Constitutional Law - Dormant Commerce Clause - Seventh Circuit Holds That State Law Disproportionately Burdening Out-of-State Businesses Has Only Incidental Effects on Interstate Commerce

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CONSTITUTIONAL LAW--DORMANT COMMERCE CLAUSE--SEVENTH CIRCUIT HOLDS THAT STATE LAW DISPROPORTIONATELY BURDENING OUT-OF-STATE BUSINESSES HAS ONLY INCIDENTAL EFFECTS ON INTERSTATE COMMERCE.--Baude v. Heath, 538 F.3d 608 (7th Cir. 2008).

In 2005, the Supreme Court held in Granholm v. Heald (1) that the dormant commerce clause prohibited a state from discriminating against other states by "allow[ing] in-state wineries to sell wine directly to consumers in that State but ... prohibit[ing] out-of-state wineries from doing so," whether this discrimination was by the terms of the state law or by its effect. (2) However, the Court did not settle the issue of exactly what constitutes discrimination against out-of-state producers. (3) In particular, it is unclear whether a state may require consumers to visit wineries in person before receiving direct shipments of wine, or whether such a requirement is discriminatory because it imposes disproportionate costs on wineries in distant states. While two district courts have found that these face-to-face requirements violate the dormant commerce clause, (4) other courts to consider such requirements have found them not discriminatory. (5) Recently, in Baude v. Heath, (6) the Seventh Circuit held that Indiana's face-to-face requirement did not violate the dormant commerce clause because the state's interests in revenue collection and in the prevention of underage drinking outweighed any incidental burden the law might have on interstate commerce. (7) While other courts to address the issue have reached a similar conclusion, the court's oversimplified cost-benefit analysis highlights how careless economic analysis can confuse, rather than clarify, a court's doctrinally sound opinion.

Indiana forbade direct shipment of alcohol to individuals, (8) except that a winery could apply for a "direct wine seller's permit" if it did not "hold a permit or license to wholesale alcoholic beverages issued by any authority," and had not recently distributed its wine through a wholesaler in Indiana. (9) This "prohibition against wholesale interests" effectively barred sales from wineries in states whose farm winery licenses automatically included wholesale privileges, including the major wine-producing states of California, Oregon, and Washington. (10) Moreover, wineries could ship directly only to consumers who had "provided to the seller in one ... initial face-to-face transaction at the seller's place of business" their personal information and proof of age. (11) Fine wine connoisseurs seeking access to out-of-state wines joined with a Michigan winery to challenge the Indiana regime.

The Southern District of Indiana held that both provisions violated the dormant commerce clause. (12) The court explained that the dormant commerce clause does not protect out-of-state businesses from natural disadvantages caused by geography, but only "forbids states from stripping out-of-state businesses of competitive advantages they have earned." (13) The wholesale interest prohibition violated this constitutional restriction by functioning as a discriminatory "concrete barrier" to bar ninety-three percent of all American-produced wine. (14) Because Indiana did not demonstrate that the prohibition was effective at or necessary to the protection of the state's three-tier alcohol distribution system, the court held it invalid. (15) The court went on to find that the face-to-face requirement, although "less obviously discriminatory," (16) had the overall practical effect of disproportionately burdening out-of-state wineries, and was thus also discriminatory per se. (17) Finding that the state could have used less burdensome methods to prevent underage drinking, the court held that the face-to-face requirement could not withstand heightened scrutiny. (18)

The Seventh Circuit affirmed in part and reversed in part. (19) Writing for the unanimous panel, Chief Judge Easterbrook (20) set out an analytical framework for assessing a state law affecting interstate commerce. …