The U. S. Supreme Court ruled on a challenge to state regulatory schemes in Michigan and New York brought by small wineries (Granholm v. Heald (544 U. S. 460). The Court heard oral arguments on December 7, 2004 on the following question: “Does a State's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of § 2 of the 21^st Amendment?” In general, the Commerce Clause prohibits states from adopting laws that benefit in-state economic interests to the detriment of out-of-state interests. In similar broad terms, § 2 of the 21^st Amendment forbids transporting or importing liquor into a state in violation of its laws.

In Michigan, the wineries successfully argued that the regulatory scheme violates the Commerce Clause. In New York, the State of New York successfully argued that the 21^st Amendment gave it the authority to establish the regulatory scheme.

The Supreme Court held, in a 5 to 4 decision, that laws banning or severely restricting the ability of out-of-state shippers to ship wine directly to consumers while allowing in-state wineries to do so violate the Commerce Clause. The Court's opinion stressed that, if states choose to allow the direct shipment of wine to consumers, they must do so on even-handed terms.

The Court determined that laws of both states discriminated against out-of-state wineries in violation of the Commerce Clause. Having made the determination, it considered whether the laws were justified because there is no other way to achieve the states' goals of preventing deliveries to minors and ensuring that state taxes are collected. It found that the states could meet their goals by requiring an adult's signature as a condition of delivery and requiring the out-of-state winery to obtain a liquor permit.

Michigan and New York both establish regulatory systems that generally require liquor to be distributed through a three-tier system: producers, wholesalers, and retailers. The court noted that it has previously held that states can require this system while exercising their authority under the 21^st Amendment.

Both states create exceptions to the system for in-state wineries. In both, in-state wineries can obtain licenses that allow them to ship directly to consumers. In both, out-of-state wineries cannot ship directly to consumers.

The discriminatory treatment towards out-of-state wineries limits the direct sale of wine to consumers. Even so, national consumer spending on direct shipment of wine, the court noted, has increased to $ 500 million per year, or 3% of all wine sales. Simultaneously, the number of small wineries has increased to approximately 3,000 and the number of wholesalers declined from 1,600 in 1984 to 600. This means that many small wineries do not produce enough wine to make it economical for wholesalers to carry their products. These wineries rely on direct shipment.

Approximately 26 states allow direct shipment. Thirteen of these have “reciprocity laws,” which allow direct shipment only if the shipper's state has a reciprocity law that allows direct shipment on the same terms. In many states, there are laws that prohibit or severely restrict direct shipping.

Domaine Alfred, a California winery and one of the plaintiffs, produces 3,000 cases per year and has had requests to ship directly to Michigan consumers. Michigan law does not allow this and, if it could find a wholesaler to distribute it, the wholesaler's markup would increase costs too much. Michigan requires most producers to distribute through the three-tier system, but creates an exception for its approximately 40 in-state wineries. These wineries can obtain a license allowing them to ship directly to consumers.

Swedenburg and Lucas, two of the plaintiffs in the New York case, operate small wineries in Virginia. They are unable to fill orders from New York, the nation's second largest wine market, due to New York's law. New York similarly requires most producers to distribute through the three-tier system. But wineries that produce wine only from New York grapes can obtain a license allowing them to ship directly to in-state consumers.

Several Michigan residents sued state officials seeking the ability to order wine directly from out-of-state wineries. Domaine Alfred joined the suit. The state defended its law by stating that it is a valid exercise of Michigan's power under § 2 of the 21^st Amendment. The state won in district court, but the Sixth Circuit Court reversed, holding that (1) the 21^st Amendment does not immunize all state liquor laws from the Commerce Clause and (2) the state failed to show that it could not meet its policy objectives through nondiscriminatory means (Heald v. Engler, 342 F. 3d 517 (2003)).

Swedenburg and Lucas, joined by three New York customers, sued seeking a declaration that New York's limit on direct shipment violates the Commerce Clause. The plaintiffs won in district court, which found that the state did not show that its ban on direct shipment implicated its core concerns under the 21^st Amendment. The Second Circuit Court reversed because it determined that the state's desire to ensure accountability through presence is aimed at its regulatory interests tied to importation of alcohol for consumption in New York (Swedenburg v. Kelly, 358 F. 3d 223(2004)).

The Court joined the cases and agreed to hear them to decide whether a state's regulatory scheme that allows in-state wineries to ship directly to consumers but restricts the ability of out-of-state wineries to do so violates the Commerce Clause in light of § 2 of the 21^st Amendment.

The Supreme Court held that a state may not ban, or severely restrict, the direct shipment of wine by out-of-state wineries to consumers while simultaneously allowing it by in-state wineries. It stated that if a state chooses to allow direct shipment of wine to consumers, it must do so on an even-handed basis.

The Court stated that the discriminatory character of the Michigan system is obvious. In-state wineries may ship directly to consumers and out-of-state wineries may not. By requiring wine from an out-of-state winery to go through two tiers of the liquor industry, the law increases an out-of-state shipper's overhead and the cost of its wine to Michigan consumers. New York's system does not ban direct shipments to consumers, but instead requires out-of-state shippers to have a physical presence in New York. This is an indirect means, the Court wrote, of subjecting out-of-state wineries, but not local ones, to New York's three-tier system. The Court concluded that New York also discriminates against out-of-state wine shippers.

Both states argued that their systems were legally protected by § 2 of the 21^st Amendment, which states, “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. ” The Court reviewed a series of cases occurring before Prohibition concerned with interstate liquor deliveries and another series occurring after its repeal. It found that they confirmed the idea that the 21^st Amendment does not displace the rule that states may not discriminate in favor of their own liquor producers.

In looking at modern § 2 cases, the Court stated that they fall into the following three categories and that the current case falls into the third.

1. State laws that violate other constitutional provisions are not saved by the 21^st Amendment.

2. Section 2 does not abrogate the Commerce Clause.

3. State regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause.

The Court stated that invalidating the Michigan and New York direct shipment laws does not, contrary to the states' contentions, mean that their laws creating the three-tier system are unconstitutional. Instead, state policies are protected if they treat liquor produced out of state in the same way they treat the domestic product.

Having determined that the laws of both states discriminate against out-of-state producers, the Court considered whether the burden imposed on interstate commerce was justified because the state goals could not be achieved with a lesser impact on interstate commerce. Both states claimed that their goals were to (1) keep liquor away from minors and (2) facilitate collection of the state excise tax on liquor. The Court noted that the states did not provide much evidence that minors purchase wine over the Internet. It stated that this was not surprising because (1) minors are less likely to consume wine, as opposed to beer, wine coolers, or hard liquor; (2) minors have more direct ways to acquire liquor, and (3) direct shipping does not give minors “instant gratification. ” The Court stated that even if it accepted the states' claim that purchasing over the Internet is a problem, they could have addressed it with less discriminatory steps, such as by requiring an adult's signature on delivery and by requiring packages to bear a label stating the requirement.

The Court also found that protecting state tax revenues was an insufficient justification for the discrimination against out-of-state producers. A state that allows direct shipping to consumers has the potential to receive more tax revenue. By requiring a permit as a condition of direct shipping to consumers, a state can collect tax revenue directly from the shipper as it does from in-state wineries.