In early December, the U.S.
Supreme Court heard oral arguments in a Michigan dispute that will determine
whether states can engage in economic protectionism in the name of public
safety. In simple terms, the issue is whether a state can prohibit out-of-state
wineries from shipping wine directly to its residents (a question the Mackinac Center first addressed in 2001). At stake are millions of
dollars, the fate of two constitutional principles and the extent to which states are permitted to regulate commerce.
Granholm v. Heald, was brought by
two Michigan wine critics and a group of wine collectors against the state
of Michigan. The Ohio-based 6th Circuit Court of Appeals ruled that
Michiganís restriction was unconstitutional,
citing in part the "commerce clause" of the U.S. Constitution, which reserves to
the U.S. Congress the power "to regulate commerce with foreign nations, and
among the several states."
But in a similar case, the
New York-based 2nd Circuit decided that a New York alcohol restriction was
constitutional. The Supreme Court has consolidated the cases, so that it could
resolve the differences between the rulings.
Michigan and New York,
among other states, currently prohibit direct-to-consumer sale of wine from
out-of-state wineries. The restrictions apply to Internet, phone sales and other
forms of long-distance direct sales. They also apply to consumers who visit a
winery and wish to have a case of their new find sent to their home.
Nearly half of U.S. states
(Michigan, New York and 22 others) impose such restrictions, citing their
prerogative under the
21st Amendment. That amendment, which
repealed prohibition in 1933, stipulates, "The transportation or importation
into any state, territory, or possession of the United States for delivery or
use therein of intoxicating liquors, in violation of the laws thereof, is
hereby prohibited (emphasis added)."
Though 24 states have used
this amendment as a rationale to enact bans on wine shipments from out-of-state
businesses, another 26 states
have enacted laws that do allow for out-of-state wineries to offer their wares
to long-distance customers.
While the Supreme Court may
strike down the bans in existence, those 24 states, including Michigan, would
have had good reason to do so long ago.
First of all, a ban on
out-of-state shipments to residentsí homes creates a government-imposed barrier
to competition. The state requirement that out-of-state wineries market their
product through a state-licensed wholesaler limits their ability to compete on
an even footing with in-state wineries, which can sell direct. This restricts
competition for direct-to-consumer sales to only those companies that actually
produce wine in the state (or in the case of New York, maintain an office
This restriction, in turn,
limits the choices available to a stateís residents. They are denied the
possibility of getting not only the lower prices that can result from
competition, but the variety of products and other benefits of
competition-driven innovation. Thus, one effect of the stateís prohibition is to
generate a form of economic protectionionism that benefits in-state wineries and
distributors at the expense of Michigan residents.
Second, the stateís policy
arguments for this regulation donít quite wash. The most appealing is the
stateís desire to police underage drinking. But ultimately this is a weak point,
since, for instance, Michigan allows
40 in-state wineries to make
shipments to state residents, as a lawyer for some of the Michigan plaintiffs
David Souter remarked on this
contradiction when he said, "The very activity you don't want (out-of-state
wineries) to engage in Ö your in-state wineries are engaging in."
State regulators insist
they need to make onsite visits to wineries to ensure enforcement. Yet many
states find that the geographic distance of an out-of-state winery has not
proven a barrier to granting a license to sell. And at least in the case of New
York, onsite inspection of wineries appears to be weak, and there is little
evidence that states allowing out-of-state shipments have increased problems
with underage drinking. As a practical matter, it is probably easier for a
minor to procure alcohol by asking a willing older friend or a retail store
clerk than by finding a credit card, making an online transaction and then
waiting for a FedEx truck to arrive. And, of course, wineries themselves can and
do address the problem by requiring an adultís signature for shipments.
States also argue that
their regulators must make onsite inspections of wineries to ensure product
purity. Yet many other products are sold every day by out-of-state companies
without the consumerís home state inspecting the product.
Itís interesting to note
that more than 30 states, including some that allow the sales, have filed
friend-of-the-court briefs in favor of Michiganís restrictions. This suggests
that more than anything else, what is really at stake is simply state power to
regulate and to tax.
In legal terms, there are
several alternatives to Michiganís and New Yorkís differential treatment of
out-of-state wineries. The worst approach, suggested by Justice Ruth Bader
Ginsburg during oral arguments, would be to apply the ban on direct shipments to
in-state wineries as well. (Some states, such as
Utah, take this approach.) The
out-of-state wineries would not face a competitive disadvantage, but the ill
effects for consumers would actually increase.
A better approach, followed
by many states, is to allow out-of-state wineries to make direct sales. Often
this is made conditional on the securing of a license, which can be used to deal
with regulatory and tax concerns.
At stake in the current
controversy are $21 billion in annual wine sales, thousands of dollars of
campaign contributions, and in the case of Michigan, the fate of 75 distributors
who have, in the words of the Detroit Free Press, "control
over the distribution of nearly all beer and wine
sold in Michigan."
For the sake of consumers
and owners and employees of small wineries nationwide, there are plenty of
reasons to hope that the Supreme Court ends a long history of state-endorsed
protectionism and oligopoly. But if the Supreme Court upholds statesí power to
prohibit out-of-state wineries from selling directly to state residents, we
should still remember that the power to regulate does not imply the wisdom of
John R. LaPlante is an
adjunct scholar with the Mackinac Center for Public Policy, a research and
educational institute headquartered in Midland, Mich. Permission to reprint in
whole or in part is hereby granted, provided that the author and the Center are
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