BENCH MEMO: GRANHOLM v. HEALD

A. Introduction

1. On May 24, 2004, the Supreme Court granted cert in 2 cases on the following issue: "Does a State's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of Sec. 2 of the 21st Amendment?"

2. The cases:

a. My case is Granholm v. Heald, in which we challenge the constitutionality of Michigan's law against direct shipping. Michigan prohibits out-of-state wineries from selling and shipping wine directly to consumers, but allows in-state wineries to do so. The state concedes the different treatment.

b The other case is Swedenburg v. Kelly, challenging New York's law against direct shipping. New York's law is not clearly discriminatory, however. It allows any winery with a physical presence in the state to direct ship. An out-of-state winery that leases some warehouse space in New York could then (at least theoretically) direct ship out of that warehouse.

3. The record, decisions of the lower courts, and all briefs by the parties and amici can be found at www.law.indiana.edu/webinit/tanford/wine/mihome.html

4. The text of section 2 of the 21st Amendment reads: "The transportation or importation into any State ... for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

B. The Michigan dispute in a nutshell

Michigan prohibits out-of-state wineries from selling and shipping wine directly to consumers. The only way an out-of-state wine can be sold is through the "3-tier" system under which the state requires wine to be sold through local wholesalers. If it cannot find a wholesaler willing to distribute its products, the out-of-state winery is excluded altogether from the market. An in-state winery may bypass the wholesaler and sell wine directly to consumers. In-state wines are therefore never excluded from the market and are relatively cheaper because they can be sold without the wholesaler's markup.

When a discriminatory alcoholic beverage regulation is challenged, two constitutional provisions are implicated. The dormant Commerce Clause prohibits a state from discriminating against interstate commerce, but section 2 of the 21st Amendment gives states broad power to regulate alcoholic beverages.

The Supreme Court has said that when two constitutional provisions conflict, it will examine the relative extent to which the "core concerns" of each are implicated. Plaintiffs therefore characterize this law in commerce clause terms, as a trade barrier that protects the economic interests of the in-state wine industry. The state characterizes the law in 21st Amendment terms, as a regulation necessary to control the distribution of an alcoholic beverage.

Plaintiffs would seem to have the advantage on this issue because of a 1984 case, Bacchus Imports v. Dias. In Bacchus, the Supreme Court struck down a Hawaii law that imposed a 20% tax on imported liquor but not on liquor made in Hawaii. It held that the 21st Amendment did not authorize states to discriminate against interstate commerce.

The State believes it can get the Court to overrule or marginalize Bacchus. The threeBacchus dissenters (who thought the 21st Amendment gave states unlimited power over alcohol) were Rehnquist, Stevens and O'Connor. The State hopes to also win over Justices Scalia and Thomas, who support states' rights and do not believe the dormant Commerce Clause is a particularly strong constitutional concept.

C. Summary of the briefs

1. Facts.

a. There are no pertinent factual disputes.

b. There are about 3000 wineries in the US. Fifty large ones dominate the market, control the distribution chain, and account for almost all the wine found in retail and grocery stores. The remaining 2950 are places like Oliver Winery -- small, family run, producing wine of variable quality, with a small customer base. The small wineries attract new customers mostly at their tasting rooms, and may have as few as 5-10 loyal customers in any particular state. This is too few customers to make state-wide distribution through wholesalers and retailers feasible, so small wineries survive on shipping small individual orders directly to customers.

c. The states are split with respect to direct shipping --
* 13 states allow direct shipments pretty much without attempting to regulate them.
* 13 states allow direct shipping by out-of-state wineries who obtain permits, remit excise taxes, and abide by other regulations.
* 8 states (including Michigan) discriminate by allowing in-state wineries to direct ship but not out-of-state wineries.
* 16 states prohibit all direct shipping.

d. Michigan's wine shipment rule discriminates against out-of-state wineries in 3 respects:
1) Because out-of-state wineries may only sell their wine through a separate wholesaler and retailer, both of whom mark up the price, their wine is relatively more expensive to consumers than in-state wine.
2) If an out-of-state winery cannot find a wholesaler willing to distribute its wine, it is totally excluded from the market.
3) In-state businesses have a monopoly on serving customers who want home delivery.

e. There are 40 wineries in Michigan (and 7500 other licensed in-state retailers) allowed to make direct shipments. If they use a common carrier, they are required to label boxes as containing alcohol, remit taxes, submit sales records to the state, and ship only via state-approved carriers whose drivers are trained to check IDs.

f. The parties disagree to some extent about whether increasing the amount of direct shipping of wine is likely to increase the amount of alcohol that gets into the hands of minors. The State argues that minors have credit cards, easy access to computers, and that Internet ordering makes it easy for them to lie about their ages. The plaintiffs argue that minors buy cheap beer and liquor from retailers for immediate consumption, not expensive wine that takes several days or weeks to arrive by mail. None of these assertions is clearly established or refuted by the record.

2. Significant extra-record events

a. Advantage to plaintiffs. While this case was pending, the Federal Trade Commission held hearings and published a study criticizing state anti-shipment laws, explaining how such laws were hurting small wineries, benefitting the politically powerful wholesalers, and frustrating consumers. The FTC looked into various state concerns -- keeping alcohol out of the hands of minors, making sure excise taxes were paid, and protecting public health and safety, and found that the direct shipping of wine posed no danger to any of these concerns.

b. Advantage to State. 33 states filed an amicus brief arguing forcefully that the direct shipping law is a critical part of the overall liquor regulatory scheme. If a state cannot regulate importation and require that every bottle come to rest at a location in the state where it can be counted, inspected and taxed, then the rest of its regulations concerning distribution, pricing, and sales becomes unenforceable.

3. Themes and characterizations

a. The plaintiffs characterize this case as a limited attack upon a discriminatory regulation. The State characterizes it as a broad attack upon the State's fundamental power to regulate at all.

b. The plaintiffs characterize section 2 the 21st Amendment as a limited provision intended only to guarantee that those states that wished to remain dry after Prohibition could do so. Defendants characterize section 2 as a grant of nearly complete power over alcohol regulation to the states. Both sides cite historical evidence, but the evidence is sketchy, and the court has previously called the history "obscure."

c. The plaintiffs' theme is that we are a national economic union in which every farmer is supposed to have access to every market whether he is selling strawberries or strawberry wine, and no state may reserve its market for local farmers only. The State's theme is that alcohol consumption by minors is a national crisis, and direct shipping makes it easier for minors to get alcohol without having to show an ID.

4. The argument

a. Commerce Clause.

Plaintiffs argue that under well-settled dormant commerce clause law, a state's discrimination against out-of-state articles of commerce faces "a virtually per se rule of invalidity." Philadelpia v. New Jersey, 437 U.S. 617, 624 (1978). The rule of invalidity applies to commerce in alcoholic beverages. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 276 (1984); Healy v. Beer Institute, 491 U.S. 324 (1989).

The State takes a stab at arguing that its law is not impermissibly discriminatory because it did not intend to engage in economic protectionism, but does not seriously pursue it because the Court's cases have generally emphasized that economic discrimination is a question of effect, not intent.

b. Twenty-first Amendment

The State argues that it has essentially unlimited power to regulate alcoholic beverages under the 21st Amendment. The Amendment created an exception to the normal operation of the Commerce Clause with respect to alcohol. The State relies on Young's Market and several other cases from the 1930s which contained language emphasizing the broad power of states.

The Plaintiffs respond by citing more recent cases. Hostetter v. Idlewild Bon Voyage Liquors, involved Congress's affirmative commerce clause power. The Court said that the suggestion in the early cases that the Amendment removed liquor from the scope of the Commerce Clause was "absurd." Bacchus involved the dormant Commerce Clause, reiterated that Young's Market was not be read as immunizing state liquor laws from commerce clause scrutiny, and struck down a discriminatory state liquor importation tax.

The State replies by arguing that Bacchus is an isolated and aberrational case that is not true to the 21st Amendment and should be overruled or distinguished into oblivion.

c. The Webb-Kenyon Act

The Webb-Kenyon was passed in 1913, and re-enacted in 1935. It tracks the language of section 2 of the 21st Amendment, prohibiting shipments of alcohol if the receipt, possession or use of it would violate "any" state law.

The State argues that dormant Commerce Clause analysis is inappropriate because this Act was Congressional authorization for states to pass discriminatory alcohol laws.

Plaintiffs respond with two arguments -- 1) if the 21st Amendment does not trump the Commerce Clause, a mere statute with identical wording cannot either; and 2) When the Court first construed the Act in 1917, it gave it a limited construction as only applying to prevent shipments into dry states. Seaboard Air Line Ry. v. North Carolina, 245 U.S. 298, 303 (1917).

d. Non-discriminatory alternatives

Plaintiffs argue that under strict scrutiny, the state must prove that it has no non-discriminatory alternatives before it can justify a discriminatory law. There is a nondiscriminatory alternative available here, namely allowing out-of-state wineries to ship under exactly the same rules as in-state wineries (obtain a permit, pay taxes, check IDs). This system is in use in 13 states, endorsed by the FTC, and has resulted in no reported problems involving increased shipments to minors or tax evasion. Plaintiffs point out that Michigan allows over 7500 in-state retailers to direct ship, and has not explained why shipments originating out of state are any different.

The State responds with the idea of accountability. It argues that it cannot effectively compel out-of-state wineries to abide by its laws, because of lack resources and lack of enforcement power. The threat to revoke an out-of-state winery's permit when it only ships a few cases a year is not as effective a tool as the threat to revoke an in-state winery's permit that would put it out of business.

Plaintiffs reply that all wineries have a federal permit, and the federal permit will usually be revoked if a state permit is, Michigan's power to revoke the permit of an out-of-state winery in fact carries a threat to put it out of business altogether.

4. Procedural posture

a. The 6th Circuit struck down Michigan's law, relying on Bacchus. It characterized the State's reliance on Young's Market and other cases from the 1930s as "disingenuous." The State is Petitioner; we are Respondents.

b. We are consolidated with a case from New York. The 2nd Circuit agreed that a discriminatory shipment law would be unconstitutional, but found New York's statute nondiscriminatory and upheld it.

D. History of the interplay between the Commerce Clause and 21st Amendment

1 Before the 21st Amendment

a. Mugler v. Kansas, 123 U.S. 623, 661-63 (1887). Dry states could prohibit the production and consumption of alcohol within their borders pursuant to police power.

b. Walling v. Michigan, 116 U.S. 446, 460 (1886). Dormant Commerce Clause prohibits states from discriminating against out-of-state alcohol products.

c. Bowman v. Chicago & Northwestern Ry., 125 U.S. 465, 499-500 (1888). Dormant Commerce Clause prohibits states from restricting the importation of liquor through interstate commerce for personal use.

d. Leisy v. Hardin, 135 U.S. 100, 108-10 (1890). Dormant Commerce Clause prohibits states from restricting the importation and re-sale of liquor through interstate commerce as long as it remained in its original package.

e. Congress enacts the Wilson Act (27 USC 121) in 1891. The practical effect of Bowmanand Leisy was to make it impossible for states to enforce dry laws. Anyone could circumvent laws prohibiting use or sale of alcohol by importing it through interstate commerce. The Wilson Act was intended to overturn those cases. It gave states the power to restrict imported liquor "to the same extent and in the same manner" as if it had been manufactured in the state.

f. Rhodes v. Iowa, 170 U.S. 412, 423 (1898) and Vance v. W.A. Vandercook Co., 170 U.S. 438, 446 (1898). The Court construes the Wilson Act narrowly as empowering States to regulate only the resale of imported alcohol in its original package, not the directshipment of alcohol to consumers. It overturned Leisy but not Bowman.

g. Congress enacts the Webb-Kenyon Act (27 U.S.C. 122) in 1913 to fix the problem and overturn Bowman. The Act provides that "[t]he shipment of intoxicating liquor of any kind from one State into any other State to be received, possessed, sold, or used in violation of any law of such State is prohibited."

h. Adams Express Co. v. Kentucky, 238 U.S. 190, 99 (1915); James Clark Distilling Co. v. Western Maryland R. Co., 242 U.S. 311, 322 (1917); and Seaboard Air Line Ry. v. North Carolina, 245 U.S. 298, 303 (1917). Webb-Kenyon Act gives states power to ban direct shipments of alcohol into dry areas. It overturns Bowman by removing all receipt and possession of liquor prohibited by state law from the scope of the commerce clause. However, the Act "has no application and no effect to change the general rule that the States may not regulate commerce wholly interstate."

i. 18th Amendment ratified and Prohibition begins in 1919.

j. McCormick & Co. v. Brown, 286 U.S. 131, 143 (1932) [odd Prohibition-era case involving shipments of non-beverage alcohol]. Webb-Kenyon Act was not repealed by 18th Amendment.

2. The ratification of the 21st Amendment (1933)

. The legislative history of Section 2 is sketchy. All the attention of Congress and the state ratifying conventions was on Section 1 and the repeal of Prohibition. Prohibition is denounced as a failure and the return of regulatory power over alcohol to the states is proclaimed as heralding a new era of sensible temperance laws customized to local conditions. The only thing concrete said about Section 2 is that it was intended to incorporate the Webb-Kenyon Act permanently into the constitution so that state temperance laws would never be rendered unenforceable by Bowman, Leisy and Rhodes. No legislative history directly addresses the question whether states would be allowed to use their regulatory power to discriminate.

3. Supreme Court cases on the interplay between the Commerce Clause and Section 2 of the 21st Amendment

a. The early cases (1936-39) held that states had very broad power to prohibit or burden interstate commerce in liquor virtually unlimited by the dormant Commerce Clause, but were silent as to the specific question of discrimination against interstate commerce.

1) State Bd. of Equalization v. Young's Mkt. Co., 299 U.S. 59, 62-64 (1936). Liquor wholesalers challenged a California law requiring them to pay $500 for a license to import beer into the state, arguing that it burdened and discriminated against interstate commerce. The Court rejected the discrimination argument because all wholesalers had to pay the fee, and the fee was actually less than the $750 cost for a license to manufacture beer. With respect to the "burden" argument, however, the Court held that the Amendment is a "broad command" giving states the power to regulate the importation and sale of alcohol and place burdens on interstate commerce in alcohol in ways that would have violated the dormant commerce clause prior to the 21st Amendment.

2) Indianapolis Brewing Co. v. Liquor Control Comm'n, 305 U.S. 391, 394 (1939). A beer manufacturer challenged a Michigan reciprocity law that prohibited the importation and sale of beer from Indiana because Indiana did not permit the importation and sale of beer made in Michigan. The brewer argued that the law discriminated and burdened interstate commerce. The Court characterized the law as one that burdened interstate commerce but did not discriminate in favor of local brewers, and found it constitutional. It said "as held in the Young case, the right of a state to prohibit or regulate the importation of intoxicating liquor is not limited by the commerce clause."

3) Ziffrin, Inc. v. Reeves, 308 U.S. 132, 138-39 (1939). A common carrier challenged the constitutionality of a Kentucky law that required a license to transport alcohol within the state as an impermissible burden on interstate commerce. The law applied equally to in-state and out-of-state carriers. The Court upheld it as clearly within the scope of state power under the 21st Amendment, saying the state's right to "legislate concerning intoxicating liquors brought from without [is] unfettered by the Commerce Clause."

b. Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964). A person selling duty-free liquor at JFK Airport under federal license challenged the authority of New York state to require that he obtain a NY license and abide by state regulations. New York argued that the 21st Amendment had totally exempted liquor from the commerce clause. The Court conceded that the early cases suggested that a State is totally unconfined by traditional Commerce Clause limitations when it regulates the importation within its borders, but "[t]o draw a conclusion from this line of decisions that the Twenty-first Amendment has somehow operated to 'repeal' the Commerce Clause wherever regulation of intoxicating liquors is concerned would … be an absurd oversimplification." Both the Commerce Clause and 21st Amendment are parts of the same constitution and must be read together. To suggest that the Amendment had deprived Congress of its affirmative Commerce Clause power over liquor was "bizarre and patently false."

c. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984). Liquor importers challenged a Hawaii law that imposed a 20% tax on liquor imported from out-of-state, but exempted locally produced brandy, rum and wine. The Court held that the law violated the dormant Commerce Clause because it discriminated against interstate commerce and provided a commercial advantage to local businesses, and rejected the argument that the 21st Amendment immunized discriminatory liquor laws from being struck down. It held that when these two provisions conflict, the question was whether the law was "so closely related to the powers reserved by the Twenty-first Amendment" that it outweighs the federal interest in free interstate commerce. The Court found it unnecessary the scope of state power under the 21st Amendment because "one thing is certain: the central purpose of the provision was not to empower States to favor local liquor industries by erecting barriers to competition." The Court acknowledged theYoung's Market line of cases, but said, "It is by now clear that the Amendment did not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause." 468 U.S. at 275.

d. Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573 (1986). A liquor distiller challenged a New York law requiring every liquor distiller that sells liquor to wholesalers in NY must sell at a price that is no higher than the lowest price the distiller charges wholesalers anywhere else in the United States. The Court held that this law violated the dormant Commerce Clause because it directly regulated interstate commerce by effectively forcing distillers to sell at a uniform price everywhere. It said that "When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry" as violating the dormant Commerce Clause and not authorized by the 21st Amendment.

e. Healy v. Beer Institute, 491 U.S. 324 (1989). A beer shipper challenged a Connecticut law requiring out-of-state shippers, but not in-state shippers, to affirm that their posted prices for products sold to Connecticut wholesalers were no higher than the prices at which those products are sold in the bordering states. The law was both discriminatory as in Bacchus, and regulated commerce in other states as in Brown-Forman. The Court followed those two cases and struck down the law under the dormant Commerce Clause, holding that it could not be saved by the 21st Amendment. The majority relied on Brown-Forman's conclusion that the 21st Amendment conferred no authority on states to regulate extraterritorially. Justice Scalia concurred based on Bacchus, reasoning that "[the law's] discriminatory character eliminates the immunity afforded by the Twenty-first Amendment."

4. Non-Commerce Clause cases commenting on the power of the 21st Amendment.

a. Mahoney v. Joseph Triner Corp., 304 U.S. 401, 403-04 (1938). A Minnesota law that prohibited importing beverages with more than 25% alcohol, but allowed the sale of domestic liquor of that content, was challenged under the Equal protection Clause. The Court upheld the law without discussion because a regulation authorized by the 21st Amendment "cannot be deemed forbidden by the 14th."

b. Department of Revenue v. James B. Beam Distilling Co., 377 U.S. 341, 345-46 (1964). A Kentucky law imposing a tax on whisky imported from Scotland was struck down as violating the export-import clause despite the 21st Amendment. The Young's Marketcases were relegated to a brief footnote, although the Court noted that states had the power to regulate or prohibit the importation of intoxicants destined for use within its borders, and to regulate and control, by taxation or otherwise, the distribution, use, or consumption of intoxicants within the state after they have been imported.

c. Wisconsin v. Constantineau, 400 U.S. 433, 436 (1971). A Wisconsin law permitting the sheriff to issue notices forbidding the sale of alcohol to habitual drunkards without giving them an opportunity to be heard was struck down as violating Due Process despite the 21st Amendment. The case contains no significant discussion of the Amendment.

d. Craig v. Boren, 429 U.S. 190, 204-09 (1976). An Oklahoma law set the beer drinking age at 21 for males and 18 for females. The Court struck it down as gender discrimination despite the 21st Amendment. In passing, the Court made several comments about the Amendment :
1. The wording of § 2 closely follows the Webb-Kenyon and Wilson Acts and expresses the framers' clear intention of constitutionalizing the Commerce Clause framework established under those statutes.
2. The Amendment primarily created an exception to the normal operation of the Commerce Clause but did not repeal it.
3. The relevance of the 21st Amendment to constitutional provisions other than the Commerce Clause is doubtful.
4. The state's regulatory authority over importation under the Twenty-first Amendment is transparently clear.

e. California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc, 445 U.S. 97 (1980). The Court struck down a minimum pricing law for wine on the ground that it violated the antitrust laws despite the 21st Amendment. It discussed the 21st Amendment at length, saying that the early decisions on the 21st Amendment gave states "great powers" over liquor, but had not freed the States from all restrictions imposed by other provisions of the Constitution. Important federal interests in liquor matters survived its ratification. The Amendment grants the States "virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system," but those controls may be subject to the federal commerce power in appropriate situations.

e. Larkin v. Grendel's Den, Inc., 459 U.S. 116 (1982). A Massachusetts law permitted nearby churches to veto the issuance of liquor licenses. The Court struck it down as a violation of the Establishment Clause, dismissing the 21st Amendment issue in a cursory footnote.

f. Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712 (1984). Oklahoma required cable TV operators to delete commercials advertising alcoholic beverages. The Court struck down the law as pre-empted by federal broadcasting laws. It held that the 21st Amendment could not save the law because it "does not license the States to ignore their obligations under other provisions of the Constitution." Although § 2 gives states power to impose burdens on interstate commerce in liquor, it did not repeal the Commerce Clause wherever regulation of intoxicating liquors is concerned and did not deprive the federal government of authority to regulate interstate commerce in liquor. When a State is not regulating "the sale or use of liquor within its borders," federal interests may prevail, even when the state law advances temperance.

g. 324 Liquor Corp., 479 U.S. 335,(1987). The Court struck down a minimum pricing law for liquor because it violated the antitrust laws and was outside the scope of the 21st Amendment. In passing, the Court included a long footnote on legislative history concluding that the Amendment did not give states power to discriminate against out-of-state businesses, nor confer upon the states absolute control over interstate commerce affecting alcoholic beverages. 346 n.10

h. North Dakota v. United States, 495 U.S. 423, 431 (1990). This was an odd case about whether liquor sold on military bases had to comply with some trivial North Dakota regulations or were exempt because of the Supremacy Clause. It produced no majority opinion. The plurality held that under the plain terms of the 21st Amendment, states could regulate the distribution and use of liquor within its borders, including on military bases wholly within the state. It said that "within its jurisdiction," the state has virtually unlimited power over alcohol. Justice Scalia concurred because the state was not discriminating against the federal government. The opinion has a different tone from all the others, because the plurality is made up mostly of Justices who were dissenters in earlier cases.

i. 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 516 (1996). The Court struck a Rhode Island law prohibiting liquor advertising on 1st Amendment grounds, holding that it was not authorized by the 21st Amenedment. The Court commented that the Amendment granted the States increased authority over commerce in liquor, but gave it no authority whatsoever to violate other constitutional provisions.