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The New York State of Wine: e-Commerce Reaches the Supreme Court

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  1. Commerce Clause Meets the 21st Amendment
  2. Reading the Tea Leaves
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What's wine got to do with e-commerce? More than you might think at first blush. Two cases currently before the Supreme Court may signal how the high court approaches future online sales-related disputes between states.
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Nearly anything can be bought online these days—from new automobiles to the latest in zydeco music. But forget about buying a basic bottle of wine in the 24 states that prohibit direct wine shipments bought online from a winery or reseller located out-of-state. In fact, eight of those states—Florida, Georgia, Indiana, Kentucky, Oklahoma, Maryland, Tennessee, and Utah—make it a felony to ship certain wine shipments from out of state directly to consumers instate.

The entire situation devolves into near-lunacy at times. For example, visit a vineyard in California while on vacation in the Bay Area; you can't even ship that wine back to yourself if you live in one of the states prohibiting such direct wine shipments. Conversely, wineries can ship directly to California consumers if the shipping state reciprocates and allows California wineries to do likewise. With an estimated 25,000 wineries in the country, to most very small operations that can't sell very effectively through standard retail channels, it all sounds very high school.

But like high school, things get worse when cliques collide. New York state allows New York-based wineries to ship wine directly to customers located in the Empire State, but bars out-of-state wineries from shipping to New Yorkers without that same bottle stepping through a three-tier distribution system. Forget about tasting the wines tapped in the movie Sideways without a run to your local wine retailer.

On the surface, none of this sounds very fair to anyone familiar with buying online with a few clicks. A cynic would quip that fairness has nothing to do with the law. The Federal Trade Commission's own research indicates that such direct shipment bans reduce "the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online" and can add 21 percent to the per case price. (See Alan Wiseman and Jerry Ellig, How Many Bottles Makes a Case Against Prohibition? Online Wine and Virginia's Direct Shipment Ban. FTC Working Paper 258, March 2003.)

Still, it's generally perfectly legal for states to treat wineries sporting an in-state Zip code more favorably. And depending on how the Supreme Court rules in two cases currently before it, this entire anachronistic apparatus could remain absolutely valid.

How did an otherwise apparently narrow argument between states and wineries make it to the Supreme Court? And what does this have to do with the U.S. Constitution, anyway? Here's the legal situation in a nutshell and a look at why it's not what decision the Court ultimately comes to, but how the justices come to their decision that could have significant ramifications for the multibillion-dollar online sales market.

Commerce Clause Meets the 21st Amendment

The online wine cases before the Supreme Court stem from different federal cases originating in New York and Michigan. This created what's known as a "Circuit split" (when the Federal Court of Appeals ruled in opposite directions—one in favor of the State's regulation and one against). The appeal to the Supreme Court was argued before the black-robed nine in December 2004, and a decision is expected sometime before May 2005.

Picking apart every issue touched upon by these cases would easily take at least two semesters of conlaw to merely scratch the surface. But saving you from cracking open a stack of briefs and phonebook-thick law texts, here are two semesters of constitutional law distilled (no pun intended) into a few paragraphs.

First, picture the Founders back in 1787 at the Constitutional Conference in Philadelphia. There's Alexander Hamilton jawboning with another delegate; there's George Washington despondent over the recent death of his brother; there's cocky 36-year old Madison in the corner; there's an 81-year old Franklin, suffering from gout, putting a brave face on proceedings as the man with the best first name in U.S. history, Gouverneur Morris of Pennsylvania, arrives.

The Revolutionary War is long over, but the federal government is dead broke; crippling inflation is rampant; the states are killing each other with high tariffs; the Articles of Confederation are an acknowledged failure; nearly one-third of state delegates haven't shown up to the conference; and the large and small states fundamentally can't agree on representation. In short, C-SPAN would have had a field day. (See A More Perfect Union: The Creation of the U.S. Constitution.)

When the dust settled at the end of the long hot summer, however, the Constitution as we all know and love it was signed on September 17, 1787, and then ultimately ratified, with one of the primary driving forces behind its successful passage being the end of internecine economic battles between states, as documented by Madison, Hamilton, and John Jay throughout the famous Federalist Papers. The resulting solution, commonly known as the Commerce Clause, is tucked into the Constitution's Article I, Section 8, and grants Congress the power to "regulate Commerce with foreign Nations, and among the several States..." From this express federal Constitutional power, courts have derived an implied anti-power as it were, called the "dormant commerce clause," which prohibits individual States from unduly interfering with interstate commerce.

So far, so good. It sure sounds like one State can't prohibit other States' wineries from shipping wine directly to consumers, right? Clearly if any other product were at issue, say PCs, this would be a slam dunk ruling against the States. But not so fast. Jump nearly 150 years ahead to 1933 and the 21st Amendment, which repealed prohibition and made it legal again to sip a smooth aged scotch at the end of a long day at the office. In doing so, however, the 21st Amendment also appears to side-step the commerce clause when it comes to "intoxicating liquors." Section 2 of the 21st Amendment states that the "transportation or importation into any State... for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." The key here are the five words "in violation of the laws thereof," meaning the laws of the State in question. Aha. The plot thickens, particularly because constitutional amendments later in time are viewed as trumping earlier constitution sections in direct conflict.

From 1933 on, Congress' use of the Commerce Clause expanded like a legislative blob to slip federal tendrils into nearly everything, until two landmark Supreme Court decisions in 1995 and 2000 (Lopez and Morrison, respectively) clipped Congress' wings a wee bit. The decisions basically said: "Whoa, Congress! Federal laws based on commerce clause powers actually need a clear linkage to the channels, instrumentalities, or activities with a substantial relation to interstate commerce."

In the end, this wine case boils down to just how far the 21st Amendment's reach operates to otherwise dig into the broader Commerce Clause power. End of law lesson.

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