Amicus Curiae Brief — Michigan Beer & Wine Wholesalers Assn. v. Heald

1140 Asturia Avenue

Coral Gables, Florida 33134 701 Fourth Avenue South

(0) Supreme Coon US,

Nos. 03-1116 & 03-1120 JUL 2 9 2004

OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

JENNIFER M. GRANHOLM, ef ai...

Petitioners,

Vv.

ELEANOR HEALD, ef ai.,

Respondents.

MICHIGAN BEER & WINE WHOLESALERS ASSOCIATION,

Petitioner.

Vv.

ELEANOR HEALD, ef al.,

Respondents.

On Writs of Certiorari to the

United States Courts of Appeals

for the Sixth Circuit

BRIEF OF NATIONAL BEER WHOLESALERS

ASSOCIATION AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

Of Counsel: MICHAEL D. MADIGAN

STEPHEN M. DIAMOND Counsel of Record

UNIVERSITY OF MIAMI

KATHERINE E. BECKER

MADIGAN, DAHL &

HARLAN, P.A.

SCHOOL OF LAW *

(305) 569-9662 Suite 17000

R Minneapolis, Minnesota 55415

PAUL R. ROMAIN (612) 604-2000

805 SW Broadway

Suite 1900

Portland, Oregon 97205

(503) 226-8090

* Affiliation given for

associational purposes only

Counsel for Amicus Curiae

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001

QUESTION PRESENTED

Does a State’s regulatory scheme that permits in-state

wineries directly to ship alcohol to consumers but restricts the

ability of out-of-state wineries to do so violate the dormant

Commerce Clause in light of Section 2 of the Twenty-first

Amendment?

(i)

ii

PARTIES TO THE PROCEEDINGS

Petitioners, Defendant-Appelles below, are State of

Michigan officials including the Governor, the Michigan

Attorney General, and the Chair of the Liquor Control

Commission (hereafter collectively referred to as “Michigan”

or the “State”). The current holders of those offices have

been substituted as parties for the former office holders

pursuant to Sup. Ct. R. 35.3.

Petitioner, intervening Defendant-Appelle below, is

the Michigan Beer & Wine Wholesalers Association

(“MB&WWA”), a trade association of the Michigan beer and

wine wholesalers that intervened as a defendant in the district

court.

Respondents, Plaintiffs-Appellants below, include Eleanor

Heald, Ray Heald, John Arundel, Karen Brown, Richard

Brown, Bonnie McMinn, Gregory Stein, Michelle Morlan,

William Horwath, Margaret Christina, Robert Christina,

Trisha Hopkins, Jim Hopkins and Domaine Alfred, Inc. The

thirteen individual parties are Michigan residents who are

wine connoisseurs, wine journalists, and wine collectors.

Respondent Domaine Alfred, Inc. is a California winery.

TABLE OF CONTENTS

QUESTION PRESENTED.............:cccccceceeeeeseeeeees peesecs

PARTIES TO THE PROCEEDINGS .............:cc0ce0e00e

TABLE OF AUTHORITIES............:cccccccsssessesseseneeeseees

INTEREST OF AMICUS CURIAE .......c.ccccssssssseeeesesees

SUMMARY OF ARGUMENT............cccccccseeseeeseeeeeenees

ee

Il.

IV.

LIQUOR REGULATION PRIOR’ TO

ee

PASSAGE OF THE TWENTY-FIRST

_— i EE NE

JUDICIAL INTERPRETATION OF THE

TWENTY-FIRST AMENDMENT ...............0.+.

THE STATE’S REGULATORY STRUC-

TURE THAT PERMITS IN-STATE WINER-

IES TO SHIP ALCOHOL DIRECTLY TO

CONSUMERS BUT RESTRICTS OUT-OF-

STATE WINERIES IS _ PERMISSIBLE

UNDER SECTION 2 OF THE TWENTY-

FIRST AMENDMENT .............ccccceeceeseeseerereenes

THE HEALD DECISION DESTROYS THE

KEYSTONE OF THE STATE’S REGULA-

TORY POWER: THE RIGHT UNDER THE

TWENTY-FIRST AMENDMENT TO CON-

TROL THE IMPORTATION OF INTOXI-

CATING LIQUOR INTO THE STATE...........

SIT ccccccscescssecscssevsnsessccsecsssssovscssctqeescecsentecece

(iii)

1]

19

24

28

iv

TABLE OF AUTHORITIES

CASES Page

44 Liquormart, Inc. v. Rhode Island, 517 U.S.

ree iccrevensexsuiniiinasisiaiasaiienitiiiiassiiiiiaiaiaiaia 13, 16, 18

Bacchus Imports, Lid. v. Dias, 408 U.S. 263

CO rssumemcieennsntintiiiiciianeainiiaaall 14, 15, 16, 17

ipa cscccsnncensstnsvepsmnnintiiiieciasatimaieiamiataadinians 11, 16,19

Beskind v. Easley, 325 F.3d 506 (4th Cir.

yO an EN EE FE 16, 18, 27, 28

Bowman v. Chicago & NNW Ry Co., 125 U.S.

SI Cree cacncorerecvctinraremnenianrtiiticitinieaiapiineiiaiiiaiania 5, 6, 14

Bridenbaugh v. Freeman-Wilson, 227 F.3d 848

(7th Cir. 2000), cert. denied, sub nom., Briden-

baugh v. Carter, 532 U.S. 1002 (2001)............. 17, 20

Brown-Forman Distillers Corp. v. New York

State Liquor Authority, 476 U.S 573 (1986) ..... 13

Brown & Williamson Tobacco Corp. v. Pataki,

320 F.3d 200 (2d Cir. 2003) ............ccceccescceeeseees 16

California v. LaRue, 409 U.S. 109 (1972)............. 16

California Retail Liquor Dealers Ass'n v. Midcal

Aluminum, Inc., 445 U.S. 97 (1980)............00+. 8, 17, 23

Capital Cities Cable, Inc. v. Crisp, 476 U.S. 694

CRA cnsnsnrwccssncsntesnstinispidiinnusaiinnaniaiimiiiniaiataithiiaiasiis 17

Carter v. Virginia, 321 U.S. 131 (1944).......0........ 18, 27

City of Newport v. lacabucci, 479 U.S. 92

CODE wssaciccnsnssnanatinnensmnccaiitinniaiinmesmeiiniiiiiiieesias 15, 16

Clark Distilling Co. v. Western Maryland

Railway Co., 242 U.S. 311 (1917)... ccceeeeeeeee 7

Constantineau v. Wisconsin, 400 U.S. 433 (1971)... 13

Craig v. Boren, 429 U.S. 190 (1976)...........000000 8, 12, 13

Dept. of Rev. v. James B. Bean Distilling Co.,

BOE Gl BES GOED cansnrensitiinnnctiiinioninn 23

Dickerson v. Bailey, 336 F.3d 388 (Sth Cir.

Gia anracrecotemnanensitinsenccaiaitiniesaiiiiiiasiteesss 16, 19, 21

Vv

TABLE OF AUTHORITIES—Continued

Page

Dugan v. Bridges, 16 F. Supp. 694 (D. N.H. 1936).... 7

Finch v. McKittrick, 305 U.S. 395 (1939)............ 12

Heald v. Engler, 342 F.3d 517 (6th Cir. 2003)...... passim

Healy v. Beer Inst., Inc., 491 U.S. 324 (1989) ...... 14

Hostetter v. Idlewild Bon Voyage Liquor Corp.,

DET Cdk SPO COD eetttitentemnsnscnenieente 14, 20

Indianapolis Brewing Co. v. Liquor Control —

Commission, 305 U.S. 391 (1939).............cccceeee 12

Larkin v. Grendel’s Den, Inc., 459 U.S. 941

Co cicccensnsesennctstialiciilininsitetgttecnsenmeniinedioen 13

Leisy v. Hardin, 135 U.S. 100 (1890)...............0000 5,6

Mahoney v. Joseph Triner Corp., 304 U.S. 401

Cae ccreiecicccarsisininniancaitsitanenalittadtensdiaunnipatiinaiiaaads 12

North Dakota v. United States, 459 U.S. 423

i crccnirecssensaniitetiaiaiinntaiingnaeiuniamliesiaieas 17, 18, 20, 27

Pabst Brewing Co. v. Crernshaw, 198 U.S. 17

CRUE cccencsscnsspnsitnsinmntestainuiiicninsseaipiainianpeipanns 9

Reymann Brewing Co. v. Brister, 179 U.S. 445

Ee cernteentoninindnesnqnsnstapenenianesianieiniiiensenioananiniings 9

Rhodes v. Iowa, 170 U.S. 412 (1898).............c0000 6

S.A. Discount Liquor, Inc. v. Texas Alcoholic

Beverage Comm'n, 709 F.2d 291, 293 (Sth

Ge Bi Prccnnnnnseniacscsssectesicenmetnnanninniteiiiaiaiaes 11

State Bd. Of Equalization v. Young's Market Co.,

ee FO Cr castlecerscinittintncannitinntenibiiaitinn passim

Swedenburg v. Kelly, 2004 WL 254401 (2nd Cir.

FR, Fe, Bie ee cccccsasesnssstennstensscannmennsslastannnniinings passim

Vance v. Vandercook, 170 U.S. 438 (1898) .......... 9

Ziffrin v. Reeves, 308 U.S. 132 (1939) ........ccccce00 12

CONSTITUTIONAL PROVISIONS

CLS, Commit, AID, Tip ccsiiiictttenecsncccsascinscsetmsinnenss 3,7

U. S. Const. eee passim

vi

TABLE OF AUTHORITIES—Continued

STATUTES Page

Br is Oe TE <retieersubiinssitinlinannnennnsinionsinenmenmeininnes passim

Soe ese OUEE eccisicsnetatinutiicanenmincsentinimieninaneniatin 6,9

Mich. Comp. Laws § 436.1 13(a) ...........c..cccccceeeees 26

Mich. Comp. Laws §436,1203 .0..........::cccccceeeseeees 26

OTHER AUTHORITIES

I HI dentccsntidiienennmnnsieneneseesinnecenenanes 7

Pn IN: IT Neriitcetansicaninenniiiinninigpemsesennennee 6

es SITET sccnciesesneseuninciilinnscsnnstnnstnensnsiinnen 6

es aa et ecitntndesencnneninmnsnptnniiatiieen 8

ee, Bh Sr eR iirerencnsectccesnentitnmncsnten 9

76 Cong. Rec. 4146 (1933).........ccccccsseeeseeesaeeneeenes 8

76 Cong. Rec. 4219 (1933).............ccsecccsrrceseeensees 9

Beer Wholesalers: Their Role and Economic

Performance at 46-47 (3d ed. 1999).................. 2

Dayton E. Heckman, Contemporary State

Statutes for Liquor Control 28 Am. Poli. Sci.

ee icictesensseninaititencncraasiandasiettiniasniiieian 10

George A. Shipman, State Administrative

Machinery for Liquor Control 7 Law &

Contemp. Prob. 600 (1940) .00......cc cc ccceeceeeeee 24

Joseph Kallenbach, IJnterstate Commerce in

Intoxicating Liquors Under The Twenty-first .

Amendment, 14 Temple L.Q. 474 (1940).......... 13

Official Transcript Proceedings before the Su-

preme Court of the United States, January 11,

EI I civerecnssiniiiniieriunmneiitiapsiennunitnepeiiiiiiaatanaenimeees 15

Raymond B. Fosdick & Albert L. Scott, Toward

Liquor Control, at 7 (1933)...........cccceccccceeeeeeeees 10

Robert Jackson, Trade Barriers—A Threat to

National Unity, in Trade Barriers Among the

States: The Proceedings of the National

Conference on Interstate Trade Barriers, April

Fo GD F Ge ID cticrcercicnntiniennineriegnnenins 10

IN THE

Supreme Court of the Anited States

Nos. 03-1116 & 03-1120

JENNIFER M. GRANHOLM, ef ai.,

Petitioners,

Vv.

ELEANOR HEALD, ef ai.,

Respondents.

MICHIGAN BEER & WINE WHOLESALERS ASSOCIATION,

Petitioner,

Vv.

ELEANOR HEALD, ef ail.,

Respondents.

On Writs of Certiorari to the

United States Courts of Appeals

for the Sixth Circuit

BRIEF OF NATIONAL BEER WHOLESALERS

ASSOCIATION AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

INTEREST OF AMICUS CURIAE

Since 1938, the National Beer Wholesalers Association

(“NBWA”) has served as the national membership organ-

ization of the beer wholesaling industry representing over

2,200 licensed beer wholesalers.’ Its members reside in all

' This amicus curiae brief filed in support of the Petitioners was funded

solely by the National Beer Wholesalers Association and authored solely

2

fifty states. In 1997, U.S. beer wholesaler direct sales

reached $30.5 Billion Dollars. Beer wholesalers employed

92.860 individuals and paid $3.4 Billion Dollars in wages.

The total economic activity directly generated by beer

wholesalers was $8.2 Billion Dollars. The total state and

local taxes paid directly by beer wholesalers was $2.4 Billion

Dollars. See Beer Wholesalers: Their Role and Economic

Performance, at 46-47 (3d ed. 1999).

The economic activity of distributing beer stimulates other

activity in the economy. Every dollar spent by wholesalers to

buy such things as vehicles, equipment, computers and other

goods and services represents income to other industries.

Taking into account the “multiplier effect”, the total direct

and indirect economic contribution of beer wholesalers

nationwide in 1997 was as follows: 368,010 jobs created,

$10.2 Billion Dollars in wages paid, $28.4 Billion Dollars in

total economic activity created, and $4.0 Billion Dollars in

state and local taxes paid. /d. at 47. Obviously, the economic

contribution of beer wholesalers is even greater today.

This case implicates the essential interests of NBWA and

its members. The Sixth Circuit decision in Heald v. Engler,

342 F.3d 517 (6th Cir. 2003) threatens to dismantle complex

state regulatory systems governing alcoholic beverages that

have worked remarkably well for over seventy (70) years.

Through these delicately balanced and historically tested

regulatory schemes, states have addressed several funda-

mental interests: preventing illegal sales to minors, inhibiting

overly aggressive marketing and consumption, collecting

taxes, creating orderly distribution and importation systems,

and preventing a recurrence of the problems that led to the

enactment of National Prohibition.

by counsel for the National Beer Wholesalers Association. This brief is

filed with the written consent of all parties, evidence of which is

submitted with this brief.

3

Specifically, the Heald decision puts at risk the require-

ment that all imported alcoholic beverages be delivered to

an in-state licensee, thereby assuring effective regulation.

Ordinarily, wholesalers are the in-state licensed entities

through which imported alcoholic beverages must pass.

Wholesalers pay excise taxes on imported product and retain

records of their sales to retailers, thereby creating a

transparent and accountable distribution system. They have

invested large sums in creating these distribution systems in a

highly regulated environment. These investments are jeop-

ardized if the regulatory playing field is tipped against in-

state licensees and out-of-state entities are permitted to ship

directly to consumers.

SUMMARY OF ARGUMENT

Intoxicating liquor is a unique product in American law.

The detrimental impacts on individuals, families, and society

as a whole that result from intemperate or underage

consumption of intoxicating liquors are dramatically different

from those related to the use of other products, whether

measured by scale, severity, nature or remediability. As a

consequence, government has attempted to mitigate these

impacts through regulation. Indeed, intoxicating liquor has

always been, and remains, one of the most heavily regulated

products in the country. Localities and states have enacted a

variety of restrictions on the manufacture, distribution and

sale of intoxicating liquor. No other product has been the

subject of one, let alone two, Constitutional Amendments:

the first was the Eighteenth Amendment, which established

National Prohibition and the second was the Twenty-first

Amendment, which returned primary responsibility for

alcohol regulation to the states. Then, as now, community

norms and standards across the country differ widely

regarding intoxicating liquors. This fact underscores the

soundness of the Constitutional decision to rest regulatory

authority primarily at the state and local level.

4

Since passage of the Twenty-first Amendment over sev-

enty (70) years ago, this Court consistently has reaffirmed the

right of states to control and regulate the production,

shipment and sale of intoxicants within their borders. A

review of the history of the Twenty-first Amendment, the

Webb-Kenyon Act, and cases arising thereunder demon-

strates that states are at liberty to regulate intoxicating liquor

free from Commerce Clause limitations. In Heald, Re-

spondents’ entire constitutional challenge rests upon the

argument that Michigan’s different treatment of wineries with

an in-state presence (which are subject to the State’s

regulatory powers) from those without such a presence

(which are not subject to the state’s regulatory powers)

violates the dormant Commerce Clause. This challenge

simply is not cognizable.

The Heald decision destroyed a keystone of the State’s

regulatory power: the right under the Twenty-first Amend-

ment to control the importation of intoxicating liquor into the

State and insist on importation and distribution through

licensed entities with a physical presence in the State.

Without apparent regard to the consequences of its decision,

the Heald case made a Trojan Horse of one minor Michigan

statutory provision which permits in-state wineries (which are

subject to the licensing authority of the State), but not out-of-

State wineries (which are outside the regulatory reach of the

State), to ship direct to consumers, and thereby toppled a

comprehensive three-tier system governing the distribution of

intoxicating liquor.

Furthermore, the broad ruling not only undermines effec-

tive regulation, but also discriminates against licensed in-state

wholesalers and retailers, since they, unlike unlicensed out-

of-state suppliers, are subject to enforceable regulations and

taxation. In doing so, the Sixth Circuit decision ignored (or at

least rendered irrelevant) the Twenty-first Amendment

(which represents a national consensus reached by the

5

American people just seventy years ago), a long line of

decisions by this Court recognizing a state’s fundamental and

constitutional right to regulate alcoholic beverages, and an

Act of Congress (the Webb-Kenyon Act) which explicitly

grants states that right.

ARGUMENT

I. LIQUOR REGULATION PRIOR TO PROHI-

BITION.

Intoxicating liquor never has been treated like other

products either by society or government. Over the course of

our nation’s history, public tolerance and the degree of

regulatory control has vacillated between a view of alcohol as

a mere article of commerce and a view of alcohol as a

dangerous intoxicating beverage. The nineteenth century saw

several waves of temperance activity with both social and

political components. This activity led to greater regulation

of intoxicating liquors. At times and in some parts of the

country, the manufacture and sale of intoxicating liquor was

banned, public dispensaries were established, and sales

outlets were licensed, restricted and carefully regulated.

The evolution of our commercial infrastructure has led to

legal challenges to existing liquor regulatory regimes. In the

late nineteenth century, improvements in transportation, in

particular the growth of railroads, and the concomitant ex-

pansive development of the dormant Commerce Clause

doctrine gave rise to lawsuits which contested the con-

stitutionality of state statutes and ultimately undermined the

effectiveness of state regulatory efforts. The Court in

Bowman and Leisy narrowly circumscribed the power of

states to regulate the importation of intoxicating liquors. See

Bowman v. Chicago & NW Railway Co., 125 U.S. 465 (1888)

(the Court struck down a state law which restricted the

importation of intoxicating liquor to those possessing a

permit); Leisy v. Hardin, 135 U.S. 100 (1890) (the Court held

6

that intoxicating liquor shipped into the state remained an

article of “interstate commerce”, immune from state regu-

lation, as long as it remained in its original package).

Bowman and Leisy represent a short-lived, jurisprudential

detour from the subsequently established constitutional

principle that intoxicating liquor is unlike other products and

is not subject to dormant Commerce Clause analysis.

The crippling of state regulation by the Court in the

Bowman and Leisy decisions provoked a congressional

response, ending “dormacy” of federal regulations and per-

mitting state regulation of importation. Congress passed the

Wilson Act, 27 U.S.C. § 121 (1890), declaring that, upon

arrival in the state, the sale, distribution and transportation of

intoxicating liquor was subject to state regulation. In Rhodes

v. lowa, 170 U.S. 412 (1898), however, the Court narrowly

construed the Wilson Act and concluded that the dormant

Commerce Clause prohibited state regulation of direct

shipments to in-state consumers by out-of-state distributors.

As a result, railway express began to function as retail outlets.

Congress responded with the passage of the Webb-Kenyon

Act, 29 U.S.C. § 122 (1913), which gave the states power to

prohibit the sale, distribution, transportation or importation of

intoxicating liquor into the state in violation of its laws.’

There could not have been a clearer expression by Congress

of its intent to ensure that the state be the focus of control

regarding intoxicating liquor.’ The risk of discriminatory

> In vetoing the Bill, President Taft described it as permitting “the

States to exercise their old authority, before they became states, to

interfere with commerce between them and their neighbors.” The veto

was swiftly overridden. See 49 Cong. Rec. 4292.

* As originally reported by the Senate Committee, the Webb-Kenyon

Act (Senate Bill 4043) included as Section 2 the explicitly anti-

discriminatory language of the Wilson Act (i.e. states may not dis-

criminate against out-of-state suppliers, importers or wholesalers with

regard to the regulation of intoxicating liquor). 49 Cong. Rec. 2687. This

Section was eliminated from the final Bill. Clearly, this evidences the

7

legislation was outweighed by the desire to insure effective

state regulation. The constitutionality of the Webb-Kenyon

Act was upheld in 1917 in Clark Distilling Co. v. Western

Maryland Ry Co., 242 U.S. 311 (1917).

II. PASSAGE OF THE TWENTY-FIRST AMEND-

MENT.

In response to a national temperance movement, the

Eighteenth Amendment, establishing National Prohibition,

was passed in 1919. That “noble experiment” lasted just

fourteen (14) years. The Twenty-first Amendment, enacted

in 1933, marked the abandonment of the effort to have a

national policy prohibiting manufacture and sale of alcoholic

beverages. The failure of the National Prohibition i!!ustrated

that noble motives were insufficient and, without broad

support in public opinion, were ineffective and even de-

structive of the belief in the rule of and respect for law.

Regulation of intoxicating liquor was to be undertaken at the

level of government at which it was able to obtain broad

support. In the future, primarily state, not national, regulation

was to govern intoxicating liquors.

The ratification of the Twenty-first Amendment repre-

sented a constitutional commitment to make permanent the

policy behind the Webb-Kenyon Act: that the state be the

focus of intoxicating liquor control. As observed by the

intent of Congress to grant states the power to regulate intoxicating

liquors even where it may result in the possibility of differential treatment

between in-state an out-of-state vendors. See Dugan v. Bridges, 16 F.

Supp. 694 (D. N.H. 1936) (“[The Webb-Kenyon] Act in its original form

contained the same language that was used in the Wilson Act to prevent

discrimination against out-of-state production. See 49 Cong. Rec. p.

1687. In the act as finally posed the restrictive language does not appear.

Its omission seems important. It shows intent to give the states an entirely

free hand in regulating the importation and transportation of liquor.”)

8

Swedenburg court, Section 2 of the Twenty-first Amendment

“effectively constitutionalizes most state prohibitions regu-

lating importation, transportation, and distribution of alco-

holic beverages from the stream of interstate commerce into

the state.” Swedenburg v. Kelly, 358 F.3d 223, 232 (2d Cir.

2004) (quoting in part Craig v. Boren, 429 U.S. 190, 205-206

(1976)). Expressed in another way, Section 2 grants “the

States virtually complete control over whether to permit

importation or sale of liquor and how to structure the liquor

distribution system.” California Retail Liquor Dealers Ass'n

v. Midcal Aluminum, Inc. 445 U.S. 97, 110 (1980).

As originally proposed, Section 3 of the Twenty-first

Amendment would have given Congress concurrent power to

regulate sales. That section was eliminated. At the time,

Senators Blaine and Wagner explained that Section 3 would

have been inconsistent with Section 2.

Section 2 was to return effective regulatory power to the

states. The drafters of the Twenty-first Amendment, like the

drafters of the Webb-Kenyon Act, did not wish to encourage

discriminatory legislation. They were, however, prepared to

endure it to assure that state regulation of intoxicating liquor

would not be undermined. Prior to its consideration by the

House, Congressman Lea objected to Section 2 because it

would protect “unwise” or “improvident” state liquor laws.

76 Cong. Rec. 2776 (House)(1933). In submitting this

language to state conventions, Congress believed that the goal

of ensuring effective state regulation of intoxicating liquors

was paramount to the risk that states may enact laws that

some may deem to be unwise or imprudent. The Twenty-first

Amendment was intended to ensure that each state was

endowed with the power to regulate independently intoxi-

cating liquors in accordance with “local sentiment and local

habits” see, e.g. 76 Cong. Rec. 4146 (1933) and to restore to

the states “absolute control in effect over interstate commerce

9

affecting intoxicating liquors which enter the confines of the

states”, see, e.g, Comments of Senator Blaine, 76 Cong. Rec.

4143 (1933).

The purpose and effect of the Twenty-first Amendment

was to free states from the limits imposed by the dormant

Commerce Clause regarding the regulation of importation,

distribution and sale of intoxicating liquors. While judicially

created limits on state regulation over interstate commerce of

other products may have made sense, the need to create

a “safe harbor” for the states’ enforcement authority over

intoxicating liquors was primary.”

* The Senate twice was presented with language limiting Section 2 of

the proposed Twenty-first Amendment to the protection of “dry” states.

The proposal twice was rejected. The first version, of what became the

Twenty-first Amendment, was proposed in December, 1932, and con-

tained a clause protecting states that prohibited the manufacture and sale

of intoxicating liquor. The Senate Judiciary Committee, in its report,

changed the language to that which was ultimately enacted as Section 2.

The full Senate had an opportunity to reconsider the expanded scope of

paragraph 2 when Senator Glass proposed that the amendment be limited

to states prohibiting manufacture and sale of intoxicating liquors, with the

Commerce Clause continuing to constrain alcoholic beverage legislation

in states permitting such manufacture and sale. The Glass amendment

was rejected. 76 Cong. Rec. 4219, 4229 (1933). This history, in great

detail, was brought to the attention of the Supreme Court when it

considered Young's Market. The Court unanimously rejected an appeal to

history not because history pointed in a direction the Court did not wish to

go, but because the Court considered it unnecessary and unwise. Long

before, this Court had made clear that the effect of the Wilson Act was not

limited to states that prohibited the manufacture and sale of intoxicating

liquor. Vance v. Vandercook, 170 U.S. 438, 447 (1898); Reymann Brew-

ing Co. v. Brister, 179 U.S. 445, 454-55 (1900); Pabst Brewing Co. v.

Crenshaw, 198 U.S. 17, 29 (1905).

* A political scientist noted in 1934: “Those who view with appre-

hension the centralizing tendencies of New Deal legislation may find

solace in the antithetical development in the field of liquor control. The

uniform control achieved by the Eighteenth Amendment was the object of

applause until its evident unworkability was discovered. It is one of the

10

After Repeal, “true temperance” meant sustainable mod

eration; effective control meant what could be enforced

Raymond B. Fosdick & Albert L. Scott, Toward Liquo

Control, at 7 (1933). The regulation of intoxicating liquo

struggled to reconcile a tension caused by two contrastin

images: a legitimate commodity, manufactured and sold by

j

willing producers versus a dangerous intoxicating beverage,

capable of being abused. Alcohol was to be available, but,

paradoxes of American politics that we have destroyed the possibility of

centralization in the field of liquor control at the same time that we have |

been attempting to achieve greater centralization in a number of activities

hitherto believed to be completely in the field of state authority.” Dayton

E. Heckman, “Contemporary State Statutes for Liquor Control,” 28 Am.

Poli. Sci. Rev. 628 (1934).

In 1939, then Solicitor General Robert Jackson (who was one of the _

primary proponents of the creation of a national market and of the |

dormant Commerce Clause doctrine) stated: “The Twenty-first Amend-

ment to the Constitution, which repealed prohibition, provided that the —

transportation into any State of intoxicating liquors, in violation of the

laws of such State, is prohibited. Thus an exception was made to the

generally exclusive power of Congress, and control of commerce between

States in intoxicating liquors was handed back to the States of destination.

The purpose, and | intend no criticism of it, was to protect each State from

importations that would defeat its own policy of dealing with the moral

and social problems incident to the liquor traffic.

The power thus given to protect their social policy many States turned,

under pressure from local liquor interests, to the protection of home

industry. Local beer is given an effective tariff protection by imposing

higher sales taxes on out-of-state beer, or special license fees and

restrictions are placed on those who sell it. The States thus discriminated

against have then responded with all of the weapons of modern tariff

reprisal, such as retaliatory taxes, and inspections and partial and complete

embargoes. A beer war has involved many States and perverted the

purpose of the Amendment. Such legislation applied to intoxicating

liquor, however, is quite properly sustained by the Supreme Court.”

Jackson, “Trade Barriers—A Threat to National Unity,” in Trade Barriers

Among the States: The Proceedings of the National Conference on

Interstate Trade Barriers, April 5,6,7, 1939 (Chicago).

1]

rigidly licensed. Unrestricted trade was not tc be permitted;

low prices and wide availability were rejected as categoric

definitions of the public good.” Disparate treatment of im-

ported and in-state intoxicating liquors was to be permitted.

Iii. JUDICIAL INTERPRETATION OF THE

TWENTY-FIRST AMENDMENT.

Section 2 of the Twenty-first Amendments provides as

follows:

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.

“The Amendment was not a narrow legislative delegation

of federal authority; it was the will of a nation speaking

through its constitutional process.” Swedenburg v. Kelly, 358

F.3d 223, 227 (2d Cir. 2004). Moreover, this national

consensus was achieved just seventy years ago. The plain

language of the Amendment exclusively reserves to the states

the right to regulate “transportation or importation” of intoxi-

cating liquors. Nothing in the language of the Amendment

° After passage of the Twenty-first Amendment, states, for the most

part, chose to follow one of two models in order to curb increased sales,

abusive sales practices, and excessive consumption: state monopoly of the

distribution chain or the three-tier system. The three-tier system of

distribution prevails today in a majority of states. See Bainbridge v. Bush,

148 F. Supp. 2d 1306, 1308 (M.D. Fla. 2001), vacated by Bainbridge v.

Turner, 311 F.3d 1104 (11th Cir. 2002). The three-tier system is designed

to prevent vertical integration in the liquor industry by “tied houses.”

Direct links between manufacturers and retailers, and disproportionate

influence between the two, has historically led to increased sales, abusive

sales practices and excessive consumption. The three-tier system inter-

jects checks and balances by separating producers from consumers

through a distinct, mandatory, transparent and accountable distribution

system. See S.A. Discount Liquor, Inc. v. Texas Alcoholic Beverage

Comm 'n, 709 F.2d 291, 293 (Sth Cir. 1983).

12

limits the states’ power to regulate “transportation and

importation.” As such, it is clear from “the scope of the

Twenty-first Amendment’s grant of authority . . . that it is

exempted from the effect of the dormant commerce clause.”

Id. at 231 (citing Craig v. Boren, 429 U.S. 190, 206 (1976)).

Shortly after its enactment, this Court recognized the broad

powers conferred upon the states by the Twenty-first Amend-

ment. See e.g., State Board of Equalization v. Young's

Market Co., 299 U.S. 50 (1936) (upholding a statute that

imposed a license fee on beer importers); Mahoney v. Joseph

Triner Corp., 304 U.S. 401 (1938) (upholding limitation on

the types of blended spirits imported into the state, which was

not imposed upon those produced in state); Ziffrin v. Reeves,

308 U.S. 132 (1939) (upholding regulation of the exportation

of alcoholic beverages out of the state). Specifically, these

cases upheld the states’ power to regulate intoxicating liquor

even when it burdens out-of-state interests vis-a-vis in-state

interests. /d. The common thread running through these

decisions is the recognition that control of importation is the

essential component of the states’ licensing and regulatory

authority and that the Twenty-first Amendment insulates that

authority from a dormant Commerce Clause challenge.’

” This Court refused to adopt a constitutional analysis which inquires

into the underlying purposes of a state statute and determines whether

regulatory or protectionist aims predominate. See, /ndianapolis Brewing

Co. v. Liquor Control Commission, 305 US 391 (1939); Finch v. McKit-

trick, 305 U.S. 395 (1939). These cases were challenges to retaliatory (or

“protective”, as Justice Brandeis suggested they might be termed) statutes

limiting or banning importation of alcoholic beverages from states which

themselves, in the eyes of the “protective” state, discriminated against or

burdened importations. The burdens cited varied from excise tax differ-

entials, to import fees, to requirements that importers sell only to in-state

licensed wholesalers.

The Court might have rejected all such legislation or permitted it only

when imposed against protectionist rather than regulatory statutes, but

either choice would have compelled the Court to evaluate the statute being

13

The Court, however, did not declare state regulation of

intoxicating liquor free from all limitations. Justice Brandeis

wrote in Young's Market: “Twe plaintiffs insist that to sustain

the exaction of the importer’s license fee would involve a

declaration that the Amendment has, in respect to liquor,

freed the states from all restrictions upon the police power to

be found in other provisions of the Constitution. The ques-

tion for decision requires no such generalization.” 299 US

59, 64 (1936). The Court subsequently articulated such

limitations. See Craig v. Boren, 429 U.S. 190, 206 (1976)

(Equal Protection Clause); See Constantineau v. Wisconsin,

400 U.S. 433 (1971) (Due Process Clause); Larkin v.

Grendel's Den, Inc., 459 U.S. 941 (1982) (Establishment

Clause); 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484

(1996) (First Amendment). No constitutional provision, other

than the Twenty-first Amendment, is at issue in this case.*

Similarly, the Court has made it clear that states may not

attempt to regulate commercial activity extraterritorially. See

Brown-Forman Distillers Corp. v. New York State Liquor

Authority, 476 U.S. 573 (1986) (an affirmation statute that

controlied the price of intoxicating liquor in other states);

retaliated against. If the Court rejected retaliation, but did not evaluate the

statute which provoked the prohibited response, there would be neither a

political nor a judicial remedy against allegedly protectionist legislation.

Instead, the Court chose to permit protective statutes, and avoid judicial

intrusiveness into the myriad details of complex state regulatory systems.

The Court left trade disputes involving intoxicating liquors to be

resolved through the political process. By the end of the 1930's, states,

generally speaking, were no longer enacting protectionist laws regarding

intoxicating liquor. Joseph Kallenbach, “Interstate Commerce in Intoxi-

cating Liquors under the Twenty-first Amendment,” 14 Temple L.Q. 474,

488 (1940). The problem did not disappear, but, like alcohol abuse, it

was controlled.

* Dormant Commerce Clause analysis is not relevant because of the

passage of the Twenty-first Amendment and congressional enactment of

the Webb-Kenyon Act.

14

Healy v. Beer Inst., Inc.., 491 U.S. 324 (1989) (striking down

a price affirmation statute with extraterritorial effect);”

Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324

(1964) (invalidating New York’s attempt to close down an

airport duty free shop, whose products were delivered to the

ultimate consumer and whose products were used abroad).

Again, no claim is being made here that Michigan is

attempting to regulate extraterritorially.

Only once has this Court applied dormant Commerce

Clause analysis to a regulation arguably involving the im-

portation of alcoholic beverages. In Bacchus Imports, Lid. v.

Dias, 408 U.S. 263 (1984), Hawaii imposed a tax on

intoxicating liquors but exempted from taxation two locally

produced products, ti root brandy and pineapple wine. The

court struck down the Hawaii tax on the basis that it was

intended to “favor local liquor industries” and therefore was

preempted by the “strong federal interest in preventing

economic Balkanization.” /d. at 276. However, the exemp-

tions had explicitly been passed and were explicitly defended

by the state as exclusively motivated by a desire to aid local

* Justice Scalia, concurring in Healy, stated that the statute’s “dis-

criminating character eliminates the immunity afforded by the Twenty-

first Amendment. /d at 344. Importantly, he did not find that any

difference between the treatment of imports and the treatment of in-state

products was unconstitutionally protectionist and unprotected by the

Twenty-first Amendment. “Every use of §2 could be called “discrimi-

natory” in the sense that plaintiffs use that term, because every statute

limiting importation leaves intrastate commerce unaffected.” Briden-

baugh v. Freeman-Wilson, 227 F.3d 848, 853 (7th Cir. 2000). Connecticut

did not treat out-of-state suppliers differently from in-state suppliers. It

distinguished brewers, whether located in or out-of-state, who sold only in

Connecticut, from those, whether located in or out of state, who sold both

in Connecticut and in neighboring states. Justice Scalia objected to

differential treatment of interstate commerce, not differential treatment of

importation. Healy v. Beer Dist., 491 U.S. 324, 344 (1988).

15

industry. The Court stated that “[t]he central purpose of

[Section 2 of the Twenty-first Amendment] was not to

empower States to favor local liquor industries by erecting

barriers to competition” at Jd. Hawaii insisted that it had no

other purpose than a subsidy for the exemption. Official

Transcript Proceedings before the Supreme Court of the

United States. January 11, 1984, p. 35. Significantly, the

relevance of the Webb-Kenyon Act was never argued to the

Court. Furthermore, the Twenty-first Amendment was not

even cited by Hawaii until it submitted its brief to this Court.

Writing for the majority, Justice White found this ‘belated”

argument unconvincing.

The Court remanded the case for a determination of rem-

edy. Reimbursement, if ordered, would function like a fine.

It would not disable Hawaii’s future capacity to regulate the

importation, distribution, and sale of intoxicating liquors."

'° Three current members of the Court sat on the Bacchus case and all

dissented on the basis that the “commerce clause claim is squarely

foreclosed by the Twenty-first Amendment to the United States Consti-

tution.” Bacchus v. Dias, 468 U.S. 263, 278 (1894) (J. Stevens with J.

Rehnquist and J. O’Connor dissenting). In recognition of the fact that

hard cases make bad law, Bacchus should at the least be confined to its

unique facts and procedural history. At best, the case represents the

Court’s acknowledgement that there was not even a colorable attempt by

the state of Hawaii to justify the exemption on any grounds other than

naked economic protectionism nor was there any attempt below to even

argue the Twenty-first Amendment. Alternatively, the case stands for the

proposition that it is constitutionally impermissible to distinguish between

in-state and out-of-state suppliers for the sole purpose of raising revenue,

intentionally creating the functional equivalent of a tariff, but constitu-

tionally permissible when a purpose is to control importation and trans-

portation when the intoxicating liquor is destined for delivery or use

within the state.

'' The author of the dissent in Bacchus later lamented, dissenting in

City of Newport v. lacabucci, 479 U.S. 92, 98 (1986): “In recent years,

however, the Court has completely distorted the Twenty-first Amend-

16

Unfortunately, even if it was not wrongly decided, Bacchus

has been misinterpreted by lower courts and cited for the

proposition that it represents a pendulum swing by the Court

from a broad to a narrow reading of the Twenty-first

Amendment. See, e.g., Heald v. Engler, 342 F.3d 517, 523-

24 (6th Cir. 2003); Dickerson v. Bailey, 336 F. 3d 388, 400

(Sth Cir. 2003); Beskind v. Easley, 325 F.3d 506, 514 (4th

Cir. 2003); Bainbridge v. Turner, 311 F. 3d 1004, 1108 (11th

Cir. 2002). That faulty reading has led those lower courts to

apply traditional dormant Commerce Clause analysis in-

correctly to state regulations governing the importation, sale

and distribution of intoxicating liquors.”

For reasons discussed above, however, Bacchus can not be

read so broadly and does not stand for the proportion that the

Court had embraced a sea change in the interpretation of the

ment. It now has a barely discernible effect in Commerce Clause cases

...” J, Stevens supported his conclusion by citation to Healy and to

Bacchus, which did not have such a devastating effect. Justice Stevens’

gloomy assessment was perhaps colored by his disapproval of the path

taken by this Court in California v. Larue, 409 U.S. 109 (1973) and

continued in City of Newport. The path, of course, was decisively rejected

in 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996).

"? The Heald, Dickerson, Beskind and Bainbridge courts employed the

traditional two step dormant Commerce Clause analysis. First, the courts

examined whether the regulation in question “affects interstate commerce

in a manner either that (i) discriminates against interstate commerce, or

(ii) imposes burden on interstate commerce that are incommensurate with

putative local gains.” Swedenburg v. Kelly, 358 F.3d 223, 230 (2d Cir.

2003) (quoting Brown & Williamson Tobacco Corp. v. Pataki, 320 F.3d

200, 208 (2d Cir. 2004)). Second, concluding that the regulation in

question failed to pass muster, the courts examined whether the regulation

in question implicated one of the Twenty-first Amendment's “core

concerns”. If so, it may be “saved”, notwithstanding its discriminatory

effect. /d As noted by the Swedenburg court, however, this analysis

ignored (or at least rendered irrelevant) the express language of the

Twenty-first Amendment, the Webb-Kenyon Act, and numerous decision

of this Court. Swedenburg, at 231.

17

Twenty-first Amendment. Bacchus presents an unusual set of

facts. The state insisted that its exclusive intent was to favor

its own products in exempting them from an excise tax. This

case simply did not implicate the state’s interests under the

Twenty-first Amendment. Certainly, no aspect of the ruling

in this case provided a carte blanche for lower federal courts

to recast Twenty-first Amendment analysis or discard state

regulatory schemes governing the importation, sale and

distribution of intoxicating liquor. Furthermore, as noted by

the Swedenburg and Bridenbaugh courts, nothing in that case

mandated dormant Commerce Clause or “core power” analy-

sis when considering challenges to state importation regula-

tion or to requirements that intoxicating liquors be distributed

through in-state licensed entities. See Swedenburg v. Kelly,

358 F.3d 223, 236 (2d Cir. 2004); Bridenbaugh v. Freeman-

Wilson, 227 F.3d 848, 851-54 (7th Cir. 2000), cert. denied

sub. nom., Bridenbaugh v. Carter, 532 U.S. 1002 (2001).

This Court consistently has reaffirmed the right of states

under the Twenty-first Amendment to control the importation

of intoxicating liquor. In North Dakota v. United States, 495

U.S. 423 (1990), the court upheld labeling and reporting

requirements for intoxicating liquor shipped to military bases,

under concurrent jurisdiction. Justice Stevens wrote that

“within the area of its jurisdiction, the state has ‘virtually

complete control’ over the importation and sale of liquor and

the structure of the liquor distribution system.” /d. at 431; see

California Retail Liquor Dealers Assn. v. Midcal Aluminum,

Inc., 445 U.S. 97, 110 (1980); see also Capital Cities Cable,

Inc. v. Crisp, 476 U.S. 694, 712 (1984); California Board of

Equalization v. Young's Market ('~., 299 U.S. 59 (1936).”

He further noted that that “[i]n the interest of promoting

temperance, ensuring orderly markets conditions, and raising

revenue, the state established a comprehensive system for the

distribution of liquor within its borders. That system is

18

unquestionably legitimate.” North Dakota v. United States,

495 U.S. 423, 432 (1990) (citing Carter v. Virginia, 321 U.S.

131 (1994); and State Board of Equalization v. Young's

Market, Co., 299 U.S. 59 (1936))"’.

'’ The Sixth Circuit dismissed as dictum the relevance of the language

in North Dakota, describing state importation controls as being unques-

tionably legitimate, because the case involved a Supremacy Clause

challenge. The Heald Court, however, failed to appreciate the basis for

the North Dakota decision and the implications of that decision on a

dormant Commerce Clause challenge to state importation controls.

The plurality concluded that there was no discrimination because the

United States could, like all other retailers in North Dakota, purchase its

imported intoxicating liquor from in-state licensed wholesalers. This

conclusion presupposes that all other retailers were compelled to so pur-

chase from in-state licensed wholesalers. If a retailer could buy directly

from an out-of-state supplier, the terms of the transaction might be better

than those available to the United States from the in-state wholesaler, thus

making discrimination possible. Justice Scalia reached a similar result

because he believed that the state, under the Twenty-first Amendment,

could compel the United States, as well as all other retailers, to purchase

intoxicating liquors only from licensed in-state wholesalers.

More recently, this Court has again recognized the states’ power to

control importation of intoxicating liquors. In 44 Liquormart, Inc. v.

Rhode Island, 517 U.S.484 (1996), this Court held that the Twenty First

Amendment gave no authority to states to violate the First Amendment.

The advertising restriction at issue was rejected because there was no

evidence that it significantly advanced the state interest in temperance and

because there were less restrictive alternatives available. These less

restrictive alternatives were direct regulation of prices or taxation, as

conceded by the state’s own expert. Justice Stevens, joined by Justices

Kennedy, Souter and Ginsburg at 1509 and Justice O’Connor joined by

Chief Justice Rehnquist and Justices Souter and Breyer at 1521. The

principal opinion, by Justice Stevens, also referred to the possibility of

direct limitation of per capita purchases. None of these alternatives can be

effectively implemented in the absence of a requirement that all

intoxicating liquors sold or delivered for use within the state go through

an in-state licensed entity.

19

IV. THE STATE’S REGULATORY STRUCTURE

THAT PERMITS IN-STATE WINERIES TO

SHIP ALCOHOL DIRECTLY TO CONSUMERS

BUT RESTRICTS OUT-OF-STATE WINERIES

IS PERMISSIBLE UNDER SECTION 2 OF THE

TWENTY-FIRST AMENDMENT.

Currently, there is a split among six Circuit Courts of

Appeal regarding the central question presented on this

appeal. Three circuits have invalidated state laws that

prohibit out-of-state wineries (which are not subject to the

regulatory reach of the siate) to ship direct to consumers but

permit in-state wineries (which are licensed and are subject to

effective control by the state) to sell, under certain circum-

stances, direct to consumers. Heald v. Engler, 342 F.3d 517

(6th Cir. 2003); Dickerson v. Bailey, 336 F.3d 388 (Sth Cir.

2003); Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003). These

three circuits, as well as the Eleventh Circuit, utilized

traditional dormant Commerce Clause analysis in reaching

their decisions.'* In doing so, they ignored or misinterpreted

'* In Heald and Dickerson, the Sixth and Fifth Circuits respectively

struck down the direct shipping prohibition in its entirety. Heald, at 527;

Dickerson, at 409-410. In Beskind, the Fourth Circuit struck down only

the in-state exemption and left “in place the three-tiered system that North

Carolina had employed since 1937 and has given every indication it wants

to continue to employ.” Beskind, at 519. In Bainbridge v. Turner, 311

F.3d 1104 (11th Cir. 2002), the Eleventh Circuit vacated a summary

judgment for the state and remanded on the issue of whether Florida’s

statutory scheme was closely related to the “core concern” of the Twenty-

firsts Amendment of raising revenue or was a pretext for mere economic

protectionism. Bainbridge, at 1104. The Eleventh Circuit made clear,

however, that the standard to be met was far less than the least restrictive

alternative. In dissent, Judge Roney stated: “In these credit card days of

easy purchase by telephone and internet, this statute reflects the ‘core’

concerns of the Twenty-first Amendment that alcoholic beverages not be

sold to underage consumers and not be sold effectively unregulated or

untaxed. This court improperly treats as equal the prospective loss of a

beverage license to an in-state firm and the loss of a Florida beverage

20

the Twenty-first Amendment, the Webb-Kenyon Act, 27

U.S.C. § 122, and numerous decisions of this Court, in-

cluding, without limitation, State Bd. Of Equalization v.

Young's Market Co., 299 U.S. 59 (1936), Hostetter v.

Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964) and

North Dakota v. United States, 495 U.S. 423 (1990).

Two Circuits have upheld the differential treatment

between in-state and out-of-state wineries noting that it was

“a permissible expression of the state’s authority under

Section 2 of the Twenty-first Amendment.” Swedenburg v.

Kelly, 358 F.3d 223,231 (2d Cir.2004); Bridenbaugh vy.

Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000), cert denied,

sub. nom., Bridenbaugh v. Carter, 532 U.S. 1002 (2001).

Both the Swedenburg and Bridenbaugh courts rejected the

contention that the express language of the Twenty-first

Amendment was subordinate to the doctrine of the dormant

Commerce Clause. Swedenburg, at 231; Bridenbaugh, at 849

(“This case pits the Twenty-first Amendment, which appears

in the Constitution, against the ‘dormant commerce clause’,

which does not”). They also rejected the argument that the

Twenty-first Amendment only protects state regulation “that

advance so-called core concerns.” Swedenburg, at 233;

Bridenbaugh, at 851. Accordingly, the Swedenburg and

Bainbridge courts rejected as “flawed” the two-step approach

embodied in traditional dormant Commerce Clause analysis

that was applied by the other four circuits. Swedenburg, at

231; Bridenbaugh, at 853.

In a thoughtful and historically grounded analysis, the

Swedenburg court upheld New York laws, which regulated

the importation of intoxicating liquors by requiring that they

pass through an in-state licensee. The Swedenburg court

license to an out-of-state firm, if one is required at all. One would put the

firm out of business, the other would simply restrict the market by a

state.” Jd. at 1116.

21

noted that “[w]ith Prohibition’s repeal, the dafters of the

Twenty-first Amendment drafted Section 2 to ai'ow states the

authority to circumvent dormant Commerce Clause protec-

tions, provided that they were regulating the intrastate flow of

alcohol.” Swedenburg, at 237.

In reaching this conclusion, the Swedenburg court specif-

ically recognized the importance of the requirement that all

imported intoxicating liquors be delivered to an in-state

licensee, thereby assuring effective regulation. This regula-

tory concern is unquestionably valid.

Presence ensures accountability. Records of sales and

compliance with New York’s regulatory requirements

must be available for inspection by SLA officials.

Violations are subject to disciplinary measures carried

out in New York, including fines imposed against the

bond all license holders are required to post. New York

treats wine importers the same as it treats internal

sellers; all must either utilize the three-tier system or

obtain a physical presence from which the state can

monitor and control the flow of alcohol.

Swedenburg, at 237-238.

In contrast, the Heald and Dickerson decisions threaten to

dismantle complex state regulatory systems governing

intoxicating liquors that have worked remarkably well for

over seventy (70) years. Through these delicately balanced

and historically tested regulatory schemes, states have

addressed several fundamental interests: preventing illegal

sales to minors, reducing abuse of intoxicating liquors,

inhibiting overly aggressive marketing, creating orderly

distribution and importation systems, collecting taxes, and

preventing a recurrence of the problems that led to the

enactment of National Prohibition.

The Heald decision substantially undermines the effective-

ness of Michigan’s regulatory regime by proscribing the

power to control importation. In Michigan, state law requires

22

that all intoxicating liquor must either be produced in-state by

a licensed entity or be produced out-of-state and shipped in-

state to a licensed entity. Either way, the source of the

intoxicating liquor to be consumed in Michigan falls under

the licensing and enforcement umbrella of the State. If that

intoxicating liquor is produced, imported or sold in a manner

inconsistent with state law, Michigan has created a trans-

parent and accountable distribution system so that any such

violation can be ascertained, punished, and deterred in the

future. None of these regulatory functions can be effectively

exercised over an unlicensed out-of-state entity. Relying

upon inapposite dormant Commerce Clause analysis, the

Sixth Circuit invalidated this regulatory regime because in-

state wineries (which are licensed and subject to effective

control by the state) may sell, under certain circumstances,

direct to consumers while out-of-state wineries (which are not

licensed and not subject to effective control by the state) must

first sell to a licensed importer.

While this case may involve oenophiles, it is consti-

tutionally indistinguishable from one involving spirits or beer.

There is no distinction between the importation of a highly

allocated cult wine and that of an alcopop or distilled spirits.

How are regulators expected to police underage sales effec-

tively when a resourceful teenager can order distilled spirits

through the mail? A state cannot effectively hold an out-of-

state licensed entity accountable for such a violation of state

law. Is state regulation at risk because of the existence

of brewpubs, since in-state suppliers are permitted to sell

on-premise?

The logic of the opinions would seem to apply to im-

poriation controls that result in any difference in the

regulatory treatment of an out-of-state or an in-state licensed

supplier, of an out-of-state or in-state licensed wholesaler, or

of an out-of-state or in-state licensed retailer, even where the

purpose of that importation control is to ensure compliance

23

with state law by requiring that all importation be to a

licensed entity physically present within the state. The

licensed, physical presence of the source of the intoxicating

liquor, be it manufacturer, importer, or wholesaler, is the

cornerstone of an orderly, transparent, and accountable

alcoholic beverage distribution system. The validity of such a

system has never been questioned by this Court.

The Sixth Circuit also ignores the competitive advantage

that its decision confers upon out-of-state suppliers. By

effectively exempting out-of-state suppliers from the regu-

latory reach of the state, these suppliers are free to violate a

state’s laws without fear of consequences. Accordingly, the

inequitable outcome of the decision will be that out-of-state

suppliers are accorded a benefit not enjoyed by in-state sup-

pliers, while at the same time, states are hamstrung in

the effective enforcement of their laws over out-of state

suppliers.

In summary, Amicus Curiae NBWA urges the Court to

reverse the Heald decision and affirm the Swedenburg

decision. The history of the Twenty-first Amendment and a

careful analysis of the Court’s jurisprudence thereunder

makes it clear that “a state is totally unconfined by traditional

commerce clause limitations when it restricts the importation

of intoxicants destined for use, distribution, or consumption

within its borders.” See, Department of Revenue v. James B.

Bean Distilling Co., 377 U.S. 341, 344 (1964) (holding that

the Twenty-first Amendment does not grant states the power

to intrude upon the federal interest in regulating the

importation of foreign intoxicating liquor).

Simply put, the Twenty-first Amendment grants the states

“virtually complete control over whether to permit

importation or sale of liquor and how to structure the liquor

distribution system.” California Retail Liquor Dealers Ass'n

v. Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980). If no

other constitutional provisions are at issue, and if the state is

24

not seeking to regulate intoxicating liquors extrat 2rritorially

(neither of which is at issue here), the state is at liberty to

regulate intoxicating liquors free from dormant Commerce

Clause limitations. As such, Michigan, as a proper exercise

of its regulatory function, should certainly be able to

condition a winery's ability to ship direct to consumers upon

the receipt of a license and upon the establishment of a

physical presence in the state. In practical terms, these

requirements are essential to effective enforcement.

V. THE HEALD DECISION DESTROYS THE

KEYSTONE OF THE STATE’S REGULATORY

POWER: THE RIGHT UNDER THE TWENTY-

FIRST AMENDMENT TO CONTROL THE ©

IMPORTATION OF INTOXICATING LIQUOR

INTO THE STATE.

The disposition of this case requires an understanding of

the underlying theory and history of alcohol regulation, the |

complexity and efficacy of the state’s current regulatory

structure, and the consequences of the lower court’s ruling on |

Michigan’s legitimate goals of preventing illegal sales to

minors, reducing abuse of intoxicating liquor, inhibiting |

overly aggressive marketing, creating orderly distribution and

importation systems, and collecting taxes. Consideration of |

these compelling concerns leads to but one conclusion: that —

the current regulatory system has worked remarkably well for

over seventy (70) years and should not be discarded.

Following Prohibition, states generally followed one of two

models in enacting intoxicating liquor regulations. A minor-

ity of states adopted some form of public monopoly. See

George A. Shipman, State Administrative Machinery for

Liquor Control, 7 Law & Contemp. Prob. 600, 612 (1940).

While this model vested the most control in the state, it also

involved the displacement of private operation by public

operation. A majority of states elected to adopt a three-tier

25

system of distribution in their alcoholic beverage industry,

preserving that degree of entrepreneurial autonomy that was

consistent with comprehensive regulation.

To avoid the harmful effects of vertical integration in the

alcohol industry, the three-tier system effectively restricts

manufacturers, wholesalers, and retailers to one level of

activity. Prior to Prohibition, large companies often con-

trolled, through vertical and horizontal integration, both the

production and sale of intoxicating liquors. The resulting

“tied-houses” led to excessive retail capacity and cutthroat

competition for market share, which, in turn, led to

intemperate consumption as a consequence of excessive sales

stimulation. The three-tier system eliminates the probability

of “tied house” relationships or vertical integration. It also

prevents companies with monopolistic tendencies from

dominating all levels of the industry and assures that the

source of distribution will have a licensed in-state presence.

The three-tier system thus creates a transparent and ac-

countable distribution system in the industry.

While each state has implanted its unique imprint on its

three-tier system over the last seventy (70) years, the utility

and effectiveness of the three-tier model has been well

demonstrated. Before and during National Prohibition, abuse

of intoxicating liquors was an acute problem. Since Repeal, it

has been at worst a chronic one. The three-tier system has

worked remarkably well and withstood the test of time.

Furthermore, the need for and current relevance of the three-

tier system is perhaps greater today than at any time in recent

history. Public concern with both intemperate and underage

consumption is obvious. The intoxicating liquor industry has

experienced unprecedented consolidation in recent years,

which makes vertical integration, with the attendant “tied

house” evils, far more likely without appropriate controls.

Such developments highlight the need for greater control of

the productive and distributive channels of intoxicants, not

26

deregulation, and the need to protect state enforcement

powers in order to curb excessive sales, abusive sales prac-

tices and intemperate consumption.

Article Four of Michigan’s Constitution provides that “the

legislature may by law establish a liquor control commission

which, subject to statutory limitations, shall exercise

complete control of the alcoholic beverage traffic within this

state, including the retail sale thereof.” Const. 1963, Act. 4,

§ 40. In accordance with the explicit power granted by the

Twenty-first Amendment of the United States Constitution

and Article Four of the Michigan Constitution, the Michigan

Liquor Control Commission adopted a three-tier system.

Generally speaking, the system requires consumers to pur-

chase and receive intoxicating liquors from licensed in-state

retailers; retailers to purchase and receive intoxicating liquors

from licensed wholesalers; and wholesalers to purchase and

receive intoxicating liquors from licensed manufacturers.

“omp. Laws § 436.1203.

michigan permits an exception to the direct shipping

prohibition for licensed wineries with an in-state presence.

These wineries (which are subject to the state’s enforcement

powers) may ship direct to consumers provided that they

comply with all of the state’s liquor laws. Mich. Comp. Laws

§ 436.113 (a) & 436.1203 (1}—{8). There is no similar

exception for wineries, which do not have an in-state

presence (and which are therefore not subject to the state’s

enforcement powers).

Michigan's different treatment of wineries with an in-state

presence from those without such a presence clearly does not

violate the United States Constitution. Control of importation

is the essential component of the state’s licensing and

regulatory authority and the Twenty-first Amendment

insulates that power from dormant Commerce Clause chal-

lenge and from a charge of “discriminatory” treatment.

27

The Heald decision eliminated this fundamental element of

Michigan’s “comprehensive system for the distribution of

liquor within its borders.” See North Dakota v. United States,

495 U.S. 423, 432 (1990) (citing Carter v. Virginia, 321 U.S.

131 (1994) and State Board of Equalization v. Young's

Market Co., 299 U.S. 59 (1936)). Furthermore, the Heald

court’s broad ruling not only undermines effective regulation,

but also discriminates against licensed in-state wholesalers

and retailers, since they, unlike unlicensed out-of-state

suppliers, are subject to enforceable regulations and taxation.

In Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003), the

United States Court of Appeals for the Fourth Circuit

incorrectly applied dormant Commerce Clause analysis but

did recognize and protect the integrity and efficacy of the

North Carolina regulatory system. In Beskind, out-of-state

wineries challenged, under the Commerce Clause, North

Carolina’s prohibition on the direct sale of wine to North

Carolina residents by out-of-state wineries. The trial court in

Beskind agreed with the out-of-state wineries that North

Carolina’s laws prohibiting direct wine sales by out-of-state

wineries violated the Commerce Clause because North

Carolina permitted in-state wineries to sell directly to con-

sumers. At the request of the out-of-state wineries, the trial

court enjoined North Carolina from enforcing its laws

prohibiting direct sales of wine to North Carolina residents by

out-of-state wineries.

On appeal, North Carolina argued that the trial court’s

remedy was inappropriate and that it should be permitted to

cure the discrimination against out-of-state wineries by

prohibiting in-state wineries from selling wine directly to

Amendment interests in regulating the consumption of

alcoholic beverages, enforcing a minimum age for the pur-

28

chase and consumption of such beverages, limiting the

location from where they are sold, controlling the contents of

such beverages, and collecting taxes in connection with their

sale and distribution.” /d. at 516.

In refusing to effectively dismantle this system, the Court

further stated that:

Additionally, North Carolina has maintained its ABC

laws in implementation of the Twenty-first Amendment

since 1937, shortly after the end of Prohibition, but only

added the preference for local wineries over 40 years

later, perhaps to promote its local wine industry but

certainly not to relinquish its power under the Twenty-

first Amendment. And even as it added that preference

for local wineries, it did not exempt them from a

substantial portion of the ABC laws. Moreover, it did

not retreat from its general mandate that the ABC laws

be “liberally construed to prohibit the transportation and

importation of alcoholic beverages except as permitted

by those laws.

Id. at 519.

Although the Beskind Court erred in its analysis of the

Twenty-first Amendment, and an in-depth discussion of

remedy is beyond the purview of this appeal, the Beskind case

is important for its recognition that a narrow exemption

contained in a state statute should not jeopardize an entire

complex regulatory system that has worked remarkably well

for over seventy (70) years.

CONCLUSION

Based on the arguments and authorities set forth above,

Amicus Curiae National Beer Wholesalers respectfully

requests that this Court reverse the holding of the United

States Court of Appeals for the Sixth Circuit in Heald v.

29

Engler, 342 F.3d 517 (6th Cir. 2003) and affirm the holding

of the United States Court of Appeals for the Second Circuit

in Swedenburg v. Kelly, 358 F.3d 223 (2d Cir. 2004).

Respectfully Submitted,

Of Counsel: MICHAEL D. MADIGAN

Counsel of Record

KATHERINE E. BECKER

MADIGAN, DAHL &

STEPHEN M. DIAMOND

UNIVERSITY OF MIAMI

SCHOOL OF LAW *

; HARLAN, P.A.

1140 Asturia Avenue :

Coral Gables, Florida 33134 70! Fourth Avenue South

(305) 569-9662 wane Se

Minneapolis, Minnesota 55415

PAUL R. ROMAIN (612) 604-2000

805 SW Broadway

Suite 1900

Portland, Oregon 97205

(503) 226-8090

* Affiliation given for

associational purposes only

Counsel for Amicus Curiae

July 29, 2004