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Thursday, July 18, 2024 | Back issues
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Retailer Loses Challenge to Indiana Liquor Law

CHICAGO (CN) - In a blow to Indiana liquor retailers, the 7th Circuit upheld a state law that forbids them from shipping wine through a third-party motor carrier service like UPS.

Indiana has a three-tiered system for alcohol distribution in which producers sell to wholesalers, who then sell to retailers, who then sell to consumers. The state requires drivers employed by liquor retailers to be trained and tested on alcohol laws and the recognition of fake IDs. Motor carriers, such as UPS, must obtain "carriers' alcoholic permits," but the drivers do need special training.

The state also requires retailers to personally verify the ages of costumers receiving an alcohol shipment. Only the seller of the alcohol, or the seller's employee, can make the shipment.

Cap n' Cork, a Fort Wayne wine chain that ships approximately 13,000 cases of wine worth $1.5 million, said the regulations would cost its wine-club business $45,000 in annual profits. Since Indianapolis is 130 miles away from Fort Wayne, the company could not make such deliveries itself.

It filed suit, claiming pre-emption under the Federal Aviation Administration Authorization Act of 1994 and undue burden for out-of-state retailers in violation of the commerce clause.

A federal judge dismissed the case, and the 7th Circuit affirmed last week. Though the FAA law forbids states from enacting laws "related to a price route, or service of any motor carrier," the federal appeals court said that the term "related to" is too broad to block Indiana's statute.

"Since everything in an open economy relates to everything else, the term 'related to' cannot be interpreted literally, especially since the statute had a focused aim - to prevent states from nullifying the repeal ... of the federal laws that had made truck transportation a heavily regulated industry," Judge Richard Posner wrote for a three-judge panel. "The state law challenged in the present case does not regulate motor carriers, but it forbids liquor stores to use motor carriers to deliver wine ... and the effect is to prohibit motor carriers from offering a service they'd like to offer."

States may not discriminate in favor of local producers under the 21st Amendment, but their interest in regulating alcohol would lead to laws, such as that of Indiana, that affects the cost of wine produced elsewhere.

"That consequence is inherent in the central power conferred on states by the Twenty-First Amendment - the power to limit or even forbid the consumption of wine within its borders - and overrides the competing interest held to be latent in the Commerce Clause because otherwise the amendment would be a dead letter," Posner wrote.

Since Indiana's statute does not impact interstate commerce, however, a 21st Amendment analysis is not required.

"So incidental are the effects of interstate commerce in this case - in fact, so negligible - that even if the Twenty-First Amendment were inapplicable, Cap N' Cork would lose its Commerce Clause challenge," Posner wrote.

"It is true that the farther away from the consumer a winery is, the harder it is to induce consumers to come for face-to-face age verification at the winery, and most U.S. wineries are on the West Coast, more than 2000 miles from Indiana. But we ruled in Baude that this is not unlawful discrimination, given the state's interest in preventing the sale of alcoholic beverages to minors."

In a concurring opinion, Judge David Hamilton said the Indiana law should be upheld even though "its actual benefits are minimal and its burdens on federal interests are significant."

But Hamilton said the majority misconstrued the impact of the 21st Amendment on Cap N' Cork's pre-emption argument.

"In rejecting plaintiffs' preemption and dormant Commerce Clause theories, my colleagues apply a quasi-legislative form of interest-balancing," Hamilton wrote. "In my view of the applicable law, the Twenty-first Amendment to the Constitution should foreclose those balancing tests when the state is exercising its core Twenty-first Amendment power to regulate the transportation and importation of alcoholic beverages for consumption in the state."

Hamilton described the 21st Amendment as a compromise between pro-Prohibition and anti-Prohibition interests. The powers assigned to states in section 2 of the amendment - limiting federal power to regulate alcohol and allowing states to set their own distribution and consumption rules - represent the "other half of the compromise."

"Where section 2 applies, ordinary preemption doctrines under the supremacy clause simply do not apply," the 12-page opinion states.

A footnote goes on to address the boundaries of section 2. "One need only hypothesize a state alcoholic beverage law discriminating on the basis of race, sex, or religion to recognize that there are limits," Hamilton wrote.

Supreme Court precedent has also favored commerce clause protections against states' rights under the 21st Amendment, he added.

"By applying the balancing tests to this Indiana law, however, my colleges go farther than the Supreme Court has gone," Hamilton wrote. "My colleagues in the end also uphold the challenged law, but I believe the use of these balancing tests will tend to erode the states' powers protected by the Twenty-first Amendment."

The balancing test, Hamilton wrote, is too intrusive and "puts courts in an uncomfortable and almost legislative role."

Ultimately, courts are not the proper venue for challenges to state alcohol laws. "The extraordinary constitutional status given to state alcoholic beverage laws in the Twenty-first Amendment was the compromise that allowed the repeal of Prohibition," Hamilton wrote. "Rather than asking the courts to erode that compromise, those seeking a more progressive organization of the industry should turn to state-by-state political action on behalf of consumers who are hurt by these laws designed primarily to protect incumbents in the industry."

The Indiana law also curbs beer and liquor shipments, but Cap N' Cork and its co-plaintiffs, two distant customers, did not include these products in their challenge. No reason was given for the omission.

Restrictive alcohol laws in New York and New Jersey have also faced commerce clause challenges.

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