Wine Sellers and Protectionism

In early December, the U.S. Supreme Court heard oral arguments in a Michigan dispute that will determine whether states can engage in economic protectionism in the name of public safety. In simple terms, the issue is whether a state can prohibit out-of-state wineries from shipping wine directly to its residents (a question the Mackinac Center first addressed in 2001). At stake are millions of dollars, the fate of two constitutional principles and the extent to which states are permitted to regulate commerce.

The case, Granholm v. Heald, was brought by two Michigan wine critics and a group of wine collectors against the state of Michigan. The Ohio-based 6th Circuit Court of Appeals ruled that Michigan’s restriction was unconstitutional, citing in part the "commerce clause" of the U.S. Constitution, which reserves to the U.S. Congress the power "to regulate commerce with foreign nations, and among the several states."

But in a similar case, the New York-based 2nd Circuit decided that a New York alcohol restriction was constitutional. The Supreme Court has consolidated the cases, so that it could resolve the differences between the rulings.

Michigan and New York, among other states, currently prohibit direct-to-consumer sale of wine from out-of-state wineries. The restrictions apply to Internet, phone sales and other forms of long-distance direct sales. They also apply to consumers who visit a winery and wish to have a case of their new find sent to their home.

Nearly half of U.S. states (Michigan, New York and 22 others) impose such restrictions, citing their prerogative under the 21st Amendment. That amendment, which repealed prohibition in 1933, stipulates, "The transportation or importation into any state, territory, or possession of the United States for delivery or use therein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 (emphasis added)."

Though 24 states have used this amendment as a rationale to enact bans on wine shipments from out-of-state businesses, another 26 states have enacted laws that do allow for out-of-state wineries to offer their wares to long-distance customers.

While the Supreme Court may strike down the bans in existence, those 24 states, including Michigan, would have had good reason to do so long ago.

First of all, a ban on out-of-state shipments to residents’ homes creates a government-imposed barrier to competition. The state requirement that out-of-state wineries market their product through a state-licensed wholesaler limits their ability to compete on an even footing with in-state wineries, which can sell direct. This restricts competition for direct-to-consumer sales to only those companies that actually produce wine in the state (or in the case of New York, maintain an office there.)

This restriction, in turn, limits the choices available to a state’s residents. They are denied the possibility of getting not only the lower prices that can result from competition, but the variety of products and other benefits of competition-driven innovation. Thus, one effect of the state’s prohibition is to generate a form of economic protectionionism that benefits in-state wineries and distributors at the expense of Michigan residents.

Second, the state’s policy arguments for this regulation don’t quite wash. The most appealing is the state’s desire to police underage drinking. But ultimately this is a weak point, since, for instance, Michigan allows 40 in-state wineries to make shipments to state residents, as a lawyer for some of the Michigan plaintiffs notes. Justice David Souter remarked on this contradiction when he said, "The very activity you don't want (out-of-state wineries) to engage in … your in-state wineries are engaging in."

State regulators insist they need to make onsite visits to wineries to ensure enforcement. Yet many states find that the geographic distance of an out-of-state winery has not proven a barrier to granting a license to sell. And at least in the case of New York, onsite inspection of wineries appears to be weak, and there is little evidence that states allowing out-of-state shipments have increased problems with underage drinking. As a practical matter, it is probably easier for a minor to procure alcohol by asking a willing older friend or a retail store clerk than by finding a credit card, making an online transaction and then waiting for a FedEx truck to arrive. And, of course, wineries themselves can and do address the problem by requiring an adult’s signature for shipments.

States also argue that their regulators must make onsite inspections of wineries to ensure product purity. Yet many other products are sold every day by out-of-state companies without the consumer’s home state inspecting the product.

It’s interesting to note that more than 30 states, including some that allow the sales, have filed friend-of-the-court briefs in favor of Michigan’s restrictions. This suggests that more than anything else, what is really at stake is simply state power to regulate and to tax.

In legal terms, there are several alternatives to Michigan’s and New York’s differential treatment of out-of-state wineries. The worst approach, suggested by Justice Ruth Bader Ginsburg during oral arguments, would be to apply the ban on direct shipments to in-state wineries as well. (Some states, such as Utah, take this approach.) The out-of-state wineries would not face a competitive disadvantage, but the ill effects for consumers would actually increase.

A better approach, followed by many states, is to allow out-of-state wineries to make direct sales. Often this is made conditional on the securing of a license, which can be used to deal with regulatory and tax concerns.

At stake in the current controversy are $21 billion in annual wine sales, thousands of dollars of campaign contributions, and in the case of Michigan, the fate of 75 distributors who have, in the words of the Detroit Free Press, "control over the distribution of nearly all beer and wine sold in Michigan."

For the sake of consumers and owners and employees of small wineries nationwide, there are plenty of reasons to hope that the Supreme Court ends a long history of state-endorsed protectionism and oligopoly. But if the Supreme Court upholds states’ power to prohibit out-of-state wineries from selling directly to state residents, we should still remember that the power to regulate does not imply the wisdom of regulation.

John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.