High Fives in the First Circuit

Lee Pender | January 26, 2010

Justified jubilation greeted the 14 January 2010 decision of the United States Court of Appeals for the First Circuit, which affirmed the federal district court decision of 19 November 2008 in Family Winemakers of California v. Jenkins, invalidating the Massachusetts “volume cap.” (see previous post “Huge win for wineries, but can I ship to Massachusetts now?” )

Oddly enough, the appellate ruling may be more important outside Massachusetts than within. There are two reasons, one quite straightforward, the other less so.

The simple reason is that the First Circuit decision merely leaves things within the state as they have been since 18 December 2008, when Judge Zobel enjoined application of the state’s maximum volume requirement to “small winery” shipping licenses, which are necessary for sales directly to consumers. Since that order, wineries of all sizes, with and without Massachusetts wholesalers[1], have been eligible for the license. Nevertheless, the state is not practically open to direct shipment, because the major interstate carriers find the delivery vehicle licensing requirement too burdensome and wineries have no reliable way to know whether an order would be the 27th case of direct shipment wine purchased in the year by that consumer, putting the shipper in violation of a 240-liter limit. (Those obstacles, which were not involved in Family Winemakers, are described in a previous post “Why can’t I have a Boston wine party?”)

A more subtle reason is that the First Circuit has articulated an analysis, arguably even more favorable to trade than the decision it affirmed, that may prove persuasive in other circuits with challenges to volume caps and to other so-called facially neutral features that operate to the detriment of interstate trade. That aspect of the decision is well worth a closer look –though it does require striding into a bit of a legal thicket.

Which Yardstick?

Stripped to essentials, Family Winemakers is about choosing the proper test for determining the constitutionality of a state law that burdens interstate commerce in wine.

Before getting into the technicalities of constitutional tests, a little context may be helpful: As the readers of these blogs know, state laws that disadvantage interstate trade raise issues under the Commerce Clause of the federal constitution, which gives Congress power to legislate regarding commerce among the states. In subject areas, like wine distribution, where Congress has not enacted legislation that serves as a comprehensive regulatory scheme, states have some room for regulation, even if it affects interstate trade to a degree. However, the fact that interstate commerce is within Congress’s power to regulate means that in subject matter where it has not acted (where, in other words, its regulatory power is “dormant”) certain unwritten principles inherent in the Commerce Clause nevertheless limit state regulatory power. State laws that exceed those limits are said to offend the “dormant Commerce Clause.” As a leading case puts it, “The modern law of what has come to be called the dormant Commerce Clause is driven by concern about economic protectionism –that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”

In Granholm, the Supreme Court famously invalidated Michigan and New York laws for violating the dormant Commerce Clause by reserving direct shipment privileges for home state wineries. Family Winemakers is one of the most promising among many lawsuits attempting to discern the core message of Granholm and apply it to different facts.

Why Granholm Doesn’t Provide All the Answers

Granholm dealt with laws whose “object and design” to discriminate against out-of-state wineries was “evident” from their text and which in fact did discriminate. The Court considered how the presence of those factors —intent to discriminate and effect of discriminating— affected the answers to two distinct questions.

The first question concerned the 21st Amendment and certain federal legislation, which, taken together, affirmed the right of states to regulate wine from outside the state as fully as wine produced in the state and declared it illegal to ship wine into a state in contravention of “any” its laws. Does that broad language, the Court asked, permit the states intentionally to discriminate against interstate commerce (as a literal reading might suggest)? After an extensive and somewhat controversial historical analysis of the federal statutes and the constitutional amendment, the Court answered “no,” concluding that the dormant Commerce Clause subjects alcoholic beverage regulation to the same tests of constitutionality as apply to laws governing other goods.

The second question was what test would apply. In Granholm’s analysis, the choice between the two relevant tests was obvious. As stated in a leading case:

[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected . . . . But where other legislative objectives are credibly advanced and there is no patent discrimination against interstate trade, the Court has adopted a much more flexible approach . . . .

Having caught the two states before it red-handed at economic protectionism, the Court had no trouble applying the strict test, which invalidates a law unless the state clearly demonstrates with “concrete” evidence that it is necessary for an essential state purpose and there is no workable less-discriminatory means of achieving the purpose. Neither defendant state even came close to meeting that standard, with the result we all know.

So, great: No 21st Amendment immunity and a flunked dormant Commerce Clause test; commerce wins, grapes are freed. But what if the law in question were not overtly discriminatory? What if it treated all wineries alike and only incidentally burdened interstate commerce? Would it then receive the “more flexible approach?”

Pretty Faces

On its face, the law invalidated in Family Winemakers took no account of whether a winery were in-state or out-of-state. It was, in the phrase popular with its proponents, “facially neutral” as between local and interstate sellers.

Defenders of volume caps and on-site requirements argue that facial neutrality has two profound effects: For alcoholic beverages, it invokes 21st Amendment immunity from dormant Commerce Clause challenge, which was repudiated in Granholm for facially discriminatory laws; and, even if there were no immunity, it would require application of the “more flexible” test of constitutionality, under which a statute will be upheld unless the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed local benefits, rather than the strict necessity test Granholm applied to facially discriminatory laws. Neither argument survived the First Circuit’s treatment of Family Winemakers.

Not a Vaccine

The district court judge had dismissed the immunity argument summarily, citing a passage in Granholm that actually refers to an extraterritoriality case in which the Court did not expressly reject immunity, but rather spoke of the need to “reconcile the interests protected by the two constitutional provisions” (i.e., the 21st Amendment and the Commerce Clause), and two post-Granholm decisions in other circuits that did not deal explicitly with the immunity issue at all. While her no-immunity conclusion seems sound, the opinion left room to argue that the lower court did not fully deal with the facial neutrality immunity argument.

The appellate opinion takes a different tack. First, the Court of Appeals articulates a more specific repudiation of a 21st Amendment immunity defense for all facially neutral laws, formulating a useful test: Even though the statute is “neutral on its face,” if its effect is to “change the competitive balance” between in-state and out-of-state wineries in a way that benefits local wineries and “significantly burdens” their out-of-state competitors, the result is the same as for facially discriminatory statutes in Granholm –no 21st Amendment immunity.

In reaching that conclusion, the First Circuit somewhat surprisingly begins by distinguishing[2] Granholm. That is, after admitting that Granholm dealt only with facially discriminatory statutes, the court set forth on its own to decide whether the 21st Amendment provided Massachusetts with immunity from dormant Commerce Clause challenge to a discriminatory statute everyone agreed was facially neutral. It nonetheless took guidance from Granholm in viewing the question as resolvable by historical context and in reading the 21st Amendment as preserving only the pre-Prohibition regulatory power Congress allows states under the Wilson Act and the Webb-Kenyon Act –i.e., the right to regulate out-of-state wine on the same basis as in-state wine, but not to discriminate against the former in favor of the latter.

By engaging in relatively extensive history-grounded analysis, the First Circuit has provided sound support for the proposition that Granholm’s no-immunity ruling applies to all discriminatory measures, whether overtly protectionist or facially neutral. Courts adjudicating laws that burden interstate commerce relative to local have in Family Winemakers well-expounded judicial authority for ignoring putative 21st Amendment immunity. On the other hand, extension of Granholm to different scenarios, no matter how persuasively reasoned, cannot forestall further argument over the “narrow Granholm” approach advanced by states and wholesalers, which would preserve pre-2005 law for every situation that does not exactly match Granholm’s facts.

Question and Answer

If immunity is out of the picture, the primary issue becomes how to test a statute under the dormant Commerce Clause –i.e., what questions should a court ask to determine whether a statute will be upheld or struck down? Family Winemakers follows prevailing Commerce Clause jurisprudence in recognizing the two possibilities noted above, a strict “per se” test requiring proven necessity or a more flexible balancing test.

The states and wholesalers argue that facial neutrality would, at least in the absence of proven intentional protectionism, automatically require the more flexible approach, known as the Pike test after the shortened name of the case that first formulated it[3]. However, the Pike test as developed in case law is not invoked by superficial characteristics.

As enunciated in Granholm and its progeny, the Pike test requires a two-stage inquiry. First, a court asks two questions: Does the challenged state law regulate “even-handedly” as between interstate commerce and local commerce? Is whatever burden it places on the former an “indirect” consequence of its pursuit of a legitimate local interest? Only if the answer is “yes” to both does one apply the balancing test, which asks whether the burden on interstate commerce is “clearly excessive” in relation to the legitimate state purpose. If the answer to that highly subjective third question is “no,” the state law stands. For none of those questions is the answer determined by facial appearance.

In the district court analysis, a law adopted for a protectionist purpose that has the intended effect of favoring in-state commerce relative to interstate cannot meet the even-handed regulation and indirect burden requirements for application of the Pike balancing test, and is thus subject to the strict necessity test employed in Granholm, irrespective of facial neutrality. Judge Zobel went on to buttress her ruling by declaring that that even if the law constituted even-handed regulation with only incidental burdens on interstate sellers, entitling it to application of the Pike test, it would still be invalid because it did not advance any local purpose (other than the illegitimate objective of protectionism). The court’s reasoning seems almost mathematical: As the Pike test preserves a statute only when its adverse impact on interstate commerce is not excessive in comparison to a legitimate local benefit, if its local benefit is zero, any burden is excessive, and Pike won’t save it.

Adding the “but even if” reference to Pike as insurance against reversal for applying the wrong test is de rigueur in the courts and good for the prevailing litigant in the case at hand. The district court approach does not, however, prevent argument that Family Winemakers is “really” a Pike balance decision because the statute’s “facial neutrality” should have averted application of the strict necessity test –i.e., the outcome is a simple failure of the state to make an adequate record of local benefit, correctible in future litigation.

Again, the Court of Appeals opinion has a slightly different slant. The appellate court regards application of the strict necessity test as unquestionable under Granholm when, as in that case, a statute is protectionist in both intent and effect. Probably the most significant aspect of the First Circuit opinion is the means by which it so classifies the Massachusetts law.

Put Away that Smoking Gun

If anything moderated pro-trade celebration of the district court decision in Family Winemakers, it was the concern that the record was so strong on protectionist purpose that the case might not serve as a highly useful precedent for other cases, whose records will mostly be at best ambiguous on legislative intent.

Judge Zobel placed great stress on what is by any standard a sensationally revealing legislative history. Senator Morrissey, who sponsored the legislation, is quoted at length in the district court opinion, but a short bite will serve here to illustrate the tenor: “[W]ith the limitations that we are suggesting in the legislation, we are really still giving an inherent advantage indirectly to the local wineries.” The court was also impressed by the fruit wine exemption, a product of lobbying whose sole purpose appeared to be shielding a large local winery from going over the cap by producing cider.

In the Court of Appeals, proof of protectionist purpose rests on a more broadly applicable base. The finding of discriminatory intent explicitly rests not on the “smoking gun” statements of legislators or lobbyists, which featured so prominently in the district court opinion, but on the appellate court’s reading of the statute itself. Close attention to the text revealed a volume cap at odds with prevailing industry classification of wineries as objectively large or small, or as able or unable to secure wh
olesaler distribution, as well as with the state’s own size demarcation for license fees. The court was particularly impressed by the facts that ultimately there was no winery size standard at all, given that non-grape wine volume would not be counted and that the fruit wine exemption allowed an over-30,000-gallon Massachusetts winery to enjoy “small” winery benefits. Revealing intent by a combination of textual analysis and reference to objective data should be applicable to other “facially neutral” restraints before other courts, without need for thrilling exposés.

Interestingly, the First Circuit’s discussion of what constitutes evidence of discriminatory intent includes the suggestion that putting forward palpably false claims of permissible purposes is itself evidence that the real purpose is impermissible. It would be charmingly ironic if the states’ and wholesalers’ practice of asserting that discriminatory statutes do not discriminate, were adopted to help small producers, and are indispensible for preventing a parade of horrible consequences resulted in judicial findings of protectionist purpose.

Objective data also underlie the First Circuit’s finding of burdensome effect. The court follows the approach of its petroleum product distribution decision, Exxon, when it says a statute is “plainly” discriminatory if its effect is to cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market –a demonstrable effect of the statute under consideration.

Once the statute was classified as discriminatory in purpose and effect, it became subject to the strict necessity test, with its “concrete record evidence” requirement, which the state did not attempt to meet. As the appellate court pointed out, the record revealed the opposite of necessity, i.e., the existence of a non-discriminatory means of helping wineries unable to secure wholesaler distribution –passing a direct shipment law based on the NCSL model bill, as he governor had urged– and no reason why that would have been unworkable.

Scaling Cherry Hill

The beneficial ruling from the First Circuit is all the more welcome in light of its earlier opinion in a failed suit challenging Maine’s on-site-only direct consumer sale law, Cherry Hill Vineyard v. Baldacci.

The Baldacci decision can be read in various ways and had been advanced by direct shipment opponents as recognizing a “no direct shipping market” defense to Commerce Clause challenge. In brief, the theory is that if no purchases in the state can be fulfilled by direct shipment, there is no market from which out-of-state wineries could be excluded or in which they could be disadvantaged, and therefore no discrimination. The Family Winemaker defendants claimed it supported the proposition that without “explicit” discrimination, a law would not violate the dormant Commerce Clause, or at worst would be judged under the Pike test.

In Judge Zobel’s view, Baldacci turned on the absence of evidence of indirect discriminatory effects and thus presented no obstacle to her decision in Family Winemakers, in which the plaintiffs had presented effects evidence. However, her argument for distinguishing Baldacci seems to consist of two conflicting lines of reasoning.

According to one branch of her analysis, it is possible to mount a Commerce Clause attack on “leveled down” systems that equally deny direct shipment to in-state and out-of-state wineries, provided the facts show that distant wineries are losing sales to locals because they cannot use the natural means of doing nationwide business, direct shipment. It follows that the result in Baldacci would have been different had the plaintiffs made the factual showing, a proposition consistent with statements in that opinion. Judge Zobel was able to cite extensive evidence of discriminatory effects in the record before her, supporting her decision not to reach the same result as in Baldacci. So far, so good; but judges have a tendency to pile on alternative rationales in distinguishing a difficult precedent.

The second branch of her reasoning explicitly adopts another aspect of Baldacci –that there was no discrimination in the Maine system because no winery was allowed to use direct shipment, while Massachusetts permitted it for wineries below the volume cap.

The “no direct shipping market” theory directly contravenes the district court’s first line of reasoning and is, I believe, fallacious, because the Commerce Clause protects commerce, not means of delivery. A Granholm issue arises if a state favors any local market in a line of goods, even one limited to on-site sales, by directly burdening interstate sellers who are compelled by economics to use a different distribution method. Whether leveling down to all face-to-face sales constitutes discrimination subject to the strict necessity test is a hotly contested question in current Granholm litigation.

The no-local market defense theory arises from Baldacci’s misapplying Exxon, where there was no local market, to a local market in which in-state wineries made on-site sales, protected from out-of-state competition. The First Circuit clarifies Exxon in Family Winemakers:

Exxon held that a law that restricts a market consisting entirely of out-of-state interests is not discriminatory because there is no local market to benefit. Exxon is not apposite where, as here, there is an in-state market and the law operates to its competitive benefit. Massachusetts cannot apply Exxon only to "large" wineries as distinct from "small" wineries; the wine market is a single although differentiated market, and § 19F’s two provisions [the statute in question] operate on that market together.

The First Circuit went on to distinguish its decision in Baldacci (which was submitted for decision on an agreed written fact statement) as dealing with an unsupported challenge:

That case involved a challenge to a Maine law that allowed wineries to sell to consumers only in face-to-face transactions. That challenge failed because plaintiffs did not introduce any evidence that the law benefitted Maine vineyards or harmed out-of-state wineries.

Baldacci only addressed the kind of showing required when a statute is challenged as discriminatory in effect but is concededly non-discriminatory in purpose. We did not address whether a lesser showing might suffice when a law is allegedly discriminatory in both effect and purpose. We do not reach this question because even under the standard in Baldacci, plaintiffs have shown § 19F is discriminatory in effect.

The First Circuit decision encourages examination of what has been regarded as a central tenet of Granholm jurisprudence, the “level field” model. It is a commonplace that protectionist discrimination can be cured by leveling up or down; it other words, that a state can comply with the Commerce Clause by permitting direct shipment for both in-state and out-of-state wineries or by denying it to both. Such a mechanistic approach, however, leads to uncritical acceptance of formalistically even-handed schemes like on-site-only laws, notwithstanding their disparate impact on nearby and distant wineries. Putting facial neutrality in perspective, as occurs in Family Winemakers, should support critical examination of other playing fields that are only superficially level.

You Can’t Have Everything

Welcome as it is, the First Circuit opinion in Family Winemakers does not answer all the questions the case raises. Following sound judicial practice, the court prudently made the most easily defensible ruling on the record before it. The opinion’s principal limitation is that on both 21st Amendment immunity and choice of test under the dormant Commerce Clause it deals with a statute convincingly shown to be effectively and intentionally discriminatory against interstate commerce.

Thus, Family Winemakers throws a spotlight on unsettled post-Granholm issues: What test applies if a state statute is discriminatory in effect but not intent? What if it was intended to discriminate, but fails to do so (assuming anyone has an interest in arguing about it in that instance)? If it is evenhanded, but would flunk the Pike balancing test on proof of the local interest pursued, could it be saved by using a lower standard for liquor? What, if anything, is left after Granholm of the concept that a state can balance “core 21st Amendment interests,” such as temperance, against the Commerce Clause?


[1] The law had required wineries producing more than 30,000 gallons annually of grape wine to forego any sales to wholesalers in the state if they sold directly to consumers.

[2] To “distinguish” an earlier case is lawyer jargon for finding a difference in recited facts or some other aspect that could justify reaching a different result in the case at hand.

[3] I don’t have a snappy name for the first alternative, sometimes referred to in this post as the “strict necessity test.” If named after a case it could be the Philadelphia test, the Dean Milk test or the Maine v. Taylor test, etc., but no commonly accepted moniker has developed.