Is the 21st Amendment Outmoded and Bad for Business?

April 15, 2009 at 10:02 pm Leave a comment

How will the Supreme Court decision in Granholm v. Heald affect consumers? 

The Granholm decision basically indicates that states have to afford the same privileges to in-state and out-of-state businesses.  For example, Iowa cannot allow Iowa wineries to ship wine directly to Iowans and not allow Gallo or Mondavi to do the same.  Iowa cannot tax California wine at a higher rate than Iowa wine.

As states are sued for laws already on the books, a court typically finds a state’s law to be unconstitutional, then throws the issue back to the legislative branch to amend the unconstitutional statute.  At that point, state legislatures are faced with revoking privileges to in-state businesses, or alternatively, opening the privilege up to all operators. 

The process tends to be politically painful, as privileges given to native businesses, once conferred, are difficult to take away.  As a result, state legislatures struggle but consumers typically win as three-tier exemptions allow wineries and brewers to ship product to any customer, regardless of location.

Granholm is important to states, as the decision marks the first time, since repeal of Prohibition, where the nearly absolute power enumerated in the Twentyfirst Amendment has been called into question.  States are now forced to have a logical underpinning or liquor regulation and are forced to apply the regulatory framework consitently to all segments of the liquor industry. 

After the repeal of Prohibition in 1933, many states enacted what is referred to as a “three-tier” system, where liquor must travel from a manufacturer to a wholesaler, then finally through a retailer before consumers can purchase the product.  Several states, in order to provide tax and other regulatory breaks to native wineries, brewers and distillers, enacted laws allowing a manufacturer to sell the product directly at retail, circumventing the three-tier system.  The same exemption was not afforded to non-native producers, thus, according to Granholm, violating the Commerce Clause of the US Constitution. 

From a technical perspective, Granholm  caused states and the courts struggle strike a balance between the 21st Amendment and the Commerce Clause of the US Constitution.  Many states prior to Granholm, in order to promote in-state businesses had enacted statutes geared towards favoring an in-state producer over an out-of-state business.

The Twenty-first Amendment does not allow States to regulate direct shipment of wine on terms that discriminate in favor of in-state producers. The States’ position is inconsistent with this Court’s precedents and the Amendment’s history.”  The ruling marked a shift from the post-Prohibition period where the Twenty-first Amendment, repealed Prohibition (via repeal of the Eighteenth Amendment) and conferred upon states, the authority to regulate the trafficking of alcohol within their respective borders ruled supreme.  At the same time, the Commerce Clause of the US Constitution holds confers upon Congress the enumerated power to “regulate commerce with foreign nations, among the several states, and among Indian tribes.” 

Essentially, the Court ruled that states could not, under the guise of the Twenty-first Amendment, enact laws that treated out-of-state operators disparately from in-state operators.  As a result, states were forced to re-examine regulatory frameworks that rested upon restrictions such as requiring a face-to-face transaction before wineries could ship direct to customers, creating production volume caps in order to benefit small, in-state producers, requiring all retailers to purchase liquor from in-state wholesalers.  As the states consider the aforementioned issues, a second and third generation lawsuits seek to clarify the balance ordered by Granholm. 

In the meantime, the National Beer Wholesalers Association’s chief counsel, Paul Pisano, writes that “issues may be aligning for the Court to take up the issue of state-based alcohol regulation again in 2009.  As you can see from the following cert petition, Professor James Tanford has filed a writ of certiorari to the US Supreme Court arguing that the 7th Circuit was wrong to rule for Indiana in Baude v. Heath ….Unless there are any amicus briefs being filed on the state’s behalf, the US Supreme court will hopefully meet to consider this cert petition and decide to hear this matter before they recess in June.  If they do take this case, it wold most likely be part of the next term that starts in October 2009.”

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Entry filed under: 21st Amendment. Tags: , , , , , , , , , .

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