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SUPREME
COURT FILINGS
The Supreme Court Battle Last Updated: May 18, 2005 The Decision Is In Analysis of the Decision: The states took the position that the Wilson and Webb-Kenyon Acts, passed in the 1890 and 1913 respectively, were designed to overcome commerce clause problems identified by the Court, which caused the Court to repeatedly nullify state laws designed to allow them to exert effective control over the importation and transportation of alcohol in that time frame. They felt comfortable in this interpretation because the Supreme Court itself ruled in the Clark Distilling case in 1917 that the Webb-Kenyon Act took "the protection of interstate commerce away from all receipt and possession of liquor prohibited by state law." Moreover, as Justice Thomas pointed out, the reenactment of the Webb-Kenyon Act in 1935 created a presumption that it incorporated "settled judicial construction," that Congress intended to give states the authority to act in derogation of normal commerce clause restrictions. After all, the Webb-Kenyon Act was formally titled "An Act Divesting Intoxicating Liquors of Their Interstate Character in Certain Cases." That interpretation also appeared justified by
the opinion of the Court in the Young's Market case in 1936.
As Justice Thomas noted, the Young's Market Court rejected
the argument that a state "must let imported liquors compete
with the domestic on equal terms," and that "to say that
would involve not a construction of the Amendment, but a rewriting
of it.' Justice Stevens, I believe, was on to something. The majority opinion reads from the outset more like an economic treatise than an interpretation of the Constitution. But while the facts and figures provided by Justice Kennedy may be relevant for policy discussions by legislatures, they are wholly inappropriate when discussing what was meant by the people of this nation when they ratified the 21st Amendment. Justice Kennedy reinterprets the meaning of the the cases and federal enactments by selectively choosing language from the cases he cites to, while ignoring concurrent language which proves contrary to his thesis - something Justice Thomas calls him on time and time again. I should point out that this type of intellectual "selective blindness" is reminiscent of the methodology of the FTC Report, which is cited to with such approval by Justice Kennedy. You may recall that the FTC chose to ignore voluminous evidence provided by former AAG Irene Mead from Michigan that direct to consumer sales allowed for easy access by minors, and instead found that there was no problem with such sales based upon the reporting of only 11 states - none of which had conducted any law enforcement efforts - and all of whom based their response upon the fact that they received few reports of a problem (the subsequent MA AG sting reinforced the MI findings). The gist of Kennedy's opinion is that alcohol must be treated like any other item in commerce - jeans, books, CD's - and that in order for a state to justify treating out-of-state producers differently than in-state producers, states must pass a "strict scrutiny" test: Does the state regime advance a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives? Ironically, Kennedy faults the states for failing to provide sufficient evidence that underage sales to minors is a problem while concurrently holding out the woefully inadequate and self-indulgent FTC Report as an authority on the subject. He also gives short shrift to state regulatory concerns that it would be difficult to hold violators accountable, pointing to the ability of the TTB to revoke permits for unlawful interstate sales - despite the fact that TTB has never revoked a single permit for such a violation. And he utterly dismisses the state argument that tax revenue could be lost by simply instructing the states that they can condition a permit on the collection of taxes - note that he doesn't say how the state is to ensure the accuracy of such reports since the thousands of licensees will be in another state - and perhaps across the country. Justice Kennedy clearly supports the three-tier system itself, reiterating Justice Scalia's comments in the 1990 North Dakota case that it is "unquestionably legitimate." And he also confirms that nothing in the Court's opinion changes the fact that, as an earlier Court decision in Midcal made clear, The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor an how to structure the liquor distribution system." So where does that leave us? Justice Thomas argues that Justice Kennedy's opinion rests upon creating a distinction between a state's ability to discriminate at the wholesale level and retail level - which he feels is the obvious implication of Justice Kennedy's acceptance of the three-tier system and control states - and its ability to treat out-of-state producers differently. Thus where a state treats in-state producers differently than out-of-state producers, the state must change their laws to create a level playing field. In other words, the states can either prohibit direct shipping altogether - and require accountable face-to-face transactions through a locally licensed seller, or it can open the doors and allow out-of-state shippers to ship in the same quantities and with the same restrictions imposed on in-state direct shippers. The logical implication of that rationale - and Justice Kennedy's own words - is that reciprocal laws are unconstitutional - although you will search in vain for a reference to that particular part of the opinion in any press release from the wine interests. But read Justice Kennedy's words: "Laws of the type at issue in the instant
cases contradict these principles. They deprive citizens of their
right to have access to the markets of other States on equal terms.
The perceived necessity for reciprocal sale privileges risks
generating the trade rivalries and animosities, the alliances and
exclusivity, that the Constitution and, in particular, the Commerce
Clause were designed to avoid. State laws that protect local
wineries have led to the enactment of statutes under which some
States condition the right of out-of-state wineries to make direct
wine sales to in-state consumers on a reciprocal right in the shipping
state. California, for example, passed a reciprocity law in 1986,
retreating from the State's previous regime that allowed unfettered
direct shipments from out-of-state wineries. . . The obvious aim
of the California statute was to open the interstate direct shipping
market for the state's many wineries. Ibid. The current patchwork
of laws - with some states banning direct shipments altogether,
others doing so only for out-of-state wines, and still others requiring
reciprocity - is essentially the product of an ongoing, low level
trade war. Allowing states to discriminate against out-of-state
wine "invite[s] a multiplication of preferential trade areas
destructive of the very purpose of the Commerce Clause."" Assuming Justice Thomas is correct in his interpretation - that Justice Kennedy is making a producer based distinction - that could be good news for big box retailers like Costco (which issued a press release praising the decision) and Wal-Mart, but bad news for small and medium size wineries in the long run. You may be aware that Costco has brought suit in Washington State using the same legal theory as that employed in the direct shipping lawsuits, alleging that Washington's allowing in-state suppliers to ship direct to retail while denying that privilege to out-of-state suppliers is unconstitutional. Should Costco prevail in that argument and they are permitted to deal directly with suppliers, their economic power will invariably drive prices down and smaller retailers out. Since Costco admits in its pleadings that it focuses on just a limited number of SKU's, the loss of local retail establishments - which offer on average 500-1000 SKU's of wine - will in the long run hurt smaller to mid-level wineries who do not make it onto the list of big box SKU's. It was initially feared that Control States could be vulnerable if the Court ruled against the states, however the Court clearly indicated that a state decision to "assume direct control of liquor distribution through state-run outlets" is valid. But that does not mean that control states are free from the Court's mandate. As the recent federal court decision in the successor Virginia litigation proves, being a control state does not insulate you from these challenges. There, the judge struck down Virginia's personal importation law, holding that since Virginia residents could buy as much as they wanted in-state, they should be allowed to go to neighboring states like Maryland, West Virginia, and North Carolina and buy as much as they want there. Arguments that this would cause a loss of tax revenue in Virginia were ignored by the court. He upheld the quantity limit on direct shipments since both in-state and out-of-state shippers were held to the same two case per month limitation, struck down the brand owner permission requirement for out-of-state retailers because there was no such requirement for in-state retailers, disallowed "delivery" of wine and beer by in-state breweries, wineries and retailers because out-of-state retailers may not "deliver," struck down the ability of in-state wineries and breweries to ship directly to retailers since out-of-state wineries and breweries can not ship direct to retailers, and struck down the restriction on the kinds of alcohol that can be sold in state liquor stores since they do not allow out-of-state wines to be sold there. That ruling is pending appeal to the 4th Circuit and thus could result in the first decision by an appeals court interpreting the recent Supreme Court decision. Such a decision could help answer the question of whether Thomas was correct - that the decision allows for disparate treatment of wholesalers and retailers and was limited to prohibiting producer based distinctions - or whether out-of-state retailers must be treated the same way as in-state retailers. For example, it is unclear if the Court's decision means that if you allow in-state retailers to deliver, you must also allow out-of-state retailers to do the same. The last thing I will add is that I think it is probably clear from the decision that the Supreme Court did not intend for its ruling to be applied to permit "equalization" challenges. By that I mean that I do not believe the Court would entertain a challenge by brewers or distillers to a state law allowing direct shipping by wineries only. As long as the state is evenhanded - allowing all wineries in-state and out-of-state to ship wine - I believe that is all the Court is requiring. Of course, the battle now shifts back to the state
legislatures to determine which way they will go - and to the lower
courts to determine the parameters of the decision rendered by the
Supreme Court. Summary of the Oral Arguments: The states and wholesaler intervenors counter that the 21st Amendment
was designed to overcome commerce clause challenges which had stymied
their efforts to control imports until just prior to Prohibition
(the Webb-Kenyon Act, upon which the 21st Amendment was modeled,
was upheld by the Supreme Court in 1917 - just prior to the institution
of Prohibition), that its very words supply the power to control
imports as states have done, that Bacchus is inapposite since
it did not deal with importation control but with a tax, that bans
on direct shipment are entitled to deference since they are designed
to "combat the perceived evils of an unrestricted traffic in
liquor," and that the evidence in the cases demonstrates that
the laws in question are not "mere economic protectionism."
Bolick's Argument: He asked Bolick whether the entire three-tier licensing system
would necessarily be rendered invalid under his interpretation.
He asked specifically why a NJ wholesaler could not sell to NY retailers,
or vice versa, if such import controls/distinctions were invalid.
Bolick argued, unpersuasively, that this issue was limited to wine.
I say unpersuasively because Justice Kennedy obviously was not satisfied
with his answer and later raised this same point right out of the
gates with Kathleen Sullivan noting that while it was a "narrow
issue" being litigated, the plaintiffs were asking for a "sweeping
rationale" and he was unclear how the three-tier system survives
under that rationale.
Justice Breyer followed Justice Kennedy's initial questions with
something of an historical recitation wherein he seemed to take
the position that Bolick's position concerning the viability of
discrimination claims was put down by the Court's decision (Justice
Brandeis writing for the majority) in the Young's Market
case in 1936, where it held that states need not treat importers
and domestic industry in the same manner and that to argue to the
contrary would be to rewrite the 21st Amendment.
Justice Ginsburg was equally critical of Bolick's assessment of
the legislative history of the Webb-Kenyon Act and the 21st Amendment,
noting that Congress could have put into the Act or the Amendment
the non-discriminatory language Bolick argued survived the passage/ratification
of those laws, but it chose not to do so. Justice Souter asked Bolick
whether Congress had drafted and later dropped anti-discrimination
language from Webb-Kenyon, as it obviously was not present in that
statute. Bolick argued that it would have been redundant to include
it but could not answer the question directly.
Justice Kennedy then delved into the issue of tax revenue that
the states would lose, both excise taxes and sales tax, if the plaintiffs
were to prevail. He noted the Quill case and asked how states
could require that such taxes be paid in light of that decision.
Bolick responded that the taxes could be collected as a condition
of a permit.
Justice Souter followed with practical regulatory concerns. He
wondered how states could audit compliance without great expense
and without the ability to drop in unexpectedly - something that
would be impossible across the country. Bolick argued that online
compliance checks were sufficient and feasible. Justice Scalia then
asked whether the federal government policed compliance with state
tax laws and Justice Kennedy asked if such audits by the feds were
routine, to which Bolick replied that they did and they were. Of
course that is not quite the case. While wineries are subject to
the loss of their federal permit if found to have violated state
laws concerning the remittance of state taxes, the TTB does not
regularly check such records and is more concerned with the payment
of federal taxes and fees.
Justice Ginsburg closed out the questioning of Bolick by wondering
whether the rationale put forward by the plaintiffs would allow
the shipment of alcoholic beverages other than wine. Bolick tried
to argue that these cases are limited to wine, but of course the
constitution speaks to alcohol and later admissions by Sullivan
belied that argument.
Sullivan's Argument: Justice Ginsburg, exploring the nature of the relief being sought
by the plaintiffs asked whether simply taking away the in-state
direct shipping complained of would give them nothing to complain
about. Sullivan agreed, but argued that the better result would
be to open the market to all comers.
Justice Stevens, echoing Justice Brandeis' decision in Young's
Market, asked her if Michigan could bar all out-of-state wine,
even assuming the only reason were to give a monopoly to local producers.
She said no, but Justice Breyer asserted that since Section 2 of
the 21st Amendment was meant to end that part of the dormant commerce
clause that allows foreign suppliers to be treated better than domestic
suppliers, and since the dormant commerce clause was an implication
of the commerce clause, if the 21st Amendment did not speak to discrimination,
then the dormant commerce clause doesn't apply. "You can't
divide the dormant commerce clause into six parts," he explained.
Sullivan did not argue that point, but instead argued that case
law since the passage of the 21st Amendment had superseded that
interpretation - essentially saying that the Court had over time
written opinions which overturned the original intent and meaning
of the 21st Amendment. But Justice Stevens disagreed with her reading
of those cases, reminding her that the cases she cited, such as
Boren, dealt with other constitutional challenges, not challenges
under the commerce clause. He asked Sullivan whether Congress could
empower states to do what they had done here and she answered yes,
but that it had not done so.
Justice Souter, noting the states' argument that this case was
different than Bacchus, that there was a substantial need
for differential treatment, asked what standard should be applied.
Sullivan argued that the states must meet a "strict scrutiny"
standard and that they could not do so in this case since there
were less restrictive alternatives available to the state to ameliorate
their concerns. Justice Souter countered that states don't want
to travel to other states to enforce their laws and Justice Kennedy
asked whether that meant that Michigan must allow out-of-state shipments
directly to consumers. Sullivan argued that with a permit system
conditioned on tax payments and online compliance checks, the states
could achieve a satisfactory level of enforcement.
In another swipe at the sweeping rationale asserted by plaintiffs,
Justice Kennedy asked Sullivan whether the reciprocity laws, which
restrict direct shipments to consumers to only those in participating
states, must also be found invalid. Sullivan hedged saying "possibly,"
but Justice Stevens seemed incredulous noting that she had to concede
that the reciprocity laws are unconstitutional under her interpretation
given that under the heightened scrutiny she was recommending, it
would be virtually impossible to defend them. Justice Stevens closed
out her argument adding that such a result was a "necessary
consequence of your rationale."
Casey's Argument: Although Casey noted that Bacchus spoke to "mere economic
protectionism," and that the MI and NY laws were supported
by other legitimate concerns of the 21st Amendment including temperance,
Casey was less than effective in reciting the evidence in the record
in both the NY and MI cases which supported that position, merely
noting that there were "affidavits and interrogatories"
in the record which spoke to those concerns. Because of that failing,
Justice Souter pursued the issue further, asking whether there was
sufficient evidence in the case for the Court to rule, and that
lacking that evidence, should the court send it back for further
evidence gathering. Casey's response wandered into the procedural
aspects of the earlier proceedings.
Justice Kennedy observed that if the dormant commerce clause applied
to liquor distribution as Bacchus implied, that would create
a substantial burden for the states to justify those laws, whether
strict scrutiny or some other heightened level of scrutiny. Justice
Scalia followed this point by instructing Casey that the burden
was his and that he needed to tell them what the evidence was supporting
his position. At that point Casey mentioned the stings MI had pursued.
At this point, Breyer appeared to contradict his earlier perspective,
arguing that perhaps Section 2 of the 21st Amendment did not eliminate
the pre-Wilson Act anti-discrimination prohibition and Justice Kennedy
asked what evidence there was that it did. Casey correctly noted
that the Webb-Kenyon Act was entitled "An Act Divesting Alcohol
of its Interstate Character in Certain Cases," to make the
point that it was the intent of Congress to override the dormant
commerce clause - and thus the anti-discrimination principles inherent
in that doctrine - in that legislation and in the constitutional
amendment modeled after that act.
Justice Ginsburg did not question that history, but did feel that
Casey was asking to court to reject Bacchus outright and
rule that alcohol was an exception to the normal operation of the
dormant commerce clause - that the 21st Amendment trumped it. Justice
Kennedy asked if one of the purposes of the 21st Amendment was to
allow for discrimination and Casey answered it was, but O'Connor
ended Casey's argument questioning what to make of Bacchus,
just as she had at the beginning.
Halligan's Argument: Justice Souter addressed the issues of compliance with Halligan,
asking her about NY's enforcement efforts and whether those efforts
could be effectuated through an online compliance system. Justice
Ginsburg asked what merely having an office in NY did for enforcement
purposes, and Halligan explained that it was more than just an office,
that the product would have to be present in that location and available
for inspection.
Justice Scalia was plainly skeptical of NY's argument that it
was impossible to enforce against out-of-state licensees as they
could against in-state licensee, and Justice Ginsburg questioned
why other states which allowed direct shipment did not have such
concerns. Halligan made the point that she could not speak for other
states, but that simply because other states did not concern themselves
with accountability to the extent NY did, that did not make NY's
concerns less valid.
Justice Scalia wondered whether there should be a greater level
of scrutiny if discrimination were found, but Halligan pointed out
that the Court's North Dakota decision, which came after
Bacchus, found that the mere "risk of diversion"
was enough to sustain that state's increased burden on out-of-state
suppliers and that the case at bar was no different in that respect.
Justice Stevens noted that if the Court were to apply Bacchus,
where in-state tax exemptions were prohibited, it would be difficult
to sustain the NY laws. But Halligan noted that Bacchus was
distinguishable in several ways from the cases before the Court,
not least of which was that the very language of the 21st Amendment
speaks to state control over importation, an issue which was not
at stake in Bacchus.
Bolick's Rebuttal: But Justice Stevens ended the session by saying that in the end
the question really comes down to whether the 21st Amendment allows
the disparate treatment the plaintiffs were complaining about.
Legal Analysis/Prediction: Given the dissent by Justices Stevens, Rehnquist and O'Connor
in the Bacchus decision, it seems likely to me that they
will try to defend the NY and MI laws by either trying to overturn
that decision or by trying to distinguish these cases from Bacchus.
While O'Connor did question the states about the implications of
Bacchus, it is unlikely that she will change her personal
view of the 21st Amendment. Her questions about how she and other
justices could differentiate that case from the current cases supports
the conclusion that she was trying to win over those who would not
necessarily vote to overturn Bacchus, but understanding the
threat imposed by the plaintiffs' interpretation, would need to
find a way around Bacchus to avoid joining an opinion creating
anarchy in the alcohol distribution system.
The Bacchus dissent presumably gives the states/intervenors
a core of three strong justices to make the case for upholding their
laws. Justice Rehnquist's health has been an issue, but the Supreme
Court announced yesterday that although his participation in the
November cases would be limited, he would be participating fully
in the December cases - which includes the alcohol cases. As such,
and given his intention to swear in the President at inauguration,
it appears that Chief Justice Rehnquist is doing better than previously
thought, and that he will be a factor in these cases. The question
then becomes who joins with them.
Justice Thomas did not ask any questions, as is his wont. But
some aspects of his record lead me to believe he could easily join
with Rehnquist, Stevens and O'Connor. First, Justice Thomas has
gone on the record criticizing the "dormant commerce clause"
as a judicial construct not within the four corners of the constitution.
Moreover, he is a social conservative and will be receptive to the
argument that easier access to alcohol with less of an ability to
enforce state law regulating its flow is not a good thing. Being
a textualist, he will be more likely to find that the actual words
of the 21st Amendment mean what they say.
Breyer is a possible joiner because his questioning reflected
his understanding that the dormant commerce clause was overridden
by the passage of the 21st Amendment and because, although he was
concerned about the Bacchus language, his historical perspective
seems to be towards a stronger interpretation of the powers given
states by the 21st Amendment. Moreover, while he was troubled by
the Bacchus decision, if he truly believes that the dormant
commerce clause was trumped by the 21st Amendment, he will have
to put precedent over principal to sustain the challenges to the
state laws since one can only find discrimination if the dormant
commerce clause is relevant. His saying that you can't break the
dormant commerce clause into six pieces was perhaps his way of saying
the Bacchus case was not decided correctly.
Justice Souter could easily join with Rehnquist, Stevens and O'Connor
as he seemed to understand there was an important difference between
local control and out-of-state control. This would allow him to
distinguish Bacchus, assuming he doesn't get caught up in
second guessing state decisions concerning importation and gives
them the deference they deserve, even under Bacchus, and
certainly under North Dakota.
Justice Ginsburg implied that the 21st Amendment did not incorporate
anti-discrimination language and that indicated a legislative decision
to override such concerns. Like Breyer, she seemed to feel that
it is not the constitution which causes the problem for the states,
but rather the Court's latter day interpretation of the 21st Amendment
in the Bacchus case.
Justice Scalia has always been a problematic vote, as he disfavors
any type of differential treatment. But he is a strong textualist
and federalist and may find it difficult overcoming the direct language
of the 21st Amendment. And because of that conflict, I believe it
unlikely that he will be at the forefront of an effort to form a
majority opinion which would have the effect of essentially nullifying
a clearly "enumerated power" of the states.
In the end, it may come down to thinking of Justice Kennedy. Kennedy
clearly understands the damage to the orderly distribution of alcohol
that the plaintiffs' legal argument would entail. His questioning
reflects that the result the plaintiffs want would destroy the state
licensing system. But he is also concerned about whether the Bacchus
case controls here. It seems to me his ultimate decision will depend
on whether he is more concerned about the breakdown of the system
or if he feels bound by what I believe to be easily distinguishable
dicta in Bacchus. If he goes with Rehnquist, Stevens and
O'Connor, it is likely that he will bring others with him given
his understanding of the issue and his leadership on the Court.
This is the most probable result in my estimation, and should that
occur, you will see the states prevail.
However, because Kennedy understands the issues surrounding alcohol
distribution and clearly has an interest in them, I tend to believe
he is the only one with Bacchus concerns that could also
knit together a majority in favor of the plaintiffs. However, although
that is a possibility, it is not a prospect the plaintiffs in these
cases should wish for.
Why? Because if Justice Kennedy decides that the Bacchus
case controls - that there is no way to distinguish it - he will
need to gather votes to oppose Rehnquist, Stevens and O'Connor,
or to try to get them to join him. But because he clearly understands
the dangers inherent in the "sweeping rationale" sought
by the plaintiffs, it is unlikely that he would write an opinion
which would lead to the very result he fears.
I have long argued that the plaintiffs should be careful what
they ask for, because they might get it. In these cases, I think
it is unlikely that the Court will give the plaintiffs the "sweeping
rationale" they seek - assuming they prevail on the merits
- because of the dangers understood and expressed so articulately
by Justice Kennedy. Rather, the Court will be much more likely to
seek to mute the effect of any such victory for the plaintiffs by
playing on the comments of Justice Ginsburg - and the concession
by Sullivan - that any discrimination complained of can be cured
by simply removing the favoritism, in this case by knocking out
the in-state exceptions which are easily severable.
While that decision would be quite disheartening for the plaintiffs,
that would just be the beginning of their troubles. It would not
be long before follow-on litigation would soon take all reciprocal
laws off the books. As Justice Stevens noted, and as Sullivan basically
conceded, reciprocal laws must invariably be found to be unconstitutional
as well under the plaintiffs' interpretation.
If that occurs, the battle over unregulated and unaccountable
direct shipments to consumers would revert to the state legislatures
- where this battle should have been fought from the outset.
A decision in the cases should be handed down sometime in the
spring. Supreme Court Opinions
Michigan/6th Circuit Supreme Court Filings:
New York/2nd Circuit Supreme Court Filings:
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