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Possible Anti-Competitive Efforts to Restrict Competition on the Internet
Federal Trade Commission Workshop,
October 8, 2002
Possible Anti-Competitive
Efforts to Restrict
Competition on the
Internet
State of Michigan's Remarks
By Assistant Attorney General Irene M. Mead
Across the United States, 8 cases have been filed
challenging state laws that do not permit direct
shipping of alcohol as part of the state's
alcohol regulatory structure. As in the case of the other
states sued, the laws of the State of Michigan prohibit unlicensed
and unregulated out-of-state alcohol producers
and retailers from selling and delivering
alcoholic beverages directly to the state's residents. All sales and
deliveries of alcoholic beverages must be made in
accordance with the statutorily prescribed regulatory structure.
In
these cases, individual and winery plaintiffs have challenged the
states' Twenty-first Amendment authority to regulate alcohol
trafficking within their borders, suggesting
that requirements of licensing and
accountability violate the Commerce Clause. The District Court's
decision in Michigan's favor is on appeal to the Sixth Circuit,
waiting the scheduling of oral argument.
Heald, et al v. Engler, et al, (6th Cir. No.
01-2720).
In challenging direct shipping laws, direct shipping
advocates contend that enforcement and
regulation of out-of-state entities can be
accomplished as readily as with in-state entities. The direct shipping
advocates suggest that direct shippers will voluntarily pay
appropriate taxes. They assert that adequate
protection against sales to minors can be
accomplished by placing responsibility for verifying age on the
delivery personnel for common carriers such as United Parcel
Service. They contend that the direct shipping issue is limited to "fine"
wineries that want to ship and wine "connoisseurs" who want such
wines delivered to their doorsteps. They provide
no support, however, for these contentions.
However, these contentions are not borne out by
Michigan's actual direct enforcement experience.
Relevant law
First, a brief discussion of the law in this area,
which unlike commerce in other products, is
derived from the Constitution.
Section 2 of the
Twenty-first Amendment provides for state control over
alcohol trafficking within state borders:
The transportation or importation into any State,
Territory, or possession of the United States
for delivery or use therein of intoxicating
liquors, in violation of the laws thereof, is hereby
prohibited. [U.S. Const. amend. XXI, ? 2]
Pursuant to this authority, most states, including
Michigan, enacted laws establishing a three-tier
system of alcohol distribution within their
borders, which require that purchases by consumers be from
in-state licensed retailers. Licensed in-state wineries and
breweries may make limited retail sales of their
products only. Licensed retailers, wineries and
microbreweries may also deliver the alcohol
product they are authorized to sell to purchasers within the state.
The term "direct shipping" refers to the practice of
an unlicensed and unauthorized out-of-state
producer or retailer of wine, spirits, or beer,
shipping alcoholic products directly to residents at their homes.
Michigan's systems of licensure and regulation preclude the practice, as
do most other states. NOT A SINGLE STATE permits unlimited,
unregulated direct shipping of alcohol to its
residents.1
Michigan and other states have created no impediment
to sales of beverage alcohol products from other
states. Rather, they have specified a regulatory
structure for alcohol sales that ensures seller
accountability for injuries resulting from such sales and violations of
liquor laws, prohibits the sale of alcohol to minors or intoxicated
persons, promotes an orderly market, and provides a verifiable
method of tax collection.
Although certain producers of wine have chosen, for
financial, marketing, or other reasons, to not
sell their products in Michigan through the
established regulatory framework, this private choice does
not mean that the state has prohibited the sale of wines from that
source.
The choice to not sell alcohol in a particular state
within its regulatory system because it may be
more costly to do so than to sell directly (and
illegally) to individuals, does not render the regulatory
system unconstitutional. No one has a constitutional right to
compel a state to permit sales of alcohol in a
manner that would maximize an alcohol producer's
profits or provide self-appointed wine "connoisseurs"
with access to any alcoholic product produced anywhere in the
world.
Michigan's Experience
Because of concerns about the ability of minors to
order and receive alcohol from Internet sites,
in mid-1999, the Michigan Attorney General and
Liquor Control Commission conducted a series of "stings", in which a
minor with a valid credit card attempted to purchase various
alcohol products for direct delivery. The
results of these stings revealed that most
alcohol sellers were far more concerned about the validity of the
credit card number than the age of the purchaser. Virtually none of
the sellers were concerned about Michigan laws
precluding such shipments. The alcoholic beverage products available for
sale ranged from fine wines to 194 proof grain
alcohol, a substance so dangerous that in
Michigan, it can only be used in industrial applications and must be
shipped and transported as a hazardous, highly flammable material.
About one in three websites contacted during these stings agreed to
sell alcohol to the minor purchaser with no more age verification
than a "click" of the mouse. The United Parcel
Service personnel who delivered the parcels
containing alcohol purchased under these stings did not
properly verify the age of the minor recipient.
Although these stings confirmed the problem, they
were costly and time-consuming to conduct.
Proceeding against all of the thousands of
alcohol sellers and shippers through the use of stings was considered to
be an impossible task.2 Accordingly, the first action was taken
against the common carrier used for the
deliveries, United Parcel Service. The resulting
settlement required that UPS cooperate with the state to
identify illegal alcohol shipments.
Since that settlement, 174 out-of-state shipments of
alcohol have been intercepted and seized on
their way to Michigan residents. These contained
beer, various kinds of spirits, and wine, both cheap and
expensive. In some cases, packages deliberately were disguised or
mis-identified to avoid detection of the alcoholic beverage
contents.
These shipments of alcohol to Michigan
residents included 318 bottles of beer, as well
as 20 bottles of various "hard" spirits. Although some
of the 1,062 bottles of wine that were intercepted could be
classified as high-end, the shipments contained
many cheap wines as well, including a number of
wines made from fruits not normally used in "fine"
winemaking - blackberries, cranberries, currants, elderberries,
chokecherries, apricots, raspberries, and plums, as well as six
bottles of a wine labeled "Eye of Newt", of
unknown content .
The shipments came from 89 different shippers in 16
states, South Africa and Australia. Fewer than
10% of the shipments were from individuals to
Michigan residents. Of the remaining commercially sent
shipments, 65% were from out-of-state retailers. 25% of the
shipments were from out-of-state wineries.
Thus, although wineries and "wine connoisseurs" are
the loudest voices lamenting the inability to
direct ship, the greatest impact will be
shipments from alcohol retailers, who are primarily seeking to avoid
state taxes and regulations for accountability.
Not a single shipper contacted the state to pay
sales or alcohol excise taxes voluntarily prior
to seizure of the product. All tax payments have
resulted from threatened legal action and negotiated settlements.
Based on Michigan's real world experience, several conclusions may
be drawn.
A. Access by minors to alcohol from out-of-state
sources is a real issue.
Advocates of direct shipping contend that the
states' concerns about access by minors to
alcohol from out-of-state is pretense,
insufficient to justify direct shipping prohibitions. In support of
this, they assert that 1) no evidence exists that minors are buying
from direct shippers, 2) minors are unlikely to
buy costly, upscale wines, 3) minors want their
alcohol purchase immediately, and will not purchase
from a source for later delivery, and 4) training of common carrier
delivery people can eliminate any access by minors.
1. Access by Minors
The results of the stings in Michigan showed that
one in three Internet alcohol sites contacted
sold to the decoy minor. Advocates for direct
shipping of alcohol argue that only the minors who are
participating in the stings are purchasing alcohol, that no
evidence of such purchases exists outside of
stings. This argument is virtually identical to
the argument made by bricks and mortar retailers when
in-state minor stings were intensified. The fundamental flaw in
this argument is that neither retailers nor
minors voluntarily turn themselves in for
prosecution following a sale. Absent decoy stings,
sales to minors are only identified when the minor is arrested for
drunk driving or found injured or dead in an
accident. Accordingly, direct evidence of sales
to minors outside of stings is very limited. The best
evidence that minors have easy access to alcohol from remote
sellers continues to be the results of decoy
stings.
The Internet sellers who sold to the Michigan decoy
did not know that the purchaser was a minor
participating in a law enforcement sting. They simply sold to whomever
could provide them with a valid credit card.
That a greater percentage of remote sellers would sell to minors
than the percentage of state retailers is to be expected, for two
reasons.
First, a remote sale does not involve a face-to-face
transaction. In-state retailers approached by a minor to purchase alcohol
have an opportunity to observe the purchaser
directly, to assess nervousness and other
mannerisms that indicate the person may not be of legal age to
purchase, and to closely scrutinize a government-issued picture
identification. Michigan requires "diligent inquiry" to verify age,
which is defined as, "at least an examination of an official
Michigan's operator's or chauffeur's license, an
official Michigan personal identification card,
or any other bona fide picture identification." MCL 436.1701(7)(b). This requirement simply cannot
be met by a "click" of the mouse or a faxed (and
easily altered) copy of a license.
Second,
in-state licensed retailers risk their state liquor license -
their very livelihood - if they sell to minors. Out-of-state
unlicensed retailers have nothing to lose,
since, in the rare event that the sale is
identified, they have no license at risk and out-of-state
prosecutions are exceptionally difficult and costly to pursue.
2. Type of Product Sold
Advocates for direct shipping suggest that minors
won't buy costly upscale wines. This premise
presumes that minors have little discretionary
money and limited knowledge of, or palate for, fine wines.
However, no support is supplied for either presumption.
The discretionary income of minors is not perceived as minimal by
those who market to this demographic. Studies by
Teen Research Unlimited (TRU) , a
market-research firm that focuses on the teen market,
estimated that teens in the United States from ages 12 to 19 spent
$155 billion in 2000, and $172 billion in 2001,
despite slowdowns in the general economy.
The second presumption, that minors have no palate,
knowledge, or interest in wines is not true. 35%
of all wine coolers sold in the United States
are consumed by junior high, middle school, and high
school students . Moreover, current teen interest in expensive
wines is irrelevant to this analysis. Although
this issue continues to be characterized as
limited to wine connoisseurs and enthusiasts seeking
rare fine wines, however those are defined, in fact, the statutes
sought to be invalidated apply much more
broadly. The alcohol controlled by the states'
three-tiered systems includes wine coolers, beer, rums,
tequilas, flavored vodkas, and other similar products heavily
marketed to young drinkers.
The alcohol industry may contend otherwise, but the
marketing "intended" to reach those in the 21 -
25 age group has been, unfortunately, very
effective at also selling to the under -21 crowd. One research study
reported that 56% of students in grades 5 to 12 said
that alcohol advertising encourages them to drink. One of the first studies to explore Internet
marketing of alcohol and tobacco to minors was
conducted by the Center for Media Education (CME):
The study found that alcohol and tobacco companies
are using the online media to advertise and
promote their products, through a variety of
marketing techniques that capitalize on the medium's strong and unique
attraction for young people.
In December 1998, the CME published an update to the
original study. This study examined 77 beer, wine and spirits Internet
sites, and concluded that 62% of the sites
included elements appealing to youth. The study discussed the marketing
techniques:
The sites that appear to appeal to youth often
strive to create a community of brand-loyal
enthusiasts, a place where lonely teens can
talk, find peers and support for risky activities like binge drinking.
Known among marketers as relational advertising, this effort to build a
relationship between the user and the product is the dominant
trend in marketing on the Web and is already
heavily exploited by the alcohol industry.
The wineries you will hear from today contend that
they do not market to youthful drinkers. Again,
this is not about wineries, exclusively. The
statutes in question regulate beer and spirits sales
as well. Moreover, even if the case were limited to wine, many wine
sites either are directed at youth, or contain links to youth
oriented wine sites. Sites such as Wine X Wired
, with regular features "Wine Bitch" and
"X-Rated Wines", and Winebrats" with its "Vino-versity" and
"WineRave Tour", clearly are aimed toward youth.
And all types of alcohol are being offered by remote
sellers.
The first purchase made by the minor in the Michigan stings from
one Illinois retailer was a $6.85 bottle of
blackberry wine. Even after the retailer was
notified of the sale and charged with a misdemeanor
sale to a minor, he sent a follow-up email to the minor, inquiring
whether he wanted to purchase again. The minor then purchased a
$6.66 bottle of wine, which again was delivered
directly to his residence. This retailer, who pled guilty to misdemeanor
sale of alcohol to a minor, claimed that his
targeted customers were upscale wine
connoisseurs. However, in addition to webpages devoted to beer,
tequila, and vodka, at the time of the purchases, his website,
www.internetwines.com,
devoted an entire webpage to 192+ proof grain
alcohol, being sold as a beverage alcohol. As of this writing, this
website continues to sell grain alcohol.
3. Immediate Possession of Purchase
Another contention is that minors want immediate
access to alcohol, and won't wait for shipment
from a remote seller. The Wirthland Worldwide study of college students,
conducted for Americans for Responsible Access
for Alcohol , suggests otherwise, finding that 17,600 students in
the survey reported having purchased beer, wine or liquor over the
Internet, by toll-free phone order or by mail-order catalog.
Obviously, the delay in receiving the alcohol
did not stop these sales. The Wirthland
Worldwide study also found that 80% of the students surveyed
said their peers are likely to purchase alcohol online if no age
verification is required.
Moreover, the delay between ordering and delivery of
alcoholic products can be minimal. Most alcohol
sale sites offer a variety of delivery options,
ranging from UPS Ground to FedEx Preferred Overnight, the
latter of which guarantees delivery by 10:30 a.m. the morning
following the order.
Thus, a minor wishing to purchase a case of grain
alcohol from Randall's Wines and Spirits (www.internetwines.com)
for a Friday "party punch" could order it on the
preceding Monday for regular delivery, or he
could wait to order it until late Thursday, and still have it arrive
on Friday morning by adding only $20 more to the shipment cost.
4. Common carrier delivery personnel training.
Direct shipping advocates also contend that delivery
personnel can be trained to properly validate
age. The results of Michigan's stings showed
that common carrier delivery personnel were not effective at
verifying that the recipients of packages containing alcohol were
at least 21 years old. This was true even where
the contents were clearly identified on the box
as alcoholic beverages, and a sticker stated that
the package could only be delivered to an adult.
The failure to properly verify age is not
surprising. Common carrier delivery personnel
are trained to deliver packages - that is the
business of and source of revenue for the delivery company. Delivery
personnel, whose mission is to deliver as many packages in as short
a time as possible, are only hampered in
achieving their goal by requirements of age
verification.
Moreover, as a matter of policy, should delivery
personnel be held to the strict diligent inquiry
standard for verifying age? The common carrier
and its personnel are not making money from selling alcohol. The
responsibility and liability for deliveries to minors should not be
placed on delivery personnel, with limited training in verifying
age for alcohol purchases.
B. Enforcement efforts against out-of-state
entities are prohibitively difficult and costly.
This should be self-evident.
But, it has been asserted that, if direct shipping
is allowed, the states simply can subject
out-of-state shippers to the same standards and
enforce laws in the same way as the state does with its in-state
retailers. To understand how simplistic and unreasonable this
assertion is, one must have an understanding of
the obligations placed on licensed in-state
retailers and wineries and the extent of in-state enforcement
efforts to ensure that these sellers are accountable.
In-state retailers and wineries are subject to
rigorous investigation in order to become
licensed, which requires, among other things,
extensive disclosure of financial documents, on-site inspections of
proposed license premises, and police background checks. Once
licensed, they must comply with a multitude of
statutory requirements and rules designed to
protect the consuming public. Retailers bear the burden of
ensuring that sales are not made to minors or intoxicated persons,
that sales are made only during hours authorized
by statute, that sales are not made in violation
of local option laws, that only state approved
products are sold, that spirit sales are made in accordance with
state-mandated price controls, and that appropriate taxes are
collected and remitted to the state. Retailers
are held responsible for improper or illegal
sales, with penalties ranging from fines to suspension or
revocation of their liquor licenses. Dram-shop laws place liability
on retailers for injuries and deaths resulting
from sales to minors or intoxicated individuals.
These stringent requirements protect consumers from
unlawful sales by requiring that alcoholic
beverages be sold and distributed to consumers
only by persons who are responsible and can be held accountable. In-state
retail licensees are accountable to and reachable by the State,
because non-compliance with the law may subject them to fines,
suspension or revocation of their liquor licenses, and even
criminal prosecution.
Attempting to impose and enforce all of these
obligations on out-of-state wineries and
retailers is virtually impossible, given the
number of such sellers, their locations, and the overwhelming costs
involved. It is estimated that approximately 2,200 wineries are
operating in the United States. Because wineries selling and
shipping their own products are acting as
retailers for their wines, little distinction
exists between these wineries and retailers who want to ship
alcohol beverages produced by others . And literally hundreds of
thousands of alcohol retailers in the United States are affected in
the same way as the wineries by the direct
shipping laws. Add to these the wineries,
breweries distilleries, and retailers from around the world,
and the numbers become mind-boggling.
In addition to several thousand investigations for
in-state license applications, Michigan issued
3,453 complaints against in-state licensees in
calendar year 2001, based on violations of the Liquor Code
discovered by state investigators and local law enforcement
agencies. The 2000+ hearings that resulted were held all over the state,
and required, at a minimum, the attendance of a
hearing commissioner, a court reporter, the
investigator or police officer, the licensee, and
counsel. Eight Michigan Assistant Attorneys General are dedicated
nearly exclusively to this work.
The problems with attempting this level of
oversight, investigation, and enforcement with a
virtually unlimited number of out-of-state
alcohol sellers are obvious. A decoy sting on an in-state retailer is
simple: the minor attempts to make a purchase with cash furnished
by law enforcement, and immediately is either
sold to or turned away. A decoy team can make
many stops in a single outing.
A decoy sting on an out-of-state retailer is more
costly and time-consuming: the minor must have a
credit card in his own name and must be present
for delivery. Following such a sale and delivery, the
actual seller must be identified for further enforcement effort.
Establishing the true identity of the seller from the Internet
website name or assumed name is frequently
difficult. The seller's website often provides
few clues to the name of the seller or its location.
Further, once located, out-of-state sellers typically dispute
jurisdiction, refuse service, or ignore communications sent to
them. There is no state-issued license to fine or revoke; the seller
assumes little risk by selling in a manner that
would never be permitted for in-state licensees.
Applying and enforcing the state's liquor laws
"equally" on in-state and out-of-state wineries
and retailers, so casually suggested as a
panacea, is based on a superficial, simplistic, and flawed understanding
of liquor control regulation and enforcement.
An understanding of the distinctions between
licenses and why those distinctions exist is
critical to this case. Out-of-state wineries and
retailers are simply not equivalent to in-state wineries and retailers,
because of the obligations imposed on them, the level of in-state
enforcement efforts, the risks of financial penalties and
suspensions or revocations of the licenses, and
Dramshop liability where injuries or death
result from improper sales. Any resemblance with out-of-state
wineries and retailers is superficial and does not extend beyond
the descriptive terms "winery" and "retailer".
There is not a state in the union that could afford
to fund regulation of the hundreds of thousands
of out-of-state retailers and wineries the same
way it regulates its in-state retailers and wineries.
In-state retailers
and wineries may make deliveries within the state of
products they are authorized to sell, because they also are subject
to intensive, ongoing scrutiny and regulation,
and risk loss of their licenses and their
businesses if they fail to comply with state liquor
laws and rules. Out-of-state retailers and wineries are prohibited
from making such deliveries because the
necessary controls to ensure the same level of
accountability, responsibility and liability cannot be imposed
within the funds and resources available to the states.
C. Direct shipping of alcohol from out-of-state
compromises control over product quality.
States also maintain controls over the type of
product to be sold as beverage alcohol as a
protection to their residents. Alcoholic products
from unapproved sources, such as home breweries, wineries and
stills, are not permitted to be sold. Some
products from established commercial sources are
not permitted because of the concern that the product is
dangerous, such as grain alcohol and certain liqueurs that change
alcohol proof in the bottle over time. Products with obscene or
offensive labels, or which have labels targeting children, are
prohibited, as are products in certain size packaging.
These types of restrictions cannot be enforced if
direct shipping from out-of-state sellers is
permitted. Grain alcohol, "Eye of Newt" wine,
"Red Ass Ale", "Bad Frog Beer" (the frog on the label is giving the
"finger"), and other such products will enter the states
unrestricted. Although public safety requires product review and approval,
this in no way precludes out-of-state sellers
from bringing their legitimate products to
market. To the contrary, the regulatory structure is
designed to do just this.
Out-of-state producers of spirits, wine and beer may
sell their products to Michigan consumers
through other types of licensees, including
wholesalers and out-state sellers of wine and beer. These
licensees arrange for distribution of the product through licensed
retailers in the state. The system permits approved products to be
sold while ensuring accountability of the
seller.
That the system works is apparent from
the wide range and variety of alcoholic products
lining the shelves of the in-state retailers, the
vast majority of which is produced outside the state.
D. Unlicensed out-of-state sellers do not
voluntarily pay sales or excise taxes on alcohol
shipments.
It has been suggested that state sales and alcohol
excise taxes would be paid voluntarily if only
the direct shipping laws are struck down. The basis for this particular
fantasy is unknown.
Not a single out-of-state seller who shipped alcohol
into Michigan in violation of the direct
shipping laws voluntarily paid Michigan's sales
or alcohol excise taxes. Not one.
What possible incentive is there for a shipper to
proactively offer to pay taxes on shipments that
cannot be tracked, monitored, or taxed, if
direct shipping is allowed?
Because these shipments are outside the ordinary
stream of commerce, not going through licensed
retailers, the shipments are not recorded or
tracked by the state or its licensees. Little incentive or disincentive
would exist for voluntary tax payment, and to expect that it would
happen is na?ely optimistic.
In Bridenbaugh v. Freeman-Wilson, 227 F.3d
848 (7th Cir. 2000), cert. denied, sub nom.
Bridenbaugh v. Carter, 121 S.Ct. 1672 (2001), the Court
discussed the tax issue thus:
Laws forbidding purchases from sellers that lack
Indiana permits are devilishly difficult to
enforce, however, for the same reason states
have insuperable problems collecting their use taxes when people buy
from out-of-state vendors that do not collect sales taxes.
Noncompliance is almost impossible to detect, and rampant civil
disobedience ensures that a handful of prosecutions would not be
effective. Private gains from violating the laws vastly exceed
the anticipated legal penalties. Sales and
alcohol excise taxes are the lifeblood that
funds state liquor control enforcement efforts. Without
such taxes, a state loses its ability to regulate the alcohol
trade.
E. Alcohol regulation and control continues to be
a necessary adjunct to alcohol sale and
distribution.
Invalidating state laws governing who may sell
alcohol and the methods by which it is sold and
delivered would eviscerate the states' alcohol
licensing, sale and delivery systems. No effective control can be
exercised over out-of-state sellers able to sell and ship alcohol
to residents outside of the state's regulatory
structure. This result requires a determination
that the regulation of alcohol is no longer
considered to be necessary. Invalidating the states' importation laws would
permit anyone with access to a credit card,
including a minor, to have alcoholic beverages
delivered to their doorstep, with the ease and anonymity of delivering
products such as jeans or books. There is indeed a distinction to
be drawn between the sale of other products that
are generally not regulated, and the sale of
alcohol, a substance that is always potentially
dangerous and traditionally has been heavily regulated.
Alcohol is different from most other products, because of the
damage that results from its overuse and abuse.
The costs to society from alcohol-related deaths
and injuries have long been recognized, and as a
result, alcohol trafficking has a lengthy history of extensive
regulation and control.
In Craig v. Boren, 429 U.S. 190, 205, 206
(1976) reh'g denied, 429 U.S. 1124 (1977)
the Supreme Court provided a brief illuminating
history:
The history of state regulation of alcoholic
beverages dates from long before adoption of
the Eighteenth Amendment. In the License Cases, 5
How. 504, 579, 12 L.Ed. 256 (1847), the Court recognized a broad
authority in state governments to regulate the trade of alcoholic
beverages within their borders free from implied restrictions
under the Commerce Clause. Late in the
century, however, Leisy v. Hardin, 135 U.S.
100, 10 S.Ct. 681, 34 L.Ed.128 (1890), undercut the theoretical
underpinnings of License Cases. This led Congress, acting
pursuant to its powers under the Commerce
Clause, to reinvigorate the State's regulatory
role through the passage of the Wilson and Webb-Kenyon Acts.
. . . With passage of the Eighteenth Amendment, the uneasy
tension between the Commerce Clause and the
state police power temporarily subsided.
The Twenty-first Amendment repealed the Eighteenth
Amendment in 1933. The wording of ? 2 of the Twenty-first Amendment
closely follows the Webb-Kenyon and Wilson
Acts, expressing the framers' clear intention of
constitutionalizing the Commerce Clause framework established
under those statutes. This Court's decisions
since have confirmed that the Amendment
primarily created an exception to the normal operation of the
Commerce Clause. . . . (Omitting citations)
Section 2 of the Twenty-first Amendment provides:
The transportation or importation into any State,
Territory, or possession of the United States
for delivery or use therein of intoxicating
liquors, in violation of the laws thereof, is hereby
prohibited. [U.S. Const. amend. XXI, ? 2]
The first purpose of the Twenty-first Amendment was
to end Prohibition by repealing the Eighteenth
Amendment. The "noble experiment" had failed.
However, one of the reasons understood to have contributed to
the failure was that national regulation had not taken into account
local conditions. See, e.g., 76 Cong. Rec. 4146 (1933), statement
of Senator Wagner ("The real cause of the
failure of the Eighteenth Amendment was that it
attempted to impose a single standard of conduct
upon all the people of the United States without regard to local
sentiment and local habits.") Another concern was that a state
wishing to protect its residents from alcohol
crossing the border from other states might lack
the power to do so. 76 Cong. Rec. 4141 (1933),
statement of Senator Blaine.
An additional concern was the loss of tax revenue
during Prohibition because the trade in alcohol
was illicit. See, e.g., Ratification of the
Twenty-first Amendment to the Constitution of the United States, 142
(Everett Somerville Brown ed., 1938) ("It is both foolish and
intolerable to go on submitting to a fallacious system under which
an illicit, outlaw liquor traffic annually draws
hundreds of millions of dollars of profits out
of the nation's capital . . . .") (Indiana
ratification convention.) The purpose of ? 2 was summed up by Senator
Blaine, "to restore to the States by constitutional amendment
absolute control in effect over interstate
commerce affecting intoxicating liquors which
enter the confines of the States," 76 Cong. Rec. 4143
(1933).
It is worth noting that a proposed, but unadopted, ?
3 of the Amendment would have given Congress
concurrent power to regulate the sale of alcohol
for consumption on the premises. This section was
dropped on the basis that it was inconsistent with ? 2 and "would
take away from every State in the Union the
right to determine how it would regulate the
liquor traffic within its boundaries," statement of Senator
Black, 76 Cong. Rec. 4177 (1933).
Finally, still another important, clearly stated
purpose of the Twenty-first Amendment was to
moderate consumption of alcohol by separating
producers from consumers through a mandated distribution
structure, typically a three-tier system of manufacturers,
wholesalers, and retailers. Before Prohibition,
"tied-houses," where alcohol producers
controlled retailers, were considered to have contributed to
irresponsible sales and increased consumption of alcohol. See,
e.g., H.R. Rep. No. 1542, at 12 (1935) (Federal
Alcohol Control Act). The regulatory statutes
challenged provide that all alcohol sales to
consumers be through accountable licensees. Like many other
states, Michigan has established a three-tier system of
manufacturers, wholesalers, and retailers, who
deal in alcohol to be sold in the state.
Such three-tier systems have been upheld as
legitimate under ? 2. The 5th Circuit Court of
Appeals stated, with respect to a similar Texas
structure:
To avoid the harmful effects of vertical
integration in the intoxicants industry, the
state has effectively restricted manufacturers,
wholesalers, . . . and retailers to one level of activity . . .
the state of Texas is surely acting within its
discretion by placing reasonable restriction
on the intoxicants industry in order to prevent
these evils.
S. A. Discount Liquor, Inc. v. Texas Alcoholic
Beverage Comm'n, 709 F. 2d 291, 293 (5th
Cir. 1983) See also, North Dakota v. United
States, 495 U.S. 423, 432 (1990). (Such three-tier systems are
"unquestionably legitimate.")
It would be wonderful to advise you that the
historical problems of alcohol abuse and misuse
that led to Prohibition, the Wilson and
Webb-Kenyon Acts, the Federal Alcohol Administration Act, Sec. 2 of the
Twenty-first Amendment, and all of the myriad state laws regulating
alcohol have been eliminated. It would be pure joy to announce that
sales to minors, alcoholism, drunk driving deaths and injuries,
drunken assaults and rapes, and toxic alcohol
poisoning deaths are all a thing of the past.
Unfortunately, these ills continue.
The National Council on Alcoholism and Drug
Dependence tells us that 75% of ninth graders
have tried alcohol, and that alcohol related
deaths are the leading cause of deaths among 15 to 20 year olds. A
startling statistic from the Council is that at least 11% of all
alcohol consumed nationally is purchased by
underage drinkers. Students in junior highs,
middle schools and high schools consume an estimated 1.1
billion cans of beer each year. The Wirthland Worldwide study found
that 59% of college students under the age of 21 admitted drinking
alcohol.
Researchers estimate that alcohol use is implicated
in one to two thirds of sexual assault and
acquaintance or "date" rape cases among teens
and college students. In 1999, it was estimated that the total
cost of alcohol use by youth - including traffic crashes, violent
crime, burns, drowning, suicide attempts, fetal
alcohol syndrome, alcohol poisoning and
treatment - was more that $58 billion per year. Nine of Michigan's largest
universities filed an amicus brief in the
Michigan case challenging direct shipping, on the basis that
eliminating the proscription against direct shipping would provide
greater access to alcohol by underage college students, most of
whom are quite tech-savvy. The Michigan
Interfaith Council on Alcohol Problems also
filed an amicus brief, asking that the court not overturn the laws
because lack of regulation would lead to great public harm.
It is sadly apparent that the need for strong alcohol regulation
and control continues. The state's ability to regulate alcohol
trafficking for the benefit of all of its citizens, should not be
eviscerated solely because a number of self-proclaimed wine
"connoisseurs" demand the right to have "exclusive" wines delivered
to their doorsteps.
Endnotes:
1. Direct shipping is completely prohibited in
Alabama, Arizona, Arkansas, Connecticut,
Delaware, Kansas, Maine, Massachusetts, Michigan,
Mississippi, New Jersey, New York, Ohio, Pennsylvania, Rhode
Island, South Carolina, South Dakota, Texas,
Utah, Vermont, and North Carolina, with the
prohibition a felony offense in Florida, Indiana, Kentucky,
Maryland, North Carolina, Oklahoma, and Tennessee. So-called
"reciprocal" states permit shipments of wine only between each
other, but on a limited basis: California [2
cases/mo.], Colorado [2 cases/mo.* on-site sales only], Hawaii [2
cases/year], Idaho [2 cases/mo.], Illinois [2
cases/year], Iowa [2 cases/mo.], Minnesota [2 cases/year],
Missouri [2 cases/year], New Mexico [2 cases/mo.], Oregon [2
cases/mo.], Washington [2 cases/year], West
North Carolina [2 cases/mo.], and Wisconsin [1
case/year]. A few states permit limited direct shipping
without a reciprocal agreement: Alaska ["reasonable quantity"],
District of Columbia [1 btl./mo.], Georgia, Louisiana [4
cases/year], Nebraska [1 case/mo.], Nevada [1
case/mo.], New Hampshire [5 cases/year], North
Dakota [1 case/mo.], and Wyoming [2 cases/year]. See, Duncan Baird
Douglass, Constitutional Crossroads: Reconciling the Twenty-first
Amendment and the Commerce Clause to Evaluate
State Regulation of Interstate Commerce in Alcoholic Beverages,
49 Duke L.J. 1619, nn. 134-136.
2. There are at least 2,200 wineries nationwide,
with the numbers rapidly increasing: Washington
State alone has added a new winery every 20 days
since 1997. A Very Good Year for Vintners, Jerry Shriver, USA
Today, June 28, 2002.
3. This should not be construed as a commentary on
the merits of any particular alcoholic beverage,
but rather, illustrative of the variety and
extent of products shipped to Michigan.
4.A number of the shippers made multiple shipments
into Michigan - this is why the number of
shippers is much less than the number of
shipments. BATF has indicated that a producer's violation of a
state's importation laws may have a negative
impact on the basic federal permit; however,
this does not affect retailers.
5.www.teenresearch.com
6. Office of the Inspector General, United States
Department of Health and Human Services, Youth
and Alcohol, Law and Enforcement: Is the
21-year-old drinking age a myth?
7.Scholastic/CNN Newsroom Survey on Student
Attitudes about Drug and Substance Abuse.
8. Alcohol and Tobacco on the Web: New Threats to
Youth, March 1997.
9.Alcohol Advertising Targeted at Youth on the
Internet: An Update, December 1998.
10.
www.winexwired.com/toc.htm
11.
www.winebrats.org
12.Randall's Wines & Spirits, a/k/a www/internetwines.com
13.www.wirthlin.com
14. ARAA's members and supporters include, inter
alia, the North Carolina Attorney General,
Students Against Destructive Decisions (SADD),
the National Association of Governors' Highway Safety
Representatives, the American Academy of Pediatrics, the North
Carolina Alcohol Control Board, the American
Council on Alcoholism, and the National
Transportation Safety Board.
15. See fn 2.
16.That out-of-state retailers have the same goal of
direct delivery is evidenced by the fact that
65% of illegal shipments seized in Michigan were
from discount beverage shops, party stores, wine clubs,
beer clubs, and other retailers.
17.As with many states, Michigan is in a budget
crisis, and is reducing the staff available to
handle liquor matters.
18.Oddly, the laws against direct shipping have been
condemned as "economic protectionism" for
wholesalers. The three-tier systems establishing
wholesalers as a distinct tier were set up immediately
following the repeal of prohibition. There was no wholesale tier to
"protect". Certainly, licensed wholesalers have a long-standing
financial investment in the three-tier system, which they would not
want to see jeopardized. If the three-tier
system has accomplished what was intended, the
elimination of the harmful effects of vertical
integration, why eliminate the value to the public from the system
simply because a cost is associated with providing that value?
19.
www.ncadd.org/facts/youthalc.html
20. Office of the Inspector General, United States
Department of Health and Human Services, Youth
and Alcohol, Law and Enforcement: Is the
21-year-old drinking age a myth?
21.www.wirthlin.com
22. Office of the Inspector General, United States
Department of Health and Human Services, Youth
and Alcohol, Dangerous and Deadly Consequences.
23. D. T. Levy, K. Stewart, et al, Costs of Underage
Drinking (report prepared for the US Department
of Justice, Office of Juvenile Delinq
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