UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO EASTERN DIVISION

Transcription

1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO EASTERN DIVISION HAROLD STAHL, et al., ) ) Plaintiffs, ) ) Case No: 2:03cv00597 v. ) ) JUDGE SMITH BOB TAFT, Governor of Ohio, et al. ) ) MAGISTRATE JUDGE KING Defendants. ) / MEMORANDUM IN SUPPORT OF PLAINTIFF S MOTION FOR SUMMARY JUDGMENT I. INTRODUCTION The consumer plaintiffs in this lawsuit are all Ohio residents who enjoy drinking wine, collecting wine, and trying new wines from different wine growing regions of the country. Some of the wines they would like to purchase are difficult or impossible to find locally, but readily available from out-of-state wineries, retailers, or auction houses. They have not been able to obtain these wines because Ohio law prohibits most out-of-state wine sellers from selling and shipping wine directly to Ohio residents. The two out-of-state winery plaintiffs are small wineries that wish to sell and ship wine directly to Ohio residents, but have been unable to do so because Ohio law prohibits most such shipments. The legal restrictions Ohio places on interstate direct shipments are not applied to Ohio s own local wineries. Ohio will issue an in-state winery an A-2 permit that allows it to sell and ship wine directly to consumers and retailers, and exempts it from paying wine taxes, but 1

2 out-of-state wineries are not eligible for that permit or any similar permit. Out-of-state wineries are not allowed to sell and ship wine directly to Ohio residents upon the same favorable terms as in-state wineries are able to sell within Ohio. The plaintiffs are complaining that Ohio laws and regulations governing the direct shipment of wine to Ohio residents discriminate against interstate commerce. The law gives Ohio wine manufacturers a series of economic advantages, including a tax exemption, the ability to sell wine directly to retailers, and the ability to ship wine directly to consumers. These advantages are denied to out-of-state wineries. Plaintiffs ask for a level playing field that would allow them to sell and ship wine directly to Ohio residents on equal terms with in-state wineries, and argue that the Commerce Clause of the U.S. Constitution guarantees them exactly that. Controlling Supreme Court cases establish the principle that state liquor laws that discriminate against out-of-state businesses violate the Commerce Clause and are not saved by the Twenty-first Amendment. Brown-Forman Distillers Corp. v. New York State Liquor Auth. 476 US 573 (1986); Healy v. The Beer Institute, 491 US 324 (1989); Bacchus Imports, Ltd. v. Dias, 468 US 263 (1984). Four courts of appeals have applied this principle to discriminatory direct shipment laws like Ohio s and found them unconstitutional. Bainbridge v. Turner, 311 F.3d 1104 (11th Cir. 2002); Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003); Dickerson v. Bailey, F.3d 388 (5th Cir. 2003); Heald v. Engler, 342 F.3d 517 (6th Cir. 2003). Plaintiffs are 1 The court in Bainbridge found Florida s direct delivery law presumptively unconstitutional because it discriminated against interstate commerce, but remanded the case for further factfinding, which is ongoing, so could conceivably change its position. Two other courts of appeals have upheld the constitutionality of state direct shipment laws that did not discriminate against interstate commerce. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000); Swedenburg v. Kelly, F.3d, 2004 U.S. App. Lexis 2337 (2nd Cir. 2004). 2

3 asking this Court to follow this abundant precedent and declare that Ohio s discriminatory laws and regulations which prevent interstate shipment of wine directly to Ohio residents is unconstitutional in violation of the Commerce Clause. A. The Direct Shipment Rule II. THE OHIO DIRECT SHIPMENT LAWS Ohio s direct shipment rule is not contained in one statute. No single provision says that instate wineries may direct ship and out of state wineries may not. Rather, that result flows from the combined effect of a number of statutes and regulations. 1. In-state wineries may sell wine directly to residents for home use and to retailers for resale pursuant to an A-2 permit. The A-2 permit is created by Oh. Stat A-2 permit. Permit A-2 may be issued to a manufacturer to manufacture wine from grapes or other fruits grown in the state, if obtainable, otherwise to import such fruits after submitting an affidavit of nonavailability to the division of liquor control; to import and purchase wine in bond for blending purposes, the total amount of wine so imported during the year covered by the permit not to exceed forty per cent of all the wine manufactured and imported; to manufacture, purchase, and import brandy for fortifying purposes; and to sell such products either in glass or container for consumption on the premises where manufactured, for home use, and to retail and wholesale permit holders under such rules as are adopted by the division. The fee for this permit is one hundred twenty-six dollars for each plant producing one hundred wine barrels, of fifty gallons each, or less annually. This initial fee shall be increased at the rate of ten cents per such barrel for all wine manufactured in excess of one hundred barrels during the year covered by the permit. 2. Section does not explicitly authorize A-2 permit holders to ship wine directly to Ohio residents. That authorization comes from the statutory definition of the word sell contained in Oh. Stat (A)(2): 3

4 Definitions. As used in the Revised Code... "sale" and "sell" include exchange, barter, gift, offer for sale, sale, distribution and delivery of any kind, and the transfer of title or possession of beer and intoxicating liquor either by constructive or actual delivery by any means or devices whatever, including the sale of beer or intoxicating liquor by means of a controlled access alcohol and beverage cabinet pursuant to section of the Revised Code. "Sale" and "sell" do not include the mere solicitation of orders for beer or intoxicating liquor from the holders of permits issued by the division of liquor control authorizing the sale of the beer or intoxicating liquor, but no solicitor shall solicit any such orders until the solicitor has been registered with the division pursuant to section of the Revised Code. Although does not on its face apply to , it is incorporated by reference through Oh. Stat : Definitions As used in sections to of the Revised Code, "intoxicating liquor," "liquor," "sale," "sell," "vehicle," "alcohol," "beer," "wine," "mixed beverages," "spirituous liquor," "sealed container," "person," "manufacture," "manufacturer," "wholesale distributor," "distributor," "hotel," "restaurant," "club," "night club," "at retail," "pharmacy," and "enclosed shopping center" have the same meanings as in section of the Revised Code. See also Oh. Code (nothing in the code prohibits A permit holders from making deliveries). 3. The A-2 permit is available only to Ohio wineries. By its plain terms, the statute authorizes A-2 permits only for wineries that manufacture wine from grapes or other fruits grown in the state. Oh. Stat (a)(1) 4. No other Ohio alcoholic beverage permit is available to an out-of-state winery. By law, one must be a resident of Ohio to obtain any kind of liquor permit Restrictions on issuance of permits (A) No permit, other than an H permit, shall be issued to a firm or partnership unless all the members of the firm or partnership are citizens of the 4

5 United States and a majority have resided in this state for one year prior to application for the permit. No permit, other than an H permit, shall be issued to an individual who is not a citizen of the United States who has resided in this state for at least one year prior to application for the permit. No permit, other than an E or H permit, shall be issued to any corporation organized under the laws of any country, territory, or state other than this state until it has furnished the division of liquor control with evidence that it has complied with the laws of this state relating to the transaction of business in this state. * * * 5. Without a permit, an out-of-state winery may not sell and ship its wine directly to an Ohio consumer or retailer Permit required No person by himself or herself or by the person's clerk, agent, or employee shall manufacture, manufacture for sale, offer, keep, or possess for sale, furnish or sell, or solicit the purchase or sale of any beer or intoxicating liquor in this state, or transport, or import, or cause to be transported or imported any beer, intoxicating liquor, or alcohol in or into this state for delivery, use, or sale, unless such person has fully complied with Chapters and of the Revised Code or is the holder of a permit issued by the division of liquor control and in force at the time. * * * Oh. Admin. Code 4301: Consent for importing alcoholic beverages; direct shipment prohibition * * * (B) All alcoholic beverages imported into this state for purposes of re-sale to retail permit holders must be consigned and delivered to the warehouse of a wholesale distributor. (C) Direct importation of alcoholic beverages from outside the state of Ohio or the United States to persons within the state of Ohio is prohibited, unless otherwise permitted by law or rule. 6. There is one limited exception to the prohibition against direct shipments from out-ofstate wine sellers. Under Oh. Admin. Code 4301: (Rule 23), a consumer may apply to the Division of Liquor Control for a personal importation order to allow the consumer to bring 5

6 back wine from an out-of-state winery. 4301: Consent for Ohio residents to import alcoholic beverages for personal use (A) A resident of the state of Ohio may, with the consent of the division of liquor control, bring into the state of Ohio alcoholic beverages, which were brought into the United States from a foreign country or brought into Ohio from other states or territories of the United States, provided that: (1) The alcoholic beverage is for the Ohio resident's personal use and not for resale; (2) The laws of the United States allow the shipment of the alcoholic beverage into the United States, (3) The alcoholic beverage is not registered for sale in Ohio, (4) All taxes due the state of Ohio shall be paid at the time that the consent is requested from the Ohio division of liquor control, (5) In no event shall the amount of alcoholic beverage to be brought into Ohio exceed fifteen gallons per family household in any three-month period. No amount may be cumulated with any later or earlier-issued consent, and no amount may be pooled with shipments pursuant to any other consent. (6) If the alcoholic beverage is shipped into Ohio and not personally brought into the United States or Ohio by the purchaser, the shipment may only be received by the individual purchaser named on the sales or shipping order. No other designated person, by way of power of attorney or any other method, may receive said alcoholic beverage, and (B) Consent may be granted by the division of liquor control following application by the Ohio resident on forms prescribed by the division, in a manner and method as shall be established by the division of liquor control pursuant to this rule. Rule 23 does not eliminate the discriminatory treatment of out-of-state wineries. It imposes three restrictions and limitations not imposed on in-state wines: 1) consumers may use it only for wines not registered for sale in Ohio; 2) a shipment must be received by the individual who ordered it (not even a spouse or attorney); and 3) a consumer may import no more than 6 cases of wine in a 3-month period. The process itself is burdensome -- the consumer must first purchase the wine; then obtain and fill out a form with details about the shipper, method of shipment, and 6

7 the wine itself; submit the form to the Division of Liquor Control; wait for it to be processed and approved; and then make arrangements for having it shipped. No such requirements inhibit purchases from in-state wineries. B. The tax exemption rule Direct wine shipments made by in-state (but not out-of-state) wineries are exempt from taxes under Oh. Stat Tax exemption for small producers of wine An A-2 permit holder in this state whose total production of wine, wherever produced, which but for this exemption is taxable under section of the Revised Code does not exceed five hundred thousand gallons in a calendar year, shall be allowed an exemption from the taxes levied in the following calendar year under section of the Revised Code on wine produced and sold or distributed in this state. The exemption may be claimed monthly against taxes levied under such section as the reports required by section of the Revised Code are due. At the time the report for December is due for a calendar year during which a permit holder is eligible to receive an exemption under this section, if the permit holder has paid the tax levied under section of the Revised Code, the permit holder may claim a refund of such tax paid during the calendar year. For the purpose of providing this refund, taxes previously paid under section of the Revised Code during the calendar year shall not be considered final until the December report is filed. The tax commissioner shall prescribe forms for and allow the exemptions and refunds authorized by this section. III. STATEMENT OF FACTS The consumer plaintiffs are Harold and Virginia Stahl, Mark Shafer, and Judith and David Deehr. They are Ohio residents and wine drinkers over the age of twenty-one. They have traveled to various wine growing regions in the United States, including California, Florida and South Carolina, and have enjoyed visiting winery tasting rooms and trying new wines. They wish to engage in interstate commerce by purchasing wine from out-of-state sources, including 7

8 wineries, retailers and auction houses. They have made a variety of attempts to purchase wine from out-of-state sources and have it shipped to their homes in Ohio. (Stahl Aff., Ex. C; Deehr Aff., Ex. D; Shafer Aff., Ex. E). Some wines they have sought to buy cannot be obtained in Ohio through the normal channels of the three-tier distribution system. There are several different reasons for this, discussed in detail in the Affidavit of David Sloane, President of WineAmerica (Ex. I): a) Some wines that are in high demand are allocated by the winery to customers on a waiting list, and are only sold to customers who live in states where direct shipment is allowed. b) There are over 25,000 wines produced in the United States, so no retail store can carry more than a fraction of them. The wine wanted by a consumer may not be on the shelves at any of their local wine stores. c) A wine that received favorable reviews in publications such as Wine Spectator may quickly be sold out at the wine stores in a consumer s area. d) Wines from the best vintage years sell out quickly, and may become unavailable at retail stores in a consumer s area. e) A small winery with no national reputation may have been unable to find a wholesaler willing to distribute its product throughout Ohio, so its wines are not distributed in the state. f) Some wines are distributed only in one part of the state and are not available in other parts. (Stahl Aff., Ex. C; O Keefe Aff., Ex. H; Sloane Aff., Ex. I). Many of these locally unavailable wines can be found for sale from the winery where they were produced, from auction houses, or from large specialty wine retail stores outside of Ohio. They are tantalizingly available by mail, telephone. or Internet order, but plaintiffs cannot buy them because these wineries, auction houses and specialty retailers will not ship wine to customers in Ohio. They are not permitted to do so under the direct shipping laws. (Stahl Aff., 8

9 Ex. C; Deehr Aff., Ex. D; Shafer Aff., Ex. E; Butler Aff., Ex. F; Thomas Aff., Ex. G; O Keefe Aff., Ex. H). The plaintiffs would purchase wine from out-of-state sources and have it shipped if it were lawful to do so. (Deehr Aff., Ex. D; Shafer Aff., Ex. E). The interstate shipment of wine from out-of-state wineries, retailers or auction houses to Ohio wine consumers like the Plaintiffs, is generally prohibited, with one exception. If the wine has never been registered for sale anywhere in Ohio, a consumer may arrange a purchase from an out-of-state source, obtain a special consent form from the Division of Liquor Control (Application, Ex. M), fill out the form, send it to the Division, prepay the wine taxes, wait for it to be approved, and then if it is approved, arrange for shipment. The shipment must be received by the person who made the purchase and no one else -- not even a spouse or attorney. Oh. Admin. Code 4301: This procedure is burdensome (Comm n Hearing p. 103, Ex. N), and of limited usefulness to consumers. They have no way of knowing if they can use this process because they cannot know whether a wine has ever been registered for sale anywhere in Ohio (Shafer Aff., Ex. E). They cannot use this procedure to order wines that are unavailable locally but for sale at the other end of the state. (Shafer Aff., Ex. E; O Keefe Aff., Ex. H). They cannot use this procedure for wines that used to be for sale but are now sold out and no longer actually available in Ohio. Chateau Thomas Winery and Butler Winery are small wineries in Indiana. They have potential customers who live in Ohio, but their wine is not sold in Ohio. Both wineries have had Ohio tourists visit their tasting rooms, and have had requests from Ohio residents to ship wine to their homes. In theory, because these wineries products are not registered for sale through a wholesaler in Ohio, they could ship the wine to individual customers if the customer obtained a 9

10 personal consent form. In reality, few customers are willing to go through the trouble and delay in getting consent, or did not know how to go about it, so these on-site sales are lost. (Butler Aff., Ex. F; Thomas Aff., Ex. G). IV. THE STANDARD FOR SUMMARY JUDGMENT Rule 56, Fed. R. Civ. P., provides that summary judgment is proper when the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Material facts are those facts defined by the substantive law and that are necessary to apply it. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); Stamtec, Inc. v. Anson Stamping Co., 346 F.3d 651, 654 (6th Cir. 2003). If, under the governing law, the outcome would be the same regardless of how a factual dispute is resolved, the dispute is no bar to summary judgment. Pharakhone v. Nissan North Am., Inc. 324 F.3d 405, 407 (6th Cir. 2003). While a court must draw all inferences in a light most favorable to the non-moving party, it may grant summary judgment if the record, taken as a whole, could not lead a rational trier of fact to find for that party. Stamtech, 346 F.3d at 654. A dispute over a material fact cannot be "genuine" unless a reasonable jury could return a verdict for the nonmoving party. Satterfield v. Tennessee, 295 F.3d 611, 615 (6th Cir. 2002). V. PLAINTIFFS HAVE STANDING TO BRING THIS ACTION Plaintiffs and each of them have standing to maintain this action under Lujan v. Defender s of Wildlife, 504 US 555 (1992), which sets out the controlling test of standing. Constitutional standing under Lujan requires a showing of three elements: (1) An injury in fact that is concrete and particularized -- it may be either actual or 10

11 imminent, or an invasion of a legally protected interest, but must not be purely conjectural or hypothetical; (2) A connection between the injury and the conduct at issue--the injury must be fairly traceable to the defendant s action; and (3) A likelihood that the injury would be redressed by a favorable decision of the Court. See Stupak-Thrall v. Glickman, 346 F.3d 579, 583 (6th Cir.2003) (re-stating the Lujan 3-part test). The plaintiffs in this case meet all three elements of the Lujan test. First, they have suffered an injury by being prevented from participating in interstate commerce. This is the denial of a right guaranteed to them by the constitution. See Dennis v. Higgins, 498 U.S. 439 (1991) (violation of right to engage in interstate commerce is actionable). Second, they have shown a connection between the injury and the conduct complained of (the state s enforcement of its shipping laws). Law-abiding out-of-state wineries like Chateau Thomas and Butler will not ship wine to Ohio consumers because of the direct shipment law. (Butler Aff., Ex. F; Thomas Aff., Ex. G). Third, a favorable judgment would redress the injury. Out-of-state wineries like Chateau Thomas and Butler testify that if the Ohio laws against direct shipping are found to be unconstitutional or repealed, they will begin shipping wine to Ohio residents through interstate commerce, (Butler Aff., Ex. F; Thomas Aff., Ex. G), as they have done in other states like New Hampshire which have made such shipments legal. (Byrne Aff., Ex. J; Painter Aff., Ex. K; FTC Report p , Ex. L). There is an actual case or controversy between plaintiffs and defendants as required by Article III of the U.S. Constitution. Plaintiffs desire to exercise their constitutional rights to 11

12 engage in interstate commerce though the purchase and direct shipment of wine. They are prevented from doing so by the defendants enforcement of the direct shipment laws. The controversy is ripe for decision by the court. VI. OHIO S LAW PREVENTING DIRECT WINE SHIPMENTS IS UNCONSTITUTIONAL A. THE U.S. SUPREME COURT HOLDS THAT STATE LIQUOR LAWS THAT DISCRIMINATE AGAINST INTERSTATE COMMERCE VIOLATE THE COMMERCE CLAUSE Ohio liquor laws and regulations pertaining to the issuance of permits, residency requirements, direct shipments, and the personal consent to import procedure violate the 2 Commerce Clause of the United States Constitution. Taken together, the laws described in Section II, supra (referred to hereafter as the direct shipment rule ) discriminate against interstate commerce and provide economic protection for in-state businesses. Discrimination and economic protectionism are constitutionally fatal to a state alcoholic beverage regulation, and remove state alcoholic beverage laws from whatever protection the 21st Amendment might otherwise afford them. See Healy, 491 U.S. at ( this Court has followed a consistent practice of striking down state statutes that clearly discriminate against interstate commerce, unless that discrimination is demonstrably justified by a valid factor unrelated to economic protectionism ), id. at 344 (Scalia, J. concurring) (statute s invalidity fully established by discrimination). Under the Constitution, only Congress can regulate interstate commerce. When Congress does so, it exercises its affirmative Commerce Clause power. When state laws interfere with or 2 That Congress shall have power to regulate commerce with foreign nations, and among the several states U.S. Const., Art. I, 8. 12

13 burden interstate commerce, it implicates the dormant Commerce Clause principle, first articulated in Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, , 239 (1824). See also South Carolina State Hwy. Dept. v. Barnwell Bros., Inc., 303 U.S. 177, 185 (1938) (Commerce Clause "by its own force" prohibits certain state actions that interfere with interstate commerce). The Supreme Court uses a two-tiered test for scrutinizing state laws to decide if they violate the dormant Commerce Clause: This Court has adopted what amounts to a two-tiered approach to analyzing state economic regulation under the Commerce Clause. When a state 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. When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits. We have also recognized that there is no clear line separating the category of state regulation that is virtually per se invalid under the Commerce Clause, and 3 the category subject to the Pike v. Bruce Church balancing approach. In either situation the critical consideration is the overall effect of the statute on both local and interstate activity. Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, (1986). A state law that discriminates against shippers engaged in interstate commerce is subject to first-tier scrutiny and is virtually per se invalid under the Commerce Clause. Healey v. The Beer Institute, 491 US 324, (1989), Brown-Forman, 476 U.S. at 579. There is no doubt that state liquor laws are subject to dormant Commerce Clause scrutiny 4 st despite the 21st Amendment. In Healy, 491 U.S. at 342, the Court said that the 21 Amendment U.S. 137 (1970). 4 The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. US Constitution, Amendment XXI, Section 2. 13

14 does not immunize state laws from invalidation under the Commerce Clause. In Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, (1984), the Court said It is by now clear that the Amendment did not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause. The Supreme Court has held that a state alcoholic beverage law that discriminates against brewers and shippers engaged in interstate commerce is a per se violation of the dormant Commerce Clause. Healy, 491 U.S. at 340. So, too, is a liquor law that has economic protectionist effect. In Brown Forman, 476 U.S. at 579, the Supreme Court explained that when a law discriminates against interstate commerce, or when its effect is to favor in-state economic interest over out-of-state interest, we have generally struck down the statute without further inquiry. See also Philadelphia v. New Jersey, 437 U.S. at 617, (1978) (striking down statute prohibiting the interstate shipment of trash). The 21st Amendment cannot save a discriminatory liquor law. The Supreme Court has said repeatedly that although Section 2 of the Twenty-first Amendment gives states the authority to regulate alcoholic beverages within their borders, all such regulations must be even-handed and non-discriminatory. Discrimination against interstate commerce remains a per se violation of the Commerce Clause even when alcohol is involved. Brown-Forman, 476 U.S. at 579, 585; Healy, 491 at ; id. at 344 (Scalia, J., concurring); Bacchus, 468 U.S. at The 21st Amendment does not trump other constitutional provisions. It is just one part of the constitution to be read in harmony with other provisions. See, e.g., 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996) (21st Amendment does not override First Amendment right of commercial speech). Indeed, it is not even strong enough to override federal antitrust laws. 324 Liquor 14

15 Corp. v. Duffy, 479 U.S. 335 (1987). B. THE COURTS OF APPEALS UNIFORMLY HOLD THAT DISCRIMINATORY DIRECT SHIPMENT LAWS ARE UNCONSTITUTIONAL Applying the principle that discriminatory state liquor laws violate the Commerce Clause, other courts of appeals have uniformly held that direct shipment laws similar to Ohio s that discriminate against out-of-state wineries and give in-state wineries competitive advantages are unconstitutional. Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003); Dickerson v. Bailey, 336 F.3d 388 (5th Cir. 2003); Heald v. Engler, 342 F.3d 517 (6th Cir. 2003). Cf. Bainbridge v. Turner, 311 F.3d 1104 (11th Cir. 2002) (holding Florida s law probably unconstitutional, but remanding 5 for further fact-finding). C. OHIO S DIRECT SHIPMENT LAW DISCRIMINATES AGAINST OUT-OF-STATE WINERIES AND IS THEREFORE UNCONSTITUTIONAL The Ohio direct shipment law is unconstitutional under the Commerce Clause. Like the law struck down in Bacchus, Ohio s direct shipment law discriminates against out-of-state shippers. Ohio will not allow them to engage in the same kind of direct sales and shipments of wine to Ohio residents as in-state wineries: 1) An in-state winery can get an A-2 permit authorizing it to sell and ship wine directly to Ohio residents; an out-of-state winery cannot. 2) An in-state winery whose wine is carried by a wholesaler may also sell and ship its wine directly to consumers; an out-of-state winery may not. 5 Two courts of appeals have upheld the constitutionality of state direct shipment laws that did not discriminate against interstate commerce. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000); Swedenburg v. Kelly, F.3d, 2004 U.S. App. Lexis 2337 (2nd Cir. 2004). 15

16 3) An in-state winery with an A-2 permit who does not have a wholesaler may sell and ship its wine to consumers without being forced to go through any special approval process; an out-of-state winery may not. 4) An in-state winery may sell its wine directly to retailers without going through a separate wholesaler; an out-of-state winery may not. 5). Small in-state wineries are exempt from paying taxes on the wine they ship; out-ofstate wineries are not. Without an Ohio wholesaler, an out-of-state winery can only sell its wine through the special consent process (Application, Ex. M). This process is too much of a hassle for most customers, (Comm n Hearing p. 103, Ex. N); so sales at their testing rooms are lost. The wineries will not break the law by making an illegal shipment. Their federal Basic Permit would be at risk if they did, and no winery can operate without a Basic Permit. (Butler Aff., Ex. F; Thomas Aff., Ex. G). If they managed to get wholesale distribution in Ohio, their wine would probably end up at only a few stores in the state, like Chateau Grand Travers, whose wine is only sold in two cities. (O Keefe Aff., Ex. H). The demand for wine from small unknown regional wineries is very low. (Sloane Aff., Ex. I). They would have to give up a substantial part of their profit to pay the wholesalers, which makes it economically unfeasible. (Thomas Aff., Ex. G; Butler Aff., Ex. F). And the irony of getting a wholesaler is that it would prevent their wines from being sold by direct shipment at all. The few customers who might go through the burdensome process of obtaining special consent would be lost, because the special consent procedure cannot be used to purchase wine from an out-of-state winery whose wines are distributed by a wholesaler, even if they are languishing unbought on the shelves of a single 16

17 store. Oh. Admin. Code 4301: These wineries look with envy at similar small wineries in Ohio that can sell and ship directly to Ohio customers without restriction, and regardless of whether their wine is registered for sale elsewhere in the state. Also like the law struck down in Bacchus, the direct shipment law has the effect of giving impermissible economic protection to in-state wineries and to protect in-state wholesalers from direct-shipment competition. Requiring out-of-state wineries to use a wholesaler increases their cost and reduces their profits (Sloane Aff., Ex. I). Exempting in-state wineries from the wholesaler requirement and from paying taxes reduces their costs and gives them a competitive advantage in the marketplace. Giving in-state business a virtual monopoly on direct shipments gives them a competitive advantage with customers who desire home delivery. It does not matter whether this was the purpose of the law. The Court in Bacchus held that a finding of economic protectionism may be based on discriminatory effect as well as discriminatory purpose. 468 U.S. at 270. D. WHETHER THE STATUTES PROMOTE ANY LEGITIMATE STATE INTEREST IS IRRELEVANT Brown-Forman holds that [w]hen a state s statute... discriminates against interstate commerce, or when its effect is to favor in-state economic interest over out-of-state, we have generally struck down the statutes without further inquiry into whether the law advances legitimate state interests. 476 US at 573. The interests of the state are simply not relevant to strict commerce clause scrutiny. Brown-Forman holds that consideration of a state s interests is only appropriate when a court is engaged in second-tier Commerce Clause scrutiny (a balancing test) of a statute that has only indirect effects on inter-state commerce and regulates evenhandedly. Id. For example, if Ohio prohibited all wineries from shipping directly to consumers 17

18 or retailers, or required the special consent procedure for both in-state and out-of-state wineries, these would be even-handed regulations of the transportation and sale of alcoholic beverages, and the legitimacy of the state s interest would be relevant to the balancing test. In this case, however, Ohio does not regulate even-handedly. It favors its in-state wineries with a special A-2 permit that is restricted to residents, and gives in-state wineries special privileges to ship wine tax-free directly to consumers and retailers. It discriminates against interstate commerce by denying these privileges to out-of-state wineries. Therefore, under the Brown-Foreman doctrine, inquiry into the states interests is not appropriate. The Eleventh Circuit court of appeals has departed from Brown-Forman and held that a state could theoretically justify a discriminatory direct shipment law by proving that it was necessary to effectuate the state s interest in raising revenue. Bainbridge, 311 F.3d at The Fifth Circuit has noted that the state bears a towering burden of proof to justify such discrimination. Cooper v. McBeath, 11 F.3d 547, 553 (5th Cir. 1994). The state could not meet this towering burden, because the direct shipment law does not appear to significantly advance any legitimate state interests. The law does not promote temperance, because it does not restrict the amount of wine that can be purchased or consumed, only from whom it can be bought. Similarly, the law does not impact minors access to alcohol. According to the FTC, minors do not engage in any significant amount of direct ordering of wine. (FTC Report, Ex. L). Even if they did, this law does not prohibit all direct shipments -- just those of out-of-state wines not registered for sale in the state. Finally, the law does not enhance Ohio s ability to raise tax revenue. It prohibits the direct shipment of registered wines regardless of whether the taxes are paid. If the state were interested in raising revenue, it would allow direct shipments and tax them, as other states have 18

19 done. The uncontested evidence shows that allowing out-of-state wineries to direct ship wine if they pay taxes enhances revenue. (FTC Report, Ex. L; Byrne Aff., Ex. J; Painter Aff., Ex. K). VII. CONCLUSION Plaintiffs satisfy all three parts of the Lujan test and have standing to bring this lawsuit. There is no genuine issue as to any material facts -- Ohio reserves the A-2 permit which allows wineries to make direct, tax-free shipments of wine to Ohio residents to in-state wineries only. Out-of-state wineries are either prohibited from making direct shipments at all, or must require their customers to go through the hassle of obtaining special consent from the state. Plaintiffs are therefore entitled to judgment as a matter of law declaring Ohio s direct shipment law unconstitutional, and to injunctive relief to prevent the defendants from enforcing Ohio s alcoholic beverage laws and regulations in a way that prevents out-of-state wineries from making direct shipments of wine to Ohio residents. Respectfully Submitted, s/ Benson A. Wolman Benson A. Wolman, Bar number Attorney for Plaintiffs WOLMAN GENSHAFT & GELLMAN 341 South Third Street, Suite 301 Columbus, OH Tel: Fax: wolman@wgglaw.com s/ Robert D. Epstein Robert D. Epstein, Indiana Bar number Attorney for Plaintiffs EPSTEIN & FRISCH One Virginia Avenue, Suite 200 Indianapolis, IN

20 Tel: Fax: s/ James A. Tanford James A. Tanford, Indiana Bar no Attorney for Plaintiffs Indiana University School of Law 211 South Indiana Avenue Bloomington, IN Tel: Fax: