Granholm v. Heald

540 U.S. 460

Case Year: 2005

Case Ruling: 5-4, Reversed and Remanded

Opinion Justice: Kennedy

FACTS

This decision consolidates two appeals--one from Michigan, the other from New York--involving challenges to the constitutionality of certain wine sales regulations. Both states operate a three-tier regulatory system that separately licenses wine producers, wholesalers, and retailers. While the specifics of the two schemes differ, both lead to the same result: in-state wineries can sell and ship their product directly to residents of that state; either by direct prohibition or the imposition of prohibitive costs, out-of-state wineries cannot. Thus Michigan consumers can buy wine directly from a Michigan winery and have it delivered to their homes, but they cannot have wine purchased from an out-of-state vineyard shipped to their residences.

Several wine producers challenged the constitutionality of these regulations on the ground that they discriminate against interstate commerce in violation of the Commerce Clause. These litigants generally represented small wine producers who rely heavily on direct consumer sales. The Court of Appeals for the Sixth Circuit struck down the Michigan regulations, but the Court of Appeals for the Second Circuit upheld the constitutionality of the New York law. The U.S. Supreme Court accepted the appeals in order to resolve the conflict between the appellate courts.

JUSTICE KENNEDY DELIVERED THE OPINION OF THE COURT.

Time and again this Court has held that, in all but the narrowest circumstances, state laws violate the Commerce Clause if they mandate “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore. (1994). This rule is essential to the foundations of the Union. The mere fact of nonresidence should not foreclose a producer in one State from access to markets in other States. States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses. This mandate “reflect[s] a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.” Hughes v. Oklahoma (1979).

The rule prohibiting state discrimination against interstate commerce follows also from the principle that States should not be compelled to negotiate with each other regarding favored or disfavored status for their own citizens. States do not need, and may not attempt, to negotiate with other States regarding their mutual economic interests. Rivalries among the States are thus kept to a minimum, and a proliferation of trade zones is prevented.

Laws of the type at issue in the instant cases contradict these principles. They deprive citizens of their right to have access to the markets of other States on equal terms. The perceived necessity for reciprocal sale privileges risks generating the trade rivalries and animosities, the alliances and exclusivity, that the Constitution and, in particular, the Commerce Clause were designed to avoid.... The current patchwork of laws--with some States banning direct shipments altogether, others doing so only for out-of-state wines, and still others requiring reciprocity--is essentially the product of an ongoing, low-level trade war. Allowing States to discriminate against out-of-state wine “invite[s] a multiplication of preferential trade areas destructive of the very purpose of the Commerce Clause.” Dean Milk Co. v. Madison (1951).

The discriminatory character of the Michigan system is obvious. Michigan allows in-state wineries to ship directly to consumers, subject only to a licensing requirement. Out-of-state wineries, whether licensed or not, face a complete ban on direct shipment. The differential treatment requires all out-of-state wine, but not all in-state wine, to pass through an in-state wholesaler and retailer before reaching consumers. These two extra layers of overhead increase the cost of out-of-state wines to Michigan consumers. The cost differential, and in some cases the inability to secure a wholesaler for small shipments, can effectively bar small wineries from the Michigan market.

The New York regulatory scheme differs from Michigan’s in that it does not ban direct shipments altogether. Out-of-state wineries are instead required to establish a distribution operation in New York in order to gain the privilege of direct shipment. This, though, is just an indirect way of subjecting out-of-state wineries, but not local ones, to the three-tier system. New York and those allied with its interests defend the scheme by arguing that an out-of-state winery has the same access to the State’s consumers as in-state wineries: All wine must be sold through a licensee fully accountable to New York; it just so happens that in order to become a licensee, a winery must have a physical presence in the State. There is some confusion over the precise steps out-of-state wineries must take to gain access to the New York market, in part because no winery has run the State’s regulatory gauntlet. New York’s argument, in any event, is unconvincing.

The New York scheme grants in-state wineries access to the State’s consumers on preferential terms. The suggestion of a limited exception for direct shipment from out-of-state wineries does nothing to eliminate the discriminatory nature of New York’s regulations. In-state producers, with the applicable licenses, can ship directly to consumers from their wineries. Out-of-state wineries must open a branch office and warehouse in New York, additional steps that drive up the cost of their wine. For most wineries, the expense of establishing a bricks-and-mortar distribution operation in 1 State, let alone all 50, is prohibitive. It comes as no surprise that not a single out-of-state winery has availed itself of New York’s direct-shipping privilege. We have “viewed with particular suspicion state statutes requiring business operations to be performed in the home State that could more efficiently be performed elsewhere.” Pike v. Bruce Church, Inc. (1970). New York’s in-state presence requirement runs contrary to our admonition that States cannot require an out-of-state firm “to become a resident in order to compete on equal terms.” Halliburton Oil Well Cementing Co. v. Reily (1963).

In addition to its restrictive in-state presence requirement, New York discriminates against out-of-state wineries in other ways. Out-of-state wineries that establish the requisite branch office and warehouse in New York are still ineligible for a “farm winery” license, the license that provides the most direct means of shipping to New York consumers. Out-of-state wineries may apply only for a commercial winery license. Unlike farm wineries, however, commercial wineries must obtain a separate certificate from the state liquor authority authorizing direct shipments to consumers; and, of course, for out-of-state wineries there is the additional requirement of maintaining a distribution operation in New York. New York law also allows in-state wineries without direct-shipping licenses to distribute their wine through other wineries that have the applicable licenses. This is another privilege not afforded out-of-state wineries.

We have no difficulty concluding that New York, like Michigan, discriminates against interstate commerce through its direct-shipping laws.

State laws that discriminate against interstate commerce face “a virtually per se rule of invalidity.” Philadelphia v. New Jersey (1978). The Michigan and New York laws by their own terms violate this proscription. The two States, however, contend their statutes are saved by §2 of the Twenty-first Amendment, which provides:

“The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”

The States’ position is inconsistent with our precedents and with the Twenty-first Amendment’s history. Section 2 does not allow States to regulate the direct shipment of wine on terms that discriminate in favor of in-state producers....

The aim of the Twenty-first Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time....

Our more recent cases, furthermore, confirm that the Twenty-first Amendment does not supersede other provisions of the Constitution and, in particular, does not displace the rule that States may not give a discriminatory preference to their own producers....

Our determination that the Michigan and New York direct-shipment laws are not authorized by the Twenty-first Amendment does not end the inquiry. We still must consider whether either State regime “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” New Energy Co. of Ind. The States offer two primary justifications for restricting direct shipments from out-of-state wineries: keeping alcohol out of the hands of minors and facilitating tax collection....

The States, aided by several amici, claim that allowing direct shipment from out-of-state wineries undermines their ability to police underage drinking. Minors, the States argue, have easy access to credit cards and the Internet and are likely to take advantage of direct wine shipments as a means of obtaining alcohol illegally.

The States provide little evidence that the purchase of wine over the Internet by minors is a problem. Indeed, there is some evidence to the contrary.... Without concrete evidence that direct shipping of wine is likely to increase alcohol consumption by minors, we are left with the States’ unsupported assertions. Under our precedents, which require the “clearest showing” to justify discriminatory state regulation, C & A Carbone, Inc. , this is not enough....

The States’ tax-collection justification is also insufficient. Increased direct shipping, whether originating in state or out of state, brings with it the potential for tax evasion....

In summary, the States provide little concrete evidence for the sweeping assertion that they cannot police direct shipments by out-of-state wineries. Our Commerce Clause cases demand more than mere speculation to support discrimination against out-of-state goods. The “burden is on the State to show that ‘the discrimination is demonstrably justified,’” Chemical Waste Management, Inc. v. Hunt (1992) (emphasis in original). The Court has upheld state regulations that discriminate against interstate commerce only after finding, based on concrete record evidence, that a State’s nondiscriminatory alternatives will prove unworkable. Michigan and New York have not satisfied this exacting standard.

States have broad power to regulate liquor under §2 of the Twenty-first Amendment. This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms. Without demonstrating the need for discrimination, New York and Michigan have enacted regulations that disadvantage out-of-state wine producers. Under our Commerce Clause jurisprudence, these regulations cannot stand.

We affirm the judgment of the Court of Appeals for the Sixth Circuit; and we reverse the judgment of the Court of Appeals for the Second Circuit and remand the case for further proceedings consistent with our opinion. It is so ordered.

JUSTICE STEVENS, WITH WHOM JUSTICE O’CONNOR JOINS, DISSENTING.

Congress’ power to regulate commerce among the States includes the power to authorize the States to place burdens on interstate commerce. Prudential Ins. Co. v. Benjamin (1946). Absent such congressional approval, a state law may violate the unwritten rules described as the “dormant Commerce Clause” either by imposing an undue burden on both out-of-state and local producers engaged in interstate activities or by treating out-of-state producers less favorably than their local competitors. A state law totally prohibiting the sale of an ordinary article of commerce might impose an even more serious burden on interstate commerce. If Congress may nevertheless authorize the States to enact such laws, surely the people may do so through the process of amending our Constitution.

The New York and Michigan laws challenged in these cases would be patently invalid under well settled dormant Commerce Clause principles if they regulated sales of an ordinary article of commerce rather than wine. But ever since the adoption of the Eighteenth Amendment and the Twenty-first Amendment, our Constitution has placed commerce in alcoholic beverages in a special category. Section 2 of the Twenty-first Amendment expressly provides that “[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”...

My understanding (and recollection) of the historical context reinforces my conviction that the text of §2 should be “broadly and colloquially interpreted.” Indeed, the fact that the Twenty-first Amendment was the only Amendment in our history to have been ratified by the people in state conventions, rather than by state legislatures, provides further reason to give its terms their ordinary meaning. Because the New York and Michigan laws regulate the “transportation or importation” of “intoxicating liquors” for “delivery or use therein,” they are exempt from dormant Commerce Clause scrutiny. As Justice Thomas has demonstrated, the text of the Twenty-first Amendment is a far more reliable guide to its meaning than the unwritten rules that the majority enforces today. I therefore join his persuasive and comprehensive dissenting opinion.

JJUSTICE THOMAS, WITH WHOM THE CHIEF JUSTICE, JUSTICE STEVENS, AND JUSTICE O’CONNOR JOIN, DISSENTING.

A century ago, this Court repeatedly invalidated, as inconsistent with the negative Commerce Clause, state liquor legislation that prevented out-of-state businesses from shipping liquor directly to a State’s residents. The Webb-Kenyon Act and the Twenty-first Amendment cut off this intrusive review, as their text and history make clear and as this Court’s early cases on the Twenty-first Amendment recognized. The Court today seizes back this power, based primarily on a historical argument that this Court decisively rejected long ago in State Bd. of Equalization of Cal. v. Young’s Market Co. (1936). Because I would follow Young’s Market and the language of both the statute that Congress enacted and the Amendment that the Nation ratified, rather than the Court’s questionable reading of history and the “negative implications” of the Commerce Clause, I respectfully dissent.

The Court devotes much attention to the Twenty-first Amendment, yet little to the terms of the Webb-Kenyon Act. This is a mistake, because that Act’s language displaces any negative Commerce Clause barrier to state regulation of liquor sales to in-state consumers.

The Webb-Kenyon Act immunizes from negative Commerce Clause review the state liquor laws that the Court holds are unconstitutional. The Act “prohibit[s]” any “shipment or transportation” of alcoholic beverages “into any State” when those beverages are “intended, by any person interested therein, to be received, possessed, sold, or in any manner used ... in violation of any law of such State.” State laws that regulate liquor imports in the manner described by the Act are exempt from judicial scrutiny under the negative Commerce Clause, as this Court has long held. See McCormick & Co. v. Brown (1932);Clark Distilling Co. v. Western Maryland R. Co.v (1917); Seaboard Air Line R. Co. v. North Carolina (1917). The Webb-Kenyon Act’s language, in other words, “prevent[s] the immunity characteristic of interstate commerce from being used to permit the receipt of liquor through such commerce in States contrary to their laws.” Clark Distilling.

The Michigan and New York direct-shipment laws are within the Webb-Kenyon Act’s terms and therefore do not run afoul of the negative Commerce Clause. Those laws restrict out-of-state wineries from shipping and selling wine directly to Michigan and New York consumers. Any winery that ships wine directly to a Michigan or New York consumer in violation of those state-law restrictions is a “person interested therein” “intend[ing]” to “s[ell]” wine “in violation of” Michigan and New York law, and thus comes within the terms of the Webb-Kenyon Act....

In sum, the Webb-Kenyon Act authorizes the discriminatory state laws before the Court today.

There is no need to interpret the Twenty-first Amendment, because the Webb-Kenyon Act resolves these cases. However, the state laws the Court strikes down are lawful under the plain meaning of §2 of the Twenty-first Amendment, as this Court’s case law in the wake of the Amendment and the contemporaneous practice of the States reinforce.

Section 2 of the Twenty-first Amendment provides: “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” As the Court notes, this language tracked the Webb-Kenyon Act by authorizing state regulation that would otherwise conflict with the negative Commerce Clause. To remove any doubt regarding its broad scope, the Amendment simplified the language of the Webb-Kenyon Act and made clear that States could regulate importation destined for in-state delivery free of negative Commerce Clause restraints. Though the Twenty-first Amendment mirrors the basic terminology of the Webb-Kenyon Act, its language is broader, authorizing States to regulate all “transportation or importation” that runs afoul of state law. The broader language even more naturally encompasses discriminatory state laws. Its terms suggest, for example, that a State may ban imports entirely while leaving in-state liquor unregulated, for they do not condition the State’s ability to prohibit imports on the manner in which state law treats domestic products....

The Court begins its opinion by detailing the evils of state laws that restrict the direct shipment of wine.... The Court’s focus on these effects suggests that it believes that its decision serves this Nation well. I am sure that the judges who repeatedly invalidated state liquor legislation, even in the face of clear congressional direction to the contrary, thought the same. The Twenty-first Amendment and the Webb-Kenyon Act took those policy choices away from judges and returned them to the States. Whatever the wisdom of that choice, the Court does this Nation no service by ignoring the textual commands of the Constitution and Acts of Congress. The Twenty-first Amendment and the Webb-Kenyon Act displaced the negative Commerce Clause as applied to regulation of liquor imports into a State. They require sustaining the constitutionality of Michigan’s and New York’s direct-shipment laws. I respectfully dissent.