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Wednesday, August 29, 2007

Ind. Decisions - Federal Judge Tinder rules for plainitiifs in Indiana wine shipping suit

An opinion has been issued today by Judge John D. Tinder in the case of Baude v. Heath - access the 71-page decision here. The ruling contains an excellent introductory section:

This litigation challenges the constitutionality of Indiana laws that allegedly restrict the ability of wineries, and out-of-state wineries in particular, to sell their product directly to Indiana residents, primarily by orders placed by telephone or over the Internet.

The Plaintiffs are a Michigan winery, Chateau Grand Traverse, Ltd. (“Grand Traverse”), and five individuals, Patrick L. Baude, Larry J. Buckel, Kitty Buckel, J. Alan Webber, and Jan Webber (collectively the “Consumer Plaintiffs), who may be characterized as wine connoisseurs. They have filed a civil rights action, pursuant to 42 U.S.C. § 1983, seeking a declaratory judgment that Indiana’s regulatory scheme violates the Commerce Clause of the Constitution. They also are seeking a court order requiring the State of Indiana (“State”) to permit out-of-state wineries to sell and deliver their product directly to Indiana residents.

This is not the first time that a group of wine connoisseurs has challenged Indiana’s authority to regulate direct shipments of wine. Several years ago, another group of wine consumers represented by two of the same attorneys in this action, brought a similar suit that was ultimately unsuccessful. The Seventh Circuit ruled that Indiana could prohibit the direct shipment of wines to Indiana residents. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848, 854 (7th Cir. 2000). Since then, the legal landscape has changed. In 2005, the Supreme Court held that a state could not discriminate against out-of-state-wineries by prohibiting them from shipping wine directly to consumers if the state’s laws allow in-state wineries to do so. Granholm v. Heald, 544 U.S. 460, 493 (2005). The Court ruled that the Twenty-first Amendment, which repealed Prohibition but allowed states to regulate the sale and distribution of alcohol, did not override the requirements of the Commerce Clause. Id. (This is the constitutional provision that gives Congress the authority to regulate interstate commerce and by implication restricts states from interfering in the interstate flow of goods, an implication often referred to as the Dormant Commerce Clause.)

In keeping with Granholm, the regulatory setting changed, also. Indiana revised its laws to allow wineries to sell their product on their premises, at a non-profit farmer’s market, at three alternative locations, or directly to non-Indiana customers. Wineries could also obtain a permit allowing them to ship wine directly to Indiana customers with whom there had been at least one face-to-face transaction, allowing the winery to verify the customer’s age.

Grand Traverse contends the rules governing this scheme effectively prevent it, and other out-of-state wineries, from competing in the direct sale market in Indiana. The Consumer Plaintiffs contend they are barred from obtaining many wines they desire because of the impracticality of traveling to out-of-state wineries to purchase these wines or to complete the “face-to-face” transaction needed to place further sales over the Internet, by telephone, or by mail.

Additionally, the Plaintiffs contend that Indiana’s regulations effectively discriminate against out-of-state wineries because Indiana prohibits a winery from obtaining a direct sales permit if it holds a wholesale license. They note that many states, including the heavy wine-producing states of California, Oregon, and Washington, provide wholesale privileges to all wineries as part of their basic licensing procedures. These wineries are therefore excluded from obtaining a direct wine shipping permit regardless of whether they wholesale any of their wine, in Indiana or elsewhere.

The Defendant, who is Indiana Alcohol and Tobacco Commission Chairman David L. Heath in name but the State in fact, and the Intervenor-Defendant, the Wine and Spirits Wholesalers of Indiana (“Wholesalers”), contend the laws do not discriminate against out-of-state wineries. They assert that the laws are needed to prevent the sale of alcohol to minors and that the State’s interest in protecting its youth outweighs any incidental burdens on interstate commerce.

The Wholesalers, joined by the State in part, also argue that the litigation is not yet ripe, that Plaintiffs have not shown that they have any interests at stake, and that the laws are needed to protect Indiana’s three-tier system in which producers must sell their liquor to wholesalers who in turn must sell to retailers before the alcohol reaches consumers.

Similar post-Granholm litigation contesting state laws that limit the ability of outof- state wineries to sell their goods directly has occurred in Delaware, Kentucky, Maine, evolution of the Internet, and the challenges it presents to traditional three-tier regulatory structures such as Indiana’s.

Indiana’s current laws are not unique in their general outline. First they protect wholesalers from any substantial encroachment upon their hold over the wholesale wine market in Indiana. Second, they allow Indiana’s still relatively small wine industry, many with sales too inconsequential for a wholesaler’s profitable consideration, to sell directly to the public. This much is plain – from the wording of statutes and the record of this case.

The issue before the court is whether this regulatory scheme clearly discriminates against out-of-state wineries, and if so, whether the State has shown it has a legitimate purpose for this discrimination and that it cannot achieve its ends through less discriminatory means. If the statutes are not clearly discriminatory, then Plaintiffs must show that the burden on interstate commerce is clearly excessive.

All three parties are seeking judgment as a matter of law. Before the court are Plaintiffs’ Second Motion for Summary Judgment (Doc. No. 89), State’s Second Cross Motion for Summary Judgment (Doc. No. 102), and the Wholesalers’ Cross-Motion for Summary Judgment (Doc. No. 106). Additionally, Plaintiffs contend that the Wholesalers disregarded the court’s scheduling deadlines for argument. Plaintiffs have filed a Motion to Strike Wholesalers’ Unauthorized Supplemental Brief Denominated a “Notice of Supplemental Authority” (Doc. No. 146).

This court has jurisdiction over this litigation pursuant to 28 U.S.C. § 1331, and the parties have briefed the pending motions. Also participating, as amicus curiae on the issue of remedy, is the Indiana Winegrowers Guild (“Winegrowers”), an organization representing Indiana wineries.

The court rules as follows. * * *

For the reasons discussed above, the court finds the wholesale prohibition, Ind. Code § 7.1-3-26-7(a)(6), to be unconstitutional insofar as it bars wineries that possess wholesale privileges in states other than Indiana from seeking a Direct Wine Seller’s permit. The court also finds the requirement of an initial face-to-face transaction between a winery and customer prior to direct shipment, as described in Ind. Code §§ 7.1-3-26-6(4), 7.1-3-26-9(1)(A), to be unconstitutional. These two conditions constitute a form of economic protectionism and violate the Commerce Clause of the Constitution.

The court does not find Indiana’s general prohibition of direct shipping, Ind. Code Ind. Code § 7.1-5-11-1.5, to be unconstitutional except with respect to the two specific conditions in the statutory provisions cited above. Nor does the court find the statute allowing an Indiana farm winery to sell its product onsite and at certain other locations, Ind. Code § 7.1-3-12-5, to be unconstitutional. * * *

Entry of Judgment will be by separate order.

Here is the order.

For background, there are a number of ILB entries on "wine shipping," including this one from Nov. 17, 2005 ("Wineries sue over in-state shipments in Indiana, related matters"), and this one from Feb. 2, 2007 ("Wineries sue over in-state shipments in Indiana, related matters").

Posted by Marcia Oddi on August 29, 2007 06:02 PM
Posted to Ind Fed D.Ct. Decisions