Repealing E-Prohibition

Elliot Ness may have missed out on the web, but alcohol prohibition is alive and well over the Internet. More than half the states forbid residents from buying wine online and having it shipped to them from outside the state. Things may be changing, however, as three recent court decisions have come down in favor of Internet wine sales. The implications could affect e-commerce in other products as well. On July 17, the U.S. District Court for the Southern District of Texas struck down that state's restrictions on direct shipments of wine from out of state producers to in-state consumers. In Dickerson v. Bailey, Judge Melinda Harmon ruled that Texas' law violates the constitutional rights of both the out of state wineries and their prospective Texas customers. This decision comes only months after federal district courts rejected similar laws in Virginia and North Carolina. Several other cases are pending, including a challenge to New York's direct shipping ban, so 2002 could prove to be the turning point in the battle to legalize Internet wine sales. Roots of controversy This debate has its roots in the 21st Amendment, which repealed the national experiment in prohibition, and granted the states considerable authority to regulate commerce in alcoholic beverages. Today, each state has a strictly regulated system through which all sales must be channeled. The ostensible purpose of state controls is the orderly regulation of alcoholic beverage markets, including the collection of excise taxes and the prevention of purchases by minors. The biggest effect, however, has been economic — the creation of a limited network of state-licensed distributors and retailers. In some states, as few as two or three mega-distributors control virtually the entire market, and the markups for alcoholic beverages exceed those of nearly every other consumer good. Over the past decade, the Internet has emerged to challenge this status quo. Winery websites and online wine merchants have generated a growing volume of mail-order wine transactions. Wine websites are an excellent source of information before making a purchase, and direct shipping offers considerable advantages. Consumers can save a bundle by bypassing their state-licensed distribution monopoly and its exorbitant markups. Product choice is also expanded, as thousands of small-volume vintages, mostly ignored by large distributors and unlikely to obtain liquor store shelf space, are now available. The benefits extend to producers as well as consumers. All but about 20 of America's 2,000 wineries are small ones, and many of them see Internet sales as their last best hope of survival in a market otherwise skewed against the little guy. “Traditional distribution avenues are insufficient for the shipment and delivery from these numerous small producers,” says George Radanovich, R-Calif., one of two small winery owners currently serving in Congress and co-chair of the Congressional Wine Caucus. “The Internet and other alternative channels of distribution have helped these small wineries stay afloat,” he adds. Middlemen strike back But the big distributors aren't ready to give up their favored position. Led by the Wine & Spirits Wholesalers of America, they have used their lobbying clout to crack down on this new form of competition. Today, 28 states greatly restrict or completely forbid direct shipments of wine and other alcoholic beverages. Only 22 states allow it. Of the 28, seven have made such transactions a felony. Debate over the legality of these bans centers around clashing constitutional provisions. While the 21st Amendment grants states authority to regulate alcoholic beverages, the so-called Commerce Clause prohibits states from enacting measures designed to favor in-state interests against out of state competitors. When direct shipping laws drift away from legitimate state regulation of alcoholic beverages and towards protectionism, they are more likely to be found unconstitutional. Courts are particularly skeptical of state laws that restrict out of state wineries from direct shipping, but allow it for in state wineries. This was true of the statutes in Virginia, North Carolina, and Texas, and each decision emphasized the discriminatory impact based solely upon a wine's place of origin. These cases bode well for Swedenberg v. Kelly, the challenge to New York's direct shipping ban. “New York's law also exempts in-state wineries and is equally vulnerable,” says Steve Simpson, an attorney with the Institute for Justice, a public interest group representing several out of state wineries and New York wine consumers. Given that New York is the second largest wine consuming state, this decision will take on added significance. But the end of Internet prohibition is far from certain. Earlier challenges to direct shipping laws in Florida, Indiana, and Michigan have failed. And Judge Harmon conceded in Dickerson v. Bailey that “this is a gray area of law,” noting that “the Supreme Court has not specifically addressed state bans on direct importation of wine.” Given the split in lower federal court decisions, Simpson believes that the chances are “pretty high” that the Supreme Court will eventually take up this issue. The outcome of this dispute has broader implications for e-commerce. According to the Federal Trade Commission, “many states have enacted regulations that have the direct effect of protecting local merchants from competition over the Internet.” In addition to wine, the FTC mentioned automobiles, real estate, pharmaceuticals and other products in which old economy middlemen are trying to use state laws and regulations to protect themselves against Internet competition. A Progressive Policy Institute study estimates that such restrictions cost consumers $15 billion a year. Thus, a Supreme Court decision on Internet wine sales could reaffirm the basic wisdom of the Commerce Clause and its preservation of national markets. The Internet only adds to the need to restrain the efforts of local businesses to misuse the powers of states for monopolistic ends.