No. 10-671 In The Supreme Court of" the United States WINE COUNTRY GIFT BASKETS.COM, ET AL., Petitioners, JOHN T. STEEN, JR., ET AL., Respondents. On Petition for Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit BRIEF FOR ECONOMISTS, LAW AND ECONOMICS SCHOLARS, AND FORMER FTC OFFICIALS AS AMICI CURIAE IN SUPPORT OF PETITIONERS TODD J. Zh~7ICKI George Mason Universikv School of Law 3301 Fairf’ax Dr. Arlington, VA 22201 JOSHUA D. WRIGHT George Mason University School of Law 3301 Fairfax Dr. Arlington. VA 22201 ANDREW G. MCBRIDE Counsel of Record ~[HOMAS R. MCCARTHY Wiley Rein LLP 1776 K Street NW Washington, DC 20006 (202) 719-7000 amcbride~.a wileyrein.com Coz~nscl for Amici C~zriae
Transcript
No. 10-671
In The
Supreme Court of" the United States
WINE COUNTRY GIFT BASKETS.COM, ET AL.,Petitioners,
JOHN T. STEEN, JR., ET AL.,Respondents.
On Petition for Writ of Certiorari to the UnitedStates Court of Appeals for the Fifth Circuit
BRIEF FOR ECONOMISTS, LAW ANDECONOMICS SCHOLARS, AND FORMER FTCOFFICIALS AS AMICI CURIAE IN SUPPORT
OF PETITIONERS
TODD J. Zh~7ICKIGeorge Mason Universikv
School of Law3301 Fairf’ax Dr.Arlington, VA 22201
JOSHUA D. WRIGHTGeorge Mason University
School of Law
3301 Fairfax Dr.Arlington. VA 22201
ANDREW G. MCBRIDECounsel of Record
~[HOMAS R. MCCARTHYWiley Rein LLP1776 K Street NWWashington, DC 20006
(202) 719-7000amcbride~.a wileyrein.com
Coz~nscl for Amici C~zriae
B~ank
TABLE OF CONTENTS
Table of Contents ..........................................................i
Table of Authorities ....................................................111
Interest of Amici Curiae ..............................................Statement ....................................................................Summary of Argument ................................................2
I. The Decision Below Undermines theDormant Commerce Clause By ImproperlyLimiting Grat~holm to "Producers" andConsumers Who Buy Directly fromProducers ................................................................5
II. The Decision Below Improperly DispensesWith Granholm’s Two-Step DormantCommerce Clause Analysis ...................................9
III.The Failure of the Fifth Circuit To ProperlyApply Granholm’s Two-Step Analysis WillEncourage Protectionist Regulation, HarmConsumers, and Harm InterstateCommerce in Violation of the Constitution .........12A. By Refusing to Rigorously Scrutinize
Discriminatory Regulation, the FifthCircuit’s Opinion Encourages SpecialInterests and State Politicians to EvadeGranholm’s Mandates .....................................
B. By Failing to Rigorously ScrutinizeProtectionist State Regulation, the FifthCircuit’s Opinion will Result inSubstantial Harm to Consumers, Out-of-State Sellers, and Interstate Commerce ........17
iiC. Once the Court Identifies a Facially
Discriminatory Regulation, the Burdenis on the State to Justify the Regulationand the Necessity of Discrimination ..............23
Granholm v. Heald, 544 U.S. 460 (2005) ..........passim
North Dakota v. United States,495 U.S. 423 (1990) ..................................................3
West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 202(1994) .................................................................... 8, 9
Other Authorities
Alan E. Wiseman & Jerry Ellig, The Politics of Wine:Trade Barriers, Interest Groups, and the CommerceClause, 69 J. POLITICS. 859 (2007) ................... 21, 22
Cass Sunstein, Naked Preferences and theConstitution, 84 COLUM. L. REV. 1689 (1984) ....... 17
Daniel L. McFadden, E. Morris Cox Professor ofEcon., Univ. of Cal., Berkeley, Interstate WineShipments and E-Commerce ................................. 12
Dennis Carlton & Judith Chevalier, Free Riding andSales Strategies for the Internet, 49 J. INDUS. ECON.441 (2001) ............................................................... 20
Erik Brynjolfsson & Michael D. Smith, FrictionlessCommerce? A Comparison of Internet andConventional Retailers. 46 MANAGEMENT SCIENCE
Gina M. Riekhof & Michael E. Sykuta, Politics,Economics, and the Regulation of Direct InterstateShipping in the Wine Industry, 87 AM. J.AGRICULTURAL ECON. 439 (2005) ........................... 16
Gina M. Riekhof & Michael E. Sykuta, RegulatingWine by Mail, 27 No. 3, REG. 30 (2004) ................. 16
James C. Cooper & Joshua D. Wright, StateRegulation of Alcohol Distribution: The Effects ofPost and Hold Laws on Consumption and SocialHarms (Fed. Trade Comm’n, Working Paper No.304, August 2010) .................................................. 15
Jerry Ellig & Alan E. Wiseman, CompetitiveExclusion with Heterogeneous Sellers: The Case ofState Wine Shipping Laws (Mercatus Center,George Mason Univ., Working Paper, Dec. 20,2010) ....................................................................... 22
Jerry Ellig & Alan E. Wiseman, Interstate TradeBarriers and Potential ReguIato~ Competitiort: TheCase of Direct Wine Shipping, 19 g. PRIVATEENTER., no. 2. 2004 ................................................. 21
Karen Clay et al., Prices and Price Dispersion on theWeb: Evidence from the Online Book Industry, 49 J.INDUS. ECON. 521 (2001) ........................................ 20
Letter from Fed. Trade Comm’n Staff to WilliamMagee, Chairman, N.Y. Assembly AgricultureComm. (Mar. 29, 2004) .................................... 18, 25
Maureen K. Ohlhausen & Gregory P. Luib, MovingSideways: Post-Granholm Developments in WineDirect Shipping and Their Implications forCompetition, 75 ANTITRUST L.J. 505 (2008) .......... 14
Peter Zwiebach, Consolidation Marches on asLeading Players Expand, IMPACT: GLOBAL NEWSAND RESE.~RCH FOR THE DRINKS EXECUTIVE, Apr.15-May I 2009 ........................................................ 17
Press Release, L.D. Johnston et al., Univ. of Mich.,Marijuana Use is Rising; Ecstasy Use is Beginningto Rise; and Alcohol Use is Declining Among U.S.
THE FEDERALIST No. 10 (James Madison) ................16
Todd Zywicki & Asheesh Agarwal, Wine, Commerce,and the Constitution, 1 N.Y.U.J. LAW & LIBERTY609 (2005) ......................................................... 10, 11
Wayne T. Brough, No Wine Shall be Served Before ItsTime--At Least Not Without Wholesalers Taking aCut, Issue Analysis, July 14, 2010 ........................ 18
INTEREST OF AMICI CURIAE1
The amici curiae submitting this brief are econo-mists, law and economics scholars, and former FTCofficials who teach, conduct research, and publish oneconomics and economic regulation. A list of amici isset forth in the appendix hereto.
Amici have no financial interest in any party tothe case or in the outcome of the case.
STATEMENT
Petitioners seek a writ of certiorari to review a de-cision of the United States Court of Appeals for theFifth Circuit rejecting a challenge to a facially dis-criminatory Texas state law that permits in-state re-tailers to accept remote orders and directly ship alco~holic beverages but denies that same right to out-of-state businesses. Petitioners contend that the Texaslaw violates the dormant Commerce Clause of theUnited States Constitution as interpreted in Gran-holm v. HeaId, 544 U.S. 460 (2005). The Fifth Circuitaffirmed a grant of summary judgment in favor ofRespondents, holding that Texas’s discriminatory re-gime was permissible without requiring the state tojustify its discrimination with a legitimate regulatoryinterest.
1 This brief is filed pursuant to notice provided to the parties
more than ten days before the filing of the brief and their writ-ten consent. No counsel for a party authored this brief in wholeor in part. Professors Todd Zywicki and Joshua Wright receivedfunding for preparation and submission of this brief from Fami-ly Winemakers of California, a 625 member statewide associa-tion of wine producers, independently owned vineyards, andsuppliers, founded in 1991 and based in Sacramento, California.
2
Amici fully endorse Petitioners’ arguments ex-plaining why a grant of certiorari is appropriate here.Amici write separately to highlight the harm to smallwineries, consumers, and interstate commerce fromallowing states to enact discriminatory barriers to in-terstate commerce in wine and other alcoholic beve-rages. The Federal Trade Commission describes dis-criminatory state laws inhibiting direct shipment as"the single largest regulatory barrier to expanded e-commerce in wine." FEDERAL TRADE COMMISSION,POSSIBLE ANTICOMPETITIVE B~%RRIERS TO E-COMMERCE:WINE (2003) [hereinafter "FTCReport"],at 3, available athttp://www.ftc.gov/os/2OO3/O7/winereport2.pdf, andthe decision below perpetuates this harm. Moreover,the Fifth Circuit’s opinion will result in substantialharm to consumers, small wineries, and interstatecommerce, and will invite evasion of Granholm’s pro-tections by politicians and special interests seeking toerect protectionist policies, notwithstanding Gran-holm’s guarantee of equal access to America’s mar-kets for wineries and consumers. Given the impor-tance of this issue to American consumers~ smallwineries, and interstate commerce, and the increas-ing uncertainty caused by tensions arising from judi-cial efforts to apply Granholm to various state laws,
it is essential for this Court to review the decision ofthe Fifth Circuit. See, e.g., Freeman v. Corzine, _F.3d ,2010 WL 5129219 (3d. Cir. 2010) (applyingGranholm to New Jersey law).
SUMMARY OF ARGUMENT
1. The decision below conflicts with this Court’sreasoning in Granholm v. Heald, 544 U.S. 460 (2005),
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undermines the system of nondiscriminatory and ro-bust interstate commerce guaranteed by the Com-merce Clause of the Constitution, and imposes unjus-tiffed injury on the nation’s citizen-consumers andwine producers. The Texas regulatory scheme ex-pressly discriminates between in-state and out-of-state wine retailers, striking at the heart of reasona-ble, non-discriminatory regulation recognized inGranholm.
2. The decision below will result in substantialharm to consumers, small wineries, and interstatecommerce. It rests on three fundamental errors withprofound economic consequences. First, the FifthCircuit improperly limits Granholm and thus thedormant Commerce Clause’s protections to "produc-ers." As such, a retailer of wine is protected byGranholm only if it is also vertically integrated intoproduction of the wine that it sells even if distribu-tion through a retailer would be more efficient. Nei-ther Granholm’s logic nor the dormant CommerceClause compel the vertical integration of productionand retailing to gain the protection of the dormantCommerce Clause.
Second, rather than applying the two-step analysismandated by Granholm, the Fifth Circuit began andended its analysis with the dicta in Granholm thatthe three-tier system is "unquestionably legitimate."544 U.S. at 489 (quoting North Dakota v. UnitedStates, 495 U.S. 423, 432 (1990)). The Fifth Circuit,finding that discrimination is inherent in the three-tier system, read this passage as endorsing discrimi-nation against out-of-state retailers.
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Third, the Fifth Circuit’s opinion fails to properlyconsider the constitutional and economic purposes ofthe dormant Commerce Clause and the need to limitevasion of this Court’s Granholm decision by statesand interest groups seeking to erect discriminatorybarriers to interstate commerce. These three misap-plications of Granholm and the dormant CommerceClause underscore the need for this Court to reaffirmGranholm in order to guarantee the benefits of thedormant Commerce Clause and to prevent further ef-forts to erect discriminatory barriers to interstatecommerce.
3. Granholrn expressly recognized the economicvalue of vigilant enforcement of the dormant Com-merce Clause against discriminatory trade barriers.Granholm has mitigated but has not eliminated thecentral economic problem identified there: wholesalerconsolidation and barriers to entry creating a bottle-neck hampering the distribution of wine, especiallythe ever-growing number of small wineries seeking tobring their products to market. Permitting out-of-state retailers to compete on equal terms with in-state retailers will allow a more efficient system ofdistribution, reduce prices and increase variety for
consumers, and enhance competitive opportunities
for America’s small wineries.
ARGUMENT
I. The Decision Below Undermines the Dor-mant Commerce Clause By Improperly Li-miting GranhoDn to "Producers" and Con-sumers Who Buy Directly from Producers
The decision below rests on the flawed premisethat Granholm applies only to "producers" and not toany other elements of the three-tier system. SeeWine Country Gift Baskets, 612 F.3d at 818 ("The dis-crimination that Granholm invalidated was a State’sallowing its wineries to ship directly to consumersbut prohibiting out-of-state wineries from doing so..¯ . Such discrimination--among producers--is not thequestion today."); id. at 820 ("Granholm prohibiteddiscrimination against out-of-state products or pro-ducers. Texas has not tripped over that bar by allow-ing in-state retailer deliveries.") This reading wouldforeclose more efficient systems of alcohol distribu-tion, resulting in harm to consumers, small wineries,and interstate commerce.
Even a cursory reading of Granholm reveals thatit focuses on "producers" simply because the plaintiffsin that case happened to be out-of-state producersand the state law in question was designed to benefitlocal producers. But its language and logic are notlimited to producers. And for good reason. The dor-mant Commerce Clause protects not producers, butcommerce--buying and selling--across state lines¯Whether a retailer is also vertically integrated toproduction is immaterial to this protection.
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Simply put, there is no basis in logic, economicreasoning, or constitutional law to justify an artifi-cially narrow reading of Granholm that protects only"producers." By focusing on the identity of the sellerof a product, the decision below ignores the funda-mental principle of the dormant Commerce Clause--to promote consumer welfare and supplier competi-tion in a national market unencumbered by discrimi-natory trade barriers. See Granholm, 544 U.S. at 473("Laws of the type at issue in the instant cases con-tradict the~ principles [of the dormant CommerceClause]. They deprive citizens of their right to haveaccess to the markets of other States on equalterms.")
Furthermore, Granholm did not merely establishCommerce Clause protections for wine producers, butalso for consumers and sellers to transact free of dis-criminatory state regulation. As the Court explainedat the outset of its opinion, "States may not enactlaws that burden out-of-state producers or shipperssimply to give a competitive advantage to in-statebusinesses." Id. at 472 (emphasis added). This Courtonly mentioned the plaintiffs’ status as "producers"because the particular Michigan and New York lawsin question exempted in-state producers from salesrestrictions those same laws imposed upon out-of-state wine producers. That the out-of-state sellers inthat case also happened to produce the products thatthey sold was coincidental to Granholm’s conclusion.The relevant question instead is rather whether simi-larly-situated sellers of a product were being treated
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in a non-discriminatory manner.2 Nothing in Gran-holm or any other case supports the Fifth Circuit’scontention that only production combined with retailsale is protected by the dormant Commerce Clause.
Under the Fifth Circuit’s logic, a producer wouldlose the dormant Commerce Clause’s protection if itdecided that it would be more efficient to sell to con-sumers via a retailer instead of directly distributingits own products. Distribution through a professionalretailer provides multiple economic benefits whichredound to consumers. Retailers develop expertise inmarketing and selling wine to consumers that indi-vidual wineries may lack, especially smaller wineries.Retailers have economies of scale in marketing, orderfulfillment, and tax and regulatory compliance thatallow them to sell to consumers at lower expense andwith greater efficiency than small wineries. Special-ty retailers may also be a credible source of productinformation to consumers. These benefits provideconsumers with greater choice, reduced prices, andreduced information costs in choosing and purchasingwine products. All of these benefits of the ability touse professional retailers to market products are ofparticular benefit to smaller wineries and, in turn, towine consumers.
Under the Fifth Circuit’s flawed theory, however,the dormant Commerce Clause protects only consum-ers seeking to buy products produced by the sellerfrom whom the consumer wishes to purchase. This
~- See Freeman, __ F.3d at *8 (holding that out of state pro-ducers that sell wine "at retail to consumers" must be treated onequal footing as in-state producers that sell wine "at retail toconsumers").
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would imply, for example, that Granholrn protects aconsumer sending a gift basket of wine or enrolling ina "wine of the month" club--but only if the order it-self is to be fulfilled by one winery filling its own or-der. This proposed constitutional limitation begsquestions. Would two small wineries that banded to-gether to offer gift baskets that combine their winesinto one basket be protected from state-sanctioneddiscrimination? Would three wineries within a mar-keting cooperative to jointly market and fulfill ordersfor their products be protected? Presumably underthe Fifth Circuit’s opinion, all commercial arrange-ments other than a single retailer vertically inte-grated from production of wine to retail sale wouldfall outside Granholm because each individual wine-ry was not receiving and fulfilling each individual or-der, even if a third party could do so at lower cost andhigher consumer value.
Nothing in Granholm compels this absurd result.The dormant Commerce Clause does not require ver-tical integration for its protections. Indeed, thisCourt has emphasized that "the imposition of a diffe-rential burden on any part of the stream of com-
merce--from wholesaler to retailer to consumer--isinvalid, because a burden placed at any point will re-sult in a disadvantage to the out-of-state producer."West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 202(1994). There is nothing in the dormant CommerceClause that conditions non-discriminatory access tomarkets on adopting a specific mode of business or-ganization or method of distribution.
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II. The Decision Below Improperly DispensesWith Granholm’s Two-Step Dormant Com-merce Clause Analysis
The Fifth Circuit erred in reading Granholm asendorsing all three-tier systems as "unquestionablylegitimate," even those that discriminate against out-of-state shippers. Under Granholm, however, theCourt is required to apply a two-step process of anal-ysis that is designed to protect interstate commerceby ensuring that discriminatory barriers to interstatecommerce in alcohol are justified. This analysis be-gins with a determination of whether the discrimina-tion was necessary to effectuate the state’s regulatoryscheme. Only afterwards may the court considerwhether the Twenty-First Amendment saved the dis-criminatory regulation.
This analysis is the same whether the product inquestion is fresh grapes or grapes that have beenvinted into wine. See, e.g., West Lynn Creamery, Inc.v. Healy, 512 U.S. 186 (1994). When a state enacts adiscriminatory regulatory regime governing alcohol,the state must justify the discrimination as necessaryto the fulfillment of legitimate regulatory purposes.Texas’s regulatory regime discriminates against out-of-state wineries and merchants.
Yet, the Fifth Circuit began and ended its analysiswith Granholm’s dicta dubbing the three-tier system"unquestionably legitimate," Granholm, 544 U.S. at489, in the abstract. The court did not consider thediscriminatory nature of the state regulation muchless whether it was justified. Because it was part of athree-tier system, the court found it insulated fromthe application of the dormant Commerce Clause.
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Notably, the Fifth Circuit erroneously concludedthat discrimination at the retail level is integral tothe three-tier system. The Fifth Circuit thereby cha-racterized this case as a frontal challenge on the va-lidity of the entire three-tier system itself. But dis-crimination is not inherent to the operation of thethree-tier system. As Petitioner notes, several statesoperate three-tier systems without discrimination.See Brief for Petitioner at 13. There is nothing inhe-rent in the three-tier system that would justify allow-ing in-state retailers but not out-of-state retailers toaccept remote orders and fulfill them by delivery.
As the Court recognized in Granholm, the purposeof Section 2 of the Twenty-First Amendment was thesame as the purpose of the Wilson and Webb-KenyonActs that preceded it: to allow the state police powerto regulate alcohol moving in interstate commerce tothe same extent as alcohol in intrastate commercebut subject to the limitation that states could noterect discriminatory barriers. GranhoIm, 544 U.S. at484-85. rl’he Twenty-First Amendment, like its pre-decessors the Wilson and Webb-Kenyon Acts, in-tended to grant the states regulatory parity - to pre-vent states from having to treat out-of-state retailersof alcohol on more favorable terms than in-state ven-dors, not to permit plenary authority to discriminateagainst interstate commerce. Todd Zywicki &Asheesh Agarwal, Wine, Commerce, and the Constitu-tion, 1 N.Y.U.J. Law & LIBERTY 609 (2005).
The three-tier system may be, as a starting point,"unquestionably legitimate." But this does not au-thorize states to violate the Commerce Clause anymore than it would authorize a state to violate any
II
other Constitutional protection as part of the imple-mentation of the three-tier system. See ZywicM &Agarwal, supra, at 639-40. While some early casessuggested that the Twenty-First Amendment essen-tially repealed the dormant Commerce Clause as itapplied to interstate commerce in alcohol, those samecases asserted that the Twenty-First Amendment al-so protected state alcohol regulation from scrutinyunder the Fourteenth Amendment. See Bd. of Equa-lization of Cal. v. Young’s Mkt. Co., 299 U.S. 59, 64(1936) (rejecting Equal Protection challenge to statealcohol regulation as "[a] classification recognized bythe Twenty-First Amendment cannot be deemed for-bidden by the Fourteenth.") As this Court has subse-quently and repeatedly recognized, the Twenty-FirstAmendment no more deprives citizens of the dormantCommerce Clause’s protection from discriminationthan it protects them from discrimination under theFourteenth Amendment. See Craig v. Boren, 429U.S. 190 (1976) (holding that "the operation of theTwenty-first Amendment does not alter the applica-tion of the equal protection standards that wouldotherwise govern this case").
The decision below thus rests upon fundamentaldoctrinal and conceptual errors that sharply under-mine the dormant Commerce Clause. Review iswarranted so that this Court preserve the protectionsof the dormant Commerce Clause for consumers andwineries and prevent evasion of GranhoIrn by inter-est groups and state legislatures.
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III. The Failure of the Fifth Circuit To ProperlyApply Granholm’s Two-Step Analysis WillEncourage Protectionist Regulation, HarmConsumers, and Harm Interstate Com-merce in Violation of the Constitution
The Fifth Circuit’s failure to properly conductGranholm’s two-step analysis injures consumers andthe economy by undermining the integrated nationaleconomy the dormant Commerce Clause protects.Application of the two-step analysis required byGranholm is necessary in order to prevent evasion ofthe dormant Commerce Clause’s anti-discriminationmandate thereby ensuring that laws further regula-tory, not protectionist, purposes. Insulating thewhole three-tier system from judicial review invitescircumvention of this Court’s Granholm decisionthrough legislative gerrymandering. The only rele-vant question left for states would be how to plausi-bly label all manners of discriminatory interstateprotectionism as essential to the three-tier system.
This threat is especially dangerous in the area ofalcohol regulation, where as Nobel Laureate DanielMcFadden has observed, the political economy ofstate legislative and regulatory process systematical-ly disadvantage the interests of consumers and out-of-state suppliers relative to those of wholesalers.See Daniel L. McFadden, E. Morris Cox Professor ofEcon., Univ. of Cal., Berkeley, Interstate Wine Ship-merits and E-Commerce 2, available athttp://www.ftc.gov/opp/ecommerce/anticompetitive/panel/mcfadden.pdf ("I find it particularly sad that theanti-interstate shipping legislation that has beenpassed is so disproportionate in its negative impacton consumers relative to the very modest protectionit provides to traditional distributors and retailers.").
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Absent rigorous scrutiny by federal courts, wholesa-ler-dominance of the legislative and regulatoryprocesses will result in rampant evasion of theCourt’s holding in Granholm and significant welfarelosses imposed upon consumers.
A. By Refusing to Rigorously Scrutinize Discrimi-natory Regulation, the Fifth Circuit’s OpinionEncourages Special Interests and State Politi-cians to Evade Granholm’s Mandates.
Interest groups and state legislatures have workedceaselessly to undermine Granholm. Legislatureshave developed several types of camouflage to sal-vage discriminatory regimes. The Fifth Circuit’s opi-nion will greatly simplify this process: every discri-minatory element that a state asserts as essential toits three-tier regulatory regime would be deemed"unquestionably legitimate." Indeed, the Fifth Cir-cuit’s interpretation renders Granholm itself a near-nullity, enabling direct shipments of wine directlyfrom producers to consumers, but providing no otherlimits on regulations of a myriad of economically sim-ilar transactions (as noted above). It is essential forthis Court to reaffirm the importance of Granholm tolimit these evasions.
In 2007, two officials of the Federal Trade Com-mission undertook a comprehensive review of statelegislative responses in the wake of Granholm andthe negative impact those evasions continued to haveon consumers and interstate commerce. Maureen K.Ohlhausen & Gregory P. Luib, Moving Sideways:Post-Granholm Developments in Wine Direct Ship-ping and Their Implications for Competition, 75 AN-
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TITRUST L.J. 505 (2008). As Ohlhausen and Luibnote, in the wake of Grant, olin, several states in-vented new restrictions on direct shipping that typi-cally fall more heavily on out-of-state producers.These included restrictions such as on-site purchaserequirements and production limitations.3 In somecases, these new restrictions "effectively make directshipping by out-of-state wineries economically im-possible." Ohlhausen & Luib, supra at 506. Theynote that "[r]estrictions on direct shipping, includingthose enacted in the wake of Granholm, have adverseeffects on consumers of wine. Such restrictions pre-vent consumers from conveniently purchasing manypopular wines and from reaping significant price sav-ings on some wines. Further, direct shipping fosterscompetition between online and offline sellers ofwine--even if consumers choose to buy wine frombricks-and-mortar retailers." Id. at 506. They con-clude that "[a] Commerce Clause challenge may bethe only practical way to attack these restrictions andprotect the interests of producers and consumers inenjoying the benefits of a competitive, national mar-ket." Id. Moreover, they warn that the failure of thisCourt to protect consumers and interstate commerce
’~ Family g,~’nemakers of Cal. c’. Jenkins, 592 F.3d 1 (1st Cir.2010) illustrates the importance of judicial vigilance to preventevasion of the dormant Commerce Clause. In 2006 Massachu-setts enacted a facially neutral law that created distinct distri-bution regimes for "small" and "large" wineries, as defined byoutput of more or less than 30,000 gallons per year. While fa-cially neutral, ti~e t~irst Circuit recognized that no Massachu-setts winery produced more than 30,000 gallons per year. TheFirst Circuit thereby invalidated the state law under Granholmas discriminatory in effect.
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from these evasions will invite further surreptitioustrade barriers erected to protect in-state merchantsfrom out-of-state competition.
As this legislative response to Granholm indicates,state legislatures are highly prone to erecting harm-ful discriminatory barriers to interstate commerce.Consumer interests tend to be systematically under-represented in political processes as consumers aresubject to collective action and free-riding problems.See ~¥L~NCUR OLSON, THE LOGIC OF COLLECTIVE AC-TION (1965). By contrast, wholesalers present a cohe-sive, well-organized lobbying machine. Such anasymmetry in lobbying power increases the threat ofprotectionist legislation motivated by wholesaler spe-cial interest groups. Thus, allowing states to author-ize alcohol cartels enables financially interested fi~m~to reap cartel profits at the expense of consumers, of-ten in ways that do not materially further any legiti-mate interest of the state.
Studies of state alcohol markets confirm thesesuspicions. In most states, wholesalers and stategovernments combin~ to impose losses on consumersto increase both profits and tax revenues. See JamesC. Cooper & Joshua D. Wright, State Regulation ofAlcohol Distribution." The Effects of Post and HoldLaws on Consumption and Social Harms (Fed. TradeComm’n, Working Paper No. 304, August 2010) (de-monstrating that state post and hold regulations re-..sult in a reduction in consumer welfare with no off-setting reduction in the social harms associated withalcohol consumption), available athttp://www.ftc.gov/be/workpapers/wp304.pdf; Gina M.Riekhof & Michael E. Sykuta, Politics, Economics,
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and the Regulation of Direct Interstate Shipping inthe Wine Industry, 87 AM. J. AGRICULTURAL ECON.439 (2005); Gina M. Riekhof & Michael E. Sykuta,Regulating Wine by Mail, 27 No. 3, REG. 30 (2004).Riekhof and Sykuta conduct an empirical analysis ofstate wine direct shipping "reciprocity" laws to findthat interest-group struggles and tax revenues pri-marily determine state alcohol regulatory policies. Ina few states, the domestic wine industry is sufficient-ly strong and well-organized that it can sometimesexert a counter-weight to anti-consumer wholesalerinterests. Riekhof and Sykuta find that consumer in-terests predominate in absolutely no states. When astate lacks a large wine-producing sector that canprovide a political counterweight to wholesaler inter-ests, however, consumers are at the mercy of whole-saler interests.
By limiting the capacity of states to engage in dis-criminatory regulation, a primary function of thedormant Commerce Clause is to temper the ability oflocal interest group factions to weaken national mar-kets and erode individual liberty. THE FEDERALISTNo. 10 (James Madison). Discriminatory laws trans-fer wealth to small, cohesive special interests at theexpense of millions of consumers that are hard to or-ganize politically and out-of-state sellers that have noability to vote and limited ability to participate instate political processes. These trends reflect thegrim reality that discriminatory interstate lawstempt politicians to reward special interest groups atthe cost of consumer welfare. These forces unders-core the need for vigilance by this Court to preventinterest-group motivated evasions of the dormant
17
Commerce Clause. See Cass Sunstein, Naked Prefe-rences and the Constitution, 84 COLUM. L. REV. 1689(1984).
B. By Failing to Rigorously Scrutinize Protection-ist State Regulation, the Fifth Circuit’s Opinionwill Result in Substantial Harm to Consumers,Out-of-State Sellers, and Interstate Commerce.
This Court’s decision in Granholm produced majoreconomic benefits for consumers and the economyand led to a blossoming of smaller wineries by freeingnew producers from an innavigable and shrinkingbottleneck of wholesalers. As noted in Granholm, be-tween 1984 and 2002 the number of licensed whole-salers nationwide dropped from 1,600 to 600 whilethe number of wineries had grown to over 3,000.Granholm, 544 U.S. at 467. Since Granholm, thenumber of wineries has increased to over 6,000, seeGrowth of the U.S. Wine Industry,http://www.wineamerica.org/newsroom/wine%20data%20center/2010-Growth-of-U S-Wine-Industry.pdf(last visited Dec. 19, 2010), suggesting that discrimi-natory state regulation was a significant and bindingconstraint on competition and consumer choice in thewine market. By contrast, some industry analystsclaim that the wholesaler industry has become evenmore consolidated and concentrated since then. Pc-ter Zwiebach, Consolidation Marches on as LeadingPlayers Expand, IMPACT: GLOBAL NEWS AND RE-
SEARCH FOR THE DRINKS EXECUTIVE, Apr. 15-May 12009, at 1, 22. One indication of the wholesaler’s re-gulatorily-preferred position is that while the returnon equity (an accounting measure of profitability
used by many investors) in less-protected wholesaleindustries averages ii percent a year over the pasti0 years, the return in alcohol wholesaling rangesfrom 18-20 percent, 66 to 83 percent higher. See
Wayne T. Brough, No Wine Shall be Served Before ItsTime--At Least Not Without Wholesalers Taking aCut, Issue Analysis, July 14, 2010.
As the Federal Trade Commission has noted, byexpanding efficiency, competition, and consumerchoice, further breaking down discriminatory bar-tiers to retailing will expand the benefits that wereseeded by Granholm. See Letter from Fed. TradeComm’n Staff to William Magee, Chairman, N.Y. As-sembly Agriculture Comm. (Mar. 29, 2004) (observingthat "allowing out-of-state retailers, as well as wine-ries, to ship directly to consumers would provide ad-ditional competition that likely would lead to evenlower prices for such consumers"), available athttp://www.ftc.gov/be/v040012.pdf. Direct shipmentby out-of-state retailers enables small and mediumwineries to distribute their products to retailers whocan then sell and ship a greater variety of products toconsumers. These retailers will otherwise struggle to
find distribution as a result of the wholesaler bottle-neck. This will naturally expand the economic bene-fits created by Granholm, leading to lower prices,
broader selection, and greater consumer convenience.Just as Internet and catalogue shopping have revolu-tionized other areas of retail shopping for the benefit
of consumers, prying open previously closed marketsto allow heightened competition by out-of-state re-tailers holds the potential for vast consumer welfaregains.
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The products sold by the plaintiff in the currentcase, Wine Country Gift Baskets.corn, illustrate thepotential gain to consumers and small wineries fromeliminating arbitrary and protectionist restraints oncompetition. Wine Country Gift Baskets.com andother similar retailers market, sell, and ship giftbaskets to consumers around the country. They ac-cept orders around the clock through their website,assembling baskets of wines, cheeses, chocolates, andother items. They offer a variety of baskets designedfor particular occasions, such as at birthdays, anni-versaries, births, and other celebrations. By provid-ing innovative product selections in a national mar-ket, sellers such as plaintiff increase the competitivepressure on bricks and mortar wine retailers, in-creasing product variety and convenience while lo-wering prices.
Less balkanized markets will also have beneficialdynamic effects. By reducing barriers to entry, in-creasing competition, and facilitating the free flow ofgoods across state lines, expanding trade will pro-mote still greater entrepreneurship, innovation, qual-ity improvement, and choice. Undistorted competi-tion allows the best products and sellers to prevail,not just those most able to navigate the wholesalers’stranglehold on the marketplace. These open condi-tions lead to economic growth in the marketplacewhich, in turn, enhance competition and increasestate tax revenues.
Volumes of economic and empirical evidence dem-onstrate that online retailers are an important com-petitive force. In many product markets, online re-tailers offer lower prices than offiine retailers. Even
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where online retailers do not offer a price advantage,they generate other important competitive benefitsfor consumers by reducing price dispersion or offering
services. See, e.g., Erik Brynjolfsson & Michael D.Smith, Frictionless Commerce? A Comparison of ~ln-ternet and Conventional Retailers. 46 MANAGEMENT
SCIENCE 563, 563 (2000) (observing that prices on theInternet are 9-16% lower than prices in conventionaloutlets); Dennis Carlton & Judith Chevalier, FreeRiding and Sales Strategies for the Internet, 49 J. IN-DUS. ECON. 441 (2001); Karen Clay et al., Prices andPrice Dispersion on the Web: Evidence from the On-line Book Industry, 49 J. INDUS. ECON. 521 (2001).Furthermore, competition drives down prices for allsellers in a market - even amongst traditional brick-and-mortar stores that must reduce prices and ira-prove quality in order to compete against electroniccounterparts. By reducing search costs competitionfrom Internet retailers tends to reduce price discrim-ination, promoting lower and more uniform pricing.These gains flow almost entirely to consumers, per-mitting greater quantities to be purchased at lowercosts.
Increased competition for wine generates the samebeneficial effects. As part of the Federal TradeCommission’s 2003 study on Possible AnticompetitiveBarriers to E-Commerce: Wine, in 2002 Jerry Elligand Alan E. Wiseman conducted a study of competi-tion in the consumer wine industry in Northern Vir-ginia and the effects of state regulatory barriers todirect shipping of wine. FTC Report at Appendix A;see also Jerry Ellig & Alan E. Wiseman, InterstateTrade Barriers and Potential Regulatory Competition:
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The Case of Direct Wine Shipping, 19 J. PRIVATE EN-TER., no. 2, 2004, at 26 (noting and subsequently pub-lishing 2002 Ellig and Wiseman findings). Promptedby an adverse judicial decision by the United StatesCourt of Appeals for the Fourth Circuit, in 2003 Vir-ginia amended its law to permit direct wine shippingfrom out-of-state sellers. In 2004, soon after the Vir-ginia law was enacted, the authors conducted a fol-low-up study that compared the price and availabilityof popular wines in local wine retailers and comparedthose findings to the study conducted in 2002, beforethe law was enacted. See Alan E. Wiseman & JerryEllig, The Politics of Wine: Trade Barriers, InterestGroups, and the Commerce Clause, 69 J. POLITICS.859 (2007).
Wiseman and Ellig’s follow-up study drew severalrelevant conclusions. First, they found that of the to-tal of 152 popular labels included in the two studiescombined, only 1 was not available at any online re-tailer while 21 were unavailable at any local bricks-and-mortar store. In 2002, 15% of the wines in thestudy were available online but not offline, and in2004, 12.5% of the wines were still available onlinebut not offline. Wiseman & El]ig, supra at 866. Ofthe wines not available offline in 2002, 8 of the 15came from among the 20 most popular labels in Wineand Spirits’ restaurant poll. FTC Report at 18. Inboth periods there were many popular wines thatwere unavailable offline but were available online.
Wiseman and Ellig found that in 2002, there weresubstantial savings to be had from purchasing online:consumers saved an average of 8-I°°~o/o on wines cost-ing more than $20 per bottle and an average of 20-
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21% on wines costing more than $40 per bottle. FTCReport at 3.
In their 2004 follow-up study, Wiseman and Elligfound that the legalization of online wine shoppingchanged the competitive structure of the NorthernVirginia wine market, leading to lower prices for con-sumers both online and offline. As economic theorypredicts, the 2004 Virginia law reduced barriers toentry, leading to increased competition and consumerchoice. While Wiseman and Ellig found that onlinewine prices were lower than offline prices in both2002 and 2004, the offline-online price differentialwas 40% smaller in 2004 than 2002, indicating thatthe threat of online competition led to lower prices of-fiine as well. Wiseman and Ellig conclude that"[c]onsistent with the intentions of the dormant[C]ommerce [C]lause, removal of Virginia’s directshipment ban increased competition in local mar-kets." Wiseman & Ellis, supra, at 870.
Ellig and Wiseman’s most recent research showsthat opening competition to direct shipping by retail-ers as well as wineries would enhance competitionand drive down consumer prices still further--andthat excluding retailers from direct shipment sub-stantially reduces the price savings available fromonline competition. See generally Jerry Ellig & AlanE. Wiseman, Competitive Exclusion with Heterogerte-ous Sellers: The Case of State Wine Shipping Laws(Mercatus Center, George Mason Univ., Working Pa-per, Dec. 21, 2010).
Moreover, Wiseman and Ellig’s study actually un-derstates the full benefit to consumers and the econ-omy of online shopping. Online shopping provides a
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consumer with the ability to shop at their conveni-ence, day or night, from the comfort of their ownhome, rather than being required to run around townseeking particular wines or comparing prices. Con-sumers benefit from the convenience of the option ofplacing remote orders and accepting direct ship-ment--which is precisely why Texas, like many otherstates, allows retailers to do exactly that. Consumersalso benefit from innovative retailers such as WineCountry Gift Baskets.com that increase the variety ofproducts available to consumers or specialized winemerchants that feature wines of particular varietalsor geographic regions. These effects save consumerstime, money, and hassle, increasing consumer satis-faction, encouraging marginal consumers to enjoywine, and providing drastic price savings to infra-marginal consumers as well. By creating virtual re-tail shelf-space, online shopping dramatically reducesthe search and transaction costs of finding and pur-chasing products, allowing customers to find the bestprice and quality.
C. Once the Court Identifies a Facially Discrimi-natory Regulation, the Burden is on the Stateto Justify the Regulation and the Necessity ofDiscrimination.
Under Granholm, once the Court identifies a fa-cially discriminatory regulation, the burden shifts tothe state to justify the necessity of the discriminatoryregulation. Granholm, 544 U.S. at 489-90 ("TheCourt has upheld state regulations that discriminateagainst interstate commerce only after finding, basedon concrete record evidence, that a State’s nondiscri-
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minatory alternatives will prove unworkable."). Thestate here apparently offers the same three basic ra-tionales for its discriminatory regime as in Gran-holm: preventing underage access to alcohol, ensur-ing taxation, and the promotion of "orderly markets."
As recognized in Granholm, however, there is littlebasis for believing that economic discrimination isnecessary to accomplish the state’s regulatory goals.Granholm, 544 U.S. at 490; see also FTC Report at34-41. Following Granholm, some states and whole-salers direly predicted that they needed the power toerect discriminatory barriers to direct shipment ofwine to forestall an epidemic of underage access towine. No such floodgate has opened--in fact, a recentstudy found that underage drinking has reached thelowest point in the study’s 35 year history. See PressRelease, L.D. Johnston et al., Univ. of Mich., Mariju-ana Use is Rising; Ecstasy Use is Beginning to Rise;and Alcohol Use is Declining Among U.S. Teens (Dec.14, 2010), available athttp://monitoringthefuture, org/dat a/10 data.html#2010data-drugs. As this Court recognized in Granholm,and as subsequent experience has demonstrated, theapocalyptic warnings about the consequences of strik-ing down discriminatory barriers to direct shippingwere then, and are today, highly implausible. Now,as then, underage drinkers will usually find ampleopportunity to try to acquire alcohol from bricks-and-mortar vendors without the delay, difficulty, and riskof ordering over the Internet for delivery. See FTCReport at 35.
Moreover, whatever the strength of Texas’s justifi-cations for its regime, there is no reason to assume
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that its need to discriminate is greater for regulatingretailer direct shipping than winery direct shipping.As the Federal Trade Commission has recognized,the same means used to regulate direct shipment bywineries can be used to ensure regulatory complianceby retailers, including labeling, adult signature re-quirements, and reporting requirements. See Letterfrom Fed. Trade Comm’n Staff to William Magee,Chairman, N.Y. Assembly Agriculture Comm. (Mar.29, 2004). As recognized in Granholm, "minors arejust as likely to order wine from in-state producers asfrom out-of-state," Granholm, 544 U.S. at 490--anobservation that applies equally to shipment by re-tailers. Id. ("Michigan, for example, already allows
its licensed retailers (over 7,000 of them) to deliveralcohol directly to consumers."). Regulation of directshipment by retailers does not present any distinctregulatory issues from regulation of direct shipmentby wineries. The prospect of retailer direct shipmentno more requires state discrimination against inter-state commerce than regulation of direct retail salesby wineries does.
The dormant Commerce Clause requires that thestate provide a justification for its discriminatoryregulations. Rather than requiring this justification
to be made, the Fifth Circuit assumed that discrimi-nation was warranted and excused the state of Texasfrom providing that justification to consumers andthe public at large. This Court’s guidance is neces-sary to vindicate the protections of the dormantCommerce Clause and to ensure that discriminatorybarriers to interstate commerce are justified.
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CONCLUSIONFor the reasons above, this Court should grant the
petition for a writ of certiorari.
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Respectfully submitted,
Dated: December 22, 2010
ANDREW G. McBRIDECounsel of Record
THOMAS R. MCCARTHYWILEY REIN LLP1776 K Street NWWashington, DC 20006(202) 719-7000Counsel for Amicus Curiae
