4th Circuit Holds North Carolina Ban On Internet Wine Sales Is Unconstitutional
April 8, 2003. The U.S. Court of Appeals (4thCir) issued its opinion [20 pages in PDF] in Beskind v. Easley, holding that North Carolina's ban on direct shipment of wine from out of state wineries to North Carolina residents violates the Commerce Clause.
Numerous state protectionist statutes have the effect of banning many forms of e-commerce, including sales of wines, cars, contact lenses, and other products. These types of laws also obstruct internet based travel agencies, pharmacies, mortgage brokers, and many other services. See, for example, story titled "House Subcommittee Holds Hearing on State Impediments to E-Commerce", TLJ Daily E-Mail Alert No. 518, September 27, 2002.
E-commerce proponents (and small wineries and oenophiles) have had some success in challenging these types of statutes under the Constitution's Commerce Clause. However, in the case of internet wine sales, and other direct sales of alcoholic beverages, the challenge is complicated by the authority to regulate alcohol sales granted to the states by the 21st Amendment.
North Carolina Statute. North Carolina's alcoholic beverage control (ABC) statute prohibits the direct shipment of wine from out of state to consumers in the state. The statute does not ban direct shipment from in state wine makers. For example, it provides that it is unlawful "for any person who is an out-of-state retail or wholesale dealer in the business of selling alcoholic beverages to ship or cause to be shipped any alcoholic beverage directly to any North Carolina resident who does not hold a valid wholesaler's permit".
Dormant Commerce Clause. Article I, Section 8, of the Constitution provides that "The Congress shall have Power ... to regulate Commerce with foreign Nations, and among the several States ..." The dormant commerce clause is the judicial concept that the Constitution, by delegating certain authority to the Congress to regulate commerce, thereby bars the states from legislating on certain matters that affect interstate commerce, even in the absence of Congressional legislation. It is applied to block states from regulating in a way that materially burdens or discriminates against interstate commerce. See, Gibbons v. Ogden, 22 U.S. 1 (1824), and Cooley v. Board of Wardens, 53 U.S. 299 (1851). More recent treatments of the concept include Healy v. The Beer Institute, 491 U.S. 324 (1989), and CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987).
21st Amendment. The 21st Amendment provides, in part, that "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."
District Court. The Oakstone Winery is a small winery in California that sells primarily over the internet and through direct sales. Donald Beskind and other individuals are wine consumers who reside in the state of North Carolina. Donald Beskind, the Oakstone Winery, and other individuals, filed a complaint in U.S. District Court (WDNC) against Michael Easley, in his capacity as Governor of North Carolina, Ann Fulton, in her capacity as chairman of the North Carolina Alcoholic Beverage Control Commission, and other state officials, alleging that the ban on direct shipment violates the dormant Commerce Clause of the Constitution.
The District Court ruled on summary judgment that that state statute is facially discriminatory in its treatment of in state and out of state wine makers. It declared that the statute violates the Commerce Clause, and enjoined its enforcement. North Carolina appealed.
Appeals Court. The Appeals Court affirmed the District Court's conclusion that the ABC laws unconstitutionally discriminate against out-of-state wine manufacturers and sellers. However, it vacated the District Court's remedy -- striking down the statutory provisions.
The Court reasoned that the Commerce Clause's grant of authority to Congress to regulate interstate commerce "carries with it an implied ``dormant´´ aspect that restricts the power of the States to burden interstate commerce".
The Court then identified how it is to analyze dormant Commerce Clause challenges in cases that also implicate states' authority under the 21st Amendment. It wrote that "we determine first whether the purported State regulation violates the Commerce Clause without consideration of the Twenty-first Amendment. If we conclude that it does, then we look at the State's Twenty-first Amendment interests and determine ``whether the principles underlying the Twenty-first Amendment are sufficiently implicated by the [State regulation] ... to outweigh the Commerce Clause principles that would otherwise be offended.´´" (Brackets and dots in original. Citation to Bacchus Imports, 468 U.S. 263, at 275 (1984) omitted.)
The Appeals Court concluded first that "A facial examination of North Carolina's ABC laws leaves little doubt that those laws treat in-state manufacturers of wine differently from out-of-state manufacturers of wine, with the undoubted effect of benefiting the in-state manufacturers and burdening the out-of-state manufacturers." And, "Because North Carolina's ABC laws discriminate against out-of-state wine manufacturers and shippers in favor of in-state wine manufacturers and shippers, the scheme violates ``a central tenet of the Commerce Clause.´´" (Citation omitted.)
The Appeals Court then concluded that "North Carolina failed to identify any Twenty-first Amendment interest that is served by authorizing in-state wineries to sell and ship directly to consumers while simultaneously prohibiting out-of-state direct shipment."
Hence, the Appeals Court found that North Carolina's laws unconstitutionally discriminate against outside sellers, such as Oakstone Winery. However, the Appeals Court declined to enjoin enforcement of the statutes. It concluded that "North Carolina retains great flexibility to determine what sort of relief to provide to cure the discriminatory treatment, and thus we follow North Carolina's indication of its preference."
Related Cases. Several other courts have addressed the issue of state bans on direct sales of wines, and reached different results.
On November 12, 2002, the U.S. District Court (SDNY) issued a similar opinion [32 page PDF scan] in Swedenburg v. Kelly, holding that New York state's ban on the direct shipment of out of state wine is unconstitutional. See, story titled "Court Holds New York's Ban on Internet Wine Sales Is Unconstitutional", in TLJ Daily E-Mail Alert No. 551, November 18, 2002.
However, the U.S. Court of Appeals (7thCir) reached a different conclusion in its opinion in Bridenbaugh v. Wilson. In that case, the plaintiffs challenged the constitutionality of an Indiana statute that made it unlawful for persons in another state to ship an alcoholic beverage directly to an Indiana resident. The District Court held that the Indiana direct shipment regulation was unconstitutional under the Commerce Clause, and granted the plaintiffs' summary judgment motion (Bridenbaugh v. O'Bannon, 78 F. Supp.2d 828 (N.D. Ind. 1999)). Then, the Seventh Circuit reversed, upholding the constitutionality of the state ban.
Judge Frank Easterbrook wrote that "This case pits the twenty-first amendment, which appears in the Constitution, against the ``dormant commerce clause,´´ which does not." He continued that the 21st Amendment (which repealed prohibition) "directly authorizes state control over imports, while the premise of dormant commerce clause jurisprudence is an inference that the grant of power to Congress in Art. I sec.8 cl. 3 implies a limitation on state authority over the same subject. We must decide how the combination of express grant and implied withdrawal of state power applies to" the Indiana ban on direct sales of wine. He came down on the side of the 21st Amendment.
Perhaps the Swedenburg and Beskind cases are distinguishable from the Bridenbaugh case on their underlying facts. New York and North Carolina exempted in state wineries from their ban on direct sales. Indiana did not.
Indeed, the Appeals Court in Beskind noted that "At least one reasonable nondiscriminatory alternative is available to North Carolina and it would require North Carolina simply to return to the pre-1981 structure and require in-state wines to pass through the same three-tiered scheme that all other wines must pass through." And, the Appeals Court noted in Bridenbaugh that "Wine originating in California, France, Australia, or Indiana passes through the same three tiers and is subjected to the same taxes. Where's the functional discrimination?"
See also, Bainbridge v. Bush, 148
F.Supp.2d 1306 (M.D.Fla. 2001), in which the District Court upheld Florida's ban
on direct shipment of wine. However, it was vacated and remanded by the 11th
Circuit in Bainbridge v. Turner, 311 F.3d 1104, 1112 (2002).