Direct-to-Consumer Shipping: Retailer DtC Shipping Under Granholm

U.S. wineries have had tremendous success in developing the direct-to-consumer (DtC) market — something that regular readers of this blog will find wholly unsurprising. Much of this effort arose after the 2005 Granholm v. Heald ruling by the Supreme Court, which was the momentous decision that states could not prohibit out-of-state wineries from making direct-to-consumer (DtC) sales to their residents if they did permit it for in-state wineries.

But, large segments of the beverage alcohol industry were left out of this effort. Retailers, in particular, have been largely excluded from the privileges that wine producers can enjoy. (A previous post discusses the 13 states that currently permit some form of retailer DtC sales.)

This leads to the question: why not DtC for retailers? Shouldn’t Granholm have applied to retailers too? And if it did, why have the benefits mostly been only for wineries?

In this post, we will look at the muddled history of court cases applying Granholm to retailers and attempt to find an answer. However, as the history of expanding DtC rights for wineries demonstrates, winning in court is only a part of the battle; actually amending the laws of the states is the only way to really affect the needed changes.

 

Applying Granholm to Retailers

The legacy of Granholm when applied to retailers has been mixed at best. There has been litigation trying to apply Granholm to retailers, but there has not been a single, definitive answer from the courts. And even where a court has ruled that Granholm’s anti-discrimination principle does apply to retailers, the results haven’t been wholly positive for retailers.

Three court cases, from the years right after Granholm, showcase this uncertainty, which we’ll talk about in turn. But first, it may help to quickly refresh ourselves as to what exactly Granholm decided.

 

What Did Granholm Say?

At the heart of Granholm were laws in Michigan and New York requiring a winery to have an in-state location in order to make DtC sales to residents in these states. Michigan and New York both argued that this arrangement was permitted by the open language of Section 2 of the 21st Amendment, which gives nearly unfettered rights to the states to regulate the sale and transportation of beverage alcohol in their borders.

Nearly unfettered was correct, as the Supreme Court ruled in Granholm that the 21st Amendment did not supercede another section of the Constitution, the Dormant Commerce Clause. The Dormant Commerce Clause is an interesting legal doctrine that prohibits states from inhibiting interstate commerce or discriminating against out-of-state businesses in favor of in-state ones. In the Court’s reading, while the 21st Amendment does give states extreme power to control their beverage alcohol markets, it did not permit the kind of pro-in-state discrimination that New York and Michigan’s laws established.

What was unclear in Granholm, though, was exactly who did Granholm apply to? In the facts of the case, only wineries and the sale of wine is at issue; but the Court frequently refers to “producers” as a whole, which would seem to extend its review to breweries and distilleries as well. But, in a line, the Court references at once “out-of-state producers or shippers”, which implies that other parties — namely anyone “shipping” — could be included. And more so, if the Supreme Court thought that the 21st Amendment did not supercede the Dormant Commerce Clause, why would that principle only apply to producers? Why couldn’t out-of-state retailers also be discriminated against?

 

Three Court Cases Outside of Granholm v. Heald

In the years after Granholm was decided, there was an effort to extend its ruling beyond wineries, to members of all three-tiers. Three cases in particular showcase the muddled results of this effort.

In 2008, the state of Michigan again found itself in court defending a rule that permitted in-state retailers to ship DtC, but not out-of-state retailers. The case (Siesta Village v. Granholm, 2008) made its way up to the U.S. District Court for the Eastern District of Michigan, which found the law to be improper. The court agreed that the law was discriminatory and not supported by any justifications from the state. Following the Granholm ruling, Michigan’s law had to open up to out-of-state retailers.

The victory, however, was short lived as Michigan merely amended its rules to prohibit all retailer DtC sales in the state. If in-state retailers couldn’t make DtC sales, then there would be no discrimination against out-of-state retailers. This is one of the perils of showing up the state in court — sometimes it will pick up the ball and go home, so no one can have fun.

At the same time, Siesta Village was involved with another case (Siesta Village v. Perry, 2008) against the state of Texas, which had a similar law in effect. As in the Michigan case, the U.S. District Court for the Northern District of Texas found the law discriminatory against out-of-state retailers. However, the retailer’s victory was, as a subsequent court (Siesta Village v. Perry, 2010) said, “if not Pyrrhic, apparently of no benefit.”

The court’s decision banked on the idea that Texas should treat in-state and out-of-state retailers the same. But that meant also that out-of-state retailer would have to act exactly as if it were an in-state retailer when making sales to Texas — including buying those products only from a Texas wholesaler, effectively creating a catch-22 for the out-of-state retailers. So while the principle of non-discrimination may have won out, its practical application doomed those efforts.

The third case (Arnold’s Wine v. Boyle, 2009) came down solidly against retailers. In this case, decided by the 2nd Circuit Court of Appeals, the court focussed on the ability of products to get into a state, not on the ability of the seller to enter that market. Because, as the court reasoned, all products could access the New York’s marketplace, and because all those products faced the same three-tier regulations, there was no discrimination. It rejected the argument that it wasn’t the wine that was being discriminated against but the out-of-state retailer, and as such didn’t apply the Granholm standard to the plaintiff retailer.

 

But What Does It All Mean?

In the end, we’re left with an unclear judicial history. To a certain extent, yes, states cannot discriminate against out-of-state entities merely on the basis that the 21st Amendment gives states tremendous power to regulate beverage alcohol. But courts have applied that haphazardly. In Arnold’s Wine, the court was concerned with whether the wine product itself was treated discriminatorily, and not whether a business-interest was mistreated. The Texas Siesta Village case applied Granholm to the retailers, but did so in a way that effectively shut the door on out-of-state retailers. Even the Michigan Siesta Village case, where the retailer clearly won, had a poor result, as Michigan turned around and changed its laws to prohibit all retailer DtC.

And that’s where we are today, with it unsettled as to whether Granholm applies to retailers, or whether states can definitively legally permit in-state retailer DtC while prohibiting it for out-of-state retailers.

But an answer to that could be in the works. Currently, three court cases, in Michigan, Illinois, and Missouri, are underway, all looking to apply Granholm to retailers and overturn state laws that permit in-state retailer DtC, but not out-of-state retailer DtC. The Illinois case is the most advanced, and is set to be heard by the 7th Circuit Court of Appeals on February 16. (Though the Michigan case is perhaps the more interesting one, as it is essentially relitigating the Siesta Village case. This was necessary as subsequent to the 2008 decision, Michigan reinstated its discriminatory law; where once you fail, eh?)

 

Legislate, Don’t Litigate

However, lost in the noise of the court cases is another basic question: why focus on the kerfuffle about whether Granholm applies to retailers? Indeed, as these cases have been litigated, 13 states have already gone out and extended some DtC privileges to out-of-state retailers. Their success shows that it’s unnecessary to win in court in order to get DtC rights.

And even if retailers received a single positive answer, that wouldn’t mean the nation is suddenly open to retailer DtC. Indeed, many states could choose to follow what Michigan did after its loss in Siesta Village and level down its DtC rights.

We see this when it comes to non-wine producers. On its face, Granholm should pretty clearly apply to breweries and distilleries — even more clearly than for retailers. But very few states permit any form of DtC rights for breweries and distilleries (as this post describes.) There’s nothing judicially preventing this market from developing; instead it’s a state-by-state political battle that remains to be fought.

What retailers are looking for is essentially the right to enter states’ markets in much the same way that wineries have; to be able to get DtC licenses and comply with the associated laws, like verifying the ages of consumers, paying taxes, and using licensed carriers. Retailers are currently doing this in those 13 states; they just need to opportunity, and they can do so everywhere else.

This isn’t to say that the cases in Michigan, Missouri, and Illinois are fool’s errands. Certainly, we shouldn’t want to create a world where states can discriminate against out-of-state retailers; you fight that discrimination in the courts. But any victory in the courts is only half the battle.

It’s taken decades for the winery DtC market to get where it is. There were hard fought battles in the courts. But more than that, there have been extended, years-long campaigns in state legislatures to change minds, draft bills, and amend the laws. Already several states’ laws do permit retailer DtC; with a lot more blood, sweat, and tears (and hopefully a bit of wine on the side) this right can be extended further.

 

Want to know everything about DtC shipping? Be among the first to gain access to the 2018 Direct-to-Consumer Wine Shipping Report, set to be released at the DtC Wine Symposium.

4 Comments

  1. VVP (veux, veux-pas)

    In Granholm, consumers and wineries argued with the States. Supreme Court has resolved their debate. Court’s decision did not open interstate wine shipments of any kind. State still can prohibit any in-state producer to sell off-premise any alcohol directly to consumers (DtC), so there will be no any sign of discrimination by State against similarly situated out-of-state businesses.

    Almost all States maintain so called three-tier regulatory distribution systems where tiers are: Producers, Wholesalers, Retailers, where the only Retailers are allowed to sell alcohol to consumers (Sale at Retail). The Granholm decision contains the phrase: “wholesaler’s markup would render shipment through the three-tier system economically infeasible”. This phrase simply put Retail Shipment out-of-question. If it happen, then it happen.

    States do not have any jurisdiction one over another, in general. While “the open language of Section 2 of the 21st Amendment, … gives nearly unfettered rights to the states to regulate the sale and transportation (?) (production, importation, distribution, sale and possession, by alcohol policy, but not transportation, though) of beverage alcohol in their borders” (!), it did not give to States a single right to regulate the same across the borders.

    In order to not to discriminate against out-of-state Retailers, State must prohibit Retail sale to consumers, and prohibit possession of alcohol in its borders (i.e. turn back on Prohibition).

    Normally, Retailers prepay all taxes when they buy alcohol from wholesalers. How does the author want those Retailers to pay already prepaid taxes again in another state? Will be Retailers released from prepayment of taxes in their home State? Retail DtC is the “ravings of a madman”!

    While almost all States still do prohibit distilleries and breweries DtC, no other Granholm can happen. Wholesalers can’t sell any alcohol to consumers in interstate. If they do (Californian Wine merchants combined license type 17 (Wholesaler)/20 (Wine and Beer Retailer) for example) then they violate the section 2 of 21st Amendment when ship to the State where business operation under more than one tier is prohibited. Traditional third-tier Retailers had never been needed one. If such “economically infeasible” shipment happens, it happens. That is the answer, like ii or not!

    Reply
    • Alex Koral - Industry Relations Advisor

      Hi VVP,
      Thanks for your comments, I think you make some very valid points. You’re right that much of the issue comes down to whether there’s discrimination or not: if the state prevents instate retailers from shipping through common carriers, there’s no claim for out-of-state retailers. That’s how most states operate. The return to prohibition that you posit seems a bit extreme, though. Under the 21st Amendment, states have the right to restrict how alcohol is transported in their borders (and yes, “transportation” is used in the text of Section 2). So a state will have a rule saying only properly licensed parties can ship alcohol, and then limit access to those licenses (in theory, then, if a state wanted to allow wholesalers to sell DtC, it could find a way to grant them DtC licenses). Granholm ruled that if the state permits instate parties to get that license, they can’t hide behind the 21st Amendment when denying out-of-state parties access; these current lawsuits are all about whether that principle extends beyond Tier-1 producers, or if retailers are somehow special enough that they can be discriminated against. Your point about double taxation with retailer DtC sales is notable and quite interesting. But as you say, even if economically infeasible, a sale that can happen will happen.

      Reply
  2. Illinois Policy

    How silly! It is the fool’s errand to sue Illinois for what it never did!
    In 2016, state Sen. James Clayborne Jr., D-Belleville, introduced legislation that made bypassing Illinois distributors for out-of-state purchases a criminal offense. The law that went into effect Jan. 1, 2017, made purchasing alcohol across state lines for resale in Illinois a Class 4 felony.

    For resale, Mr. Koral, FOR RESALE!!!

    Illinois has never ever prohibited its residents out-of-state purchases of any alcoholic beverages for personal use or consumption!

    Reply
    • Alex Koral - Industry Relations Advisor

      Thanks for your comment. I should point out, though, that this lawsuit is from an Indiana retailer who wants the same access to the Illinois market that Illinois retailers enjoy, in particular the right to ship products sold through a common carrier; the rights of Illinois residents to make out-of-state purchases of alcohol is not directly at issue. But if you consider the rule being contested (235 ILCS 5/5-1(d), allowing retailers licensed by Illinois to ship alcohol – a license that out-of-state parties cannot receive), I think you’ll find that Illinois residents end up hampered when making out-of-state purchases of alcohol. I think this article might help clarify what’s at issue now. (Also, there was a period from about 1920 to 1933 when Illinois absolutely prohibited its residents from purchasing alcohol, from in state and out.) I should note too, I am not personally involved in any of these lawsuits, so while I enjoy the discussion, I’m not the party to criticize regarding the merits of the argument.

      Reply

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