U.S. Court of Appeals, First Circuit - Family Winemakers of California v. Jenkins lyrics

592 F.3d 1 (1st Cir. 2010). In this case, out-of-state wineries contend that a Ma**achusetts 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. Ma**achusetts appealed. Plaintiffs, a group of California winemakers and Ma**achusetts residents, a**ert that the statute has the purpose and effect of giving advantage to Ma**achusetts wineries to the detriment of those wineries that produce 98 percent of the country's wine, in violation of the Commerce Clause. The Ma**achusetts statute at issue in this case only allows “small” wineries, defined by Ma**achusetts 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 Ma**achusetts in three ways: by shipping directly to consumers, through wholesaler distribution, and through retail distribution. All of Ma**achusetts's wineries are “small” wineries. Some out-of-state wineries also meet this definition. Wines from “small” Ma**achusetts wineries compete with wines from “large” wineries, which Ma**achusetts 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 Ma**achusetts consumers. They cannot, by law, use both methods to sell their wines in Ma**achusetts, and they cannot sell wines directly to retailers under either option. No “large” wineries are located inside Ma**achusetts. The primary question is whether the Ma**achusetts 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 Ma**achusetts law confers a clear competitive advantage to “small” wineries, which include all Ma**achusetts's wineries, and creates a comparative disadvantage for “large” wineries, none of which are in Ma**achusetts. “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 Ma**achusetts 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, Ma**achusetts's wineries have taken advantage of these benefits. Twenty-seven of Ma**achusetts'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. Ma**achusetts's wineries have also benefitted from their access to multiple distribution channels in practice. In 2007, the first year the statute was in effect, Ma**achusetts'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 Ma**achusetts's own evidence characterizes as one with indisputably slim profit margins and a highly competitive market. Moreover, contrary to Ma**achusetts's a**ertions, 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. Ma**achusetts'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 ma**-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 Ma**achusetts. Since this is a crucial way for a winery to build consumer awareness for the brand in Ma**achusetts, 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 Ma**achusetts's wineries to gain market share against their out-of-state competitors. Ma**achusetts's choice of a 30,000 gallon grape wine production cap helps Ma**achusetts 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. Ma**achusetts has a**erted various non-discriminatory purposes: to facilitate direct shipment, to further the three-tier system, to make all small wineries, irrespective of their location, better able to compete, and to thereby provide Ma**achusetts consumers with greater choice. The 30,000 gallon cap and the fruit wine exception, Ma**achusetts claimed at oral argument, reflected the legislature's rational a**essment of the kind of wineries that needed special a**istance because they were suffering from the limitations of the three-tier system. But these general aims stand in stark contrast to the specific and highly irregular features. The wine industry and federal law have developed definitions of “small,” “medium,” and “large” wineries in order to describe the way the industry produces and distributes wines and, in the case of federal law, to offer “small” wineries regulatory benefits. These definitions do not, of course, bind states to particular regulatory choices. But their lack of correlation belies Ma**achusetts's claim that its statute's features reflected an objective choice to remedy the purported competitive disadvantage faced uniquely by wineries producing 30,000 gallons or less of grape wine. That is particularly true given that this gallonage cap counts wineries as “small” even if they produce more than 30,000 gallons of wine when fruit wine production is counted. According to uncontested evidence in the record, the wine industry considers wineries that produce 120,000 gallons per year or less “small.” “Medium” wineries produce between 120,000 and 600,000 gallons annually, and “large” wineries produce more than 600,000 gallons per year. The industry apparently does not differentiate between wineries that produce fruit as opposed to grape wine; relative size is the critical factor. The Federal Trade Commission largely adopted these definitions when it surveyed conditions of competition in the wine industry. Nor, according to testimony from industry figures, does Ma**achusetts's 30,000 gallon demarcation point between “small” and “large” wineries correspond to the ability of the winery to obtain wholesaler representation. To the contrary, this choice prevents out-of-state, smaller “large” wineries from competing on equal terms with Ma**achusetts's “small” wineries even though these wineries faced similar difficulties in obtaining wholesaler distribution under the three-tier system. Ma**achusetts's unusual regulatory features do track one thing precisely: the unique attributes of Ma**achusetts's own wine industry. All of Ma**achusetts's thirty-one wineries are eligible for “small” winery licenses. All fall neatly within the 30,000 gallon cap, producing between 200 gallons and 24,000 gallons annually. And the record demonstrates-and Ma**achusetts does not contest-that legislators were well aware of these figures. The fact that this gallonage cap excludes wines made from fruits other than grapes, no matter how many gallons a winery produces per year, is particularly probative. In past years, Ma**achusetts's largest winery produced more than 30,000 gallons of wine annually because between half and three-quarters of its production came from apple wines. The main effect of the fruit wine exception was to guarantee that this winery, like all other Ma**achusetts wineries, could take advantage of its beneficial distribution rules for “small” wineries. Ma**achusetts has offered no other explanation for the fruit wine exception, and there is no obvious reason why it would serve any ostensible purposes. This exception, like similar, facially neutral statutory exemptions apparently motivated by a desire to shield in-state interests, “weaken[s] the presumption in favor of the validity of the [general provision], because [it] undermine[s] the a**umption that the State's own political processes will act as a check on local regulations that unduly burden interstate commerce.” We conclude that Ma**achusetts altered the competitive balance to favor Ma**achusetts's wineries and disfavor out-of-state competition by design. Ma**achusetts therefore bears the heavy burden of showing that the statute is nonetheless constitutional because it serves a legitimate local purpose that cannot be attained through reasonable non-discriminatory alternatives. The state can only carry this burden by presenting “concrete record evidence,” and not “sweeping a**ertion[s]” or “mere speculation,” to substantiate its claims that the discriminatory aspects of its challenged policy are necessary to achieve its a**erted objectives. Ma**achusetts has not even attempted to do so here. The judgment of the district court is affirmed.