some people believe these ubiquitous wines taste "sanitized" in part because winemakers have taken to chemically manipulating their wines to achieve higher rankings from critics, and thus higher sales. (4) But while the big producers have gotten bigger, there has also been a proliferation of small start-up wineries. (5) In 1975, the United States had fewer than 580 wineries; today it boasts over 5,900. (6) These smaller vintners are trying to "stem the tide" by producing more nuanced, boutique wines in smaller quantities. The Federal Trade Commission attributes the dramatic growth of boutique wineries to an increased demand for "individualistic, hand-crafted wines." (7)

This backlash against the mass production and homogenization of wine is noteworthy because it reflects the venerable belief that wine's nuance and diversity are what make it such a poetic and enduring drink. This philosophy--that no two wines could, or should, taste alike--stems from the concept of terroir, a French term that encompasses a grape's "growing area, starting with the soil (la terre) and the slope, and taking into account other elements of the vineyard's microclimate, such as sun, rain, wind, and temperature fluctuations. Each terroir produces a unique wine...." (8) In addition to terroir, "[v]ariations in varietal designation, vintage year, vineyard location, varietal blending, winemaking style and limitations on availability [also] contribute to wine's uniqueness." (9) As a result of this uniqueness, "[w]ines are not fungible." (10)

The fact that oenophiles enjoy exploring wine's diversity helps explain why U.S. wineries currently produce 25,000 different wines. (11) But because alcohol is heavily regulated, consumer access to this vast array of wines is artificially limited. It can be difficult--if not impossible--for a consumer to purchase a particular wine, especially one from a boutique winery. (12) Wineries, consumers, and advocacy groups have begun challenging a variety of state laws that, they contend, unconstitutionally restrict their ability to sell and purchase wine. (13) They point to wine's uniqueness to help explain why state restrictions on the distribution of wine are particularly unacceptable. (14)

Most states regulate alcohol through a three-tier distribution system, which generally requires suppliers (whether a brewer, vintner, distiller, or importer--the first tier) to sell only to wholesalers (also known as distributors or shippers--the second tier) who, in turn, may sell only to retailers (including liquor stores, restaurants, and bars--the third tier). (15) Over the past few decades, as producers have multiplied, wholesalers have consolidated, creating an hourglass-shaped system with wholesalers at the point of constriction. (16) Consequently, the three-tier system has become a huge impediment to consumer choice.

What started out as a system to allow controlled and regulated distribution has become its major obstacle. Of the 25,000 wines, only about 500 make it through the system to retail shelves.... Fewer than 100 wineries have stable national distribution in any form. Three thousand wineries have no wholesaler at all. (17) But despite this effect of the three-tier system, the Supreme Court continues to believe that it is "unquestionably legitimate." (18) Although some practitioners and scholars believe that the Court's opinion of the three-tier system may change in the future, the system remains constitutional for the time being. (19)

Now that each state is home to at least one winery, (20) however, the states themselves want to do something about the bottleneck created by the three-tier system. Allowing producers to sell wine over the Internet and ship it directly to their customers is an obvious alternative to wholesale distribution. One way for a state to support its burgeoning wine industry while appeasing its powerful wholesalers (21) is to create an exception to its three-tier system that allows in-state wineries to ship directly while continuing to require out-of-state wineries to sell only to wholesalers. Advocates of direct shipping have taken to challenging these exceptions as an alternative to attacking the three-tier system as a whole. While this strategy may seem counterintuitive, it may actually help expand direct shipping--at least in some states. The goal is that courts will declare these exceptions unconstitutional because they discriminate in favor of the state's own wineries and that state legislatures will respond by extending direct-shipping privileges to out-of-state wineries--as opposed to revoking them from the in-state wineries.

In the landmark case Granholm v. Heald, (22) for example, the plaintiffs challenged a Michigan law that allowed in-state wineries to sell directly to Michiganders via the Internet, but prevented out-of-state wineries from doing the same. The plaintiffs argued that this law violated the dormant Commerce Clause by discriminating against out-of-state wineries. Prior to Granholm, it was unclear whether the Twenty-First Amendment, which gives states broad authority to regulate alcohol, could "save" a law like Michigan's that would otherwise be a clear violation of the dormant Commerce Clause's nondiscrimination principle. The Granholm Court made it clear that "straightforward attempts to discriminate in favor of local producers ... [are] contrary to the Commerce Clause and [are] not saved by the Twenty-first Amendment." (23)

In response to Granholm, at least nine states with similarly discriminatory laws on the books chose to extend direct-shipping privileges to out-of-state wineries; no state revoked existing direct-shipping privileges completely. (24) To that extent, the direct-shipping advocates' plan seems to have worked. But other states have tried to sidestep Granholm by passing "interesting legislative devices" (25) that apparently are meant to favor local wineries without "straightforwardly" discriminating against out-of-state wineries. At first glance, these devices, which allow limited direct shipping, do not appear to discriminate because they are nominally available to all wineries. But their opponents argue that the devices contain such severe restrictions that in-state wineries are effectively the only beneficiaries. Examples of such devices include: production limits, case limits, face-to-face purchase requirements, prohibitive permit costs, and reciprocity requirements. (26) Of these various restrictions, the production limit and the face-to-face purchase requirement are the most significant. (27) In general, a face-to-face purchase requirement limits direct shipping by requiring consumers to make their purchases in person at the winery. A production limit restricts direct shipping by allowing only those wineries producing less than a specified amount of wine per year to ship directly to consumers.

These types of laws tend to burden out-of-state wineries more than in-state wineries, (28) but because the language of the law applies equally to in-state and out-of-state wineries, they do not fall neatly into the Granholm rubric. Nevertheless, direct-shipping advocates have brought a number of challenges to such laws in the wake of Granholm; they have been met with mixed success. (29) This Note posits that this mixed success is the result of courts not applying the dormant Commerce Clause consistently. This Note further argues that the courts have been inconsistent not only because the proper application of the dormant Commerce Clause is unclear, but also because the dormant Commerce Clause is particularly difficult to apply to laws regulating the wine industry. The wine industry poses special problems not only because it implicates the Twenty-First Amendment, but also because it is bifurcated and geographically unbalanced. (30)

Part I of this Note briefly summarizes the history of federal alcohol regulation in the United States through Granholm v. Heald. Part II lays out in general terms the various dormant Commerce Clause tests that courts use to analyze limited direct-shipping laws. Part III discusses how different courts have applied these tests to face-to-face purchase requirements and suggests which of their approaches courts should adopt going forward. Part IV discusses how application of the tests has diverged in the context of production limits. The Digestif posits that the nonfungibility of wine might be used to bolster the argument that these post-Granholm cases portend: the three-tier system itself is unconstitutional.

1. THE ROAD TO GRANHOLM

   1. Pre-Prohibition

      The Commerce Clause provides that "Congress shall have Power... To regulate Commerce ... among the several States." (31) These words reflect

      a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation. The Commerce Clause has accordingly been interpreted by this Court not only as an authorization for congressional action, but also, even in the absence of a conflicting federal statute, as a...