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HR 5034 – An attempt to legalize state discrimination in the alcohol markets | Print |  E-mail

By Michael W. Newcomb, Esq.

Newcomb Law Group

HR 5034 is a Bill pending before the 2010 House of Representatives with the goal of setting aside the U.S. Supreme Court decision in Granholm v. Heald, which struck down discriminatory alcohol laws.  If passed the Bill would and creates a new rule that would:

(1) prevent the courts from applying the dormant commerce clause;

(2) create a presumption that a discriminatory law is valid;

(3) shift the burden from the state to a challenger of a discriminatory law;

(4) require all challengers prove their case by “clear and convincing” (overwhelming) evidence; and

(5) require a challenger to prove a discriminatory law has no effect on temperance, alcohol markets, collection of taxes, the distribution system, and access to alcohol by minors.

Historical Background

In order to understand the havoc H.R. 5034 would wreck; a basic understanding of the power granted to states to regulate alcohol is important.

18th Amendment - Prohibition Ratified

At the turn of the 1900, religious and political leaders within the U.S. became increasingly wary of the effects of alcohol on the community.  In 1913 the Webb-Kenyon Act was passed that was meant to provide federal support to State’s prohibition efforts. In 1919, the Volstead Act was passed by Congress and the 18th Amendment ratified by the states.  Together, these laws created federal prohibition, which banned the production and sale of “intoxicating liquors.”

Prohibition became increasingly unpopular, as crime rates soared, organized crime made millions and corruption amongst law enforcement agencies was to be expected.  Secrete clubs called Speakeasies replaced saloons and even ardent supporters of Prohibition soon began to realize Prohibition did more harm than good.

21st Amendment – Prohibition Repealed

Congress and the States reacted by adopting and ratifying the 21st Amendment in 1933, which repealed the 18th Amendment.  The 21st Amendment states:

Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed.

Section 2. 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.

Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.

Section 2 of the 21st Amendment & the 3-Teir System

Section 2 essentially gave States total and absolute control over the regulation of alcohol within their borders.  From ratification of the 21st Amendment to the turn of the century, the States rights with regard to the production, distribution and sale of alcohol has been absolute.

Many states adopted what is known as the 3-Tier system, which creates three categories of players: (1) producers, (2) distributors, and (3) retailers.  Under the 3-Tier system, a producer can only sell to a distributor, a distributor can only sell to a retailer, and a retailer can only sell to a consumer.  This system created a de facto monopoly in favor of the wholesalers, who controlled both the inflow and outflow of alcohol within a State.

Over the years, exceptions to the basic 3-Teir system began to occur.  For example, some states, such as California, allow wineries to sell directly to consumers and retailers, bypassing the wholesaler component.  States also began to modify their laws to give “reciprocity” to other States that allowed producers in one state to ship wine or beer directly to consumers in another state.  The wholesalers were watching their monopoly slowly being chipped away.

Granholm v. Heald (2005)

Because the States were granted the power to regulate alcohol without interference from the Federal government, many states adopting discriminatory laws that granted broad rights to in-state producers, but effectively denied those same rights to out-of-state producers.

The Supreme Court in Granholm was asked to determine whether Michigan and New York discriminated against Californian wineries.  The court held:

“We hold that the laws in both States discriminate against interstate commerce in violation of the Commerce Clause, Art. I, §8, cl. 3, and that the discrimination is neither authorized nor permitted by the Twenty-first Amendment.”

The U.S. Supreme Court applied the basic two-step dormant Commerce Clause analysis.  The first step is to determine if the challenged state’s laws are discriminatory.  If the answer is yes, then the second part of the test is applied which places the “burden [] on the State to show that ‘the discrimination is demonstrably justified.’” Granholm

How HR 5034 would impact Granholm

Proponents of HR 5034 (aka the beer, wine and spirits wholesalers associations) claim that HR 5034 merely reinforces “states rights” to regulate alcohol within their borders and does not attempt to overrule Granholm.

The opponents of HR 5034 (aka the producers, retailers and consumers) claims that HR 5034 is a clear attempt at overturning the Granholm decision by granting states, such as, New York and Michigan the right to reenact discriminatory alcohol laws that were struck down as violative of the Constitution.

Either the proponents or the opponents to HR 5034 are not telling the truth, who is it?  Obviously, this debate and the veracity of each side rests on whether the Granholm decision is changed in a fundamental or meaningful manner.

As introduced, HR 5034 states in relevant part:

`SEC. 3. SUPPORT FOR STATE ALCOHOL REGULATION.

`(a) Declaration of Policy- It is the policy of Congress that each State or territory shall continue to have the primary authority to regulate alcoholic beverages.

`(b) Construction of Congressional Silence- Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the `Commerce Clause') to the regulation by a State or territory of alcoholic beverages. However, State or territorial regulations may not facially discriminate, without justification, against out-of-state producers of alcoholic beverages in favor of in-state producers.

`(c) Presumption of Validity and Burden of Proof- The following shall apply in any legal action challenging, under the Commerce Clause or an Act of Congress, a State or territory law regarding the regulation of alcoholic beverages:

`(1) The State or territorial law shall be accorded a strong presumption of validity.

`(2) The party challenging the State or territorial law shall in all phases of any such legal action bear the burden of proving its invalidity by clear and convincing evidence.

`(3) Notwithstanding that the State or territorial law may burden interstate commerce or may be inconsistent with an Act of the Congress, the State law shall be upheld unless the party challenging the State or territorial law establishes by clear and convincing evidence that the law has no effect on the promotion of temperance, the establishment or maintenance of orderly alcoholic beverage markets, the collection of alcoholic beverage taxes, the structure of the state alcoholic beverage distribution system, or the restriction of access to alcoholic beverages by those under the legal drinking age.'.

Does the above language change Granholm?  Absolutely.  In fact, it would so fundamentally change the rules regarding discriminatory alcohol laws, that if HR 5034 was passed into law prior to Granholm, the Granholm decision would have never reached the Supreme Court.

I’ll break down each sub-section of Section 3 to show how HR 5034 would fundamentally change the holding in Granholm.

`(a) Declaration of Policy- It is the policy of Congress that each State or territory shall continue to have the primary authority to regulate alcoholic beverages.

No problem here.  This is nothing more than a reiteration of the 21st Amendment, Section 2.

`(b) Construction of Congressional Silence- Silence on the part of Congress shall not be construed to impose any barrier under clause 3 of section 8 of article I of the Constitution (commonly referred to as the `Commerce Clause') to the regulation by a State or territory of alcoholic beverages. However, State or territorial regulations may not facially discriminate, without justification, against out-of-state producers of alcoholic beverages in favor of in-state producers.

Section (b) is somewhat confusing because it is written in the double negative.  Restated, in positive terms the dormant commerce clause will not “impose any barrier” “to the regulation by a State … of alcoholic beverages,” and States can facially discriminate with justification.

To understand the impact of Section (3)(b), you need to understand what the Dormant Commerce Clause is about.  The Commerce Clause states in simple terms:

[The Congress shall have power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes [Article I, Section 8, Clause 3]

The Dormant Commerce Clause arises from a negative inference to the Commerce Clause and basically states that because the power to regulate commerce among the States is vested with the Federal government, any laws passed by the States that improperly burden or discriminate against interstate commerce are invalid.

Section 2 of the 21st Amendment gave States the right to regulate alcohol production, distribution and sales.  Because Congress was “silent” as to whether this power had any limits in the Webb-Kenyon Actor the 21st Amendment, the Supreme Court applies a basic doctrine which requires laws be enforced in relationship to other laws – in Granholm, the other law was the dormant commerce clause.

If Congress wants a law to be exempt from the dormant commerce clause it need only declare that “… its silence shall not be construed to impose any barrier to the or taxation of such business by the several States” or words to that effect.  The Granholm Court recognized this basic tenant when it wrote:

The statute’s text does not compel a different result. The Webb-Kenyon Act readily can be construed as forbidding “shipment or transportation” only where it runs afoul of the State’s generally applicable laws governing receipt, possession, sale, or use. Cf. id., at 141 (noting that the Act authorized enforcement of “valid” state laws). At the very least, the Webb-Kenyon Act expresses no clear congressional intent to depart from the principle, unexceptional at the time the Act was passed and still applicable today, Hillside Dairy Inc. v. Lyons, 539 U.S. 59, 66 (2003), that discrimination against out-of-state goods is disfavored. Cf. Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648, 652—653 (1981) (holding that the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., removed all dormant Commerce Clause scrutiny of state insurance laws; 15 U.S.C. § 1011 provides: “Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States”).

The first sentence of Section (3)(b) of HR 5034 would exempt the dormant Commerce Clause from imposing a barrier to the regulation of alcohol.  This is the exact opposite of what Granholm held.

The second sentence of Section (3)(b) seems to still make it illegal to “facially discriminate.”  That’s true, but as you will see, Section (c) makes proving a law “facially discriminates” impossible and flips Granholm on its head.

`(c) Presumption of Validity and Burden of Proof- The following shall apply in any legal action challenging, under the Commerce Clause or an Act of Congress, a State or territory law regarding the regulation of alcoholic beverages:


`(1) The State or territorial law shall be accorded a strong presumption of validity.

This language reverses Granholm which recognized that “State laws that discriminate against interstate commerce face a virtually per se rule of invalidity.”  Section 3(c)(1) of the law instructs the court to presume an otherwise discriminatory law in valid, rather than presume a discriminatory law is invalid as Granholm held.

`(2) The party challenging the State or territorial law shall in all phases of any such legal action bear the burden of proving its invalidity by clear and convincing evidence.

This language reverses Granholm by (1) requiring the challenger to prove the law is invalid by the highest civil standard “clear and convincing,” rather than “preponderance of the evidence” and (2) taking away the burden from the State to prove the discrimination is demonstrably justified and placing the burden on the challenger to prove there is no effect on the States interest as required under (3)(c)(3).

`(3) Notwithstanding that the State or territorial law may burden interstate commerce or may be inconsistent with an Act of the Congress, the State law shall be upheld unless the party challenging the State or territorial law establishes by clear and convincing evidence that the law has no effect on the promotion of temperance, the establishment or maintenance of orderly alcoholic beverage markets, the collection of alcoholic beverage taxes, the structure of the state alcoholic beverage distribution system, or the restriction of access to alcoholic beverages by those under the legal drinking age.'.

This language fundamentally changes Granholm by creating a new impossible standard to which a challenger must met to prove a discriminatory law should be struck down.  Under Granholm the burden was on the State to prove a legitimate state interest was met to save a discriminatory law.  Under HR 5034, the challenger must prove a discriminatory law has “no effect” on temperance, alcohol markets, collection of taxes, the distribution system, and access to alcohol by minors.

Take “temperance” for example.  A challenger would have to prove the discriminatory law banning the sale of wine from out-of-state producers to in-state consumers will in no way, shape or form allow a consumer to consume more alcohol.  Impossible.

Who’s Lying?

(Hint: It Isn't the Producers/Retailers/Consumers)

It is the height of intellectual dishonesty for the proponents of H.R. 5035 to claim that this bill is not intended to, nor would it overrule or reverse the Granholm decision.  It fundamentally changes every element upon which Granholm was decided without stating directly its intent to overrule the decision  In short, if passed the law would:

(1) prevent the courts from applying the dormant commerce clause, as did the Court in Granholm;

(2) create a presumption that a discriminatory law is valid, the opposite of what Granholm held;

(3) shift the burden from the state to a challenger of a discriminatory law, the opposite of Granholm;

(4) require all challengers prove their case by “clear and convincing” (overwhelming) evidence at all stages, the opposite of what Granholm held; and,

(5) require a challenger to prove a discriminatory law has no effect on temperance, alcohol markets, collection of taxes, the distribution system, and access to alcohol by minors, which is a new and virtually impossible standard that would replace the dormant commerce clause analysis performed by Granholm.

Think of it this way, as long as Granholm is law, two gunfighters approach each other at high noon and shoot it out.  The sun is still at the back of the State and the challenger still at a disadvantage.  If HR 5034 is passed into law, one gunfighter (the challenger) won't be carrying a gun at all, but a wet noodle.  This sort of gives a new meaning to spaghetti westerns.