Prohibition's Last Gasp

Prohibition's Last Gasp

Lieberman Op-Ed in The National Law Journal
January 05, 2003

Reprinted with permission from the Jan. 6, 2003 issue of the National Law Journal.

It isn't exactly the Untouchables v. Al Capone, but there is a legal battle raging over the availability of alcoholic beverages. Internet wine sales have grown substantially in recent years, offering consumers both lower prices and improved product choice. But not everyone has welcomed wine electronic commerce, especially the old-economy liquor distributors. They have prevailed upon many state governments to outlaw this new form of competition.

Fortunately, the tide is turning against Internet prohibition, as four of these laws have recently been struck down on constitutional grounds. But the controversy is by no means over, and in fact may be headed to the U.S. Supreme Court, with implications for all manner of Internet commerce.

On Nov. 12, the U.S. District Court for the Southern District of New York, in Swedenburg v. Kelly, struck down a New York law banning direct mail shipments of wine from out-of-state (but not in-state) wineries to in-state consumers. The court found that New York's law violated the Constitution's commerce clause, which prohibits the states from enacting measures designed to protect in-state interests from outside competition. The judge concluded that any legitimate purposes of the law, such as ensuring the collection of sales taxes and preventing sales to minors, could be handled in ways less protectionist and discriminatory than a total ban on out-of-state direct shipments.

Three other recent federal district court decisions struck down similar laws in Virginia, North Carolina and Texas. These cases were brought by several in-state consumers who wish to shop for wine over the Internet and have it mailed directly to their residences. Consumers purchasing wine in that manner can save money by cutting out the middleman (despite the shipping costs) and enjoy expanded product choice. Several out-of-state wineries joined them, mostly small ones that see Internet sales as their last, best hope of survival—major distributors rarely bother to carry their low-volume vintages. These cases represent a major setback for the alcoholic-beverage distributors trying to hang on to their state-sanctioned monopoly status and exorbitant markups, as well as for the state governments that enacted protectionist laws to accommodate their interests.

21st Amendment Lives On

Nonetheless, the constitutional status of these and other state bans is still unsettled. Indeed, in the first such case to reach the U.S. Court of Appeals, the 7th Circuit upheld Indiana's ban on out-of-state direct shipping. In Bridenbaugh v. Freeman-Wilson, the court relied heavily on another constitutional provision, the 21st Amendment. Although best known for ending the federal experiment in prohibition, the 21st Amendment also granted the states considerable authority to regulate alcoholic beverages. The court in Bridenbaugh found that Indiana's direct-shipping restrictions fall within this authority. In effect, the court concluded that when it comes to alcoholic beverages, states have a wide berth under the 21st Amendment to enact measures that may otherwise violate the commerce clause.

However, a more recent 11th Circuit decision handled this clash of constitutional provisions very differently than in Bridenbaugh. In reviewing a district court decision upholding Florida's direct-shipping law, the 11th Circuit in Bainbridge v. Turner criticized Bridenbaugh and held that the 21st Amendment can trump the commerce clause only under limited circumstances.

Consequently, the balance between the commerce clause and the 21st Amendment is currently unclear. "The differing approaches taken by the 7th and 11th circuits enhance the chances that the Supreme Court will eventually take up the issue," said Steve Simpson, an attorney with the Institute for Justice in Washington, D.C., a free-market public-interest law firm that litigated the New York case.

If so, it will be the first such Internet commerce controversy to be heard by the high court. Though the 21st Amendment is unique to alcoholic beverages, a Supreme Court decision protecting interstate direct shipping of wine under the commerce clause could have consequences for many other products. Beyond wine, middlemen for such goods as cars, real estate, contact lenses and pharmaceuticals have erected similar state barriers to Internet sales. According to a study by the Progressive Policy Institute, removing these barriers could save consumers $15 billion a year.

Thus, the outcome of the wine dispute could open wide or substantially shut the door to the promise of Internet commerce.