Litigation Backgrounder

            The Internet era has produced an unprecedented array of consumer choices. For tens of millions of wine enthusiasts across America, the Internet creates the potential to purchase directly from wineries tens of thousands of wines that are not readily available on store shelves.

             But for many Americans, the “potential” is unrealized, snuffed out by protectionist state laws designed to preserve the liquor distributor monopoly over wine sales. In approximately 24 states, including Arizona, it is unlawful for consumers to order wines by telephone, mail or the Internet from out-of-state wineries. Such laws severely limit consumer choice and add to the cost of wine. They also severely limit business opportunities for the vast majority of American wineries, which are small, family-owned operations that rely on word-of-mouth and direct sales to consumers in order to earn a living.

            It wasn’t supposed to be that way. One of the major motivations for our U.S. Constitution was the desire to create a system of free trade among the states. That goal was effected by the Commerce Clause of Article 1, Section 8, which forbids parochial state trade barriers; and by the Privileges and Immunities Clause of Article IV, section 2, which guarantees freedom of enterprise for out-of-state residents on equal terms with in-state residents. Essentially, our Founders envisioned America to be one big free trade zone. Unfortunately, the conflicting maze of state regulations that limit free commerce in wine creates precisely the Balkanized market that those provisions were intended to prevent.

             Some state restrictions on direct shipments of wine to consumers are not only protectionist, but discriminatory as well. Such states forbid direct shipments of interstate wine but allow in-state wineries to sell and ship directly to consumers. Such discriminatory laws raise special concerns under the Commerce Clause and Privileges and Immunities Clause.

            Among the states with discriminatory bans on direct interstate wine shipments, all have been sued except Arizona–until now. On October 7, 2003, the Institute for Justice filed Parker v. Morrison, which challenges on constitutional grounds the State of Arizona’s law forbidding direct interstate shipments of wine.

Barriers from Coast to Coast

            Approximately 24 states forbid direct interstate shipments of wine to consumers. In 2003, five states (Florida, Kentucky, Maryland, Tennessee and Utah) consider direct shipment of wine a felony. Fortunately, the number of states with trade restrictions has decreased in recent years as the result of legislative action and court decisions; North Carolina, Texas, Georgia and Virginia recently opted to allow direct shipping. Among those that permit direct shipping, some are “reciprocity” states, which allow direct shipping only from wineries in states that also permit direct shipping. Laws in direct shipping states vary in terms of applicable conditions, such as obtaining a license, maximum volume, collecting taxes and so on.¹

            Still, after hearings on the subject, the Federal Trade Commission (FTC) in a 2003 study reported, “State bans on interstate direct shipping represent the largest regulatory barrier to expanded e-commerce in wine.”² The report found that such laws reduce consumer choices and add to the cost of wine. Based on data from states that allow direct shipping, the FTC debunked the main two arguments against direct shipping, finding that “states that permit direct shipping generally report few or no problems with shipments to minors,” and that “[s]everal states that allow interstate direct shipping also collect taxes from those shipments.” The FTC concluded, “consumers could reap significant benefits if they had the option of purchasing wine online from out-of-state sources and having it shipped directly to them. Consumers could save money, choose from a much greater variety of wines, and enjoy the convenience of home delivery.”³

            Technology and the explosive growth of wineries have outpaced state regulations in the states that forbid direct shipments. Most states have what is called a “three-tier” system of alcohol distribution: producers may only sell lawfully to liquor distributors, who sell to retailers, who sell to consumers. The liquor distributors siphon about 18 to 25 percent of the price at which wines are sold to retailers.⁴ Liquor distribution is a big and profitable business. The Miami-based Southern Wine and Spirits, which controls most liquor distribution in Arizona, alone generates $2.8 billion in annual revenues.⁵

            The three-tier system works well for spirits, beer, and wines from large, well-known wine-makers. But it doesn’t work for wines produced by many lesser-known wineries. Unlike spirits and beer, wine is a highly distinctive product. The number of American wineries has increased exponentially in recent decades, with approximately 2,500 wineries in 49 states. Together they produce many thousand different wines, no two of which are alike. While the nation’s top 25 wineries produce 82.7 percent of all American wine, the remainder is produced by approximately 2,475 mostly family-owned, very small wineries. Meanwhile, the liquor distributor industry has consolidated. It is not economically viable for liquor distributors to represent all (or even most wineries), much less the full spectrum of wines they produce; and shelf space in retail stores is even more limited. Hence, for the vast majority of wineries that are not represented by wholesalers (particularly in other states where they are less well-known), the main sources of sales are winery visitors and direct shipments. In many instances, the only way for out-of-state visitors to obtain such wines is by direct shipment; and where interstate direct shipments are prohibited, they often cannot obtain such wines at all.

            The ban on direct shipments obviously benefits liquor wholesalers, who defend them lavishly and tenaciously in legislatures and in courtrooms. They are less beneficial to in-state wineries, whose out-of-state markets are foreclosed in reciprocity states that allow direct shipments only from states that themselves allow direct shipments.

            As the FTC report concluded, the main arguments against direct shipping are far from honest—they seem reasonable, but, in truth, the actual reasons for imposing the restrictions are far less honorable. Few instances of underage access to wine over the Internet have been reported. Few minors consume premium wine as the alcohol of choice, and there are simply far too many easier ways to obtain alcohol. Moreover, safeguards such as adult identification at time of purchase, shipment labeling, and adult signature upon delivery have proven effective in direct shipping states. Congress recently aided law enforcement efforts by enacting the 21^st Amendment Enforcement Act, which gives state attorneys general the authority to prosecute out-of-state shippers of alcohol in federal court for violations of state law.

            Moreover, wineries are willing to remit taxes, and mechanisms exist to facilitate tax collection. Far from losing revenues from direct shipping, states may be foregoing revenues by forbidding them.

            The only real beneficiaries of direct interstate shipment bans are liquor distributors. And enriching such economic interests is an impermissible goal for discriminatory trade barriers under the U.S. Constitution.

Arizona’s Direct Shipment Ban

            Arizona allows in-state wineries to ship directly to Arizona consumers who order wine by Internet, telephone or mail. But direct shipping opportunities for out-of-state wineries are severely limited. An out-of-state winery may obtain a “direct shipment license,” which is in fact a serious misnomer: although the consumer orders the wine from the winery, the winery must ship it first to a liquor distributor, which delivers it to a retailer, which delivers it to the consumer. The role of the middlemen remains intact, standing between the consumer and winery.⁶ Additionally, as a result of legislation sponsored by State Sen. Barbara Leff and enacted in 2003, an out-of-state winery also may ship directly to a consumer in Arizona who is physically present at the winery when the order is placed, although the volume is limited to two cases per purchaser per winery.⁷

            By contrast, in-state wineries may deliver wine to Arizona consumers without shipping through liquor distributors or retailers, and without a consumer being physically present when the order is placed.⁸ Nor are Arizona wineries limited in the amount of wine they can ship to consumers.

            The ban on direct shipping of interstate wines means that Arizona consumers either do not have access to thousands of wines from other states, or that they must pay added costs and endure the inconvenience of three tiers of distribution. It also means that many small out-of-state wineries do not have equal access, or in many instances any access at all, to the Arizona wine market. Arizona wineries also suffer because they are not allowed to ship wine to a dozen “reciprocity” states, which allow direct shipments only from wineries in states that also allow direct shipping.

Constitutional Challenge

             Arizona’s discriminatory ban on direct interstate wine shipments violates two provisions of the U.S. Constitution. The Commerce Clause of Article 1, Section 8 preserves free trade among the states. Where a state law discriminates on its face against interstate commerce, it is virtually assumed by courts to be invalid.⁹ Those who back direct shipment laws claim states have complete authority to do so under the 21^st Amendment, which gives states broad authority to regulate alcohol importation and distribution. However, the U.S. Supreme Court has ruled that the 21^st Amendment does not “empower States to favor local industries by erecting barriers to competition.”¹⁰ The State must show that discriminatory trade barriers serve important state interests in the least burdensome way. That the State cannot do.

            Likewise, the prohibition violates the Privileges and Immunities Clause of Article IV, Section 2, which guarantees to citizens of other states the same rights a state’s own citizens possess, including the right to pursue businesses and occupations.¹¹ Here, Arizona has created two sets of direct shipping rules—one for its own businesses, and another for out-of-state businesses. The prohibition therefore impinges upon the rights of out-of-state winemakers.

            So far, courts have split over the constitutionality of laws prohibiting direct wine shipments. An Indiana ban was upheld by the 7^th U.S. Circuit Court of Appeals¹²; while bans were struck down in North Carolina by the 4^th Circuit,¹³ in Texas by the 5^th Circuit,¹⁴ in Michigan by the 6^th Circuit,¹⁵ and in New York by the U.S. District Court for the Southern District of New York.¹⁶ Courts have also differed on the appropriate remedy, with the 4^th Circuit opining that the exemption for in-state wineries should be stricken, while others have ruled that the ban on interstate shipments should be invalidated. A “remedy” that forbids in-state wine shipments would have the perverse effect of reducing consumer choices while expanding the liquor distributors’ monopoly, a result at odds with the free-trade promise of the Commerce Clause.

             Because of the multiplicity of decisions, the issue is surely headed for review by the U.S. Supreme Court.

Parker v. Morrison

             Lewis Parker is sole proprietor and winemaker of Willowcroft Farm Vineyards, a small winery in Leesburg, Va. On September 12, 2003, wine enthusiast John R. Norton, a former deputy secretary for the U.S. Department of Agriculture who lives in Arizona, faxed to Parker an order for one case of Willowcroft Traminette, an award-winning wine available only from the winery. Norton affixed a copy of his driver’s license evidencing that he was an adult purchaser. Parker regretfully declined the order because of Arizona’s direct shipment ban.

             On October 7, Parker, Norton and several other Arizona wine enthusiasts filed a lawsuit in the U.S. District Court for the District of Arizona, challenging Arizona’s protectionist and discriminatory interstate wine shipment ban under the Commerce Clause, the Privileges and Immunities Clause, and federal statute. They seek an order striking down the ban and allowing direct interstate wine shipments on the same terms and conditions as Arizona wineries.

             Through this litigation, the plaintiffs hope to convince the court—or the Arizona Legislature—to join the ranks of the majority of states that allow direct interstate shipping. Such an outcome would benefit both consumers and producers.

Litigation Team

Parker v. Morrison will be litigated by the Institute for Justice, a public interest law firm headquartered in Washington, D.C. Founded in 1991 by Chip Mellor and Clint Bolick. IJ litigates in support of fundamental individual liberties, including economic liberty—the right to earn a living free from arbitrary or excessive government regulation. IJ has scored significant victories on behalf of entrepreneurs and in the process opened up long-closed markets. These include:

 

·       Craigmiles v. Giles—A federal appeals court upheld a lower court ruling that found Tennessee’s government-imposed cartel on casket sales was unconstitutional. This is the highest pro-economic liberty court decision since the New Deal.

·       Swedenburg v. Kelly—A federal judge declared unconstitutional New York state’s laws that barred the interstate direct shipment of wine into New York.

·       Cornwell v. California Board of Barbering and Cosmetology—IJ represented JoAnn Cornwell, who created the Sisterlocks technique of hairbraiding and locking, in defeating the cosmetology licensing requirement for African hairbraiders in California.

·       Ricketts v. City of New York—IJ helped commuter vans fight a public bus monopoly that would not allow the vans to put people to work and take people to work in underserved metropolitan neighborhoods.

·       Clutter v. Transportation Services Authority—IJ represented independent limousine drivers who defeated Las Vegas’ Transportation Services Authority (TSA) and entrenched limousine companies that had stifled competition. Through IJ’s litigation, the once-closed market was opened.

·       Jones, et. al. v. Temmer, et. al.—Leroy Jones, Ani Ebong and Girma Molalegne opened Freedom Cabs, Inc., in Denver after IJ helped them overcome Colorado’s protectionist taxicab monopoly. Stemming from pressure in the court of public opinion created by their lawsuit, the state legislature enabled Freedom Cabs to become the first new cab company in Denver in nearly 50 years. Jones’ testimony also contributed to the breakdown of government-sanctioned taxicab monopolies in Indianapolis and Cincinnati.

·       Uqdah v. D.C. Board of Cosmetology—Although they lost in court, Taalib Din Uqdah and his wife Pamela Ferrell prevailed against the District of Columbia to eliminate a 1938 Jim Crow-era licensing law for African hairbraiders when the District subsequently deregulated cosmetology.

 

            The lead counsel is Clint Bolick, IJ’s co-founder and vice-president, who works at the Institute’s Phoenix-based Arizona Chapter. Bolick is also lead counsel in IJ’s challenge to New York’s

direct shipment prohibition. Last year, Bolick served as counsel in Zelman v. Simmons-Harris, the successful defense of the Cleveland school choice program.

             Joining Bolick as co-counsel are Indianapolis attorney Robert Epstein and Indiana University law professor J. Alex Tanford. Epstein and Tanford have litigated direct shipment challenges in Indiana, North Carolina, Michigan and Florida.

             Together, the litigation team vows to uncork freedom for wine entrepreneurs and Arizona wine-lovers.

For more information contact:

John Kramer

Vice President for Communications

Institute for Justice

901 N. Glebe Road, Suite 900

Arlington, VA 22203

W: (703) 682-9320, ext. 205

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Lisa Knepper

Director of Communications

Institute for Justice

901 N. Glebe Road, Suite 900

Arlington, VA 22203

W: (703) 682-9320, ext. 202

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