Designer Skin LLC v. S & L Vitamins, Inc., et al.
Donald Beskind, et al. v. Michael F. Easley, in his official capacity as Governor of the State of North Carolina, et al.
3:00CV258-MU (W.D.N.C., April 5, 2002) aff'd. in part, vacated in part, remanded 325 F.3d 506 (4th Cir., 2003)
Court holds that those provisions of North Carolina's Alcoholic Beverage Control law which prohibit out-of-state retailers from selling liquor directly to North Carolina consumers, while allowing in-state wineries to make such sales, are unconstitutional violations of the Commerce Clause of the United States Constitution. The dormant Commerce Clause prohibits states from enacting regulations, such as those at bar, which directly discriminate against interstate commerce. The court held that the legislation at issue was not saved by operation of the Twenty First Amendment, which grants the States the power to regulate in-State liquor sales. The Twenty First Amendment does not trump the Commerce Clause; rather, when faced with a conflict between their competing concerns, courts engage in a balancing test, asking "whether the interests implicated by [the] state regulation are so closely related to the powers preserved by the Twenty First Amendment that the regulation may prevail …". Here, North Carolina did not identify the state interests served by the challenged regulation. As a result, the District Court assumed the purpose of the legislation was to protect local wineries from out-of-state competitors. The Court held that such an improper purpose mandates a finding that the statute is an unconstitutional violation of the Commerce Clause. The Court accordingly enjoined North Carolina from enforcing the statutes at issue, including those laws "that prohibit … out-of state wine dealers from directly shipping wines to … North Carolina residents."
North Carolina regulates the sale of alcoholic beverages through a "three-tiered" system. The top tier consists of manufacturers or importers of alcoholic beverages. The middle tier is occupied by North Carolina wholesalers, while the bottom tier is occupied by retailers.
The direct shipment of alcoholic beverages by out-of-state manufacturers, retailers or wholesalers to consumers is prohibited by provisions of North Carolina's Alcoholic Beverage Control ("ABC") law. Out-of-state manufacturers instead must ship their products to in-state licensed wholesalers. The wholesaler, in turn, sells the products to the retailer, who sells it to the consumer. These rules were applicable to out-of-state wineries.
The ABC law treated in-state wineries in a different fashion, however. Unlike their out-of-state brethren, in-state wineries were allowed to sell their products directly to consumers. This, in turn, gave in-state wineries an economic advantage, allowing their products to avoid the mark-ups charged by wholesalers and retailers to compensate them for their involvement in the sale of the products.
Complaining that this statutory scheme discriminated directly against interstate commerce, and therefore violated the Commerce Clause, plaintiffs commenced suit. The Court agreed, and enjoined further enforcement of this legislation.
The Commerce Clause provides that "Congress shall have power to regulate commerce … among the states." The dormant Commerce Clause prohibits the States from passing legislation that directly discriminates against interstate commerce in favor of local interests. Said the Court: "Direct regulation is typically addressed severely: When a statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry."
The Court held that the ABC laws "present a relatively cut and dry example of direct discrimination against interstate commerce" and accordingly ran afoul of the Commerce Clause.
The State of North Carolina argued that the statute was nonetheless a valid exercise of its power by operation of the Twenty First Amendment. Section 2 of that Amendment provides: "[t]he transportation or importation into any State … of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." The Court held that "the Twenty-first Amendment does not trump other sections of the United States Constitution." Instead, in situations where these provisions of the Constitution conflict, courts balance their competing interests, and ask "whether the interests implicated by a State regulation are so closely related to the powers preserved by the Twenty-first Amendment that the regulation may prevail …".
This, in turn, requires the Court to inquire into the goals the State hoped to achieve when it enacted the legislation at issue. In the case at bar, North Carolina did not identify any interests it was seeking to protect when it created a legislative scheme that allowed local but not out-of-state wineries to sell alcoholic beverages directly to North Carolina residents. As a result, the Court assumed that the statute was enacted to protect local North Carolina economic interests, an impermissible purpose under the Commerce Clause. Said the Court: "No equilibrium can be achieved when economic protectionism is placed on one side of the scale, and the Commerce Clause's need to preserve the respect of the several states for each other is placed on the opposite side."
As a result, the Court held the challenged regulations unenforceable, and enjoined North Carolina from enforcing those laws "that prohibit … out-of state wine dealers from directly shipping wines to … North Carolina residents."