Justices Reject Curbs on Wine Sales

By Charles Lane
Washington Post Staff Writer
Tuesday, May 17, 2005

The Supreme Court gave a boost to commerce between wineries and their far-flung customers yesterday, ruling that states that permit in-state vintners to sell directly to consumers may not deny that right to out-of-state producers.

Ruling that free interstate trade in wine trumps the states' rights to regulate alcohol sales, the court struck down New York and Michigan laws under which wineries from other states had to sell through state-licensed wholesalers, while local wineries could deal with lovers of the grape by phone and Internet. This discrimination was an unconstitutional trade barrier, the court said.

The ruling could help reshape the nation's fast-growing $22 billion-a-year wine business. It gives consumers in some of the largest wine markets in the country the right to buy wine directly from thousands of small producers that previously could not meet the states' conditions.

Given the consolidation of the wholesale business, "it is very difficult for a small winery, or even a mid-size winery, to get adequate distribution," said Herb Schmidt, a former vice president at Robert Mondavi Corp. and an industry consultant. "For smaller wineries, this decision opens up a huge new market."

In addition to New York and Michigan, yesterday's decision could apply directly to six other states, including Florida, according to wine industry analysts. Although local wineries could see new business, consumers in the District, Virginia and Maryland are unaffected: The District allows residents to purchase a bottle a month by mail, Virginia allows winemakers in and out of state to ship to its residents, and Maryland bans all wine shipments directly to consumers whether the winemaker is in the state or not.

New York and Michigan, backed by the wholesalers, argued that their laws were permitted under the Constitution's 21st Amendment, which repealed Prohibition in 1933 and gave control over sales of alcohol to the states.

But a Middleburg, Va., winemaker who challenged New York's law, along with wine journalists, a California winery and connoisseurs who challenged the Michigan law, said the statutes were discriminatory and violated the Constitution's implicit ban on state trade barriers.

By a 5 to 4 vote, the court agreed with opponents of the laws. "State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent," Justice Anthony M. Kennedy wrote for the majority. "The instant cases, in contrast, involve straightforward attempts to discriminate in favor of local producers. The discrimination is contrary to the Commerce Clause and is not saved by the Twenty-first Amendment."

The states and wholesalers, backed by traffic safety and anti-alcoholism groups, as well as the National Association of Evangelicals, argued that their laws ensure full tax collection and limit underage drinking.

But the court dismissed those claims; Kennedy's opinion frequently cited a 2003 Federal Trade Commission report that said consumers reap significant benefits from direct shipment in states that permit it, with few problems. The states "provide little concrete evidence for the sweeping assertion that they cannot police direct shipments by out-of-state wineries," Kennedy wrote, adding that the court's precedents "demand more than mere speculation to support discrimination against out-of-state goods."

"In this David versus Goliath battle, the ruling is a triumph for America's family wine farmers," W. Reed Foster, president of the Coalition for Free Trade, a California-based group of winemakers that had helped fund lawsuits against the state laws, said in a statement.

The states and their supporters emphasized that the court had not struck down the wider system of state alcohol regulation. They vowed to use the states' remaining powers to rein in alcohol sales.

"This decision puts the ability to protect our communities and youth back in the hands of the Michigan citizens," Betty Mercer, director of the Coalition for a Safe and Responsible Michigan, which supported that state's law, said in a statement. "It is the intention of the Coalition to continue to support efforts to keep our communities safe from the unregulated sale of alcohol."

Beyond the six states -- Vermont, Massachusetts, Connecticut, Florida, Indiana and Ohio -- with statutes similar to those in Michigan and New York, the effects of the ruling are difficult to gauge.

Twenty-seven states, including Virginia, already have laws permitting direct shipment in some form.

Fifteen other states ban direct shipments. But some of those states -- including Maryland, which makes direct shipment a felony -- prohibit both out-of-state and in-state direct shipping and are thus still constitutional under yesterday's ruling.

Wine industry officials said there is some chance that states whose laws were struck down might respond by banning both local and out-of-state direct shipments, as New Jersey did recently when its ban on out-of-state shipments was voided by a lower court.

Hinting at such a reaction, Juanita D. Duggan, president and chief executive of the Wine and Spirits Wholesalers of America, said the court gave states a "choice between supporting face-to-face transactions by someone licensed to sell alcohol, or opening up the floodgates."

But Steve Simpson, a lawyer from the libertarian Institute for Justice, who represented Middleburg winemaker Juanita Swedenburg at the court, said that was unlikely. "The momentum is in our favor and will continue to be," he said.

Kennedy's opinion was joined by Justices Antonin Scalia, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.

Justice Clarence Thomas wrote a dissenting opinion, joined by Chief Justice William H. Rehnquist and Justices John Paul Stevens and Sandra Day O'Connor.

The 21st Amendment, which prohibits shipment of alcohol into a state "in violation of the laws thereof," essentially created an exception for alcohol from the usual constitutional rule in favor of free interstate trade, Thomas argued. He wrote that the court "followed a confused mishmash of elite opinion" rather than the text of the amendment.

Stevens, 85, who spent his boyhood in Prohibition-era Chicago as the son of a hotelier, wrote a separate dissent, joined by O'Connor. He noted that his own "recollection" of the social and political context of the 21st Amendment, which was adopted in 1933, convinced him that the majority's opinion "would have seemed strange indeed to the millions of Americans who condemned the use of 'demon rum' in the 1920s and 1930s."

The cases decided yesterday are Granholm v. Heald , No. 03-1116; Michigan Beer & Wine Wholesalers Association v. Heald , No. 03-1120; and Swedenburg v. Kelly , No. 03-1274.

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