HUGE STAKES

August 2004

HUGE STAKES:

Pressing IJ’s Wine Case Before the U.S. Supreme Court

By Steve Simpson

On May 24, 2004, the U.S. Supreme Court agreed to hear Swedenburg v. Kelly, the appeal of IJ’s challenge to New York’s wine direct-shipping ban, marking the second time in three years the Institute will be before the Supreme Court. The Court consolidated IJ’s case with Heald v. Engler, a case from Michigan challenging another direct-shipping ban. The cases will finally clarify an issue that has divided the states and the courts for years: whether states can permit in-state wineries to ship wine directly to consumers while prohibiting out-of-state wineries from doing so. The stakes are huge. More than 2,000 small wineries across the nation rely on direct shipping for a large part of their business, while billion-dollar wholesalers rely just as much on government-imposed direct-shipping bans to maintain their monopolies over distribution.

IJ’s case pits small vintners Juanita Swedenburg of Virginia and David Lucas of California, along with three wine consumers, against the State of New York and some of the most powerful alcohol wholesalers in the nation. New York is one of 25 states that bans the direct shipping of wine from out-of-state wineries to in-state consumers. Thus, while consumers nationwide may enjoy the fruits of free trade when it comes to books, clothing, food and a host of other goods and services, in half the states they can’t have their favorite wine delivered to their doorstep.

The bans date back to the 1930s, when the 21st Amendment ended Prohibition but gave significant control over alcohol to the states. Most state governments erected laws that require alcohol to be imported to licensed wholesalers and sold through licensed retailers. The problem for small wineries is that wholesalers and retailers tend to carry wines from big wineries that will sell the quickest. Wineries with widely dispersed customers are often unable to find wholesalers and retailers willing to devote resources and shelf space to their wines.

From a constitutional standpoint, the bans represent precisely the sort of protectionism the U.S. Constitution was designed to prevent. The Constitution’s Commerce Clause provides Congress the authority to regulate commerce “among the several States.” The U.S. Supreme Court has also recognized the notion of a “dormant” Commerce Clause that functions to limit state regulations that discriminate or interfere with interstate commerce—in other words, to guarantee free trade and business opportunities among the states.

But while New York, Michigan and many other states prohibit only out-of-state wineries from shipping directly to consumers, in-state wineries are permitted to do so. The beneficiaries of this protectionism are not in-state wineries, however, but wholesalers. Most wineries realize that opening markets will, as IJ client David Lucas has put it, “grow the pie for everyone.” Wholesalers, unfortunately, are too comfortable with their monopolies to see the light of free trade. They have lobbied vigorously for the bans and fought tirelessly in court to maintain them.

The states and the wholesalers claim that the bans are necessary to prevent underage drinking. Yet New York and Michigan both allow in-state wineries to direct ship. If kids were going to order expensive bottles of wine through the mail (an absurd notion on its face) they would order in-state wine just as often as out-of-state wine. In fact, as the experience in states that have allowed direct shipping for years has shown, kids don’t order wine through the mail.

Defenders still contend that the 21st Amendment gives states the raw power to regulate the importation of alcohol whatever the merits of any particular law. However, the whole point of the U.S. Constitution’s Commerce Clause was to prevent just this sort of protectionism. As the U.S. Supreme Court has put it, the notion that “the 21st Amendment operated to repeal the Commerce Clause is an absurd oversimplification.” The two provisions are part of the same Constitution and must be read in concert with one another. While the states can remain dry if they wish and can regulate alcohol for many purposes, the Court has held that blatant protectionism is not one of them.

Federal courts so far have split on the constitutional issue, but increasingly, consumers and even legislators are getting on the free trade bandwagon. Several states recently passed legislation opening up their markets to out-of-state direct shipments. And small wineries and wine connoisseurs with groups like Free the Grapes! are teaming to push for reform.

It’s a case study in the power of consumer choice and free markets. As more states open their borders and more consumers enjoy the freedom to seek out and find new products, the taste for more—wine and freedom, that is—becomes insatiable.

The High Court has before it a historic opportunity to strike a blow for free markets over protectionism, and consumer choice over state-protected monopoly. Let’s raise a glass to that.

Steve Simpson is an IJ senior attorney.