# Amicus Curiae Brief — Wine Country Gift Baskets.com v. Steen > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2770%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 2011 - **Citation:** 562 U.S. 1270 ## Text 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 pp Ce ae eee ae nee i Te Oe a inci as ose nese ieee ill BRO CE FREE CTI ois veces ccsissc canon caciosevinnvnnses l I oo ecociapaneateaseone eves ontecdeneds en ] UOT GE FANE acoder cess sera scea ote 2 SRST SCR se RST me Se ne NR SAN UO 5 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2770%3A5. Public record. Not legal advice.