HR 1161: Factional FAQ

Editor’s Note: The following is a guest post, written by R. Corbin Houchins, in our series on the CARE Act of 2011.

Questions abound regarding what HR 1161 would do if it became law. Published answers conflict, ranging from “merely clarify existing law” to “instantly terminate direct shipment.” Here’s my take on some frequently encountered queries.

If Granholm is a decision of the Supreme Court interpreting the federal constitution, how can Congress mess with it?

Although the question is not without complexities, there is a short answer: Granholm presupposes that Congress has not delegated to the states its constitutional power to regulate interstate commerce in the way the New York and Michigan laws in question regulated wine. Granholm is, in other words, a “dormant Commerce Clause” case, meaning that the power to regulate lay unexercised in the province of Congress, where, though dormant, it constituted a prohibition of state encroachment on congressional subject matter.

Dormant (or “negative”) Commerce Clause theory rests on a negative interpretation of the silence of Congress in a subject area –refraining from speaking equals reservation of the area to federal regulation. It does not operate if Congress explicitly delegates portions of its regulatory power to states, as it has done, for example, with the Bank Holding Company Act. In upholding that delegation, the Supreme Court remarked that such laws are “invulnerable to constitutional attack.” The same principle probably applies to HR 1161.

How would HR 1161 change the status quo?

First, one has to know what the status quo is.

Today, neither the states’ undoubted 21st Amendment right to prohibit all entry of alcoholic beverages or admit them under even-handed rules, nor their right under the Wilson Act and Webb-Kenyon Act to exercise jurisdiction equally over local and incoming alcoholic beverages, includes an unqualified right to give local wineries significantly greater direct access to local purchasers than is accorded out-of-state wineries. Granholm is less than clear at several points, but its ruling on intentional state discrimination against interstate commerce is unmistakable: The 21st Amendment does not even come into play in evaluating the constitutionality of laws that facially discriminate. Rather, they are judged under the standard applicable to commerce in all goods, which renders them invalid unless (a) they are demonstrably necessary to serve a legitimate state purpose than cannot reasonably be achieved by a less discriminatory method or (b) Congress has delegated regulation of the interstate commerce in question to the states in a manner that supports the discrimination. In Granholm the majority found that Wilson and Webb-Kenyon did not constitute the requisite Congressional delegation, and, as is well known, the states failed to meet the necessity test for the laws then before the Court.

State laws that do not facially or inevitably discriminate against interstate commerce and were not adopted with protectionist intent are judged under an easier standard. If a state statute regulates even-handedly to serve a legitimate state interest, and its effects on interstate commerce are only incidental, it will be upheld unless on balance the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed intrastate benefits. Because discrimination was evident on the faces of the statutes considered in Granholm, the balancing test didn’t apply, but it remains applicable where the facts support it. A statute that failed even that test could be saved by express congressional delegation of sufficient regulatory power, but no relevant delegation exists.

The status quo is, of course, subject to controversy on some significant points. For example, we do not know with certainty whether in-person purchase requirements constitute facial discrimination, and it remains unsettled whether maintenance of a three-tier distribution structure is a legitimate state purpose in itself or merely one means of achieving legitimate objectives such as reliable tax collection.

HR 1161 aims to correct the failure of the Webb-Kenyon Act to provide delegation of congressional regulatory power over interstate commerce in liquor to the states sufficient to overcome the antidiscrimination effects of the dormant Commerce Clause, and failure of the Wilson Act to authorize differential treatment of out-of-state liquor once it has arrived in a state, by amending both statutes. With an explicit expression of congressional delegation in the subject area, the dormancy goes away, and the states would be free to legislate consistently with the expressed intent of Congress.

Current text of HR 1161 begins with congressional intent that silence not be interpreted as creating a Commerce Clause barrier to whatever regulation of liquor a state wants. It then adds circumscribed restraints on state action that echo selected portions of present law. It is in the limited nature of those restraints, alongside the radically comprehensive delegation of regulatory power, that the significant changes are to be found.

If HR 1161 gives states a regulatory carte blanche and adds only limited restraints, what practical effects would it have?

Three appear clearly from the text:

1) Application of Granholm’s location neutrality principle to interstate retailers and wholesalers is fiercely contested . HR 1161 would resolve the issue by denying Commerce Clause protection for businesses other than producers.

2) Facially or intentionally discriminatory state law can now be invalidated if the state has a reasonable and less discriminatory alternative for achieving its purpose. HR 1161 would allow the law to stand except in the rarer situation where a nondiscriminatory law would have enabled the state to reach the same objective.

3) Laws with discriminatory effects that are not facially apparent are now subject to the balancing test for excessive burden on interstate commerce. Under HR 1161, all such laws, which constitute the majority of existing barriers to interstate trade in wine, would be exempt from Commerce Clause scrutiny, irrespective of differential burdens on out-of-state sellers.

Note that none of those features of HR 1161 has any effect on its own. They allow states to do things they cannot now do without inviting constitutional challenge, an important change, but one that depends on new or existing state legislation to make a practical difference.

Who Needs It?

It is entirely legitimate to advance one’s economic interests by legislation and to couch arguments for legislative measures in terms of general societal interest. Introduction and advocacy of HR 1161 is not an outrage, but it does deserve thoughtful critique.

Space considerations preclude Oxonian debate here. I hope it is not inappropriate to catalog some opinions, which may or may not provoke more extended discussion.

First, proponents imply that the nation, or at least the judicial system, needs more clarity with respect to the meanings of the Commerce Clause and § 2 of the 21st Amendment, and that the bill will provide it. Clarity is usually a virtue, and the law ordinarily benefits from it. However, no particular clarity crisis exists in the subject matter of HR 1161. The dormant Commerce Clause concept is criticized by some observers, notably Justice Thomas, as based on tenuous legal theory, but the doctrine itself is not unclear, difficult to apply, or surprising in its results. Granholm is not harder to understand and apply than the mine run of Supreme Court constitutional cases, and there is nothing unusual about the time it is taking for corollary issues to work their way through intermediate appellate courts.

Secondly, the bill has been touted as a judicial economy measure because it will reduce the grounds under which industry members can challenge state law. Obviously, societal cost-benefit analysis of potential lawsuits must take the subject matter into account. To me, the notion that litigation attempting to bring state laws into compliance with the constitution is an “end run” around beverage regulation is like saying that Brown v. Board was an end run around school administration. The national market envisioned by the authors and early judicial interpreters of the Commerce Clause is a fundamental American goal, one that has never been repudiated and, as we have known at least since 2005, one that is not trumped by the 21st Amendment. That amendment itself and related statutes give states ample power to fashion their methods of combating intemperance and other asserted evils of drink, without creating cartel distribution structures.

Finally, HR 1161 may indeed address a need for those who fear that after Granholm the legitimacy of state-mandated middle tier turnstiles in the stream of commerce may be contingent on their not excessively burdening interstate commerce. The bill certainly blunts constitutional inquiry in that regard. Some proponents meet the obvious question, why is burdening in excess of what’s required to achieve legitimate state goals a good thing, with the reply that the three-tier distribution system is in itself a goal of unquestioned legitimacy.

When debate over HR 1161 devolves to whether the three-tier system is a blessing compared to systems in which the roles and compensation of businesses are determined by the value of the services they provide, we enter areas of values where argument never ends. Proponents often seek to shorten the exchange by resort to passing remarks in Granholm that the three-tier system at issue in North Dakota v. U.S., which provided the alternative of direct distribution from outside the state, was valid, in hopes of morphing them into endorsement of a state right to enact whatever is needed to support any closed three-tier system. In fact, only one justice in North Dakota thought the direct distribution workaround was unnecessary for upholding state law. Nonetheless, the wholesalers have had considerable success with the contention that the North Dakota dicta constitute persuasive authority under present law and imbue three-tier systems with an aura of public value.

Interestingly, it is not clear that HR 1161 would have much effect on the three-tier preservation aspect of the debate, because there are few (if any) examples of mandated three-tier distribution laws that do not facially discriminate against interstate commerce or whose purported objectives could not reasonably be attained by nondiscriminatory means.

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