Granholm v. Heald; Swedenburg v. Kelly; Michigan Beer & Wine Wholesalers Ass'n v. Heald

Significance of the Case

These cases require the Supreme Court to reconcile two seemingly disparate elements of the Constitution: the dormant Commerce Clause and the Twenty-first Amendment. Normally, the Commerce Clause prevents states from interfering with interstate commerce by expressly granting Congress the power to "regulate commerce with foreign nations, and among the several States, and with the Indian tribes." U.S. Const., Art I, § 8, Cl. 3. The regulation of commerce "among the several states" has, for centuries, been read to mean that because only Congress can regulate interstate commerce, states are impliedly barred from interfering with interstate commerce. Id. Courts understand this grant of power to Congress as a sort of "dormant" limit on the States. However, the Twenty-first Amendment, which repealed Prohibition in 1933, also explicitly declared that transporting liquor into a state "in violation of the laws thereof, is hereby prohibited." U.S. Const., 21 Amendment, § 2. Congress also enacted a statute prohibiting alcohol shipments in violation of state laws. 27 U.S.C. § 122.

These cases neatly illustrate the collision between the two Constitutional clauses. For example, the Plaintiffs in the Granholm case, a group of wine lovers, wine journalists and a small California winery that shipped its wines to customers in other states, claimed that Michigan's policy was unconstitutional under the dormant Commerce Clause because it interfered with interstate commerce by discriminating against out-of-state wineries. The defendants, who include Michigan Gov. Jennifer M. Granholm and other state officials, responded that they had such authority under the Twenty-first Amendment. See Heald v. Engler, 342 F.3d 517, (6th Cir. 2003).

The Supreme Court has previously held that the core concerns of the Twenty-first Amendment are "promoting temperance, ensuring orderly market conditions, and raising revenue." North Dakota v. United States, 495 U.S. 423, 432 (1990). Meanwhile, restraint of trade in order to protect local industry from out-of-state competition is not a legitimate exercise of power under the Twenty-first Amendment. See Bacchus Imports v. Dias, 468 U.S. 263 (1984). Essentially, if the Supreme Court believes the state regulations are really designed as boosters for local industry, the state will probably see its power in this area trimmed.

The winemakers and their customers have a tremendous vested interest in the outcome of the fight. About half of the states currently ban direct out-of-state shipments of alcohol to consumers. See Uncorking Freedom, Institute for Justice. Additional restraints on the ability of states to regulate out-of-state alcohol shipments would open up markets for out-of-state wineries by allowing them to ship directly to customers. Free trade advocates argue that this increased competition not only benefits buyers by driving prices down and increasing selection, but benefits the economy in general by allowing goods to flow to the users who value them the most. The state regulations also prohibit the wine industry from taking full advantage of the Internet shopping boom; the Internet allows wineries, especially small wineries, access to a wide new base of dispersed but enthusiastic customers that can only be reached by direct sales. Indeed, eBay and United Parcel Service joined the groups filing amicus briefs urging the court to cut back on the regulations. Plus, wine consumption continues to grow in America. In 2003, the shipment of domestic and international wine in the United States increased five percent to a record 627 million gallons, and since 1990, adult per capita spending on wine has increased to $33 from $12. See Uncorking Freedom, Institute for Justice.

States, however, maintain that by requiring all liquor to pass through the hands of a licensed in-state seller, they can maintain orderly markets, operated by people the states can hold accountable. Such conditions promote the states' ability to collect taxes as well as to reduce the risk of alcohol falling into the hands of minors. The states see the ability to regulate alcohol as necessary to allow them to monitor the distribution of alcohol in order to protect the health, safety, and welfare of their citizens. Because of the growth of the small wineries and the boom in Internet sales in other areas of commerce, the states are concerned about the increased possibility that minors may have access to alcohol. In addition, taxes on alcohol are a valuable source of revenue for the states, and the Supreme Court has recognized the raising of revenue as a valid reason for exercising power under the Twenty-first Amendment. See North Dakota, 495 U.S. at 432. The states also argue that the type of regulatory scheme present in Michigan allows them to ensure that collusion and price-fixing, a widespread problem before Prohibition, do not occur. See U.S. Supreme Court Says Direct Shipping Case is Ripe for Ruling, Modern Brewery Age, June 22, 2004, at 1.

Hanging in the balance are not only wine consumers and winemakers, but alcohol wholesalers. The Supreme Court has already ruled that the Twenty-first Amendment may not be used for economic protectionism. See Bacchus, 468 U.S. 263. Alcohol wholesalers will suffer a serious setback if the Supreme Court determines that states are trying to protect not only their in-state wineries, but the wholesalers who distribute alcohol manufactured outside the state. Permitting out-of-state sellers to ship alcoholic beverages directly to consumers could remove in-state wholesalers out of the process entirely.

Discussion

Non-Discrimination and the Dormant Commerce Clause

Michigan's wine shipment law discriminates against out-of-state commerce, so the Supreme Court will likely find that it violates the dormant Commerce Clause. The dormant Commerce Clause prohibits "differential treatment of in-state and out-of-state economic interests that benefit the former and disadvantage the latter." Or. Waste Sys., Inc. v. Dep't of Envtl. Quality Comm. of the State of Or., 511 U.S. 93 (1994). The Court has consistently held that the Commerce Clause prohibits state-imposed discrimination against interstate commerce. See e.g., Gibbons v. Ogden, 22 U.S. 1 (1824). This non-discrimination policy is also firmly grounded in the structure of our national economic union. See Respondent's Brief 12. This is illustrated by the fact that the framers granted Congress plenary authority over interstate commerce with the intent of avoiding the hostile divisions that had plagued the colonies and later the states under the Articles of Confederation. See Or. Waste Sys., 511 U.S. at 97.

There have already been numerous holdings by the Supreme Court that prohibit discrimination by the states against interstate commerce. In Baldwin v. G.A.F. Seelig, Inc., the Supreme Court instructed New York dairy farmers that a national economic union requires competition with more efficient Vermont dairies, even where there is a public health justification. 294 U.S. 55 (1935). Similarly in Hughes v. Okla., the Court held that Oklahoma cannot conserve the local minnow population by not allowing fisherman to sell their catch out of state. 441 U.S. 322 (1979). In addition, the Court has held that North Carolina apple growers may not avoid competition with Washington State apple growers through a state law prohibiting Washington from advertising the higher quality of their apples. Hunt v. Wash. State Apple Adver. Comm., 432 U.S. 333. Finally, the Court told the state of Oregon that it could not impose a surcharge on out-of-state garbage. Or. Waste Sys., 511 U.S. 93.

The non-discrimination policy established under the dormant Commerce Clause also applies to alcohol. In Bacchus Imp., Ltd. v. Dias, the Court held that the Commerce Clause prohibited Hawaii from exempting the makers of local pineapple wine and local brandy from a tax applied to all liquor imported from out of state. 468 U.S. 263 (1984). In its rationale, the Court stated that the tax discriminated against out-of-state producers in favor of local producers, and thus violating the "cardinal rule" of the Commerce Clause. Id. at 268. Similarly, in Brown-Forman Distillers Corp. v. N.Y. State Liquor Authority the Court applied strict scrutiny to a state regulation that sought to regulate beer prices outside the territory of the state. 476 U.S. 573 (1986). The Court stated that a state statute is generally struck down when it "directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests at the expense of out-of-state interests…" Id. at 579.

The Michigan statute at issue here clearly fits within the above arguments and violates the non-discrimination principle established by the dormant Commerce Clause. In Michigan, only out-of-state wineries must find a wholesaler willing to distribute wine or else be wholly excluded from the market. See Respondent's Brief 5. State laws that raise the price of out-of-state goods in relation to in-state goods are "paradigmatic examples" of discrimination against interstate commerce. W. Lynn Creamery, Inc. v. Healy, 512 U.S. 193 (1994).

Achieving Statute's Goals Without Discrimination

In addition, there is no compelling need for Michigan to have this discriminatory statute because it can meet the goals of the statute through other, non-discriminatory means. Michigan asserts that discrimination is necessary to keep wine out of the possession of minors, prevent loss of revenue, and protect public health and safety. See Petitioner's Brief 38. However, Michigan's in-state wineries can still ship directly to consumers, thereby violating the so-called "purpose" of the prohibition against out-of-state wineries, and illustrating the discriminatory effects. A better solution would be for Michigan to require that in order to receive delivery, person 21 years of age or older has to sign for the package (Model Direct Shipping Bill). See id. at 41. Even given that the motive for the Michigan statute is legitimate, the fact that state wants to protect health and safety not enough, discrimination is subject to strict scrutiny regardless of a goal of protecting the public. Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997).

An Appropriate Remedy

If the Supreme Court should find the respective statutes to violate the dormant Commerce Clause, there is no question that it has the authority to invalidate such statutes. Because states are not permitted to regulate areas delegated to Congress, the alcohol prohibitions schemes in question would be unconstitutional and thus invalid if they improperly discriminate against out-of-state wineries. See Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964). Though the dormant Commerce Clause is not explicitly mentioned in the Constitution, state statutes violating the doctrine are still unconstitutional, and are generally struck down. See Healy v. The Beer Inst.., 491 U.S. 324, 326 (1989).

When a state scheme that violates the dormant Commerce Clause was carried out through many statutory provisions, a court must take care to only invalidate the offending provisions. A court must narrowly strike down laws on constitutional grounds because in doing so it is acting at its limits. Adkins v. Children's Hosp. of D.C., 261 U.S. 525, 544 (1923). Also, rules regarding judicial restraint require courts to limit their judgments to the precise facts and issues before them thus strongly discouraging an overbroad prohibition. See Kremens v. Bartley, 431 U.S. 119, 136 (1977).

Michigan asserts the Sixth Circuit invalidated the core of its Liquor Control Code even though the court could remove a single provision to alleviate the found discrimination. See Petitioner's Brief 11. The Sixth Circuit did not explicitly strike down any specific statute, but this ambiguity caused some discontent, and Respondents even tacitly agree that an injunction should be tailored to increasing access to out-of-state wine, not all alcohol. See Respondent's Brief 34. Though both parties desire a narrow invalidation of the liquor control scheme, the Supreme Court will likely follow an approach focused on removing the improper discrimination instead of increasing access to out-of-state wine. See Beskind v. Easley, 325 F.3d 506, 520 (4th Cir. 2003). This approach may leave the out-of-state wineries and wine lovers unsatisfied because the Court may allow the state to correct its discrimination by merely requiring in-state wineries to pass through the same scheme as out-of-state wineries. See id.

Twenty-first Amendment

The Twenty-first Amendment to the U.S. Constitution, passed on February 20, 1933, repealed the Eighteenth Amendment alcohol prohibition and further stated: "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." U.S. Const. amend. XXI. The questions at hand pertain to the scope of the above text in relation to other sections of the Constitution, especially the Commerce Clause and the Privileges and Immunities Clause.

In the years directly following the Twenty-first Amendment's enactment, a number of cases upheld the facial interpretation of the text, that is, the absolute power of a state, territory, or U.S. possession to regulate transportation and importation of alcohol by propagating state laws. See, e.g., State Bd. of Equalization v. Young's Mkt. Co., 299 U.S. 59 (1936) (upholding a license fee to import beer from other states); Seagram & Sons v. Hostetter, 384 U.S. 35 (1966) (upholding a state statute regulating the price of alcohol and noting that states are not totally bound by the Commerce Clause with regards to alcohol). The Court recognized in these cases that such restrictions on the interstate trade of goods would have been unconstitutional prior to the Twenty-first Amendment.

Within fifteen to twenty years of jurisprudence under the Twenty-first Amendment, however, the Supreme Court began expanding its use of the Commerce Clause to decide cases relating to alcohol transport and importation. In a number of these cases, the Court based its ruling upon the Commerce Clause and federalism directly, with little or no regard to the Twenty-first Amendment. See, e.g., Ziffrin, Inc. v. Reeves, 308 U.S. 132 (1939) (upholding a statute forbidding the transportation of alcohol by unlicensed carriers on the basis of a state's right to use police power); Duckworth v. Ark., 314 U.S. 390 (1941) (upholding a statute requiring a permit to transport alcohol across Arkansas on the basis of the Commerce Clause, without regard to the Twenty-first Amendment). In Hostetter v. Idlewild Bon Voyage Liquor Corp. the Supreme Court when so far as to state that interpreting the Twenty-first Amendment to repeal the Commerce Clause with regard to alcoholic beverages would be "an absurd oversimplification" and "patently bizarre and . . . demonstrably incorrect." 377 U.S. 324, 331-32. More recently the Supreme Court has stated that the Commerce Clause will invalidate state laws that constitute "mere economic protectionism," essentially, laws that are not justified by the purposes of the Twenty-first Amendment, and that "the central purpose of the Twenty-first Amendment was not to empower States to favor local liquor industries by erecting barriers to competition." Bacchus Imp.,. Ltd. v. Dias, 468 U.S. 263, 276.

In addition to the Supreme Court's trend away from a strictly facial interpretation of the Twenty-first Amendment, logic dictates that the facial interpretation must be wrong, according to Professor Zywicki of the George Mason University School of Law. For instance, "if the expansive interpretation of the plain language is adopted, it seems that the state government could enslave members of the population and make them drive beer trucks." Todd J. Zywicki, Wine Wars: The Twenty-first Amendment and Discriminatory Bans to Direct Shipment of Wine, George Mason Law & Economics Working Paper Series, Oct. 2004, at 5. Professor Zywicki argues that the Court should interpret the text "in violation of the laws [of the state]" in the Twenty-first Amendment to mean "in violation of otherwise valid laws [of the state]." Id.

Perhaps because of increasing court pressure to propagate state laws that do not conflict with the Commerce Clause, there are signs of a trend toward easing restrictions on direct shipment of wine. Stephanie A. Waller, Comment, Bacchus Rules: Recent Court Decisions on the Direct Shipment of Wine, 40 Hous. L. Rev. 1111 (2003). The Fourth, Fifth, and Sixth Circuits have struck down out-of-state direct wine shipment bans as unconstitutional. Id. In this case we should expect to receive some guidance from the Supreme Court on the conflict between the Commerce Clause and the Twenty-first Amendment. Given the trend towards respecting the Commerce Clause, the Court will likely invalidate these statutes "absent compelling evidence that public safety would be irreparably harmed by allowing small, family wineries to ship their wines to consumers in other states." Wine prohibition; Constitutional clash over interstate sales, San Diego Union-Tribune, May 31, 2004, at B-8.

Impact of Twenty-first Amendment

Given the Court's recent record on states' rights in a variety of circumstances, however, reaching this conclusion is far from a certainty. Recent cases involving congressional acts allegedly exercising Congress' power under the Commerce Clause have marked a change in the Court's position on federalism towards strengthening of states' rights. See Wine Wars: The Twenty-first Amendment and Discriminatory Bans to Direct Shipment of Wine. In striking down a federal law prohibiting the possession of guns near schools, Chief Justice Rehnquist suggest that criminal law is a subject of primary state responsibility. United States v. Lopez, 514 U.S. at 559-61 & n.3. The court could reach a similar conclusion that alcoholic beverage control is also a subject of primary state responsibility. Although the relationship between direct shipment of wine from out of state and interstate commerce is much clearer than the one between possession of guns near schools and interstate commerce, a distinction that might resonate with the Court.

Although the intent of Section 2 of the Twenty First Amendment is presently debated, the ratification history behind it may imply that there is an exception for state regulation that may otherwise be barred under the Commerce Clause. The Twenty-First Amendment's sponsor, Senator John J. Blaine, stated "[w]hen our government was organized and the Constitution of the United States was adopted, the States surrendered control over and regulation of interstate commerce. This proposal is restoring to the states . . . the right to regulate commerce respecting a single commodity -- namely, intoxicating liquor." 76 Cong. Rec. 4141 (1933). Additionally, the Senate refused to pass a third section which would give the federal government concurrent power to regulate or prohibit the sale of intoxicating liquor. S.J. Res. 211, 72d Cong., 76 Cong. Rec. 4138 (1933); 79 Notre Dame L. Rev. 1563.

Contrary to the Sixth Circuit's claim that the issue has been decided, Federal Circuits vary in their interpretation and application of the Twenty First Amendment as it intersects with the Commerce Clause. The Fourth and Fifth Circuits apply no presumption of validity to the state's power under the Twenty First Amendment to control the importation of alcohol when it finds facial discrimination against out-of-state wine manufacturers, wholesalers or retailers. In Beskind v. Easley the Fourth Circuit declared that a North Carolina statute violated the Commerce Clause and was not saved by the Twenty First Amendment. 325 F.3d 506 (4th Cir. 2003). Similarly, in Dickerson v. Bailey the Fifth Circuit held that the Twenty First Amendment did not shield the Texas Alcoholic Beverage Code from strict judicial scrutiny under the Commerce Clause. 336 F.3d 388 (5th Cir. 2003).

The Second and Seventh Circuit take the opposite view applying a presumption of validity to the state's right to control the importation of alcohol in such instances. The Second Circuit in Swedenburg v. Kelly, held that a New York alcohol regulatory scheme fell within the ambit of powers vested in the states by the Twenty First Amendment. 358 F.3d 223 (2d Cir. 2004). In Bridenbaugh v. Freeman-Wilson, the Seventh Circuit's Judge Easterbrook recognized that "section 2 of the Twenty-First Amendment empowers Indiana to control alcohol in ways that it cannot control cheese" under the Commerce Clause. 227 F.3d 848 (7th Cir. 2000). The Seventh Circuit concluded that after the ratification of the Twenty First Amendment no longer may the Dormant Commerce Clause be read to protect interstate shipments of liquor from regulations. The Eleventh Circuit in Bainbridge v. Turner chose to apply a lower level of scrutiny, upholding a local direct shipping exemption for wineries when a state demonstrates that the statutory scheme is closely related to a core power under the Twenty First Amendment and is not a pretext for mere economic protectionism. 311 F.3d 1104 (11th Cir. 2002).

Dormant or Active Commerce Clause

An argument may be made that the intersection of the Twenty First Amendment and the dormant Commerce Clause need not be resolved because the active Commerce Clause and not the dormant Commerce Clause applies to the Michigan issue. The dormant Commerce Clause prohibits state laws which unduly burden interstate commerce, in the absence of express federal authorization. Gen. Motors Corp. v. Tracy, 519 U.S. 278, 287 (1997). When Congress gives this express federal authorization, it is exercising its active Commerce Clause power. Congress's choice to enact the Webb-Kenyon Act, which states, "The shipment or transportation… of any… vinous…intoxicating liquor…into any [s]tate… to be… sold… in violation of any law of such State… is hereby prohibited," can be seen as an exercise of the active Commerce Clause power, authorizing an exception for State implementation of alcohol statutes. The active Commerce Clause power gives Congress the ability to expressly regulate commerce and by creating the Webb-Kenyon Act, Congress has chosen to regulate it by giving the power to the States. Such an allocation to the States through the use of Congress's active Commerce Clause power means that the dormant Commerce Clause may not be implicated.

Privileges and Immunities Clause

The Privileges and Immunities Clause of the U.S. Constitution "forbids states from denying to citizens of other states the rights and opportunities available to citizens of their own states." U.S. Const. amend. XIV. Courts have repeatedly invalidated laws that unduly obstruct freedom of enterprise. See, e.g., Toomer v. Witsell, 334 U.S. 385 (1948) (overturning a law requiring nonresidents to pay a shrimp boat licensing fee 100 times greater than that of residents); United Bldg. and Constr. Trades v. Mayor, 465 U.S. 208 (1984) (holding that a resident-hiring quota was subject to Privileges and Immunities Clause review because of its unequal effect on out-of-state citizens). Arguably, out-of-state direct wine shipment bans unduly obstruct freedom of enterprise, particularly the rights of proprietors of out-of-state wineries to engage in legitimate enterprise.

Except for a few early cases, the Supreme Court has consistently held that the Twenty-first Amendment has no effect on provisions of the Constitution adopted before the Twenty-first Amendment was ratified, with the exception of the Commerce Clause's application to the transportation and importation of alcoholic beverages. In Craig v. Boren, the Court stated that the Twenty-first Amendment "primarily created an exception to the normal operation of the Commerce Clause," that its "relevance . . . to other constitutional provisions" is doubtful, and that "[n]either the text nor the history of the Twenty-first Amendment suggests that it qualifies individual rights protected by . . . the Fourteenth Amendment." 429 U.S. 190, 206 (1976). Similarly, in 44 Liquormart, Inc. v. R.I., the Court said that although the Twenty-first Amendment "limits the dormant Commerce Clause's effect on a State's regulatory power over the delivery or use of liquor within its borders, the Amendment does not license the States to ignore their obligations under other constitutional provisions." 517 U.S. 484, 484 (1996).

The Court has repeatedly said that, other than the Commerce Clause, the Twenty-first Amendment does not relieve a state of its constitutional duty to citizens of its own and other states. Therefore, the Privileges and Immunities Clause should still apply to the wine sellers and lovers in these cases, as well as other similarly situated people nationwide. The question will be solely a Privileges and Immunities inquiry, and the Court has found statutes with similar harm to violate the Privileges and Immunities Clause in the past, therefore, it would not be surprising to see the statute in Swedenburg overturned or modified on these grounds.