Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller

Exercise 11

IN THE LANGUAGE OF THE COURT
LYNCH, Chief Judge.
The ratification of the Twenty-first Amendment ended Prohibitionb 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. Wholesalers then must obtain licenses to sell to retailers. Retailers, which
a. The case was brought against Eddie J. Jenkins, the chair of the Massachusetts Alcoholic Beverages Control Commission, in his official capacity.
b. The Eighteenth Amendment to the U.S. Constitution, adopted in 1919, prohibited the sale of alcoholic beverages, giving rise to the so-called Prohibition Era. The Twenty-first Amendment, ratified in 1933, repealed the Eighteenth Amendment
include stores, taverns, restaurants, and bars, must in turn obtain licenses to sell to consumers or to serve alcohol on their premises. Recently, as to wine, Massachusetts has adjusted the separation between these three tiers
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* * * * Wineries have heralded direct shipping as a supplemental avenue of distribution because of its economic advantages, especially for wineries that do not rank among the fifty to one hundred largest producers. Direct shipping lets consumers directly order wines from the winery, with access to their full range of wines, not just those a wholesaler is willing to distribute. Direct shipping also avoids added steps in the distribution chain, eliminating wholesaler and retailer price markups.
Before 2005, Massachusetts's * * * winery licensing law * * * allowed only in-state wineries to obtain licenses to combine distribution methods through wholesalers, retailers, and direct shipping to consumers. [After the United States Supreme Court] invalidated similar facially discriminatory state laws, [the 2005 Massachusetts law] was held to be invalid under the Commerce Clause. In 2006, the Massachusetts legislature enacted [a new law regulating wineries, which] does not distinguish on its face between in-state and out-of-state wineries' eligibility for direct shipping licenses, but instead distinguishes between "small" or "large" wineries through [a] 30,000 gallon cap.
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* * * * All wineries producing over 30,000 gallons of wine-all of which are located outside Massachusetts- can apply for a "large winery shipment license[.]" * * * "Large" wineries can either choose to remain completely within the three-tier system and distribute their wines solely through wholesalers, or they can completely opt out of the three-tier system and sell their wines in Massachusetts exclusively through direct shipping [to consumers]. They cannot do both. * * * By contrast, "small" wineries can simultaneously use the traditional wholesaler distribution method, direct distribution to retailers, and direct shipping to reach consumers. * * *
* * * * 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[.]" [Emphasis added.]
* * * Plaintiffs argue that Massachusetts's choice of 30,000 gallons as the demarcation [separation] point between "small" and "large" wineries, along with [a] production exception for fruit wine, has both a discriminatory effect and [a] purpose. The discriminatory effect is because [the law's] definition of "large" wineries encompasses the wineries which produce 98 percent of all wine in the United States, all of which are located out-of-state and all of which are deprived of the benefits of combining distribution methods. All wines produced in Massachusetts, on the other hand, are from "small" wineries that can use multiple distribution methods. Plaintiffs also say that [the law] is discriminatory in purpose because the gallonage cap's particular features, along with legislators' statements and [the law's] process of enactment, show that [the law's] true purpose was to ensure that Massachusetts's wineries obtained advantages over their out-of-state counterparts.
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* * * * 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. * * * Here, the totality of the evidence introduced by plaintiffs demonstrates that [the law's] preferential treatment of "small" wineries that produce 30,000 gallons or less of grape wine is discriminatory. Its effect is to significantly alter the terms of competition between in-state and out-of-state wineries to the detriment of the out-of-state wineries that produce 98 percent of the country's wine.
[The 2006 law] confers a clear competitive advantage to "small" wineries, which include all Massachusetts's wineries, and creates a comparative disadvantage for "large" wineries, none of which are in Massachusetts. "Small" wineries that obtain a * * * 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 Massachusetts consumers, resulting in greater overall sales.
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We conclude that [the 2006 law] altered the competitive balance to favor Massachusetts's wineries and disfavor out-of-state competition by design.
* * * * We affirm the judgment of the district court.
LEGAL REASONING QUESTIONS
1. The court held that the Massachusetts statute discriminated against out-of-state wineries "by design" (intentionally). How can a court determine legislative intent?
2. Suppose that most "small" wineries, as defined by the 2006 Massachusetts law, were located out of state. How could the law be discriminatory in that situation?
3. Suppose that the state had only required the out-of-state wineries to obtain a special license that was readily available. Would this have affected the outcome of the case? Explain.
4. When it is difficult to predict how the law might be applied-as in cases arising under the dormant commerce clause-what is the best course of conduct for a business?