Family Winemakers of California v. Jenkins lyrics

592 F.3d 1 (1st Cir. 2010).

In this case, out-of-state wineries contend that a Massachusetts wine-distribution statute violates the Commerce Clause of the United States Constitution, and is therefore unconstitutional and unenforceable. A federal district court agreed and issued an injunction to prevent enforcement of the statute. Massachusetts appealed.

Plaintiffs, a group of California winemakers and Massachusetts residents, assert that the statute has the purpose and effect of giving advantage to Massachusetts wineries to the detriment of those wineries that produce 98 percent of the country's wine, in violation of the Commerce Clause. The Massachusetts statute at issue in this case only allows “small” wineries, defined by Massachusetts as those producing 30,000 gallons or less of grape wine a year, to obtain a “small winery shipping license.” This license allows them to sell their wines in Massachusetts in three ways: by shipping directly to consumers, through wholesaler distribution, and through retail distribution. All of Massachusetts's wineries are “small” wineries. Some out-of-state wineries also meet this definition. Wines from “small” Massachusetts wineries compete with wines from “large” wineries, which Massachusetts has defined as those producing more than 30,000 gallons of grape wine annually. These “large” wineries must choose between relying upon wholesalers to distribute their wines in-state, or applying for a “large winery shipping license” to sell directly to Massachusetts consumers. They cannot, by law, use both methods to sell their wines in Massachusetts, and they cannot sell wines directly to retailers under either option. No “large” wineries are located inside Massachusetts.

The primary question is whether the Massachusetts statue substantially burdens interstate commerce.

The Commerce Clause prevents states from creating protectionist barriers to interstate trade. Discrimination under the Commerce Clause “means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter,” as opposed to state laws that regulate evenhandedly with only incidental effects on interstate commerce. Plaintiffs bear the initial burden of showing discrimination. If plaintiffs meet their burden, then “a discriminatory law is virtually per se invalid ... and will survive only if it advances a legitimate local purpose that cannot be adequately served by reasonable non-discriminatory alternatives.” The state bears the burden of showing legitimate local purposes and the lack of non-discriminatory alternatives, and discriminatory state laws rarely satisfy this exacting standard.

A state law is discriminatory in effect when, in practice, it affects similarly situated entities in a market by imposing disproportionate burdens on out-of-state interests and conferring advantages upon in-state interests. One such form of discrimination is plainly when “the effect of a state regulation 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.” State laws that alter conditions of competition to favor in-state interests over out-of-state competitors in a market have long been subject to invalidation.

The Massachusetts law confers a clear competitive advantage to “small” wineries, which include all Massachusetts's wineries, and creates a comparative disadvantage for “large” wineries, none of which are in Massachusetts. “Small” wineries that obtain a state license can use direct shipping to consumers, retailer distribution, and wholesaler distribution simultaneously. Combining these distribution methods allows “small” wineries to sell their full range of wines at maximum efficiency because they serve complementary markets. “Small” wineries that produce higher-volume wines can continue distributing those wines through wholesaler relationships. They can obtain new markets for all their wines by distributing their wines directly to retailers, including individual bars, restaurants, and stores. They can also use direct shipping to offer their full range of wines directly to Massachusetts consumers, resulting in greater overall sales.

Combining these methods also lowers “small” wineries' distribution costs because they can choose which method or combination of methods will be most cost-effective for a particular wine. As the parties' briefs highlight, this produces important synergies. “Small” wineries' use of retail distribution increases brand recognition and makes wholesaler distribution more likely. Direct shipping can similarly increase consumer demand for a particular wine, increasing the prospects for further retail sales and wholesaler distribution.

Not surprisingly, Massachusetts's wineries have taken advantage of these benefits. Twenty-seven of Massachusetts's thirty-one wineries have obtained “small” winery licenses; in contrast, only twenty-six of the 2,933 out-of-state “small” wineries producing more than a gallon per year have done so. Massachusetts's wineries have also benefitted from their access to multiple distribution channels in practice. In 2007, the first year the statute was in effect, Massachusetts's wineries distributed 29 percent of their annual production through wholesalers and 71 percent through retail outlets, including direct shipping.

The 637 out-of-state wineries that qualified as “large” do not get these advantages and must instead choose between direct shipping and wholesaler distribution. Under the statute, whether a “large” winery chooses wholesaler distribution or direct shipping, its choice carries a significant loss of potential profits, since using a single method results in a comparative loss of consumer sales. “Large” wineries also face comparatively greater distribution costs because they cannot always distribute a given wine through the most cost-effective method. And they cannot take advantage of the synergies that increase the net amount of demand for wines when multiple distribution methods are used together. These amount to considerable competitive disadvantages in an industry that Massachusetts's own evidence characterizes as one with indisputably slim profit margins and a highly competitive market.

Moreover, contrary to Massachusetts's assertions, the statute does not level the playing field for all wineries unable to obtain consistent wholesaler distribution under the three-tier system. The demarcation line between “small” and “large” wineries instead creates an especially acute competitive disadvantage for the wineries that are defined as “large” but which in practice face the same difficulties in distributing most of their wines as the “small” wineries. Massachusetts's own evidence shows that only the largest 50 to 100 wineries can distribute most of their wines through wholesalers under the three-tier system. The remaining 537 or so “large” wineries each produce between 30,001 and 680,000 gallons per year of a mix of mass-market and boutique wines. In 2006, their percentage of the market share for wine production far exceeded that of “small” wineries.

These smaller “large” wineries lose the most under the statutory regime. Unlike the largest of the “large” wineries, which can distribute the vast majority of their wines through existing wholesale distribution, these smaller “large” wineries can only distribute a handful of their higher-volume wines through wholesalers. If they choose direct shipping, however, they are forced to terminate their existing wholesaler relationships, which also means that they lose all access to retailers in Massachusetts. Since this is a crucial way for a winery to build consumer awareness for the brand in Massachusetts, its unavailability means that these wineries are not able to compete on the same footing as “small” wineries. Importantly, these are also the wineries that would otherwise be most competitive in the market for boutique wines: their size affords them otherwise considerable advantages in terms of marketing, volume, transportation, and brand recognition.

The ultimate effect of is to artificially limit the playing field in this market in a way that enables Massachusetts's wineries to gain market share against their out-of-state competitors. Massachusetts’s choice of a 30,000 gallon grape wine production cap helps Massachusetts wineries to improve their position in the market, and, at the same time, burdens all the larger out-of-state competitors and impedes their ability to effectively use their natural advantages.