Amicus Curiae Brief — Wine Country Gift Baskets.com v. Steen

Supreme Court, U.S.

FILED

DEC 2 2 2010

OFFICE OF THE CLERK

No. 10-671

In The

Supreme Court of the United States

WINE COUNTRY GIFT BASKETS.COM, ET AL.,

Petitioners,

JOHN T. STEEN, JR., ET AL.,

Respondents.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Fifth Circuit

BRIEF FOR ECONOMISTS, LAW AND

ECONOMICS SCHOLARS, AND FORMER FTC

OFFICIALS AS AMICI CURIAE IN SUPPORT

OF PETITIONERS

TODD J. ZYWICKI

George Mason University

School of Law

3301 Fairfax Dr.

Arlington, VA 22201

JOSHUA D. WRIGHT

George Mason University

School of Law

3301 Fairfax Dr.

Arlington, VA 22201

ANDREW G. MCBRIDE

Counsel of Record

THOMAS R. MCCARTHY

Wiley Rein LLP

1776 K Street NW

Washington, DC 20006

(202) 719-7000

amcbride@wileyrein.com

Counsel for Amici Curiae

TABLE OF CONTENTS

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I. The Decision Below Undermines the

Dormant Commerce Clause By Improperly

Limiting Granholm to “Producers” and

Consumers Who Buy Directly from

po . OREORN SAIS Re ho LENG STEEL BR 7 IE TOTO Cee ne 5

II. The Decision Below Improperly Lispenses

With Granholm’s Two-Step Dormant

Commerce Clause Analysis ..........2...2...00es0eee00e- a

III.The Failure of the Fifth Circuit To Properly

Apply Granholm’s Two-Step Analysis Will

Encourage Protectionist Regulation, Harm

Consumers, and Harm Interstate

Commerce in Violation of the Constitution........ 12

A. By Refusing to Rigorously Scrutinize

Discriminatory Regulation, the Fifth

Circuit’s Opinion Encourages Special

Interests and State Politicians to Evade

Granholm’s Mandates...................02.c0cceeceeeeee es i3

B. By Failing to Rigorously Scrutinize

Protectionist State Regulation, the Fifth

Circuit’s Opinion will Result in

Substantial Harm to Consumers, Out-of-

State Sellers, and Interstate Commerce........ 1

il

C. Once the Court Identifies a Facially

Discriminatory Regulation, the Burden

is on the State to Justify the Regulation

and the Necessity of Discrimination. ............. 23

Conclusion................ Re cle sities omanskecaee a teeetetanet ieee 26

i

TABLE OF AUTHORITIES

Cases

Bd. of Equalization of Cal. v. Young’s Mkt. Co., 299

Meee. Wee (POBG) ............-...-ccesncccoscececccscseccoscossenees 11

Craig v. Boren, 429 U.S. 190 (1976)....... ica 11

Freeman v. Corzine, _ F.3d, 2010 WL 5129219

I MOTD on cnnuescecsncsesenrasomsnssnedatvasainceseenccne ap

Granholm v. Heald, 544 U.S. 460 (2005).......... passim

North Dakota U. United States,

ES MEE © POD)... in naicnsnennencuscasaracoceseensansensnersens 3

West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 202

ef Re RR ERD RR rnin oF 82: 8,9

Other Authorities

Alan E. Wiseman & Jerry Ellig, The Politics of Wine:

Trade Barriers, Interest Groups, and the Commerce

Clause, 69 J. POLITICS. 859 (2007)................... oi, Ze

Cass Sunstein, Naked Preferences and _ the

Constitution, 84 COLUM. L. REV. 1689 (1984) ....... 17

Daniel L. McFadden, E. Morris Cox Professor of

Econ., Univ. of Cal., Berkeley, Interstate Wine

Shipments and E-Commerce ...................000e.0eeeeeee 12

Dennis Carlton & Judith Chevalier, free Riding and

Sales Strategies for the Internet, 49 J. INDUS. ECON.

ee 20

Erik Brynjolfsson & Michael D. Smith, Frictionless

Commerce? A Comparison of Internet and

Conventional Retailers. 46 MANAGEMENT SCIENCE

EE CIID 0.5 evevedsnecacocancnaesdascransesnaos ce ocae 20

lV

FEDERAL TRADE COMMISSION, POSSIBLE

ANTICOMPETITIVE BARRIERS TO E-COMMERCE: WINE

CI sccizetcc ec aaree eee eee passim

Gina M. Riekhof & Michael E. Sykuta, Politics,

Economics, and the Regulation of Direct Interstate

Shipping tin the Wine Industry, 87 AM. J.

AGRICULTURAL ECON. 439 (2005).................2c0ecee ee 16

Gina M. Riekhof & Michael E. Sykuta, Regulating

Wine by Mail, 27 No. 3, REG. 30 (2004)................. 16

James C. Cooper & Joshua D. Wright, State

Regulation of Alcohol Distribution: The Effects of

Post and Hold Laws on Consumption and Social

Harms (Fed. Trade Comm'n, Working Paper No.

A Fe sok ee 1d

Jerry Ellig & Alan E. Wiseman, Competitive

Exclusion with Heterogeneous Sellers: The Case of

State Wine Shipping Laws (Mercatus Center,

George Mason Univ., Working Paper, Dec. 20,

tS, | a ae nA ae reo AEE Aaa th Ra liebe: 22

Jerry Elhg & Alan E. Wiseman, /nterstate Trade

Barriers and Potential Regulatory Competition: The

Case of Direct Wine Shipping, 19 J. PRIVATE

Re Si Te ee ccs nscoesictecae aunt ca ee 2]

Karen Clay et al., Prices and Price Dispersion on the

Web: Evidence from the Online Book Industry, 49 J.

PG, TCE Be Ee 0 vanced esses. 20

Letter from Fed. Trade Comm'n Staff to William

Magee, Chairman, N.Y. Assembly Agriculture

Comm. (ter. FO. TOO0) wivioscidscindccceee 18, 25

MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION

RIN ccna ca ails etc yee taaw hee eos ee eee 15

V

Maureen K. Ohlhausen & Gregory P. Luib, Moving

Sideways: Post-Granholm Developments in Wine

Direct Shipping and Their Implications for

Competition, 75 ANTITRUST L.J. 505 (2008).......... 14

Peter Zwiebach, Consolidation Marches on as

Leading Players Expand, IMPACT: GLOBAL NEWS

AND RESEARCH FOR THE DRINKS EXECUTIVE, Apr.

LUlee FOO ce ieee ee 17

Press Release, L.D. Johnston et al., Univ. of Mich.,

Marijuana Use is Rising; Ecstasy Use is Beginning

to Rise; and Alcohol Use is Declining Among U.S.

I Fee, Fre i oiooeoe enastreeraeie a ere keds 24

THE FEDERALIST No. 10 (James Madison)................ 16

Todd Zywicki & Asheesh Agarwal, Wine, Commerce,

and the Constitution, 1 N.Y.U. J. LAW & LIBERTY

eas cecadaes eee osteo ees 10, 11

Wayne T. Brough, No Wine Shall be Served Before Its

Time—At Least Not Without Wholesalers Taking a

Cut, Issue Analysis, July 14, 2010 ......0..00000.cecc. 18

INTEREST OF AMICI CURIAE!

The amici curiae submitting this brief are econo-

mists, law and economics scholars, and former FIC

officials who teach, conduct research, and publish on

economics and economic regulation. A list of amici is

set forth in the appendix hereto.

Amici have no financial interest in any party to

the case or in the outcome of the case.

STATEMENT

Petitioners seek a writ of certiorari to review a de-

cision of the United States Court of Appeals for the

Fifth Circuit rejecting a challenge to a facially dis-

criminatory Texas state law that permits in-state re-

tailers to accept remote orders and directly ship alco-

holic beverages but denies that same right to out-of-

state businesses. Petitioners contend that the Texas

law violates the dormant Commerce Clause of the

United States Constitution as interpreted in Gran-

holm v. Heald, 544 U.S. 460 (2005). The Fifth Circuit

affirmed a grant of summary judgment in tavor of

Respondents, holding that Texas’s discriminatory re-

gime was permissible without requiring the state to

justify its discrimination with a legitimate regulatory

interest.

' This brief is filed pursuant to notice provided to the parties

more than ten days before the filing of the brief and their writ

ten consent. No counsel! for a party authored this brief in whole

or in part. Professors Todd Zywicki and Joshua Wright received

funding for preparation and submission of this brief from Fami-

ly Winemakers of Calforma, a 625 member statewide associa-

tion of wine producers, independently owned vineyards, and

suppliers, founded in 1991 ar © based in Sacramento, California.

?

—

Amici fully endorse Petitioners’ arguments ex-

plaining why a grant of certiorari is appropriate here.

Amici write separately to highlight the harm to small

wineries, consumers, and interstate commerce from

allowing states to enact discriminatory barriers to in-

terstate commerce in wine and other alcoholic beve-

rages. The Federal Trade Commission describes dis-

criminatory state laws inhibiting direct shipment as

“the single '.sgest regulatory barrier to expanded e-

commerce in wine.” FEDERAL TRADE COMMISSION,

POSSIBLE ANTICOMPETITIVE BARRIERS TO E-

COMMERCE: WINE (2003) [hereinafter “FTC Report”],

at 3, avatlable at

http://www.ftc.gov/os/2003/07/winereport2.pdf, and

the decision below perpetuates this harm. Moreover,

the Fifth Circuit’s opinion will result in substantial

harm to consumers, small wineries, and interstate

commerce, and will invite evasion of Granholm’s pro-

tections by politicians and special interests seeking to

erect protectionist policies, notwithstanding Gran-

holm’s guarantee of equal access to America’s mar-

kets for wineries and consumers. Given the impor-

tance of this issue to American consumers, small

wineries, and interstate commerce, and the increas-

ing uncertainty caused by tensions arising from judi-

cial efforts to apply Granholm to various state laws,

it is essential for this Court to review the decision of

the Fifth Circuit. See, e.g., Freeman v. Corzine,

F.3d ___, 2010 WL 5129219 (3d. Cir. 2010) (applying

Eeaatoba to New Jersey law).

SUMMARY OF ARGUMENT

1. ‘Ine decision below conflicts with this Court’s

reasoning 1n Granholm v. Heald, 544 U.S. 460 (2005),

3

undermines the system of nondiscriminatory and ro-

bust interstate commerce guaranteed by the Com-

merce Clause of the Constitution, and imposes unjus-

tified injury on the nation’s citizen-consumers and

wine producers. The Texas regulatory scheme ex-

pressly discriminates between in-state and out-of-

state wine retailers, striking at the heart of reasona-

ble, non-discriminatory regulation recognized in

Granholm.

2. The decision below will result in substantial

harm to consumers, small wineries, and interstate

commerce. It rests on three fundamental errors with

profound economic consequences. First, the Fifth

Circuit improperly limits Granholm and thus the

dormant Commerce Clause’s protections to “produc-

ers.” As such, a retailer of wine is protected by

Granholm only if it is also vertically integrated into

production of the wine that it sells even if distribu-

tion through a retailer would be more efficient. Nei-

ther Granholm’s logic nor the dormant Commerce

Clause compel the vertical integration of production

and retailing to gain the protection of the dormant

Commerce Clause.

Second, rather than applying the two-step analysis

mandated by Granholm, the Fifth Circuit began and

ended its analysis with the dicta in Granholm that

the three-tier system is “unquestionably legitimate.”

544 U.S. at 489 (quoting North Dakota v. United

States, 495 U.S. 423, 432 (1990)). The Fifth Circuit,

finding that discrimination is inherent in the three-

tier system, read this passage as endorsing discrimi-

nation against out-of-state retailers.

4

Third, the Fifth Circuit’s opinion fails to properly

consider the constitutional and economic purposes of

the dormant Commerce Clause and the need to limit

evasion of this Court’s Granholm decision by states

and interest groups seeking to erect discriminatory

barriers to interstate commerce. These three misap-

plications of Granholm and the dormant Commerce

Clause underscore the need for this Court to reaffirm

Granholm in order to guarantee the benefits of the

dormant Commerce Clause and to prevent further ef-

forts to erect discriminatory barriers to interstate

commerce.

3. Granholm expressly recognized the economic

value of vigilant enforcement of the dormant Com-

merce Clause against discriminatory trade barriers.

Granholm has mitigated but has not eliminated the

central economic problem identified there: wholesaler

consolidation and barriers to entry creating a bottle-

neck hampering the distribution of wine, especially

the ever-growing number of small wineries seeking to

bring their products to market. Permitting out-of-

state retailers to compete on equal terms with in-

state retailers will allow a more efficient system of

distribution, reduce prices and increase variety for

consumers, and enhance competitive opportunities

for America’s smal] wineries.

ARGUMENT

I. The Decision Below Undermines the Dor-

mant Commerce Clause By Improperly Li-

miting Granholm to “Producers” and Con-

sumers Who Buy Directly from Producers

The decision below rests on the flawed premise

that Granholm apphes only to “producers” and not to

any other elements of the three-tier system. See

Wine Country Gift Baskets, 612 F.3d at 818 (“The dis-

crimination that Granholm invalidated was a State’s

allowing its wineries to ship directly to consumers

but prohibiting out-of-state wineries from doing so. .

.. Such discrimination—among producers—is not the

question today.”); id. at 820 (“Granholm prohibited

discrimination against out-of-state products or pro-

ducers. Texas has not tripped over that bar by allow-

ing in-state retailer deliveries.”) ‘his reading would

foreclose more efficient systems of alcohol distribu-

tion, resulting in harm to consumers, small wineries,

and interstate commerce.

Even a cursory reading of Granholm reveals that

it focuses on “producers” simply because the plaintiffs

in that case happened to be out-of-state producers

and the state law in question was designed to benefit

local producers. But its language and logic are not

limited to producers. And for good reason. The dor-

mant Commerce Clause protects not producers, but

commerce—buying and selling—across state lines.

Whether a retailer is also vertically integrated to

production is immaterial to this protection.

6

Simply put, there is no basis in logic, economic

reasoning, or constitutional law to justify an artifi-

cially narrow reading of Granholm that protects only

“producers.” By focusing on the identity of the seller

of a product, the decision below ignores the funda-

mental principle of the dormant Commerce Clause—

to promote consumer welfare and suppher competi-

tion in a national market unencumbered by discrimi-

natory trade barriers. See Granholm, 544 U.S. at 473

(“Laws of the type at issue in the instant cases con-

tradict the[] principles [of the dormant Commerce

Clause]. They deprive citizens of their right to have

access to the markets of other States on equal

terms.”)

Furthermore, Granholm did not merely establish

Commerce Clause protections for wine producers, but

also for consumers and sellers to transact free of dis-

criminatory state regulation. As the Court explained

at the outset of its opinion, “States may not enact

laws that burden out-of-state producers or shippers

simply to give a competitive advantage to in-state

businesses.” Jd. at 472 (emphasis added), This Court

only mentioned the plaintiffs’ status as “producers”

because the particular Michigan and New York laws

in question exempted in-state producers from sales

restrictions those same laws imposed upon out-of-

state wine producers. That the out-of-state sellers in

that case also happened to produce the products that

they sold was coincidental to Granholm’s conclusion.

The relevant question instead is rather whether simi-

larly-situated sellers of a product were being treated

in a non-discriminatory manner.’ Nothing in Gran-

holm or any other case supports the Fifth Circuit’s

contention that only production combined with retail

sale is protected by the dormant Commerce Clause.

Under the Fifth Circuit’s logic, a producer would

lose the dormant Commerce Clause’s protection if it

decided that it would be more efficient to sell to con

sumers via a retailer instead of directly distributing

its own products. Distribution through a professional

retailer provides multiple economic benefits which

redound to consumers. Retailers develop expertise in

marketing and selling wine to consumers that indi-

vidual wineries may lack, especially smaller wineries.

Retailers have economies of scale in marketing, order

fulfillment, and tax and regulatory compliance that

allow them to sell to consumers at lower expense and

with greater efficiency than small wineries. Special

ty retailers may also be a credible source of product

information to consumers. These benefits provid

consumers with greater choice, reduced prices, and

reduced information costs 1n choosing and purchasing

wine products. All of these benefits of the ability to

use professional retailers to market products are of

particular benefit to smaller wineries and, in turn, to

wine consumers.

Under the Fifth Circuit’s flawed theory, however,

the dormant Commerce Clause protects only consum-

ers seeking to buy products produced by the seller

from whom the consumer wishes to purchase. This

* See Freeman, _ F.3d at *8 (holding that out of state pro

ducers that sell wine “at retail to consumers" must be treated on

equal footing as in-state producers that sell wine "at retail to

consumers")

8

would impiy, for example, that Granholm protects a

consumer sending a gift basket of wine or enrolling in

a “wine of the month” club—but only if the order it-

self is to be fulfilled by one winery filling its own or-

der. This proposed constitutiona] limitation begs

questions. Would two small wineries that banded to-

gether to offer gift baskets that combine their wines

into one basket be protected from state-sanctioned

discrimination? Would three wineries within a mar-

keting cooperative to jointly market and fulfill orders

for their products be protected? Presumably under

the Fifth Circuit’s opinion, all commercial arrange-

ments other than a single retailer vertically inte-

grated from production of wine to retail sale would

fall outside Granholm because each individual wine-

ry was not receiving and fulfilling each individual or-

der, even if a third party could do so at lower cost and

higher consumer value.

Nothing in Granholm compels this absurd result.

The dormant Commerce Clause does not require ver-

tical integration for its protections. Indeed, this

Court has emphasized that “the imposition of a diffe-

rential burden on any part of the stream of com-

merce—from wholesaler to retailer to consumer-—is

invalid, because a burden placed at any point will re-

sult in a disadvantage to the out-of-state producer.”

West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 202

(1994). There is nothing in the dormant Commerce

Clause that conditions non-discriminatory access to

markets on adopting a specific mode of business or-

ganization or method of distribution.

y

Il. The Decision Below Improperly Dispenses

With Granholm’s Two-Step Dormant Com-

merce Clause Analysis

The Fifth Circuit erred in reading Granholm as

endorsing all three-tier systems as “unquestionably

legitimate,” even those that discriminate against out-

of-state shippers. Under Granholm, however, the

Court is required to apply a two-step process of anal

ysis that 1s designed to protect interstate commerce

by ensuring that discriminatory barriers to interstate

commerce in alcohol are justified. This analysis be-

gins with a determination of whether the discrimina

tion was necessary to effectuate the state’s regulatory

scheme. Only afterwards may the court consider

whether the Twenty-First Amendment saved the dis-

criminatory regulation.

This analysis 1s the same whether the product in

question is fresh grapes or grapes that have been

vinted into wine. See, e.g., West Lynn Creamery, Inc.

v. Healy, 512 U.S. 186 (1994). When a state enacts a

discriminatory regulatory regime governing alcohol,

the state must justify the discrimination as necessary

to the fulfillment of legitimate regulatory purposes.

Texas's regulatory regime discriminates against out-

of-state wineries and merchants.

Yet, the Fifth Circuit began and ended its analysis

with Granholm’s dicta dubbing the three-tier system

“unquestionably legitimate,” Granholm, 544 U.S. at

489, in the abstract. The court did not consider the

discriminatory nature of the state regulation much

less whether it was justified. Because it was part of a

three-tier system, the court found it insulated from

the application of the dormant. Commerce Clause

LO

Notably, the Fifth Circuit erroneously concluded

that discrimination at the retail level is integral to

the three-tier system. The Fifth Circuit thereby cha-

racterized this case as a frontal challenge on the va-

hdity of the entire three-tier system itself. But dis-

crimination 1s not inherent to the operation of the

three-tier system. As Petitioner notes, several states

operate three-tier systems without discrimination.

See Brief for Petitioner at 13. There is nothing inhe-

rent in the three-tier system that would justify allow-

ing in-state retailers but not out-of-state retailers to

accept remote orders and fulfill them by delivery.

As the Court recognized in Granholm, the purpose

of Section 2 of the Twenty-First Amendment was the

same as the purpose of the Wilson and Webb-Kenyon

Acts that preceded it: to allow the state police power

to regulate alcohol moving in interstate commerce to

the same extent as alcohol in intrastate commerce

but subject to the hmitation that states could not

erect discriminatory barriers. Granholm, 544 U.S. at

484-85. The Twenty-First Amendment, hke its pre-

decessors the Wilson and Webb-Kenyon Acts, in

tended to grant the states reguiatory parity — to pre-

vent states from having to treat out-of-state retailers

of alcohol on more favorable terms than in-state ven-

dors, not to permit plenary authority to discriminate

against interstate commerce. Todd Zywicki &

Asheesh Agarwal, Wine, Commerce, and the Constitu-

tion, 1 N.Y.U. J. LAW & LIBERTY 609 (2005).

The three-tier system may be, as a starting point,

“unquestionably legitimate.” But this does not au

thorize states to violate the Commerce Clause any

more than it would authorize a state to violate any

|

other Constitutional protection as part of the imple-

mentation of the three-tier system. See Zywicki &

Agarwal, supra, at 639-40. While some early cases

suggested that the Twenty-First Amendment essen-

tially repealed the dormant Commerce Clause as it

applied to interstate commerce in alcohol, those same

cases asserted that the Twenty-First Amendment al-

so protected state alcohol regulation from = scrutiny

under the Fourteenth Amendment. See Bd. of Kqua

lization of Cal. v. Young’s Mkt. Co., 299 U.S. 59, 64

(1936) (rejecting Equal Protection challenge to state

alcohol regulation as “[a] classification recognized by

the Twenty-First Amendment cannot be deemed for-

bidden by the Fourteenth.”) As this Court has subse-

quently and repeatedly recognized, the Twenty-First

Amendment no more deprives citizens of the dormant

Commerce Clause’s protection from. discrimination

than it protects them from discrimination under the

Fourteenth Amendment. See Craig v. Boren, 429

U.S. 190 (1976) (holding that “the operation of the

Twenty-first Amendment does not alter the applica-

tion of the equal protection standards that would

otherwise govern this case”).

The decision below thus rests upon fundamental

doctrinal and conceptual errors that sharply under-

mine the dormant Commerce Clause. Review is

warranted so that this Court preserve the protections

of the dormant Commerce Clause for consumers and

wineries and prevent evasion of Granholm by inter-

est groups and state legislatures.

12

Iii. The Failure of the Fifth Circuit To Properly

Apply Granholm’s Two-Step Analysis Will

Encourage Protectionist Regulation, Harm

Consumers, and Harm Interstate Com-

merce in Violation of the Constitution

The Fifth Circuit’s failure to properly conduct

Granholm’s two-step analysis injures consumers and

the economy by undermining the integrated nationa!

economy the dormant Commerce Clause protects.

Appheation of the two-step analysis required by

Granholm is necessary in order te prevent evasion of

the dormant Commerce Clause’s anti-discrimination

mandate thereby ensuring that laws further regula-

tory, not protectionist, purposes. Insulating the

whole three-tier system from judicial review invites

circumvention of this Court’s Granholm decision

through legislative gerrymandering. The only rele-

rant question left for states would be how to plaus)-

bly label all manners of discriminatory interstate

protectionism as essential to the three-tier system.

This threat is especially dangerous in the area of

alcohol regulation, where as Nobel Laureate Danicl

Mcl’adden has observed, the political economy of

state legislative and regulatory process systematical-

ly disadvantage the interests of consumers and out-

of-state suppliers relative to those of wholesalers.

See Daniel L. McFadden, i. Morris Cox Professor of

Econ., Univ. of Cal., Berkeley, Interstate Wine Ship-

ments and K-Commerce 2, available at

http://www.fte.gov/opp/ecommerce/anticompetitive/pa

nel/mefadden.pdf (“I find it particularly sad that the

anti-interstate shipping legislation that has been

passed is so disproportionate in its negative impact

on consumers relative to the very modest protection

it provides to traditional distributors and retailers.”).

13

Absent rigorous scrutiny by federal courts, wholesa-

ler-dominance of the legislative and regulatory

processes will result in| rampant evasion of the

Court’s holding in Granholm and significant welfare

losses imposed upon consumers.

A. By Refusing to Rigorously Scrutinize Discrimt-

natory Regulation, the fifth Circuit's Opinion

Encourages Special Interests and State Politi

clans to Kvuade Granholm’'s Mandates.

Interest groups and state legislatures have worked

ceaselessly to undermine Granholm. Legislatures

have developed several types of camouflage to sal-

vage discriminatory regimes. The I*ifth Circuit's op1-

mion will greatly simplify this process: every discri-

minatory element that a state asserts as essential to

its three-tier regulatory regime would be deemed

“unquestionably legitimate.” Indeed, the Vufth Cir-

cult’s interpretation renders Granholm itself a near-

nullity, enabling direct shipments of wine directly

from producers to consumers, but providing no other

limits on regulations of a myriad of economically sim-

ilar transactions (as noted above). It is essential for

this Court to reaffirm the importance of Granholm to

limit these evasions.

In 2007, two officials of the Federal Trade Com-

mission undertook a comprehensive review of state

legislative responses in the wake of Granholm and

the negative impact those evasions continued to have

on consumers and interstate commerce. Maureen K.

Ohlhausen & Gregory P. Luib, Moving Sideways:

Post-Granholm Developments in Wine Direct Ship

ping and Their Implications for Competition, 75 AN-

14

TITRUST L.J. 505 (2008). As Ohthausen and Laub

note, in the wake of Granholm, several states in

vented new restrictions on direct. shipping that typ1-

cally fall more heavily on out-of-state producers.

These included restrictions such as on-site purchase

requirements and production lmitations.’ In some

cases, these new restrictions “effectively make direct

shipping by out-of-state wineries economically im-

possible.” Ohlhausen & Luib, supra at 506. They

note that “[rlestrictions on direct shipping, including

those enacted in the wake of Granholm, have adverse

effects on consumers of wine. Such restrictions pre-

vent consumers from conveniently purchasing many

popular wines and from reaping significant price sav-

ings on some wines. Further, direct shipping fosters

competition between online and offline sellers of

even if consumers choose to buy wine from

wine

bricks-and-mortar retailers.” Jd. at 566. They con-

clude that “fa] Commerce Clause challenge may be

the only practical way to attack these restrictions and

protect the interests of producers and consumers in

enjoying the benefits of a competitive, national mar-

ket.” Jd. Moreover, they warn that the failure of this

Court to protect consumers and interstate commerce

3 Family Winemakers of Cal. v. Jenkins, 592 F.3d 1 (1st Cir.

2010) illustrates the importance of judicial vigilance to prevent

evasion of the dormant. Commerce Clause. In 2006 Massachu

setts enacted a facially neutral law that created distinct distri-

bution regimes for “small” and “large” wineries, as defined by

output of more or less than 30,000 gallons per year. While fa

cially neutral, the First Circuit recognized that no Massachu

setts winery produced more than 30,000 gallons per year. The

First Circuit thereby invalidated the state law under Granholm

as discriminatory in effect.

Ld

from these evasions will invite further surreptitious

trade barriers erected to protect in-state merchants

from out-of-state competition.

As this legislative response to Granholm indicates,

state legislatures are highly prone to erecting harm-

ful discriminatory barriers to interstate commerce.

Consumer interests tend to be systematically under-

represented in political processes as consumers are

subject to collective action and free-riding problems

See MANCUR OLSON, THE LOGIC OF COLLECTIVE AC

TION (1965). By contrast, wholesalers present a cohe-

sive, well-organized lobbying machine. Such an

asymmetry in lobbying power increases the threat of

protectionist legislation motivated by wholesaler spe-

cial interest groups. Thus, allowing states to author-

ize alcohol cartels enables financially interested firms

to reap cartel profits at the expense of consumers, of-

ten in ways that do not materially further any legiti-

mate interest of the state.

Studies of state alcohol markets confirm these

suspicions. In most states, wholesalers and state

governments combine to impose losses on consumers

to increase both profits and tax revenues. See James

C. Cooper & Joshua D. Wright, State Regulation of

Alcohol Distribution: The Effects of Post and Hold

Laws on Consumption and Social Harms (Fed. Trade

Comm'n, Working Paper No. 304, August 2010) (de-

monstrating that state post and hold regulations re-

sult in a reduction in consumer welfare with no off-

setting reduction in the social harms associated with

alcohol consumption), available at

http://www.ftc.gov/be/workpapers/wp304.pdf; Gina M.

Riekhof & Michael E. Sykuta, Politics, Economics,

16

and the Regulation of Direct Interstate Shipping in

the Wine Industry, 87 AM. J. AGRICULTURAL ECON.

439 (2005); Gina M. Riekhof & Michael E. Sykuta,

Regulating Wine by Mail, 27 No. 3, REG. 30 (2004).

Riekhof and Sykuta conduct an empirical analysis of

state wine direct shipping “reciprocity” laws to find

that interest-group struggles and tax revenues pri-

marily determine state alcohol regulatory policies. In

a few states, the domestic wine industry is sufficient-

ly strong and well-organized that it can sometimes

exert a counter-weight to anti-consumer wholesaler

interests. Riekhof and Sykuta find that consumer in-

terests predominate in absolutely no states. When a

state lacks a large wine-producing sector that can

provide a political counterweight to wholesaler inter-

ests, however, consumers are at the mercy of whole-

saler interests.

By limiting the capacity of states to engage in dis-

criminatory regulation, a primary function of the

dormant Commerce Clause is to temper the ability of

‘ocal interest group factions to weaken national mar-

kets and erode individual liberty. ‘THE FEDERALIST

No. 10 (James Madison). Discriminatory laws trans-

fer wealth to small, cohesive special interests at the

expense of millions of consumers that are hard to or-

ganize politically and out-of-state sellers that have no

ability to vote and lhmited ability to participate in

state political processes. These trends reflect the

grim reality that discriminatory interstate laws

tempt politicians to reward special interest groups at

the cost of consumer welfare. These forces unders-

core the need for vigilance by this Court to prevent

interest-group motivated evasions of the dormant

17

Commerce Clause. See Cass Sunstein, Naked Prefe-

rences and the Constitution, 84 COLUM. L. REV. 1689

(1984).

B. By Failing to Rigorously Scrutinize Protection-

ist State Regulation, the Fifth Circuit's Opinion

will Result in Substantial Harm to Consumers,

Out-of-State Sellers, and Interstate Commerce.

This Court’s decision in Granholm produced major

economic benefits for consumers and the economy

and led to a blossoming of smaller wineries by freeing

new producers from an innavigable and shrinking

bottleneck of wholesalers. As noted in Granholm, be-

tween 1984 and 2002 the number of licensed whole-

salers nationwide dropped from 1,600 to 600 while

the number of wineries had grown to over 3,000.

Granholm, 544 U.S. at 467. Since Granholm, the

number of wineries has increased to over 6,000, see

Growth of the U.S. Wine Industry,

http://www.wineamerica.org/newsroom/wine%20data

“o20center/2010-Growth-of-US-Wine-Industry.pdf

(last visited Dec. 19, 2010), suggesting that discrim1-

natory state regulation was a significant and binding

constraint on competition and consumer choice in the

wine market. By contrast, some industry analysts

claim that the wholesaler industry has become even

inore consolidated and concentrated since then. Pe-

ter Zwiebach, Consolidation Marches on as Leading

Players Expand, IMPACT: GLOBAL NEWS AND RE.

SEARCH FOR THE DRINKS EXECUTIVE, Apr. 15-May 1

2009, at 1, 22. One indication of the wholesaler’s re-

gulatorily-preferred position is that while the return

on equity (an accounting measure of profitability

18

used by many investors) in less-protected wholesale

industries averages 11 percent a year over the past

10 years, the return in alcohol wholesaling ranges

from 18-20 percent, 66 to 83 percent higher. See

Wayne T. Brough, No Wine Shall be Served Before Its

Time-—At Least Not Without Wholesalers Taking a

Cut, Issue Analysis, July 14, 2010.

As the Federal Trade Commission has noted, by

expanding efficiency, competition, and consumer

choice, further breaking down discriminatory bar-

riers to retailing will expand the benefits that were

seeded by Granholm. See Letter from Fed. Trade

Comm'n Staff to William Magee, Chairman, N.Y. As-

sembly Agriculture Comm. (Mar. 29, 2004) (observing

that “allowing out-of-state retailers, as well as wine-

ries, to ship directly to consumers would provide ad-

ditional competition that likely would lead to even

lower prices for such consumers”), available at

http://www.ftc.gov/be/v040012.pdf. Direct shipment

by out-of-state retailers enables small and medium

wineries to distribute their products to retailers who

‘an then sell and ship a greater vaniety of products to

consumers. These retailers will otherwise struggle to

find distribution as a result of the wholesaler bottle-

neck. This will naturally expand the economic bene-

fits created by Granholm, leading to lower prices,

broader selection, and greater consumer convenience.

Just as Internet and catalogue shopping have revolu-

tionized other areas of retail-shopping for the benefit

of consumers, prying open previously closed markets

to allow heightened competition by out-of-state re-

tailers holds the potential for vast consumer welfare

galns.

19

The products sold by the plaintiff in the current

case, Wine Country Gift Baskets.com, illustrate the

potential gain to consumers and small wineries from

eliminating arbitrary and protectionist restraints on

competition. Wine Country Gift Baskets.com and

other similar retailers market, sell, and ship gift

baskets to consumers around the country. They ac-

cept orders around the clock through their website,

assembling baskets of wines, cheeses, chocolates, and

other items. They offer a variety of baskets designed

for particular occasions, such as at birthdays, anni-

versaries, births, and other celebrations. By provid-

ing innovative product selections in a national mar-

ket, sellers such as plaintiff increase the competitive

pressure on bricks and mortar wine retailers, in-

creasing product variety and convenience while lo-

werlng prices.

Less balkanized markets will also have beneficial

dynamic effects. By reducing barriers to entry, in-

creasing competition, and facilitating the free flow of

goods across state lines, expanding trade will pro-

mote still greater entrepreneurship, innovation, qual-

ity improvement, and choice. Undistorted competi-

tion allows the best products and sellers to prevail,

not just those most able to navigate the wholesalers’

stranglehold on the marketplace. These open condi-

tions lead to economic growth in the marketplace

which, 1n turn, enhance competition and increase

state tax revenues.

Volumes of economic and empirical evidence dem-

onstrate that online retailers are an important com-

petitive force. In many product markets, online re-

tailers offer lower prices than offline retailers. Even

20

where online retailers do not offer a price advantage,

they generate other important competitive benefits

for consumers by reducing price dispersion or offering

services. See, e.g., Erik Brynjolfsson & Michael D.

Smith, Frictionless Commerce? A Comparison of In-

ternet and Conventional Retailers. 46 MANAGEMENT

SCIENCE 563, 563 (2000) (observing that prices on the

Internet are 9-16% lower than prices in conventional

outlets); Dennis Carlton & Judith Chevaher, Free

Riding and Sales Strategies for the Internet, 49 J. IN.

bUS. ECON. 441 (2001); Karen Clay et al., Prices and

Price Dispersion on the Web: Evidence from the On-

line Book Industry, 49 J. INDUS. ECON. 521 (2001).

Furthermore, competition drives down prices for all

sellers in a market — even amongst traditional brick-

and-mortar stores that must reduce prices and im-

prove quality in order to compete against electronic

counterparts. By reducing search costs competition

from Internet retailers tends to reduce price discrim-

ination, promoting lower and more uniform pricing.

These gains flow almost entirely to consumers, per-

mitting greater quantities to be purchased at lower

costs.

Increased competition for wine generates the same

beneficial effects. As part of the Federal Trade

Commission’s 2003 study on Possible Anticompetitive

Barriers to E-Commerce: Wine, in 2002 Jerry Ellig

and Alan E. Wiseman conducted a study of competi-

tion in the consumer wine industry in Northern Vir-

ginia and the effects of state regulatory barriers to

direct shipping of wine. FTC Report at Appendix A;

see also Jerry Elhg & Alan E. Wiseman, Interstate

Trade Barriers and Potential Regulatory Competition:

21

The Case of Direct Wine Shipping, 79 J. PRIVATE EN.

TER., no. 2, 2004, at 26 (noting and subsequently pub-

lishing 2002 Ellig and Wiseman findings). Prompted

by an adverse judicial decision by the United States

Court of Appeals for the Fourth Circuit, in 2003 Vir-

ginia amended its law to permit direct wine shipping

from out-of-state sellers. In 2004, soon after the Vir-

ginia law was enacted, the authors conducted a fol-

low-up study that compared the price and availability

of popular wines in local wine retailers and compared

those findings to the study conducted in 2002, before

the law was enacted. See Alan E. Wiseman & Jerry

Ellig, The Politics of Wine: Trade Barriers, Interest

Groups, and the Commerce Clause, 69 J. POLITICS.

859 (2007).

Wiseman and Ellig’s follow-up study drew several]

relevant conclusions. First, they found that of the to-

tal of 152 popular labels included in the two studies

combined, only 1 was not available at any online re-

tailer while 21 were unavailable at any local bricks-

and-mortar store. In 2002, 15% of the wines in the

study were available online but not offline, and in

2004, 12.5% of the wines were still available online

but not offline. Wiseman & Ellig, supra at 866. Of

the wines not available offline in 2002, 8 of the 15

came from among the 20 most popular labels in Wine

and Spirits’ restaurant poll. FTC Report at 18. In

both periods there were many popular wines that

were unavailable offline but were available online.

Wiseman and Ellhg found that in 2002, there were

substantial savings to be had from purchasing online:

consumers saved an average of 8-13% on wines cost-

ing more than $20 per bottle and an average of 20-

22

21% on wines costing more than $40 per bottle. FTC

Report at 3.

In their 2004 follow-up study, Wiseman and Ellhig

found that the legalization of online wine shopping

changed the competitive structure of the Northern

Virginia wine market, leading to lower prices for con-

sumers both online and offline. As economic theory

predicts, the 2004 Virginia law reduced barriers to

entry, leading to increased competition and consumer

choice. While Wiseman and Ellig found that online

wine prices were lower than offline prices in both

2002 and 2004, the offline-online price differential

was 40% smaller in 2004 than 2002, indicating that

the threat of online competition led to lower prices of-

fline as well. Wiseman and Ellig conclude that

“(cJonsistent with the intentions of the dormant

[(C]ommerce [C]lause, removal of Virginia’s direct

shipment ban increased competition in local mar-

kets.” Wiseman & Ellig, supra, at 870.

Ellig and Wiseman’s most recent research shows

that opening competition to direct shipping by retail-

ers as well as wineries would enhance competition

and drive down consumer prices still further—and

that excluding retailers from direct shipment sub-

stantially reduces the price savings available from

online competition. See generally Jerry Ellig & Alan

EK. Wiseman, Competitive Exclusion with Heterogene-

ous Sellers: The Case of State Wine Shipping Laws

(Mercatus Center, George Mason Univ., Working Pa-

per, Dec. 21, 2010).

Moreover, Wiseman and Ellig’s study actually un-

derstates the full benefit to consumers and the econ-

omy of online shopping. Online shopping provides a

Zo

consumer with the ability to shop at their conven-

ence, day or night, from the comfort of their own

home, rather than being required to run around town

seeking particular wines or comparing prices. Con-

sumers benefit from the convenience of the option of

placing remote orders and accepting direct ship-

ment -—which 1s precisely why Texas, hke many other

states, allows retailers to do exactly that. Consumers

also benefit from innovative retailers such as Wine

Country Gift Baskets.com that increase the variety of

products available to consumers or specialized wine

merchants that feature wines of particular varietals

or geographic regions. These effects save consumers

time, money, and hassle, increasing consumer satis-

faction, encouraging marginal consumers to enjoy

wine, and providing drastic price savings to infra-

marginal consumers as well. By creating virtual re-

tail shelf-space, online shopping dramatically reduces

the search and transaction costs of finding and pur-

chasing products, allowing customers to find the best

price and quality.

C. Once the Court Identifies a Facially Discrimt

natory Regulation, the Burden ts on the State

to Justify the Regulation and the Necessity of

Discrimination.

Under Granholm, once the Court identifies a fa-

cially discriminatory regulation, the burden shifts to

the state to justify the necessity of the discriminatory

regulation. Granholm, 544 U.S. at 489-90 (“The

Court has upheld state regulations that discriminate

against interstate commerce only after finding, based

on concrete record evidence, that a State’s nondiscri-

24

minatory alternatives will prove unworkable.”). The

state here apparently offers the same three basic ra-

tionales for its discriminatory regime as in Gran-

holm: preventing underage access to alcohol, ensur-

ing taxation, and the promotion of “orderly markets.”

As recognized in Granholm, however, there is little

basis for beheving that economic discrimination 1s

necessary to accomplish the state’s regulatory goals.

Granholm, 544 U.S. at 490; see also FTC Report at

34-41. Following Granholm, some states and whole-

salers direly predicted that they needed the power to

erect discriminatory barriers to direct shipment of

wine to forestall an epidemic of underage access to

wine. No such floodgate has opened—in fact, a recent

study found that underage drinking has reached the

lowest point in the study’s 35 year history. See Press

Release, L.D. Johnston et al., Univ. of Mich., Mariju-

ana Use is Rising; Ecstasy Use is Beginning to Rise;

and Alcohol Use is Declining Among U.S. Teens (Dec.

14, 2010), avatlable al

http://monitoringthefuture.org/data/10data.html#201

Odata-drugs. As this Court recognized in Granholm,

and as subsequent experience has demonstrated, the

apocalyptic warnings about the consequences of strik-

ing down discriminatory barriers to direct shipping

were then, and are today, highly implausible. Now,

as then, underage drinkers will usually find ample

opportunity to try to acquire alcohol from bricks-and-

mortar vendors without the delay, difficulty, and risk

of ordering over the Internet for delivery. See FTC

Report at 35.

Moreover, whatever the strength of Texas’s justifi-

cations for its regime, there is no reason to assume

Or

that its need to discriminate is greater for regulating

retailer direct shipping than winery direct shipping.

As the Federal ‘Trade Commission has recognized,

the same means used to regulate direct shipment by

wineries can be used to ensure regulatory comphance

by retailers, including labeling, adult signature re-

quirements, and reporting requirements. See Letter

from Fed. Trade Comm'n Staff to William Magee,

Chairman, N.Y. Assembly Agriculture Comm. (Mar.

29, 2004). As recognized in Granholm, “minors are

just as likely to order wine from in-state producers as

from out-of-state,” Granholm, 544 U.S. at 490—an

observation that applies equally to shipment by re-

tailers. J/d. (“Michigan, for example, already allows

its licensed retailers (over 7,000 of them) to deliver

alcohol directly to consumers.”). Regulation of direct

shipment by retailers does not. present any distinct

regulatory issues from regulation of direct shipment

by wineries. The prospect of retailer direct shipment

no more requires state discrimination against inter-

state commerce than regulation of direct retail sales

by wineries does.

The dormant Commerce Clause requires that the

state provide a justification for its discriminatory

regulations. Rather than requiring this justification

to be made, the Fifth Circuit assumed that discrimt}-

nation was warranted and excused the state of Texas

from providing that justification to consumers and

the public at large. This Court’s guidance is neces-

sary to vindicate the protections of the dormant

Commerce Clause and to ensure that discriminatory

barriers to interstate commerce are justified.

26

CONCLUSION

‘or the reasons above, this Court should grant the

petition for a writ of certiorari

Respectfully submitted,

ANDREW G. MCBRIDE

Counsel of Record

THOMAS R. MCCARTHY

WILEY REIN LLP

1776 K Street NW

Washington, DC 20006

(202) 719-7000

Counsel for Amicus Curiae

TODD J. ZYWICKI

George Mason University

School of Law

3301 Fairfax Dr.

Arlington, VA 22201

JOSHUA D. WRIGHT

George Mason University

School of Law

3301 Fairfax Dr.

Arlington, VA 22201

Dated: December 22. 2010

APPENDIX

la

Amici economists, law professors, and former Federal

Trade Commissioners include:

Donald J. Boudreaux is Professor of Economics at

George Mason University.

Henry N. Butler is George Mason University

Foundation Professor of Law at George Mason Uni-

versity School of Law and Executive Director of the

George Mason University Center for Law and Eco-

nomics.

Tyler Cowen is Holbert C. Harris Chair of Econom-

ics at George Mason University.

Harold Demsetz is Kmeritus Chair Professor of

Business Economics at University of California, Los

Angeles.

Richard Epstein is the Laurence A. Tisch Professor

of Law at New York University Law School and Peter

and Kirsten Bedford Senior Fellow at The Hoover In-

stitution.

Mark Grady is Professor of Law and Director, Cen-

ter for Law and Economics, UCLA School of Law, and

former Acting Director, Office of Policy Planning &

Evaluation, Federal Trade Commission.

Kric Helland is Robert J. Lowe Professor of Eco

nomics at Claremont McKenna College.

Peter Klein is Associate Professor in the Division

of Apphed Social Sciences at the University of Mis

sour}.

John M. Letiche is Emeritus Professor of Econom-

ics at the University of Calfornia at Berkeley.

2a

Robert IE. Litan is Vice President for Research and

Policy at the Kauffman Foundation, and Senior Fel-

low in Economic Studies at the Brookings Institution.

Daniel L. McFadden is E. Morris Cox Professor of

Economics and 2000 Nobel Laureate in Economics.

Fred S. McChesney is Class of 1967 James B.

Haddad Professor of Law and Professor, Department

of Management and Strategy, Kellogg School of Man-

agement and former Associate Director for Planning

and Evaluation, Federal Trade Commission.

Roger KE. Meiners is Chairman, Department of

Economics, Goolsby Distinguished Professor of Eco-

nomics and Law, University of Texas-Arlington, and

former Regional Director, Federal Trade Commission.

Maureen K. Ohlhausen is Partner, Wilkinson

Barker Knauer and former Director, Office of Policy

Planning, Federal Trade Commission.

Paul H. Rubin is Samuel Candler Dobbs Professor

of Economics at Emory University and former Assis-

tant Director of the Bureau of Economics, Federal

Trade Commission.

Vernon Smith is Professor of Law and Economics

and George L. Argyros Endowed Chair in Finance

and Economics at Chapman University and 2002 No-

bel Laureate in Economics.

Michael E. Sykuta is Associate Professor in the

Division of Apphed Social Sciences at the University

of Missouri.

3a

Joshua D. Wright is Associate Professor at George

Mason University School of Law and Department of

Economics and former Scholar in Residence, Bureau

of Competition, Federal Trade Commission.

Bruce Yandle is Alumni Distinguished Professor of

Economics Emeritus and Dean Emeritus, Clem-

son University, and former Executive Director, Fed-

eral Trade Commission.

Todd J. Zywicki is George Mason University

Foundation Professor of Law at George Mason Uni-

versity School of Law and former Director, Office of

Policy Planning, Federal Trade Commission.