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Alcohol Regulation Holds Special Place in U.S. Constitution: Fourth Circuit Reviews State Ban on Direct-to-Consumer Wine Sales

By Michael W. Mitchell and Edward Roche
Published by LAW.COM
07.19.2022

The decision examines two overlapping constitutional issues: the effect of the “dormant Commerce Clause” on state regulation of commerce, and states’ ability to regulate alcohol sales under the Twenty-First Amendment.

If North Carolinians want to order alcoholic beverages for home delivery, they must generally order from in-state retailers. Those retailers must ship the beverages from within the state, and they must purchase them from in-state wholesalers. Some exceptions apply, but for wine sales the exception applies only to wineries—the actual producers of the wine. Out-of-state wine producers can obtain a permit allowing them to ship directly to North Carolina consumers, skipping the wholesalers and retailers. The effect of these rules is that the following businesses can ship wine directly to North Carolinians: (1) wineries, whether in-state or out-of-state; and (2) retailers, but only if in the state. Out-of-state retailers cannot do so.

In B-21 Wines v. Bauer, an out-of-state retailer, along with some prospective customers in North Carolina, sued the state. They argued that the legal regime favors in-state retailers over out-of-state retailers, and that this discrimination is unconstitutional. After the district court ruled against them, they appealed to the U.S. Court of Appeals for the Fourth Circuit.

Restrictions on Interstate Commerce

The Commerce Clause (Art. I, § 8, cl. 3 of the U.S. Constitution) is well known as the source of Congress’ authority to make federal laws regulating interstate commerce. Another consequence of that clause is to prohibit states from making laws that unduly restrict interstate commerce. A state generally cannot treat in-state economic interests more favorably than the economic interests of those outside the state. Citizens must generally have access to other states’ markets on equal terms. This principle is known as the “dormant Commerce Clause.”

Most state laws that discriminate against out-of-state interests in regulating commerce are unconstitutional. For such a law to be upheld, the state would have to show that the law serves a legitimate non-protectionist purpose and that the state could not have achieved that same purpose without discriminating.

Alcohol is different, however. Courts have held that restrictions on alcohol sales by out-of-staters are constitutionally permissible. They are burdens on interstate commerce, but not undue burdens. That is because alcohol regulation holds a special place in the U.S. Constitution. In fact, alcoholic beverages are the only consumer product mentioned in the Constitution, for reasons dating back to the Prohibition era.

State Control of Alcoholic Beverages

Prohibition was imposed in 1919, with the ratification of the Eighteenth Amendment to the Constitution. That meant alcoholic beverages could not be legally made, transported, or sold anywhere in the United States. (In fact, North Carolina had banned sales of alcohol years earlier, in 1908.)

The Twenty-First Amendment was passed in 1933, ending Prohibition and giving states the authority to regulate “intoxicating liquors.” The Twenty-First Amendment allows states to ban alcohol completely, or to regulate alcoholic beverages in other ways. A state’s authority is not unlimited. A state could not regulate alcohol sales in a way that violated the Equal Protection Clause, for example. And, as relevant here, a state still cannot burden interstate alcohol sales for protectionist reasons.

But courts have recognized that there may be non-protectionist reasons for limiting interstate alcohol sales—principally, health and safety. And, recognizing that the Twenty-First Amendment gives states substantial regulatory power, courts give states broad latitude. If a state alcohol law serves a public health or safety purpose, or some other non-protectionist goal, it will be upheld.

North Carolina, like many states, has a complex system of alcohol regulation, designed to control the flow of alcohol into the state and thereby protect public health. According to the state, the prohibition on wine sales from out-of-state retailers to North Carolina consumers is simply part of that scheme. But the challengers argued to the Fourth Circuit that this restriction on wine sales violated the dormant Commerce Clause. In their view, the restriction discriminated against those beyond the state’s borders, and did not have a rational basis beyond protectionism.

The Fourth Circuit’s Decision

The Fourth Circuit acknowledged that North Carolina’s wine laws discriminated against out-of-state retailers, but still upheld the law.

The determination that the law privileges in-state retailers was straightforward. A North Carolina retailer can ship directly to a consumer in the state. An out-of-state retailer cannot. This kind of preferential treatment would have been hard to justify—and likely would have been inadmissible—if it applied to retailers in general, or to retailers of most types of goods.

Again, however, alcohol is different. The Fourth Circuit ruled that the North Carolina law at issue served a legitimate non-discriminatory purpose: controlling the importation and transportation of alcoholic beverages, as the Twenty-First Amendment authorizes.

North Carolina follows a “three-tier” system of regulation. Alcoholic beverages must generally go from manufacturers to in-state wholesalers and then to in-state retailers before they can be sold to consumers. This is a way of pursuing the public-health goal of limiting the importation of alcohol into the state. Courts have previously upheld three-tier systems as constitutional. Direct-to-consumer shipping by an in-state retailer falls within this three-tier structure because the beverages delivered to consumers have already passed from a producer to a North Carolina wholesaler, and then to a North Carolina retailer. In contrast, allowing shipments from out-of-state retailers to consumers would mean bypassing the three-tier system. No North Carolina wholesaler or retailer would be involved.

Takeaways from the B-21 Decision

In most contexts, states have very little latitude to burden interstate sales. State laws preventing all Americans from accessing the national market on equal footing are subject to challenge and may be struck down. But alcohol sales are of a different ilk. If state regulations on the sale of alcohol are rationally geared toward legitimate goals, they are constitutional.


This article was first published on LAW.COM on July 19, 2022, and is republished here with permission. ©2022 ALM Media Properties, LLC. All rights reserved.

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Jamie Lunder
jlunder@smithlaw.com
T: 919.838.2045

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