Last Tuesday, the Supreme Court heard
arguments in the appeals of the NY and Michigan decisions. A decision should be handed down sometime
this coming spring.
Arguing for the NY plaintiffs was Clint
Bolick (Bolick) of the Institute for Justice. Representing
the MI plaintiffs was Stanford professor Kathleen
Sullivan (Sullivan). Defending the MI laws was Solicitor
General Thomas Casey (Casey), with NY
Solicitor General Caitlin Halligan (Halligan) supporting
NY's laws.
The Post-Argument
Media:
I would initially note that many of the analyses you
have probably read concerning the oral argument
need to be taken with a grain of salt - for
a couple of reasons.
First, it has become clear over the past
five years that I have dealt with this issue that
the media is largely ignorant of the history of
alcohol control in the United States, the scope
of power granted states by the 21st Amendment,
and the nature of and need for the complicated
regulatory systems employed by the states in controlling
the distribution of alcohol. Nor is there
a desire by most in the media to see beyond
the simplistic issue of rare wine sales to oenophiles
and understand the potentially destructive consequences
to alcohol control in this country if the
legal framework espoused by the plaintiffs in these
cases prevails, a danger Justice Kennedy obviously
recognized from the first question from the bench.
Second, the order of the argument contributed
to certain misconceptions and misperceptions about
what actually occurred. The plaintiffs
in the cases went first, and faced a
torrent of criticism concerning the underpinnings
of their legal arguments, their understanding of
the history of the 21st Amendment, and the
scope of the relief they were seeking. If
you were to have seen just that portion of the
argument, you would have come to the conclusion
that the case was over and that the states would
easily prevail. However, the states went
second and faced their own series of difficult
questions. As a result, much of the criticism of
the plaintiffs' argument was forgotten or omitted
by the media which emphasized the latter period
of questioning - questioning which was more consistent
with the prevailing media bias. But as you
will see from my legal analysis below, those questions
- which voiced the concerns of the justices
who asked them - and the answers given by counsel
for the plaintiffs - will in the end make
it very difficult for the plaintiffs to obtain
a decision to their liking.
Summary of the Arguments:
The basic premise put forward by the plaintiffs
in these cases is that while the 21st Amendment
did to some degree shield states from the scrutiny
of the "dormant commerce clause," it did not delete
pre-21st Amendment jurisprudence which disallowed "discrimination" by
the states in structuring their regulatory systems. The
plaintiffs rely predominantly on Bacchus, a 1984 case dealing with Hawaii's
tax treatment which favored a locally produced
wine, which held that "[t]he central purpose of the provision (Section 2
of the 21st Amendment) was not to empower
States to favor local liquor industries by erecting
barriers to competition. It is also beyond doubt
that the Commerce Clause itself furthers strong
federal interests in preventing economic Balkanization.
. . State laws that constitute mere economic protectionism
are therefore not entitled to the same deference
as laws enacted to combat the perceived evils of
an unrestricted traffic in liquor. Here, the State
does not seek to justify its tax on the ground
that it was designed to promote temperance or to
carry out any other purpose of the Twenty- first
Amendment, but instead acknowledges that the purpose
was "to promote a local industry." (parenthetical
supplied).
The states and
wholesaler intervenors counter that the 21st Amendment
was designed to overcome commerce clause challenges
which had stymied their efforts to control imports
until just prior to Prohibition (the Webb-Kenyon
Act, upon which the 21st Amendment was
modeled, was upheld by the Supreme Court in 1917
- just prior to the institution of Prohibition),
that its very words supply the power to control
imports as states have done, that Bacchus is inapposite
since it did not deal with importation
control but with a tax, that bans on direct shipment
are entitled to deference since they are designed
to “combat the perceived evils of an unrestricted
traffic in liquor," and that the evidence in the
cases demonstrates that the laws in question are
not "mere economic protectionism."
Bolick's Argument:
One of the biggest
concerns voiced by wholesalers and the states arising
out of this litigation is that the legal framework
promoted by the plaintiffs is very broad and that
virtually no import control now existing could
withstand scrutiny were the courts to accept that
perspective. Justice Kennedy, the first of
the justices to ask a question, immediately
recognized that issue.
He asked Bolick
whether the entire three-tier licensing system
would necessarily be rendered invalid under his
interpretation. He asked specifically why
a NJ wholesaler could not sell to NY retailers,
or vice versa, if such import controls/distinctions
were invalid. Bolick argued, unpersuasively,
that this issue was limited to wine. I say
unpersuasively because Justice Kennedy obviously
was not satisfied with his answer and later raised
this same point right out of the gates with Kathleen
Sullivan noting that while it was a "narrow issue" being
litigated, the plaintiffs were asking for a "sweeping
rationale" and he was unclear how the three-tier
system survives under that rationale.
Justice Breyer
followed Justice Kennedy's initial questions
with something of an historical recitation wherein
he seemed to take the position that Bolick's position
concerning the viability of discrimination claims
was put down by the Court's decision (Justice Brandeis
writing for the majority) in the Young's Market case in 1936,
where it held that states need not treat importers
and domestic industry in the same manner and that
to argue to the contrary would be to rewrite the
21st Amendment.
Justice Ginsburg
was equally critical of Bolick's assessment
of the legislative history of the Webb-Kenyon
Act and the 21st Amendment, noting that Congress
could have put into the Act or the Amendment the
non-discriminatory language Bolick argued survived
the passage/ratification of those laws, but it chose not to do
so. Justice Souter asked Bolick whether Congress
had drafted and later dropped anti-discrimination
language from Webb-Kenyon, as it obviously was
not present in that statute. Bolick argued
that it would have been redundant to include it
but could not answer the question directly.
Justice Kennedy
then delved into the issue of tax revenue
that the states would lose, both excise taxes and
sales tax, if the plaintiffs were to prevail. He
noted the Quill case and asked
how states could require that such taxes be paid
in light of that decision. Bolick responded
that the taxes could be collected as a condition
of a permit.
Justice Souter
followed with practical regulatory concerns. He
wondered how states could audit compliance without
great expense and without the ability to drop in unexpectedly
- something that would be impossible across the
country. Bolick argued that online compliance
checks were sufficient and feasible. Justice
Scalia then asked whether the federal government
policed compliance with state tax laws and Justice
Kennedy asked if such audits by the feds were routine,
to which Bolick replied that they did and they
were. Of course that is not quite the
case. While wineries are subject
to the loss of their federal permit if found to
have violated state laws concerning the remittance
of state taxes, the TTB does not regularly check
such records and is more concerned with the payment
of federal taxes and fees.
Justice Ginsburg
closed out the questioning of Bolick by wondering
whether the rationale put forward by the plaintiffs
would allow the shipment of alcoholic beverages
other than wine. Bolick tried to argue that
these cases are limited to wine, but of course
the constitution speaks to alcohol and later admissions
by Sullivan belied that argument.
Sullivan's Argument:
As noted previously,
Justice Kennedy immediately raised the issue of
the "sweeping rationale" being sought by the plaintiffs
with Sullivan, just as he had with Bolick, noting
that virtually any import regulation would be invalid
under their interpretation.
Justice Ginsburg,
exploring the nature of the relief being sought
by the plaintiffs asked whether simply taking away
the in-state direct shipping complained of would
give them nothing to complain about. Sullivan
agreed, but argued that the better result would
be to open the market to all comers.
Justice Stevens,
echoing Justice Brandeis' decision in Young's Market, asked her if Michigan could bar
all out-of-state wine, even assuming the only reason
were to give a monopoly to local producers. She
said no, but Justice Breyer asserted that since
Section 2 of the 21st Amendment was meant to end
that part of the dormant commerce clause that allows
foreign suppliers to be treated better than domestic
suppliers, and since the dormant commerce clause
was an implication of the commerce clause, if the
21st Amendment did not speak to discrimination,
then the dormant commerce clause doesn't apply. "You
can't divide the dormant commerce clause into six
parts," he explained.
Sullivan did not
argue that point, but instead argued that case
law since the passage of the 21st Amendment had
superseded that interpretation - essentially saying
that the Court had over time written opinions which
overturned the original intent and meaning of the
21st Amendment. But Justice Stevens disagreed
with her reading of those cases, reminding
her that the cases she cited, such as Boren, dealt with other
constitutional challenges, not challenges under
the commerce clause. He asked Sullivan whether
Congress could empower states to do what they had done
here and she answered yes, but that it had
not done so.
Justice Souter,
noting the states' argument that this case was
different than Bacchus, that there was
a substantial need for differential treatment,
asked what standard should be applied. Sullivan
argued that the states must meet a "strict scrutiny" standard
and that they could not do so in this case since
there were less restrictive alternatives available
to the state to ameliorate their concerns. Justice
Souter countered that states don't want to travel
to other states to enforce their laws and Justice
Kennedy asked whether that meant that Michigan must allow out-of-state
shipments directly to consumers. Sullivan
argued that with a permit system conditioned on
tax payments and online compliance checks, the
states could achieve a satisfactory level of enforcement.
In another swipe
at the sweeping rationale asserted by plaintiffs,
Justice Kennedy asked Sullivan whether the reciprocity
laws, which restrict direct shipments to consumers
to only those in participating states, must
also be found invalid. Sullivan hedged saying "possibly," but Justice Stevens
seemed incredulous noting that she had to concede
that the reciprocity laws are unconstitutional
under her interpretation given that under the heightened
scrutiny she was recommending, it would be virtually
impossible to defend them. Justice Stevens
closed out her argument adding that such a result
was a "necessary consequence of your rationale."
Casey's Argument:
Justice O'Connor,
who had remained silent during the grilling of
the plaintiffs' counsel, asked the first question
of Casey. It should be noted that O'Connor,
Rehnquist and Stevens dissented in the Bacchus case, and that
they are the only three members of the court still
on the bench from the time of that decision. Thus,
given their view in that case that the 21st Amendment
trumped the dormant commerce clause and allowed
discriminatory burdens on interstate commerce,
those three justices are viewed as the core of
those who would be expected to uphold the NY and
MI laws. So when she noted the difficulty
in overturning a precedent such as Bacchus, and pronounced
her opinion that it "cut against the state to some
extent," she was undoubtedly looking for Casey
to enunciate clearly why it should not apply to
the cases at bar. Justices Kennedy and Ginsburg
also noted that the language of Bacchus seemed to "restore" the
anti-discrimination principles of the dormant commerce
clause to the 21st Amendment.
Although Casey
noted that Bacchus spoke to "mere
economic protectionism," and that the MI and NY
laws were supported by other legitimate concerns
of the 21st Amendment including temperance, Casey
was less than effective in reciting the evidence
in the record in both the NY and MI cases which
supported that position, merely noting that there
were "affidavits and interrogatories" in the record
which spoke to those concerns. Because of
that failing, Justice Souter pursued the issue
further, asking whether there was sufficient
evidence in the case for the Court to rule, and
that lacking that evidence, should the court send
it back for further evidence gathering. Casey's
response wandered into the procedural aspects of
the earlier proceedings.
Justice Kennedy
observed that if the dormant commerce clause applied
to liquor distribution as Bacchus implied, that
would create a substantial burden for the states
to justify those laws, whether strict scrutiny
or some other heightened level of scrutiny. Justice
Scalia followed this point by instructing Casey
that the burden was his and that he needed to tell
them what the evidence was supporting his position. At
that point Casey mentioned the stings MI had pursued.
At this point,
Breyer appeared to contradict
his earlier perspective, arguing that perhaps Section
2 of the 21st Amendment did not eliminate the pre-Wilson
Act anti-discrimination prohibition and Justice
Kennedy asked what evidence there was
that it did. Casey correctly noted that the
Webb-Kenyon Act was entitled "An Act Divesting
Alcohol of its Interstate Character in Certain
Cases," to make the point that it was the intent
of Congress to override the dormant commerce clause
- and thus the anti-discrimination principles inherent
in that doctrine - in that legislation
and in the constitutional amendment modeled after
that act.
Justice Ginsburg
did not question that history, but did feel that
Casey was asking to court to reject Bacchus outright and rule that
alcohol was an exception to the normal operation
of the dormant commerce clause - that the 21st
Amendment trumped it. Justice Kennedy asked
if one of the purposes of the 21st Amendment was
to allow for discrimination and Casey answered
it was, but O'Connor ended Casey’s argument
questioning what to make of Bacchus, just as she had at the beginning.
Halligan's Argument:
Halligan began
by noting that the 21st Amendment expressed a consensus
that alcohol was different and thus needed to be
treated differently. Justice Kennedy asked
her if that meant that she was taking the position
that even "mere protectionism" was sufficient to
justify the sale of only NY wines, in a reference
to the wording of the Bacchus case; in other
words, was the state taking the position
that Bacchus was a bad decision and that the
dissent in that case had the correct view. Halligan
did not address that point directly, indicating
that the justifications of the NY and MI laws were
valid even in light of Bacchus.
Justice Souter
addressed the issues of compliance with Halligan,
asking her about NY's enforcement efforts and whether
those efforts could be effectuated through an online
compliance system. Justice Ginsburg asked
what merely having an office in NY did for enforcement
purposes, and Halligan explained that it was more
than just an office, that the product would have
to be present in that location and available for
inspection.
Justice Scalia
was plainly skeptical of NY's argument that it
was impossible to enforce against out-of-state
licensees as they could against
in-state licensee, and Justice Ginsburg
questioned why other states which allowed direct
shipment did not have such concerns. Halligan
made the point that she could not speak for other
states, but that simply because other states did
not concern themselves with accountability to the
extent NY did, that did not make NY's concerns
less valid.
Justice Scalia wondered
whether there should be a greater level
of scrutiny if discrimination were found,
but Halligan pointed out that the Court's North Dakota decision, which came after Bacchus, found that the
mere "risk of diversion" was enough to sustain
that state's increased burden on out-of-state suppliers
and that the case at bar was no different in that
respect.
Justice Stevens
noted that if the Court were to apply Bacchus, where in-state
tax exemptions were prohibited, it would be difficult to
sustain the NY laws. But Halligan noted that Bacchus was distinguishable
in several ways from the cases before the Court,
not least of which was that the very language of
the 21st Amendment speaks to state control over
importation, an issue which was not at stake in Bacchus.
Bolick's Rebuttal:
Bolick used his
rebuttal time to make an essentially political/equitable
argument, talking, inter alia, about
the power imbalance between wholesalers and small
wineries and the merits of the FTC report. In
the course of that argument, Bolick incorrectly
stated that there were only 600 wines in distribution
in New York when in fact
the record shows that over 19,000 brands are actually
in distribution. Unfortunately, the format
of the arguments did not allow for rebuttal of
that misstatement.
But Justice Stevens ended
the session by saying that in the end the
question really comes down to whether the 21st
Amendment allows the disparate treatment the plaintiffs
were complaining about.
Legal Analysis/Prediction:
Trying to make
a prediction about the outcome of any case before
the Supreme Court is a perilous proposition. Nonetheless,
I will give it a shot.
Given the dissent
by Justices Stevens, Rehnquist and O'Connor in
the Bacchus decision, it seems likely to me
that they will try to defend the NY and MI laws
by either trying to overturn that decision
or by trying to distinguish these cases from Bacchus. While
O'Connor did question the states about the implications
of Bacchus, it is unlikely that she will
change her personal view of the 21st Amendment. Her
questions about how she and other justices could differentiate
that case from the current cases supports the conclusion
that she was trying to win over those who would
not necessarily vote to overturn Bacchus, but understanding
the threat imposed by the plaintiffs' interpretation,
would need to find a way around Bacchus to
avoid joining an opinion creating anarchy in the
alcohol distribution system.
The Bacchus dissent
presumably gives the states/intervenors a
core of three strong justices to make
the case for upholding their laws. Justice Rehnquist's health
has been an issue, but the Supreme Court announced
yesterday that although his participation in the November
cases would be limited, he would be participating
fully in the December cases - which includes
the alcohol cases. As such, and given his
intention to swear in the President at inauguration,
it appears that Chief Justice Rehnquist is doing
better than previously thought, and that he will
be a factor in these cases. The question
then becomes who joins with them.
Justice Thomas
did not ask any questions, as is his wont. But
some aspects of his record lead me to believe
he could easily join with Rehnquist, Stevens
and O'Connor. First, Justice Thomas has gone
on the record criticizing the "dormant commerce
clause" as a judicial construct not within
the four corners of the constitution. Moreover,
he is a social conservative and will be receptive
to the argument that easier access to alcohol with
less of an ability to enforce state law regulating
its flow is not a good thing. Being a textualist,
he will be more likely to find that the actual
words of the 21st Amendment mean what they say.
Breyer is a possible
joiner because his questioning reflected his understanding
that the dormant commerce clause was overridden
by the passage of the 21st Amendment and because,
although he was concerned about the Bacchus language, his
historical perspective seems to be towards a stronger
interpretation of the powers given states by the
21st Amendment. Moreover, while he was troubled
by the Bacchus decision, if
he truly believes that the dormant commerce clause
was trumped by the 21st Amendment, he will have
to put precedent over principal
to sustain the challenges to the state laws since
one can only find discrimination if the dormant
commerce clause is relevant. His saying that
you can't break the dormant commerce clause into
six pieces was perhaps his way
of saying the Bacchus case was not
decided correctly.
Justice Souter
could easily join with Rehnquist, Stevens and O'Connor
as he seemed to understand there was an important
difference between local control and out-of-state
control. This would allow him to distinguish Bacchus, assuming he
doesn't get caught up in second guessing
state decisions concerning importation and
gives them the deference they deserve, even under Bacchus, and certainly under North Dakota.
Justice Ginsburg
implied that the 21st Amendment did not incorporate
anti-discrimination language and that indicated
a legislative decision to override such concerns. Like
Breyer, she seemed to feel that it is not the constitution
which causes the problem for the states, but rather
the Court's latter day interpretation of the 21st Amendment
in the Bacchus case.
Justice Scalia has
always been a problematic vote, as he disfavors
any type of differential treatment. But
he is a strong textualist and federalist and may
find it difficult overcoming the direct language
of the 21st Amendment. And because of that
conflict, I believe it unlikely that he will be
at the forefront of an effort to form a majority
opinion which would have the effect of essentially
nullifying a clearly “enumerated power” of
the states.
In the end, it
may come down to thinking of Justice Kennedy. Kennedy
clearly understands the damage to the orderly distribution
of alcohol that the plaintiffs’ legal
argument would entail. His questioning
reflects that the result the plaintiffs want would
destroy the state licensing system. But he
is also concerned about whether the Bacchus case controls
here. It seems to me his ultimate decision
will depend on whether he is more concerned about
the breakdown of the system or if he feels
bound by what I believe to be easily distinguishable
dicta in Bacchus. If he goes with Rehnquist, Stevens
and O'Connor, it is likely that he will bring others with
him given his understanding of the issue and his
leadership on the Court. This is the most
probable result in my estimation, and should that
occur, you will see the states prevail.
However, because
Kennedy understands the issues surrounding alcohol
distribution and clearly has an interest in them,
I tend to believe he is the only one with Bacchus concerns that
could also knit together a majority in favor of
the plaintiffs. However, although that is
a possibility, it is not a prospect the plaintiffs
in these cases should wish for.
Why? Because
if Justice Kennedy decides that the Bacchus case controls
- that there is no way to distinguish it - he will
need to gather votes to oppose Rehnquist, Stevens
and O'Connor, or to try to get them to join him. But
because he clearly understands the dangers inherent
in the "sweeping rationale" sought by the plaintiffs,
it is unlikely that he would write an opinion
which would lead to the very result he fears.
I have long argued
that the plaintiffs should be careful what they
ask for, because they might get it. In these
cases, I think it is unlikely that the Court will
give the plaintiffs the “sweeping rationale” they
seek - assuming they prevail on the merits
- because of the dangers understood and expressed
so articulately by Justice Kennedy. Rather, the
Court will be much more likely to seek to
mute the effect of any such victory for the plaintiffs
by playing on the comments of Justice Ginsburg – and
the concession by Sullivan - that any discrimination
complained of can be cured by simply removing the
favoritism, in this case by knocking out the in-state
exceptions which are easily severable.
While that decision
would be quite disheartening for the plaintiffs,
that would just be the beginning of their troubles. It
would not be long before follow-on litigation would
soon take all reciprocal laws off the books. As
Justice Stevens noted, and as Sullivan basically
conceded, reciprocal laws must invariably be found
to be unconstitutional as well under the plaintiffs'
interpretation.
If that occurs,
the battle over unregulated and unaccountable direct
shipments to consumers would revert to the state
legislatures - where this battle should have been
fought from the outset.
Until the next time . . .
Craig
Craig Wolf
General Counsel
Wine & Spirits Wholesalers of America, Inc.
805 15th Street, N.W., Suite 430
Washington, D.C. 20005
(202) 371-9792, ext. 303
(202) 789-2405 (fax)
(202) 415-6732 (cell)
craig.wolf@wswa.org
www.wswa.org
