The Supreme Court Opens a Case of Vintage Arguments
In striking down restrictive state regulations prohibiting direct wine shipments from out-of-state wineries to customers in Michigan and New York, while allowing direct shipments from instate winery shipments to instate residents, the Supreme Court in Granholm v. Heald, 544 U.S. __ (2005), (initially analyzed back on April 22nd, in A New York State of Wine), has surprised many, but not necessarily for the reasons you might think.
First, although the Supreme Court often splits 5-4, as they did here, this was most definitely not your typical 5-4 decision, in which Justices Rehnquist, Scalia, O'Connor, Thomas and Kennedy align against the remaining four Justices (Breyer, Stevens, Souter and Ginsburg). In fact, according to a Harvard Law Review analysis of Supreme Court decisions, the Supreme Court has never split this way — with Justices Kennedy, Scalia, Souter, Ginsburg and Breyer in the majority — in any of the 175 5-4 Court decisions issued from 1993 to 2004. (See Nine Justices, Ten Years: A Statistical Retrospective, 118 HARV. L. REV. 497 (2004); see also The Supreme Court, 2003 Term—The Statistics, 118 HARV. L. REV. 497, 503 nn.n-v (2004)).
So what you say? Well, beyond the statistical interest to Supreme Court trivial buffs, the case breakdown highlights just how unique the confluence of issues were here at the intersection of states' regulatory rights, the implied constitutional commerce power (a.k.a. the dormant commerce clause), the express constitutional commerce power, two federal legislative acts, previous contradictory Court precedents and two constitutional amendments, all pushed up against interstate online wine sales. For students of constitutional law, it doesn't get much more interesting than this.
But while the decision is clearly a win for the small winery plaintiffs, and may ignite a flurry of direct wine sales, which tallied $500 million in 1999, the final outcome remains uncertain. Granted, the Court used very unequivocal language at times, noting for example that in keeping with past decisions interpreting the Commerce Clause a "[s]tate may not enact laws that burden out-of-state producers . . . simply to give a competitive advantage to in-state businesses" (Granholm, No. 03-1116, slip op. at 8), and that in its view "[t]he current patch-work of laws — with some States banning direct shipments altogether, others doing so for out-of-state wines, and still others requiring reciprocity — is essentially the product of an ongoing, low-level trade war." (Id. at 9-10.) And interstate trade wars, whether low-level or all guns blazing, is exactly what the Constitution's Commerce Clause was designed to deflect.
But the pesky Twenty-first Amendment muddied the waters briefly. While the Court had a bit more difficulty in dispatching the states' argument that the Twenty-first Amendment "grants to the States the authority to discriminate against out of state goods," (id. at 21) an argument the dissenters agreed with, the majority quickly dealt with previous cases that held just this by pointing to the history surrounding the Twenty-first Amendment's enactment, and then distinguishing these previous contrary cases' apparent holdings as either mere dicta or not necessary to the case's underlying decision — in short, classic court technique. Going further, however, the Court expressly declined urging by the states to overrule or limit the Court's previous liquor-related holding in Bacchus v. Dias, 468 U.S. 263 (1984), that "[t]he central purpose of the [Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition." (Id. at 276.)
The end result? While the states can no longer prevent shipment of wine directly to consumers within their borders, if they allow wineries instate to ship directly to residents, they can ban all direct wine shipments by both instate and out-of-state wineries. This throws the ultimate resolution of this issue back to each state and to the state's political processes. The wineries' lobbies will face off with the wine distributors' lobbies to twist the arms of state legislatures. In the end, however, I expect states with strong wine industries to lean toward opening direct sales to all; because that means more tax dollars for state coffers, and in politics taxes are the grease that keeps the machinery turning.
However, where the opinion may its greatest long-term effect is via two broader issues the Court touched upon. First, the Court torpedoed New York's "physical presence" argument; New York said that, as it allowed out-of-state wineries to ship to in-state customers if they set up an branch office and warehouse in New York, there was no actual discrimination against out-of-state wineries (since in-state wineries had offices and warehouses, too). The Court gave this argument the back of its hand, noting:
"The expense of establishing a bricks-and-mortar distribution operation in 1 State, let alone all 50 is prohibitive. It comes as no surprise that not a single out-of-state winery has availed itself of New York's direct shipping privilege. * * * New York's in-state presence requirement runs contrary to our admonition that States cannot require an out of state firm 'to become a resident in order to compete on equal term.'"Granholm, at 11.
According to George Mason Law Professor Todd Zywicki, , in reaffirming the principle that "a law does not become nondiscriminatory against out-of-staters simply by permitting them an option to become in-staters . . . the Court [may have] saved the entire fabric of e-commerce in the country." (Todd Zywicki, at Volokh.com) Given the ol' "physical presence" gambit has proved to be a common state trick in creating barriers to out-of-state competition, the Court's express disapproval of it will put the kibosh on a good many state practices. See generally Todd Zywicki and Asheesh Agarwal, Wine, Commerce, and the Constitution (forthcoming NYU Journal of Law & Liberty).
Second, in writing for the majority, Justice Kennedy stressed states need to put forth actual "concrete evidence" that a discriminatory regulation is necessary, because the Commerce Clause demands "more than mere speculation to support discrimination against out-of-state goods." (Granholm, at 29.) This marks a change in the Court's approach, at least with regard to Commerce Clause-related review, of state economic regulation. Generally, courts have been very deferential to state economic regulations; upholding state law, if there's any conceivable rational basis by which it can be supported. Now, however, it appears state regulation on Commerce Clause matters requires not only a rational basis — that is, the legislature was arguably sane in enacting it — but actual concrete evidence in support. How far the court decides to build on this remains to seen, but it's certainly a point to watch closely going forward.
For now, however, fire up your Web browser, ready your toast, and prepare for the brave new world of Internet wine. I have a feeling 2006 may just be a very good year.