Family Winemakers of California v. Jenkins

Decision Date14 January 2010
Docket NumberNo. 09-1169.,09-1169.
Citation592 F.3d 1
PartiesFAMILY WINEMAKERS OF CALIFORNIA, Stephen J. Poor, III, M.D., Gerald C. Leader, Plaintiffs, Appellees, v. Eddie J. JENKINS, in his official capacity as Chairman of the Massachusetts Alcoholic Beverages Control Commission; Robert H. Cronin and Susan Corcoran, in their official capacities as Associate Commissioners of the Massachusetts Alcoholic Beverages Control Commission, Defendants, Appellants.
CourtU.S. Court of Appeals — First Circuit
592 F.3d 1
FAMILY WINEMAKERS OF CALIFORNIA, Stephen J. Poor, III, M.D., Gerald C. Leader, Plaintiffs, Appellees,
v.
Eddie J. JENKINS, in his official capacity as Chairman of the Massachusetts Alcoholic Beverages Control Commission; Robert H. Cronin and Susan Corcoran, in their official capacities as Associate Commissioners of the Massachusetts Alcoholic Beverages Control Commission, Defendants, Appellants.
No. 09-1169.
United States Court of Appeals, First Circuit.
Heard November 2, 2009.
Decided January 14, 2010.

[592 F.3d 3]

David Hadas, Assistant Attorney General, with whom Martha Coakley, Attorney General of the State of Massachusetts, and Thomas A. Barnico, Assistant Attorney General, were on brief for the appellants.

Michael D. Madigan, with whom Stephen M. Diamond and Madigan, Dahl & Harlan, P.A., were on brief for the National Beer Wholesalers Association, amicus curiae.

Lisa Hibner Tavani, Deputy Attorney General, with whom Anne Milgram, Attorney General of the State of New Jersey, and Lorinda Lasus, Deputy Attorney General were on brief for the states of New Jersey, Ohio, Rhode Island, Utah, and Wyoming, amici curiae.

Evan T. Lawson, with whom Michael Williams, Lawson & Weitzen, LLP, and Louis A. Cassis were on brief for Wine & Spirits Wholesalers of Massachusetts, Inc., Wine & Spirits Wholesalers of America, Inc., American Beverage Licensees, and Sazerac Company, amici curiae.

Tracy K. Genesen, with whom Kenneth W. Starr, Micah C.E. Osgood, Gerald J. Caruso, Susan E. Engel, and Elizabeth M. Locke were on brief for the appellees.

Bruce L. Hay for Wine Institute, WineAmerica, Oregon Winegrowers Association, Virginia Wineries Association, Washington Wine Institute, Madera Vintners Association, Monterey County Vintners and Growers Association, and Napa Valley Vintners, amici curiae.

[592 F.3d 4]

Before LYNCH, Chief Judge, STAHL, Circuit Judge, and DiCLERICO,* District Judge.

LYNCH, Chief Judge.


Massachusetts officials appeal from an injunction against a 2006 Massachusetts statute establishing differential methods by which wineries distribute wines in Massachusetts, Mass. Gen. Laws ch. 138, § 19F. The district court enjoined enforcement of § 19F on the ground that the law discriminates against interstate commerce in violation of the Commerce Clause of the United States Constitution. See Family Winemakers of Cal. v. Jenkins, No. 1:06-cv-11682-RWZ at 17-28 (D.Mass. Nov. 19, 2008) (order granting summary judgment).

We briefly summarize the basis for the lawsuit, the issues presented, and our resolution of them before turning to the supporting analysis. Section 19F 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.

Plaintiffs, a group of California winemakers and Massachusetts residents, assert § 19F was designed with the purpose, and has the effect, of advantaging Massachusetts wineries to the detriment of those wineries that produce 98 percent of the country's wine, in violation of the Commerce Clause. Massachusetts defends § 19F on the basis that its law has neither a discriminatory purpose nor a discriminatory effect. Massachusetts has not argued in its briefs that there are no legitimate alternative methods of regulation to serve § 19F's asserted purposes. Massachusetts also argues that under the Twenty-first Amendment, state laws are immunized from Commerce Clause scrutiny unless the laws discriminate on their face.

The primary question before us is whether § 19F unconstitutionally discriminates against interstate commerce in light of both the Commerce Clause,1 art. I, § 8, cl. 3, and § 2 of the Twenty-first Amendment.2

592 F.3d 5

It is clear that § 2 of the Twenty-first Amendment does not protect state alcohol laws that explicitly favor in-state over out-of-state interests from invalidation under the Commerce Clause. Granholm v. Heald, 544 U.S. 460, 489, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). But § 19F is neutral on its face; it does not, by its terms, allow only Massachusetts wineries to distribute their wines through a combination of direct shipping, wholesaler distribution, and retail sales. Section 19F instead uses a very particular gallonage cap to confer this benefit upon "small" as opposed to "large" wineries.

We hold that § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors. Massachusetts has used its 30,000 gallon grape wine cap to expand the distribution options available to "small" wineries, including all Massachusetts wineries, but not to similarly situated "large" wineries, all of which are outside Massachusetts. The advantages afforded to "small" wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F's statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative.

We further hold that the Twenty-first Amendment cannot save § 19F from invalidation under the Commerce Clause. Section 2 of the Twenty-first Amendment does not exempt or otherwise immunize facially neutral but discriminatory state alcohol laws like § 19F from scrutiny under the Commerce Clause. We affirm the grant of injunctive relief.

I. Facts

We engage in de novo review both because the district court entered summary judgment and because the issues presented are ones of law. There is no disagreement on the material facts. See Fed. R.Civ.P. 56(c); see also Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st Cir.2009).

The ratification of the Twenty-first Amendment ended Prohibition and gave states substantial control over the regulation of alcoholic beverages. Most states, including Massachusetts, then imposed a three-tier system to control the sale of alcoholic beverages within their territories. The hallmark of the three-tier system is a rigid, tightly regulated separation between producers, wholesalers, and retailers of alcoholic beverages. Producers can ordinarily sell alcoholic beverages only to licensed in-state wholesalers. Mass. Gen. Laws ch. 138, §§ 2 and 19. Wholesalers then must obtain licenses to sell to retailers. Id. § 18. Retailers, which include stores, taverns, restaurants, and bars, must in turn obtain licenses to sell to consumers or to serve alcohol on their premises. Id. §§ 12, 15. Recently, as to wine, Massachusetts has adjusted the separation between these three tiers, as we describe below.

The structure of the usual three-tier system is commonly described as an hourglass, with wholesalers at the constriction point. There are thousands of producers

592 F.3d 6

nationwide, a handful of licensed Massachusetts wholesalers, and approximately ten thousand licensed retailers in Massachusetts. See Commonwealth of Massachusetts Alcoholic Beverages Control Commission, Licensing, http://www.mass. gov/abcc/licensing/licensing.htm.

The three-tier system has had a particularly pronounced effect on wineries' access to the Massachusetts market. The economic incentives created by the three-tier system, in conjunction with the structure of the wine industry, severely limited certain wineries' ability to sell their wines in Massachusetts.

In 2006, the year § 19F was enacted, 5,350 registered wineries in the United States produced a total of 646,395,818 gallons of wine, which includes both grape wine and fruit wine production. Almost all of the country's wine production and sales come from a small number of wineries. In 2006, the five largest wineries in the U.S. produced approximately 70 percent of the country's wine. The country's thirty largest wineries comprised approximately 92 percent of the market, and each produced between 680,000 and 150 million gallons per year. The rest of the commercial market—the 3,540 wineries which produce between one and 680,000 gallons per year—competed for 8 percent of the market share. Finally, 1,780 wineries produced less than one gallon of wine per year and had virtually zero percent of the market share.3

The concentration of wine production among the largest producers is driven by another feature of the wine industry: there are, broadly speaking, two categories of wine, high-volume, lower-cost wines and low-volume, higher-quality, higher-priced boutique wines. The largest wineries produce millions of gallons of wine per year because they have generally specialized in the former, but not to the exclusion of the latter. Wineries smaller than the largest producers have tended to specialize in low-volume boutique wines, which can be produced with a relatively small quantity of grapes and a much lower initial outlay of resources. At least until the current recession, consumer demand for boutique wines...

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