What’s the Deal with Heald?

OVERVIEW

The 2005 United States Supreme Court case, Granholm v. Heald, reshaped how wine was sold throughout the United States and affirmed a principle of federalism fundamental to the efficiency of the domestic economy. 

The case involved an impressive roster of legal figures: Kathleen M. Sullivan, the former Dean of Stanford Law School, and Kenneth W. Starr, former D.C. Circuit judge, independent counsel on the Monica Lewinsky investigation and recently-disgraced head of Baylor University, appeared on the brief for Respondents.  Eliot Spitzer even made an appearance in his capacity as the New York State Attorney General.

At issue in the case was the practice in Michigan and New York of favoring their home wineries to the detriment of out-of-staters.  Both states used the three-tiered system for wine distribution, where producers, wholesalers, and retailers were separately licensed. 

Michigan gave its approximately 40 in-state wineries the home-court advantage through a special license.  This license allowed Michigan wineries to sell directly to Michigan consumers.  Out-of-state wineries could only sell to wholesalers who would then sell to retailers who, only then would reach the consumer.  Each link in the chain increased the cost, and the price, of getting a bottle of wine into the hands of a Michiganian. 

New York had a similarly skewed system: most wine distribution in the state happened through the three-tiered system, but a winery using only New York grapes could get a license allowing direct-to-consumer shipping.

The Plaintiffs in the case included California wineries and their owners who wished to sell to consumers in New York and Michigan directly.  They did not appreciate the states’ practice of creating structural barriers against healthy competition with in-state wineries.  They decided to take this perceived injustice to the courts, relying on one of the most robust principles of constitutional law to make their case.  However, they would have to overcome one of the most popular constitutional amendments in United State’s history.

LEGAL BACKGROUND

The case pits two clauses of the Constitution against each other.  Favoring the wineries was the Commerce Clause, and favoring the states was the Twenty-First Amendment.

The Commerce Clause, (U.S. Constitution Article 1, Section 8, Clause 3), simply states, “[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”  This means that Congress (not the states) has the power to regulate interstate commerce.  As a corollary, the Supreme Court has read in a prohibition against states discriminating against or unduly burdening interstate commerce. Reading Railroad v. Pennsylvania, 82 U.S. 232 (1873).  This prohibition is captured in a concept known as the “Dormant Commerce Clause.”  Its purpose is “to prohibit state or municipal laws whose object is local economic protectionism,” and ensure efficient trade between states.  C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383, 390 (1994).

The Twenty-First Amendment of the Constitution repealed the Eighteenth Amendment and ended Prohibition in the United States.  It reads in relevant part:

Section 2. 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.

Section 2 of the Amendment is generally understood to have delegated the power to regulate the alcoholic beverage industry to the states. 

ARGUMENT AND DECISION

The out-of-state wineries in this case argued that the Dormant Commerce Clause’s prohibition against economic protectionism should trump the Twenty-First Amendment’s delegation of authority to the states.  The states conceded that in any other industry, this regulatory framework wouldn’t fly.  But they said the Twenty-First Amendment made the protectionist statutes a valid exercise of the states’ authority. 

The states also argued in the alternative, that if the dormant commerce clause did apply, their statutory frameworks fell into an exception to the rule that allowed a discriminatory statute to stand if it “advanced a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”  The states argued that the framework was necessary to prevent minors from purchasing wine over the internet, and that it prevented tax evasion.

The Supreme Court sided with the wineries on all claims.  It found that the Twenty-First Amendment did not confer on states the authority to defy the principles of the Dormant Commerce Clause.  States, even when it came to regulating wine, could not discriminate against out-of-state providers.  The Court found that

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.

Heald, 544 U.S. 460 at 473. 

The Court further examined whether the states’ “patchwork of laws” fell into the exception to the Dormant Commerce Clause.  They found the states failed to meet the heavy burden of so proving.

CONCLUSION

After Heald, therefore, if a state wanted to allow its own wineries to ship its wares directly to in-state consumers, it had to do the same for out-of-state wineries.  As we see in the cases, this detangled somewhat the Gordian regulation of the alcoholic beverage industry, and made competition a little a little more fair among producers.