Sunday, November 28, 2004

More on the constitutionality of on line wine sale restrictions

The Wall Street Journal from Wednesday, Nov. 24, carried an interesting article on the case involving the constitutionality of state restrictions on on-line wine sales before the Supreme Court this term.  Robert S. Greenberger writes as follows:

"The case pits a new breed of small winemakers against the old guard, the politically potent Wine & Spirits Wholesalers of America, and has created some odd alliances. Former Whitewater prosecutor Kenneth Starr has filed a brief in support of the wineries (as an advocate of free markets). Ralph Reed, former executive director of the Christian Coalition who now runs a public-relations firm with offices in Washington and Atlanta, was hired by the wholesalers. Even the normally abstemious National Association of Evangelicals is backing the wholesalers, united in their opposition to underage drinking.

"The outcome could affect more than just the
wine-and-cheese set, because other state laws restrict all sorts of Internet commerce. For example, the Federal Trade Commission says 15 states require mortgage lenders to maintain a brick-and-mortar presence to do business in those states.

"The case centers on a clash between the constitution's commerce clause, which empowers the federal government to regulate interstate trade, and the Twenty-First Amendment, passed by Congress in 1933 to repeal Prohibition and authorize states to regulate alcohol within their borders. The lifting of Prohibition led to a three-tier system to regulate alcohol. Producers sell only to state-licensed wholesalers, who in turn sold only to licensed retailers, who controlled and monitored sales to consumers.

"The market began to change during the 1990s with expansion of the Internet, the increasing popularity of
wine and the explosive growth of new wineries, particularly small ones that benefited most from Internet sales. The number of wineries swelled to 3,726 this year from 1,367 in 1985, according to WineAmerica, a national winery association. Many small vineyards broke from the standard distribution system by using independent freight carriers to send wine to customers in other states. These vineyards technically were breaking the law but in the early years of the Internet, no one paid much attention. "

What is worth watching for in the case is how closely the Court will scrutinize the state's justification for the restriction and what justification, if any, the Court will find constitutionally valid.    Most likely, a morality based justification for the restriction will be constitutionally suspect and an economics based justification will be viewed as too protectionist and in conflict with the Commerce Clause.  My best guess is that the Court will invalidate the restriction.

Although the antitrust laws are not implicated in this case, the dormant commerce clause analysis is historically and analytically linked to the doctrine of state action immunity in antitrust law.  We have not had a good state action case for a long time largely because the battles have been better waged under the dormant commerce clause.  When we next have to deal with a state action, it will be interesting to follow the implications of the Swedenburg decision  for a state's immunity under antitrust law.

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