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High court to review interstate wine shipping laws

Remnant of Prohibition focuses on states' commerce laws

From Bill Mears
CNN Washington Bureau

Supreme Court
Electronic Commerce
Regulatory Policy and Organizations

WASHINGTON (CNN) -- The Millbrook Vineyards and Winery is a popular stop for tourists looking for a bit of culture and culinary indulgence, all in a country setting.

Situated in Duchess County, about 90 minutes north of New York City, Millbrook has been selling chardonnay, pinot noir and other varieties on its 130 acres for nearly two decades.

But wine-tasting visitors who later may want to order a bottle or two of Millbrook's Tocai Friulano as holiday gifts would find an unexpected legal impediment -- a vestige of Prohibition that will be argued in a Supreme Court case being heard Tuesday.

At issue is the legality of state laws prohibiting wineries from shipping alcohol directly to out-of-state customers.

New York, as well as 23 other states, bans individual consumers from ordering wine from outside the state. In many cases, however, vendors can ship wine to private in-state residents, a common practice thanks to e-commerce.

Two groups of wine connoisseurs and winery owners filed separate suits -- one in Michigan, the other in New York -- saying certain large-production wineries and distributors benefit from the ban, thus violating free trade laws.

The case focuses on the interpretation of two constitutional provisions. The Commerce Clause in Article I gives the federal government power to regulate interstate commerce. But Supreme Court decisions on the 21st Amendment, which repealed Prohibition, have given unclear guidance over the power of the states to regulate alcohol sales.

At least two federal appeals courts have disagreed on the issue.

Many consumers are unaware of such state laws. "That's strange. I didn't know that," said like Connie Rapp of California as she and her family toured Millbrook's facilities and sampling the wines.

Most interstate wine is shipped from the producer to a wholesaler who controls national distribution, then to the local retailer or consumer.

Small, family-owned wineries complain that distributors cut into their profits. They say changing such state laws would benefit their customers.

"The distributor marks it up and sells it to the restaurant or the liquor store or wine store," said David Bova, Millbrook Winery's co-founder.

"And then, the wine store marks it up again to the consumer. If we had direct shipping, it would allow me, honestly, to lower my prices."

Profits, Bova said, also would get a boost. Bova predicted that a Supreme Court ruling in the winery owners' favor could boost Millbrook's sales by 50 percent.

The economic interests, many wine experts say, could be revolutionized in the United States if the state laws are found unconstitutional, allowing the industry to increase its competitiveness with other countries.

"We are on the cusp of really creating a homespun wine culture in the United States," said David Sloane, president of Wine America, a leading trade group.

There are an estimated 3,000 small, family-owned wineries across the country, according to the Wine Institute.

But states also have a financial motive. They claim that the 21st Amendment, in addition to overturning Prohibition, gives them the power to raise tax revenue from alcohol sales.

About half the states limit hard liquor purchases to government-operated stores, many of which also sell wine.

Some private distillers and wineries question whether the state should enjoy such a monopoly on the sale and distribution of certain types of alcohol.

The issue goes beyond economics. Wholesalers argue that public safety is behind their opposition to overturning such state laws.

Supported by a number of states, the wholesale lobby fears uncontrolled sales of wine over the Internet or by phone would allow minors to buy wine.

"You're going to have unaccountable, unregulated sales of alcohol and we don't think that's in the public interest," said Juanita Dugga, president of the Wine and Spirits Wholesalers of America.

Many in the wine industry say that argument is exaggerated.

"The legal issue is all about discrimination," said Wine Institute President Robert Koch. "The case has nothing to do with the serious issue of underage drinking. This is a false argument that the wholesalers are using to protect their monopoly."

Alcohol regulation has long been a special and sticky constitutional question, with the issue dating to colonial days and the ability of the British crown to regulate and tax the importation of rum.

Two of the most controversial amendments to the U.S. Constitution are the 18th, which prohibited alcohol sales beginning in 1919, and the 21st, which repealed the 18th in 1933.

Legal experts say the broader issue deals with the power of federal courts to regulate state commerce laws, and whether alcohol sales deserve greater state regulation and scrutiny.

The cases are Granholm v. Heald, case no. 03-1116; Michigan Beer & Wine Wholesalers v. Heald, case no. 03-1120; Swedenburg v. Kelly, case no. 03-1274.

CNN's Alina Cho contributed to this report.

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