Legality of Internet Wine Sales in Flux

New Jersey Law Journal July 19, 2004 Copyright 2004 ALM Properties, Inc. All Rights Reserved.

HEADLINE: Legality of Internet Wine Sales in Flux;
Consumers and wine makers argue state restrictions violate the Dormant Commerce Clause

BYLINE: By Jonathan Bick; Bick is of counsel to WolfBlock Brach Eichler of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law [Random House 2000].

Buying wine using the Internet is lawful, but selling wine on the Internet is problematic. E-commerce wine sales are stifled in the name of consumer protection.

State regulations are exploited to thwart Internet sales of various goods and services. For example, Oklahoma proscribes the online sale of funeral caskets and related merchandise. 59 Okl. Stat. §[396.3a[1][c] [2003]. Also, seventeen states require mortgage brokerage firms to maintain a physical office in the state. Based on economic potential, however, the ban on selling wine via the Internet is arguably the most significant disruption of e-commerce.

Accordingly, it is not surprising that the ban on Internet wine sales continues to be challenged in court. In the district courts, the results have been mixed. On May 24, the U.S. Supreme Court agreed to consider the constitutionality of state laws that restrict interstate shipment of wine to consumers. The Court granted review in a trio of cases that present conflicting lower court decisions involving restrictive laws from Michigan and New York. Swedenburg v. Kelly, No. 03-1274, Granholm v. Heald, No. 03-1116, and Michigan Beer and Wine Wholesalers Association v. Heald, No. 03-1120.

Barriers to E-Commerce

Wine sellers face significant barriers to e-commerce. Thirty states, including New Jersey, have laws forbidding the direct sale of out-of-state wines to consumers. Seven states - Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina, and Tennessee - make such shipments by wineries or retailers a felony.

Ratification of the Twenty-first Amendment to the U.S. Constitution in 1933 ended the era of nationwide prohibition of the production, sale and transport of alcoholic beverages in the United States. This Amendment also prohibited the import of alcohol into any state in violation of that state's laws. State laws regulating interstate sale have generally emerged in two forms. The first allows alcohol shipments by in-state liquor stores only. The second is a licensing system that grants licenses to those in the liquor distribution chain - manufacturers, wholesalers, and retailers - who must operate under detailed regulations.

Consumers and wine makers have largely failed to persuade state legislators to allow Internet wine sales associated with interstate delivery to consumers. Therefore, many have sought relief in the courts. Plaintiffs claim state restrictions on direct shipment of alcohol violate the Dormant Commerce Clause because the existing statutes unequivocally favor in-state producers of alcohol.

The Commerce Clause [U.S. Const. art. I, §[8, cl. 3.] grants Congress the explicit power to "regulate Commerce with foreign Nations, and among the several States." In Gibbons v. Ogden, 22 U.S. 1, 224 [1824] the Supreme Court began its long-held interpretation of a negative component of the Commerce Clause, known as the "dormant" Commerce Clause. This interpretation prohibits states from unduly burdening interstate commerce.

Recent Litigation

Several significant court decisions that have dealt with the application of the Dormant Commerce Clause to the Internet sale of wine. The Seventh U.S. Circuit Court of Appeals was the first Circuit Court of Appeals to decide whether a state statutory regime regulating Internet implemented alcohol shipments was unconstitutional. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 [7th Cir. 2000].

In Bridenbaugh, the consumer plaintiffs argued the statute violated the Dormant Commerce Clause because it prohibited only out-of-state sellers of wine from delivering directly to Indiana consumers. Although the Supreme Court has held states may not use the Twenty-first Amendment to discriminate against out-of-state sellers, the court upheld Indiana's statute, relying heavily on Section 2 of the Twenty-first Amendment. Section 2 gives state legislatures the right to establish the common three-tiered system that many states use to regulate the consumption of alcohol. This interpretation of Section 2 effectively elevated a state government's power over the power of the Dormant Commerce Clause.

The Seventh Circuit highlighted a significant economic concern: if consumers were able to order liquor from out-of-state sources, Indiana state excise taxes would not be paid. The court noted that one of the original purposes of Section 2 was to remedy the problems states had collecting taxes from the direct shipment of alcohol. Indiana's statute, which allowed direct shipment only by in-state sellers, helped to achieve that legislative intent.

Other United States District Court decisions have reached different results. In Bolick v. Roberts, 199 F.Supp.2d 397 [E.D.Va. 2002], the United States District Court for the Eastern District of Virginia considered a challenge by consumers and out-of-state wine producers to Virginia's alcohol regulatory scheme. Virginia law prohibited the out-of-state shipment of wine directly to a Virginia consumer without it passing through a party that was licensed by Virginia, typically a wholesaler or a retailer. As in the Bridenbaugh case, Virginia wine producers were allowed to ship wine directly to consumers within the state.

The Bolick court noted the Dormant Commerce Clause prevents state legislatures from enacting and implementing isolationist trade policies that hinder a national free market. The Bolick court said strict scrutiny must be applied.

Because Virginia's statutory scheme was per se valid, Virginia had the burden of demonstrating that there was no other means of fulfilling the state's objective of promoting temperance and protecting minors from alcohol. Virginia failed to meet its burden. Thus, the court found that the state had failed to create a genuine issue of material fact regarding any justification for the discriminatory policy.

In Dickerson v. Bailey, 212 F.Supp.2d 673 [S.D.Tex. 2002], the U.S. District Court for the Southern District of Texas, struck down the statutory ban on direct importation of wine by Texas residents.

After considering the different approaches used in Bridenbaugh and Bolick, the Dickerson court found that section 107.07[f] was facially unconstitutional, because it placed unequal burdens on in-state and out-of state wine-sellers. The court held that requiring out-of-state wine sellers to go through Texas wholesalers was impermissible since in-state wineries were not subject to the same requirements. Furthermore, the language accompanying section 107.12 explicitly reflected a protective concern for the growing wine industry in Texas and the legislature's desire to help Texas wineries compete with established wine growers.

In Beskind v. Easley, 197 F.Supp.2d 464, 476 [D.N.C. 2002], the court found that certain provisions of the North Carolina alcoholic beverage control laws discriminated against out-of-state wine manufacturers. The North Carolina statutory scheme prohibited out-of-state wineries from shipping direct to state residents, but North Carolina wineries licensed to do business in the state were exempt from this rule. The court declared the statute unconstitutional because its preference for in-state wineries represented economic protectionism and was therefore barred by the Dormant Commerce Clause.

This case was affirmed in part and vacated in part by Beskind v. Easley, 325 F.3d 506 [4th Cir. 2003]. The Fourth Circuit affirmed the finding that the in-state preferences were unconstitutionally discriminatory and agreed that the preference was not saved by the Twenty-first Amendment. However, the Fourth Circuit held the appropriate remedy was to strike down the statute creating the preference for local wineries, rather than the provisions regulating shipments of wine by out-of-state entities.

The Beskind pronouncement was disparaged in Swedenburg v. Kelly, 358 F.3d 223, [2d Cir. N.Y. 2004] - one of the trio of cases granted cert by the U.S. Supreme Court. In Swedenburg, the court quashed a New York interdiction on the direct shipment of out-of-state wine. New York's statute was comparable to other state statutes, because it prohibited the direct shipment of alcoholic beverages to consumers, while including exceptions for in-state wineries. The exceptions were enacted to provide an economic benefit for local farmers, which made the statute discriminatory.

Finally, in Bainbridge v. Turner, 311 F.3d 1104 [11th Cir. 2002], the Eleventh Circuit vacated and remanded the lower court's decision in favor of direct shipment rules. On remand, the lower court must determine whether the regulatory scheme was so closely related to the core concern of raising revenue as to escape Commerce Clause scrutiny