Weighing in on the wine wars: what the European Union can teach us about the direct shipment controversy.

• Author: Garlough, Jonathan W.

INTRODUCTION

Suppose you run a small Virginia winery that produces a white wine that has long been the favorite of traveling oenophiles from Tennessee who annually make the trip to visit your winery and taste your product. You might believe the rising popularity of electronic commerce and mail-order shopping is a godsend, allowing you to increase the volume of orders received from your loyal Tennessee customers and their friends who have been clued in to your wine. Under Tennessee law, (1) however, and the law of six other states, (2) every time you ship an order of wine to a Tennessee buyer, you are committing a felony. Tennessee is one of twenty-six states (3) that regulates the importation of alcohol into its borders by prohibiting the direct shipment of alcohol to consumers by any supplier, retailer, or wholesaler, without a permit. These laws are commonly known as "direct shipment laws." (4)

This Note analyzes direct shipment laws in the United States by comparing them with the decisions of the European Court of Justice (ECJ) that have protected the European Union's (EU) common market by responding to EU member states' attempts to restrict the importation of alcoholic beverages into their borders. A comparison between the United States and the EU is particularly helpful, because the ECJ has been faced with a task analogous to that faced by U.S. courts-balancing an interest in free, unfettered trade among member states against the interest of those states in regulating alcohol. This Note argues that U.S. direct shipment laws create an impermissible barrier to interstate trade and are, therefore, per se infringements of the Commerce Clause. Furthermore, it contends that the Twenty-First Amendment's grant of alcohol regulation authority to the states does not validate the infringements of the Commerce Clause by these direct shipment laws.

Part I of this Note introduces the parties involved in direct shipment law litigation and outlines their general arguments. Part II describes the dormant Commerce Clause doctrine and provides a review of the history of state alcohol regulation that led to the the Twenty-First Amendment. Part III addresses the legislative intent behind the Twenty-First Amendment and the subsequent Supreme Court decisions interpreting Section 2 of the Amendment. (5) Part IV examines the recent direct shipment law litigation. In particular, it analyzes the opposing decisions of the Seventh Circuit, (6) which upheld Indiana's direct shipment prohibition, and the Fourth (7) and Fifth Circuits, (8) which struck down direct shipment prohibition laws. Part V of this Note considers EU free market regulations and the ECJ's decisions interpreting the EU member states' alcohol restrictions in light of the EU common market. Finally, in Part VI, this Note suggests that the EU's approach is a workable method in the United States that would strike a proper balance between the dormant Commerce Clause and the Twenty-First Amendment in direct shipment law litigation. The EU's prohibition on any obstacles to free movement that result from disparities between member state laws relating to the importation of alcohol is consistent with the Commerce Clause of the U.S. Constitution and is not barred by the Twenty-First Amendment.

1. THE INTERESTS INVOLVED IN DIRECT SHIPMENT LAW LITIGATION

   States generally have one of three types of direct shipment laws. Thirteen states currently employ a reciprocity policy, in which the state allows direct shipments only from states that afford the same reciprocal privilege. (9) These reciprocal agreements limit the amount of wine ordered per person and restrict the orders to purchases only for personal consumption. (10) Sixteen states allow for limited direct shipping, with restrictions ranging from allowing only wine ordered on-site at an out-of-state winery to be shipped, (11) to permitting out-of-state wineries to ship a limited number of cases to in-state residents. (12) The remaining twenty-one states completely prohibit the direct shipment of alcohol to a consumer from an out-of-state seller. (13)

   Rather than allow producers of wine to sell directly to consumers, most states regulate the sale and distribution of alcohol by private retailers through a three-tiered system of circulation. (14) A producer of wine (15) must obtain a permit through the state to sell its product. (16) The producer may sell only to a licensed wholesaler, who collects excise taxes from the producer and provides the state with information about the suppliers and the alcohol they import. (17) The wholesaler then sells and delivers the wine to a retail outlet within the state, profiting by charging a higher price than they paid to the suppliers, (18) The retailers, in turn, sell to the consumer and make a profit by charging a higher price than they paid to the wholesalers. (19) By limiting the issuance of permits to producers and the issuance of licenses to wholesalers and retailers, the state is able to control the types, amounts, and producers of alcohol sold in its territory, and increase its tax revenue by collecting taxes on each sale of the alcohol.

   In addition to the increased tax burden levied on consumers by mandating the three-tiered wholesaler system, a recent report by the Federal Trade Commission (FTC) reveals a second hardship that direct shipping laws impose on consumers. (20) An empirical study conducted by the FTC concluded that wine consumers could save as much as twenty-one percent on wine purchases by shopping on the internet. (21) Yet, this avenue is unavailable for those consumers who live in states that prohibit the direct shipment of alcohol to consumers. As the report states, "[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine." (22)

   The report also provides evidence that counters two common justifications for direct shipment legislation. Although the report acknowledges that citizens are "concerned about the direct shipment of wine to minors" and that states have responded "in part by banning direct shipment of wine to all consumers, or banning direct shipment from out-of-state sellers," the study's data reveals that "states that permit interstate direct shipping generally report few or no problems with shipments to minors." (23) Furthermore, the report indicates that states that do allow interstate direct shipping are able to collect taxes from out-of-state sellers by requiring these vendors to obtain permits and comply with their tax laws. (24) Thus, concerns by state legislators that out-of-state sellers will be out of their taxing reach, thereby putting in-state sellers at a competitive disadvantage and causing a significant loss in tax revenue to the state, can be mitigated by other measures.

   Aside from preventing oenophiles the opportunity to purchase out-of-state wines that may not be carried by their states' wholesalers, the mandatory three-tier system particularly affects two types of wineries. Small, "morn-and-pop" wineries that lack the name recognition to get wholesalers to carry their labels are completely excluded from out-of-state sales if they fail to get distributorship of their product from a wholesaler. (25) Consequently, the existence of other opportunities for these wineries to reach customers is essential to their survival. This problem has only increased with time, as the number of wholesalers has shrunk from 10,900 to 300 since 1963, making it increasingly difficult for smaller wineries to get a wholesaler to carry its label. (26) A 2003 survey of Wine Institute members bears this problem out, as fifty-four percent of the wineries who responded declared that they were unable to gain access to another state's market due to an inability to find a wholesaler willing to carry their brands. (27)

   The direct shipment laws also adversely affect highly respected boutique wineries, which can sell all of their yearly production without the aid of the wholesalers. (28) Without the mandatory three-tier system, these producers could sell their wines at a higher price to consumers, rather than have the wholesalers and retailers increase transaction costs.

   The constitutionality of direct shipment laws that prohibit the direct delivery to consumers from out-of-state producers has been challenged recently in twelve states. (29) Opponents of these laws--typically winery owners, oenophiles, and food critics--argue that the laws discriminate against out-of-state vintners and favor in-state producers, a violation of the Commerce Clause of the U.S. Constitution. (30) The challengers rely on the dormant Commerce Clause, contending that because many of the states that ban interstate direct shipping allow intrastate direct shipment of alcohol, the laws are prejudiced against out-of-state wineries. (31) Thus, they argue that the basis for these laws is economic protectionism and that the Twenty-First Amendment cannot be used as a pretext for protectionism. (32) Proponents of these laws--state legislatures and alcoholic beverage wholesalers--argue that the laws are a constitutional use of state power conferred upon the states by Section 2 of the Twenty-First Amendment of the U.S. Constitution. (33) They argue that although the dormant Commerce Clause prohibits discriminatory practices against out-of-state producers, the Twenty-First Amendment is an exception to this general principle, and states have the right to regulate alcohol as they see fit. (34)

2. THE DORMANT COMMERCE CLAUSE AND PRE-PROHIBITION STATE ALCOHOL REGULATION

   1. The Dormant Commerce Clause

      Article I, Section 8 of the U.S. Constitution grants Congress the power "[t]o regulate Commerce ... among the several States." (35) Along with its affirmative grant of power to Congress to regulate interstate commerce, the Commerce Clause also has a logical corollary, long recognized by the Supreme Court, that "imposes limitations on the States...