You Won't Drink To This

Buying wine over the Internet is legal, but selling wine on the Net has its problems and, as a result, there are few resounding cheers in the United States regarding e-sales of wine.

Here's how cork flecks get in the vintage: state authorities ' saying that they're protecting consumers ' exploit state regulations to thwart Internet sales of various goods and services, and wine is no exception. For example, Oklahoma proscribes the online sale of funeral caskets and related merchandise (59 Okl. Stat. '396.3a(1)(c) (2003)).

And consider this ' a restriction surprising on its face, let alone when one explores the motivations of various state legislators behind the restrictions: 17 states require mortgage-brokerage firms to maintain a physical office in the state.

But based on economic potential, the ban on selling wine via the Internet is probably the most significant disruption of e-commerce, because it's a good bet that more people would buy more wine via e-commerce than would buy caskets, or apply for a mortgage ' the latter practice still largely conducted in brick-and-mortar bound transactions.

So, it's hardly surprising that the ban on Internet wine sales continues to be challenged in court. Results have been mixed in district courts. On May 24, the U.S. Supreme Court agreed to consider the constitutionality of state laws that restrict interstate shipment of wine to consumers. The Court granted review in a trio of cases that present conflicting lower-court decisions involving restrictive laws from Michigan and New York. Swedenburg v. Kelly, No. 03-1274, Granholm v. Heald, No. 03-1116, and Michigan Beer and Wine Wholesalers Association v. Heald, No. 03-1120.

Barriers To e-Commerce

Wine sellers have little to toast when it comes to e-commerce. Thirty states forbid the direct sale of out-of-state wines to consumers. In fact, seven states ' Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina and Tennessee ' make such shipments by wineries or retailers a felony.

Ratification of the Twenty-first Amendment to the U.S. Constitution in 1933 ended the era of nationwide prohibition of the production, sale and transport of alcoholic beverages in the United States. This amendment also prohibited importing alcohol into any state in violation of that state's laws. State laws regulating interstate sale have generally emerged in two forms:

• First, allowing alcohol shipments by in-state liquor stores only; and
• Second, a licensing system that grants licenses to operators in the liquor-distribution chain ' manufacturers, wholesalers and retailers ' who must operate under detailed regulations.

But consumers and winemakers have largely failed to persuade state legislators to allow Internet wine sales associated with interstate delivery to consumers. As a result, many advocates of these potential sales have sought relief in the courts. Plaintiffs claim that state restrictions on direct shipment of alcohol violate the Dormant Commerce Clause because the existing statutes unequivocally favor in-state producers of alcohol.

The Commerce Clause (U.S. Const. art. I, '8, cl. 3) grants Congress the explicit power to “regulate Commerce with foreign Nations, and among the several States.” In Gibbons v. Ogden, 22 U.S. 1, 224 (1824), the Supreme Court began its long-held interpretation of a negative component of the Commerce Clause, known as the “dormant” Commerce Clause. This interpretation prohibits states from unduly burdening interstate commerce.

Recent Litigation

Several significant court decisions have dealt with application of the Dormant Commerce Clause to the sale of wine via the Internet. The Seventh U.S. Circuit Court of Appeals was the first circuit court of appeals to decide whether a state statutory regime regulating Internet-implemented alcohol shipments was unconstitutional. In Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000), the consumer plaintiffs argued that the statute violated the Dormant Commerce Clause because it prohibited only out-of-state sellers of wine from delivering directly to Indiana consumers. Although the Supreme Court has held that states cannot use the Twenty-first Amendment to discriminate against out-of-state sellers, the Court upheld Indiana's statute, relying heavily on Section 2 of the Twenty-first Amendment. Section 2 gives state legislatures the right to establish the common three-tiered system that many states use to regulate alcohol consumption, and this interpretation of Section 2 effectively elevated a state government's power over the Dormant Commerce Clause.

In its reasoning, the Seventh Circuit highlighted a significant economic concern: if consumers were able to order liquor from out-of-state sources, then Indiana state excise taxes would not be paid. The court noted that one of the original purposes of Section 2 was to remedy the problems states had collecting taxes from the direct shipment of alcohol. Indiana's statute, which allowed direct shipment only by in-state sellers, helped to achieve that legislative intent.

Not All Courts Have Agreed

Other U.S. district court decisions have reached different results. In Bolick v. Roberts, 199 F. Supp.2d 397 (E.D.Va. 2002), the U.S. District Court for the Eastern District of Virginia considered a challenge by consumers and out-of-state wine producers to Virginia's alcohol-regulatory scheme. Virginia law prohibited the out-of-state shipment of wine directly to a Virginia consumer without it passing through a party licensed by Virginia, typically a wholesaler or a retailer. As in the Bridenbaugh case, Virginia wine producers were allowed to ship wine directly to consumers within the state.

The Bolick court noted that the Dormant Commerce Clause prevents state legislatures from enacting and implementing isolationist trade policies that hinder a national free market, and the court said that strict scrutiny must be applied.

Because Virginia's statutory scheme was per se valid, Virginia had the burden of demonstrating that there was no other means of fulfilling the state's objective of promoting temperance and protecting minors from alcohol. But the state failed to meet its burden. Thus, the court found that the state had also failed to create a genuine issue of material fact regarding any justification for the discriminatory policy.

In Dickerson v. Bailey, 212 F.Supp.2d 673 (S.D.Tex. 2002), the U.S. District Court for the Southern District of Texas struck down the statutory ban on direct importation of wine by Texas residents. After considering the different approaches used in Bridenbaugh and Bolick, the Dickerson court found that section 107.07(f) was on its face unconstitutional, because it placed unequal burdens on in-state and out-of-state wine sellers. The court held that requiring out-of-state wine sellers to go through Texas wholesalers was impermissible because in-state wineries were not subject to the same requirements. Furthermore, the language accompanying section 107.12 explicitly reflected a protective concern for the growing Texas wine industry and the legislature's desire to help Texas wineries compete with established wine producers.

In Beskind v. Easley, 197 F.Supp.2d 464 (D.N.C. 2002), the court found that certain provisions of the North Carolina alcoholic-beverage control laws discriminated against out-of-state wine manufacturers. The Tar Heel statutory scheme prohibited out-of-state wineries from shipping directly to state residents, but North Carolina wineries licensed to do business in the state were exempt from this rule. The court declared the statute unconstitutional because its preference for in-state wineries represented economic protectionism and was therefore barred by the Dormant Commerce Clause.

This case was affirmed in part, and vacated in part by Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003).

The Fourth Circuit affirmed the finding that the in-state preferences were unconstitutionally discriminatory and agreed that Twenty-first Amendment didn't save the preference; however, the court held that the appropriate remedy was to strike down the statute creating the preference for local wineries, rather than the provisions regulating shipments of wine by out-of-state entities.

The Beskind pronouncement was disparaged in Swedenburg v. Kelly, 358 F.3d 223 (2d Cir. N.Y. 2004) ' one of the trio of cases granted cert by the U.S. Supreme Court. In Swedenburg, the court quashed a New York interdiction on the direct shipment of out-of-state wine. New York's statute was comparable to other states', because it prohibited the direct shipment of alcoholic beverages to consumers, while including exceptions for in-state wineries. The exceptions were enacted to provide an economic benefit for local farmers, which made the statute discriminatory.

Finally, in Bainbridge v. Turner, 311 F.3d 1004 (11th Cir. 2002), the Eleventh Circuit vacated and remanded the lower court's decision in favor of direct-shipment rules. On remand, the lower court must determine whether the regulatory scheme was so closely related to the core concern of raising revenue as to escape Commerce Clause scrutiny.

If the courts rule in favor of the revenue-generating, vigorous exercise of e-commerce, then more online and other practitioners of electronic business in the wine trade will be saying “Cheers” instead of words less appropriate for uttering in legal and business settings. And we could all drink to that.

Buying wine over the Internet is legal, but selling wine on the Net has its problems and, as a result, there are few resounding cheers in the United States regarding e-sales of wine.

Here's how cork flecks get in the vintage: state authorities ' saying that they're protecting consumers ' exploit state regulations to thwart Internet sales of various goods and services, and wine is no exception. For example, Oklahoma proscribes the online sale of funeral caskets and related merchandise (59 Okl. Stat. '396.3a(1)(c) (2003)).

And consider this ' a restriction surprising on its face, let alone when one explores the motivations of various state legislators behind the restrictions: 17 states require mortgage-brokerage firms to maintain a physical office in the state.

But based on economic potential, the ban on selling wine via the Internet is probably the most significant disruption of e-commerce, because it's a good bet that more people would buy more wine via e-commerce than would buy caskets, or apply for a mortgage ' the latter practice still largely conducted in brick-and-mortar bound transactions.

So, it's hardly surprising that the ban on Internet wine sales continues to be challenged in court. Results have been mixed in district courts. On May 24, the U.S. Supreme Court agreed to consider the constitutionality of state laws that restrict interstate shipment of wine to consumers. The Court granted review in a trio of cases that present conflicting lower-court decisions involving restrictive laws from Michigan and New York. Swedenburg v. Kelly, No. 03-1274, Granholm v. Heald, No. 03-1116, and Michigan Beer and Wine Wholesalers Association v. Heald, No. 03-1120.

Barriers To e-Commerce

Wine sellers have little to toast when it comes to e-commerce. Thirty states forbid the direct sale of out-of-state wines to consumers. In fact, seven states ' Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina and Tennessee ' make such shipments by wineries or retailers a felony.

Ratification of the Twenty-first Amendment to the U.S. Constitution in 1933 ended the era of nationwide prohibition of the production, sale and transport of alcoholic beverages in the United States. This amendment also prohibited importing alcohol into any state in violation of that state's laws. State laws regulating interstate sale have generally emerged in two forms:

• First, allowing alcohol shipments by in-state liquor stores only; and
• Second, a licensing system that grants licenses to operators in the liquor-distribution chain ' manufacturers, wholesalers and retailers ' who must operate under detailed regulations.

But consumers and winemakers have largely failed to persuade state legislators to allow Internet wine sales associated with interstate delivery to consumers. As a result, many advocates of these potential sales have sought relief in the courts. Plaintiffs claim that state restrictions on direct shipment of alcohol violate the Dormant Commerce Clause because the existing statutes unequivocally favor in-state producers of alcohol.

The Commerce Clause (U.S. Const. art. I, '8, cl. 3) grants Congress the explicit power to “regulate Commerce with foreign Nations, and among the several States.” In Gibbons v. Ogden , 22 U.S. 1, 224 (1824), the Supreme Court began its long-held interpretation of a negative component of the Commerce Clause, known as the “dormant” Commerce Clause. This interpretation prohibits states from unduly burdening interstate commerce.

Recent Litigation

Several significant court decisions have dealt with application of the Dormant Commerce Clause to the sale of wine via the Internet. The Seventh U.S. Circuit Court of Appeals was the first circuit court of appeals to decide whether a state statutory regime regulating Internet-implemented alcohol shipments was unconstitutional. In Bridenbaugh v. Freeman-Wilson , 227 F.3d 848 (7th Cir. 2000), the consumer plaintiffs argued that the statute violated the Dormant Commerce Clause because it prohibited only out-of-state sellers of wine from delivering directly to Indiana consumers. Although the Supreme Court has held that states cannot use the Twenty-first Amendment to discriminate against out-of-state sellers, the Court upheld Indiana's statute, relying heavily on Section 2 of the Twenty-first Amendment. Section 2 gives state legislatures the right to establish the common three-tiered system that many states use to regulate alcohol consumption, and this interpretation of Section 2 effectively elevated a state government's power over the Dormant Commerce Clause.

In its reasoning, the Seventh Circuit highlighted a significant economic concern: if consumers were able to order liquor from out-of-state sources, then Indiana state excise taxes would not be paid. The court noted that one of the original purposes of Section 2 was to remedy the problems states had collecting taxes from the direct shipment of alcohol. Indiana's statute, which allowed direct shipment only by in-state sellers, helped to achieve that legislative intent.

Not All Courts Have Agreed

Other U.S. district court decisions have reached different results. In Bolick v. Roberts , 199 F. Supp.2d 397 (E.D.Va. 2002), the U.S. District Court for the Eastern District of Virginia considered a challenge by consumers and out-of-state wine producers to Virginia's alcohol-regulatory scheme. Virginia law prohibited the out-of-state shipment of wine directly to a Virginia consumer without it passing through a party licensed by Virginia, typically a wholesaler or a retailer. As in the Bridenbaugh case, Virginia wine producers were allowed to ship wine directly to consumers within the state.

The Bolick court noted that the Dormant Commerce Clause prevents state legislatures from enacting and implementing isolationist trade policies that hinder a national free market, and the court said that strict scrutiny must be applied.

Because Virginia's statutory scheme was per se valid, Virginia had the burden of demonstrating that there was no other means of fulfilling the state's objective of promoting temperance and protecting minors from alcohol. But the state failed to meet its burden. Thus, the court found that the state had also failed to create a genuine issue of material fact regarding any justification for the discriminatory policy.

In Dickerson v. Bailey , 212 F.Supp.2d 673 (S.D.Tex. 2002), the U.S. District Court for the Southern District of Texas struck down the statutory ban on direct importation of wine by Texas residents. After considering the different approaches used in Bridenbaugh and Bolick, the Dickerson court found that section 107.07(f) was on its face unconstitutional, because it placed unequal burdens on in-state and out-of-state wine sellers. The court held that requiring out-of-state wine sellers to go through Texas wholesalers was impermissible because in-state wineries were not subject to the same requirements. Furthermore, the language accompanying section 107.12 explicitly reflected a protective concern for the growing Texas wine industry and the legislature's desire to help Texas wineries compete with established wine producers.

In Beskind v. Easley , 197 F.Supp.2d 464 (D.N.C. 2002), the court found that certain provisions of the North Carolina alcoholic-beverage control laws discriminated against out-of-state wine manufacturers. The Tar Heel statutory scheme prohibited out-of-state wineries from shipping directly to state residents, but North Carolina wineries licensed to do business in the state were exempt from this rule. The court declared the statute unconstitutional because its preference for in-state wineries represented economic protectionism and was therefore barred by the Dormant Commerce Clause.

This case was affirmed in part, and vacated in part by Beskind v. Easley , 325 F.3d 506 (4th Cir. 2003).

The Fourth Circuit affirmed the finding that the in-state preferences were unconstitutionally discriminatory and agreed that Twenty-first Amendment didn't save the preference; however, the court held that the appropriate remedy was to strike down the statute creating the preference for local wineries, rather than the provisions regulating shipments of wine by out-of-state entities.

The Beskind pronouncement was disparaged in Swedenburg v. Kelly , 358 F.3d 223 (2d Cir. N.Y. 2004) ' one of the trio of cases granted cert by the U.S. Supreme Court. In Swedenburg, the court quashed a New York interdiction on the direct shipment of out-of-state wine. New York's statute was comparable to other states', because it prohibited the direct shipment of alcoholic beverages to consumers, while including exceptions for in-state wineries. The exceptions were enacted to provide an economic benefit for local farmers, which made the statute discriminatory.

Finally, in Bainbridge v. Turner , 311 F.3d 1004 (11th Cir. 2002), the Eleventh Circuit vacated and remanded the lower court's decision in favor of direct-shipment rules. On remand, the lower court must determine whether the regulatory scheme was so closely related to the core concern of raising revenue as to escape Commerce Clause scrutiny.

If the courts rule in favor of the revenue-generating, vigorous exercise of e-commerce, then more online and other practitioners of electronic business in the wine trade will be saying “Cheers” instead of words less appropriate for uttering in legal and business settings. And we could all drink to that.