UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN ELEANOR HEALD, RAY HEALD, JOHN ARUNDEL, KAREN BROWN, RICHARD BROWN, BONNIE Civil No. 00-71438 McMINN, GREGORY STEIN, MICHELLE MORLAN, WILLIAM HORWATH, MARGARET CHRISTINA, Bernard A. Friedman ROBERT CHRISTINA, TRISHA HOPKINS, JIM United State District Judge HOPKINS, MALVADINO WINERY and DOMAINE ALFRED, INC., Marc L. Goldman Plaintiffs Magistrate Judge vs. JOHN ENGLER, Governor of Michigan, JENNIFER M. GRANHOLM, Attorney-General of Michigan, and JACQUELYN STEWART, Chairperson, Michigan Liquor Control Commission, in their Official Capacities, Defendants MICHIGAN WINE & BEER WHOLESALERS ASSOCIATION Intervening Defendants / PLAINTIFFS RESPONSE AND BRIEF IN OPPOSITION TO INTERVENOR MICHIGAN BEER & WINE WHOLESALERS ASSOCIATION S MOTION TO DISMISS Robert D. Epstein (6726-49) Irene M. Mead (P31283) Epstein & Frisch Michigan Dept. of Attorney general 1 Virginia Av, Ste 200, Indianapolis IN 46204 P.O. Box 30005, Lansing MI 48909 (317) 639-1325 (517) 322-1367 Attorney for Defendants James A. Tanford (16982-53) Indiana University School of Law Anthony S. Kogut (P31697) 211 S. Indiana Av, Bloomington IN 47405 Raymond J. Foresman, Jr. (P13574) (812) 855-4846 Willingham & Cote, P.C. P.O. Box 1070, East Lansing MI 48826 David A. Whitaker (P40299) (517) 351-6200 Philo, Atkinson, Stephens, et al. Attorneys for Intervening Defendant 2920 East Jefferson, Detroit MI 48206-4286 (313) 259-7200 Attorneys for Plaintiffs /

PLAINTIFFS RESPONSE TO MOTION TO DISMISS Plaintiffs have sued state officials for a declaratory judgment that Michigan s ban on the direct shipment of wine from out-of-state retailers to Michigan residents violates the Commerce Clause. Michigan Beer & Wine Wholesalers Association intervened and filed a motion to dismiss the complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The Wholesalers Association asserts that the case should be dismissed on the pleadings because the direct shipment law is a valid exercise of state power under the Twenty-first Amendment or the Webb-Kenyon Act, either of which trumps the Commerce Clause. 1 Intervenor s arguments were also raised by the Defendants in their motion for summary judgment, and responded to in Plaintiffs brief in opposition, and have therefore already been fully briefed on both sides. Plaintiffs oppose the Wholesalers Association s motion to dismiss for the following reasons: a) Recent Supreme Court cases hold that the Twenty-First Amendment does not trump the Commerce Clause. Instead, the state s interests in controlling alcohol sales must be balanced against the national interest in interstate commerce. If a state law discriminates against interstate commerce or constitutes economic protectionism for instate businesses, it will generally violate the commerce clause, especially if the law does 1 The Wholesalers Association also alleges that Plaintiffs Commerce Clause claim is barred by the Tax Injunction Act, but does not separately brief this issue. Intervenor merely incorporates by reference the Tax Injunction Act argument raised by the state Defendants. Plaintiffs therefore incorporate by reference their response to the Tax Injunction Act argument contained in their Brief in Opposition to Defendants Motion for Summary Judgment at 10-11. In addition, Intervenor moves to dismiss Plaintiffs claim under the Privileges and Immunities Clause, although Plaintiffs have made no claim relating to that Clause. i

not advance the core purpose of the Twenty-First Amendment -- temperance. Michigan s direct shipment law constitutes a prima facie violation of the commerce clause because it protects in-state wine sellers against competition from out-of-state sellers. The legitimate state interests purportedly advanced by the law, such as facilitating tax collection and enforcing proof-of-age laws, are tangential to temperance and therefore insufficient justification for a ban on direct wine shipments to adults. b) The Supreme Court has held that Webb-Kenyon Act was not intended to interfere with personal use in states such as Michigan where personal consumption is lawful, nor does the Act contain the unambiguous statement of congressional intent necessary to remove anti-competitive direct shipment laws from Commerce Clause scrutiny. Its language is virtually identical to the Twenty-first Amendment, and adds nothing to the Intervenor s argument. WHEREFORE, Plaintiffs request that the Wholesalers Associations s motion to dismiss be consolidated with the cross-motions for summary judgment filed by Plaintiffs and Defendants, and that the motion be DENIED. Respectfully submitted: Dated: October 20, 2000 Attorneys for Plaintiffs Robert D. Epstein EPSTEIN & FRISCH One Virginia Ave., Ste 200, Indianapolis, IN 46204 ii

James A. Tanford INDIANA UNIVERSITY SCHOOL OF LAW 211 S. Indiana Ave., Bloomington, IN 47405 David A. Whitaker PHILO, ATKINSON, et al 2920 E. Jefferson, Detroit, MI 48206 iii

CONCISE STATEMENT OF THE MAIN ISSUE PRESENTED Does either the Twenty-First Amendment or the Webb-Kenyon Act override the Commerce Clause and justify a ban on direct interstate shipments of wine to adult consumers in Michigan? iv

THE CONTROLLING OR MOST APPROPRIATE AUTHORITIES 1. COMMERCE CLAUSE/TWENTY-FIRST AMENDMENT BALANCING: Brown- Forman Distillers Corp. v. NY State Liquor Auth., 476 U.S. 573 (1986). 2. WEBB-KENYON ACT, 27 U.S.C. 122: Adams Express Co. v. Kentucky, 238 US 190 (1915). v

I. INTRODUCTION PLAINTIFFS BRIEF IN OPPOSITION TO WHOLESALERS ASSOCIATION S MOTION TO DISMISS Plaintiffs sued state officials for a declaratory judgment that Michigan s ban on the direct shipment of wine from out of state sellers to adult consumers in Michigan for their personal use, violates the Commerce Clause of the United States Constitution. 2 The State of Michigan defends the law on the grounds that such a prohibition is authorized by the Twenty-first Amendment 3 and/or the Webb-Kenyon Act. 4 Plaintiffs and Defendants have already filed cross-motions for summary judgment on these issues. Intervening defendant Michigan Beer & Wine Wholesalers Association joins the State s argument that the direct shipment law is authorized by either the Twenty-first Amendment or the Webb-Kenyon Act. It has filed a Rule 12 motion to dismiss the complaint for failure to state a claim upon which relief can be granted, 5 arguing that the Twenty-first Amendment and Webb- 2 U.S. CONST., art I, 8 says The Congress shall have Power...To regulate Commerce with foreign nations, and among the several States... By implication, if Congress has the power to regulate interstate commerce, the States may not interfere with it. This is known as the dormant Commerce Clause principle. See Camps Newfound/Owattano v. Town of Harrison, 520 U.S. 564, 571-72 (1997). 3 U.S. CONST., AMEND. XXI, 2 provides that the transportation or importation into any State... for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited... 4 27 U.S.C. 122 ( The shipment or transportation [of] intoxicating liquor... into any... State... to be received, possessed, sold, or in any manner used... in violation of any law of such State... is hereby prohibited ). 5 Intervenor characterizes its motion as being in the alternative for Summary Judgment pursuant to Rule 56. However, FED. R.CIV.P. 56 says that at summary judgment a party may not rest on mere conclusory allegations, but must point to admissions in the pleadings, 1

Kenyon Act trump the Commerce Clause and give states broad, virtually unlimited power to regulate and control the sale and distribution of wine. The Wholesalers Association places particular emphasis on Bridenbaugh v. Freeman-Wilson, 2000 U.S. App. LEXIS 22991 (7th Cir. 9-13-00), suggesting that it is persuasive authority for these propositions. II. THE MAIN ISSUES RAISED BY INTERVENOR ARE ALREADY COVERED IN PLAINTIFFS AND DEFENDANTS CROSS-MOTIONS FOR SUMMARY JUDGMENT The main arguments raised by the Wholesalers Association in its motion to dismiss the complaint were also raised by the Defendants in their motion for summary judgment. Plaintiffs have fully addressed these issues in their brief in opposition to Defendants motion for summary judgment. The specific question of the relevance of Bridenbaugh v. Freeman-Wilson, supra, was raised by Defendants in their Supplemental Brief in support of their motion for summary judgment, and addressed by Plaintiffs in their response to the state s supplemental brief. To avoid needless repetition, Plaintiffs defer to the briefs already filed for a full discussion of the merits, and merely summarize their arguments here. A. THE TWENTY-FIRST AMENDMENT DOES NOT TRUMP THE COMMERCE CLAUSE Intervenor asserts that the Twenty-first Amendment trumps the Commerce Clause with regard to interstate commerce in wine. The Wholesalers Association claims that the Supreme Court has repeatedly recognized and reaffirmed that the Twenty-first Amendment confers a broad depositions, answers to interrogatories, admissions, and affidavits that provide admissible evidentiary support for its allegations. E.g., Lujan v. National Wildlife Fed n, 497 U.S. 871, 888 (1990); Bailey v. Floyd Cty. Bd. of Ed., 106 F.3d 135, 145 (6th Cir. 1997). Intervenor has not filed a single affidavit or pointed to any other admissible evidence in support of any of its claims, so the motion is inadequate as a summary judgment motion. 2

grant of authority upon states to regulate commerce in intoxicating liquors, Intervenor s Brief at 5; and that the State has virtually complete control of the importation and sale of liquor and the structure of its liquor system. Interv. Br. at 6. To support its argument, the Wholesalers cite pre-1964 Supreme Court cases and dictum from cases that did not involve the Commerce Clause. 6 The Intervenor ignores the Court s recent Commerce Clause-Twenty-first Amendment cases which disavowed the early unlimited power view. The Supreme Court has decided four cases since 1964 involving interstate commerce in alcoholic beverages: Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984); Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573 (1986); and Healey v. The Beer Institute, 491 U.S. 324 (1989). These cases clearly reject the virtually unlimited power argument advanced by the Wholesalers Association. For example, in Hostetter, the Court said: To draw a conclusion... that the Twenty-First Amendment has somehow operated to repeal the Commerce Clause wherever regulation of intoxicating liquors is concerned would... be an absurd oversimplification...patently bizarre and is demonstrably incorrect. 377 U.S. at 331-32. In Bacchus, the Court reiterated: 468 U.S. at 275. It is by now clear that the [21st] Amendment did not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause. These cases articulate a modern view of the relationship between the Twenty-first 6 The Wholesalers Association relies most heavily on brief dictum in North Dakota v. United States, which was a Supremacy Clause case and not a Commerce Clause case, and which did not produce a majority opinion. Interv. Br. at 6-7. 3

Amendment and the Commerce Clause. When state and federal interests conflict, the Court has consistently used a balancing test that leans in favor of the Commerce Clause, not the Twentyfirst Amendment: When a state [liquor] 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 the category subject to the...balancing approach. In either situation the critical consideration is the overall effect of the statute on both local and interstate activity. Brown-Forman, 476 U.S. at 579. Because Michigan s direct shipment law directly regulates interstate commerce, discriminates against interstate commerce by denying out-of-state businesses access to the Michigan market on the same terms as in-state sellers, and favors the economic interest of instate wineries by exempting them from the three-tier distribution system, Plaintiffs have established a prima facie case on the merits and Intervenor s motion to dismiss should be denied. This argument is more fully developed in Plaintiffs Brief in Opposition to Defendants Motion for Summary Judgment at 13-27. B. THE WEBB-KENYON ACT ADDS NOTHING TO THE CONSTITUTIONAL BALANCING TEST Intervenor asserts that a 1913 law called the Webb-Kenyon Act, 27 U.S.C. 122, exempts anti-competitive direct shipment laws from Commerce Clause scrutiny, and confirm[s] a state s 4

right to regulate and control traffic in alcoholic beverages within its borders free from any Commerce Clause restrictions. Interv. Br. at 14. However, the Webb-Kenyon Act is of doubtful application in the present case for several reasons. First, the Act has been given a very limited reading by the Supreme Court, which held that it was intended only to help dry states enforce their prohibition laws and had no application in a state like Michigan, where possession and consumption of wine is lawful. Adams Express Co. v. Kentucky, 238 US 190 (1915). Second, the Act does not meet the Supreme Court s requirement that in order to exempt a product from the Commerce Clause, Congress must make it unmistakably clear that it intends to allow trade barriers. E.g., Maine v. Taylor, 477 U.S. 131 (1986). Nothing in the 90-year-old Act suggests it was Congress s intent to remove mail-order and Internet sales of wine from Commerce Clause scrutiny. Third, the language of the Webb-Kenyon Act and the Twenty-first Amendment are essentially identical, so the Act adds nothing to the basic constitutional analysis. These arguments are more fully developed in Plaintiffs brief, supra, at 27-30. C. BRIDENBAUGH V. FREEMAN-WILSON IS NOT RELEVANT TO THIS CASE Intervenor devotes a substantial part of its brief to an argument that this court should be guided by Bridenbaugh v. Freeman-Wilson, 2000 U.S. App. LEXIS 22991 (7th Cir., 9-13-00) (petition for rehearing en banc pending), which ruled that Indiana s anti-shipment law was a constitutional exercise of the State s taxation power. Interv. Br. at 16-19. However, Bridenbaugh is of doubtful applicability to the present case, for four reasons: 1. There is a key differences between the facts of the Bridenbaugh case and the present case. The Seventh Circuit opinion turned on whether there was functional discrimination 5

against out-of-state sellers and in favor of in-state sellers. The court found no such discrimination because Indiana insists that every drop of liquor, including both in-state and out-of-state wines, must pass through the same three tiers of its distribution system. (Slip opinion at 10)(emphasis in original). Michigan s direct shipment law does not fit this fact pattern. Michigan does not insist that every drop of wine go through the three tiered system. Only out-of-state wineries must use a separate wholesaler and retailer; in-state wineries are exempt. This point is conceded by Defendants (Def. Br. at 24). The issue of discriminatory treatment is critical, because the Supreme Court has held that when a state liquor law discriminates against interstate commerce [or] favor[s] in-state economic interests over out-ofstate interests, we have generally struck down the statute without further inquiry. Brown- Forman, 476 U.S. at 579. 2. The Indiana case had no Plaintiff with standing to raise the issue of discriminatory licensing. A second key factor in the Seventh Circuit decision was the absence of an out-of-state winery as a Plaintiff. Both Michigan and Indiana issue direct shipment permits only to in-state wineries; both states deny them to out-of-state wineries. Other circuits have held that a residency requirement for obtaining a liquor permit is itself an unconstitutional violation of the Commerce Clause. E.g., Cooper v. McBeath, 11 F.3d 547, 554 (5th Cir. 1994). In the Indiana case, the court declined to address this issue because only consumers were before the court. The present case is different because an out-of-state winery is a co-plaintiff who can raise the discriminatory licensing issue. 6

3. The Seventh Circuit applied unconventional legal analysis, deviating from generally accepted principles of constitutional law. The panel opinion in Bridenbaugh was written by Judge Easterbrook, who rejected the conventional methods of analysis and interpretation usually used in constitutional cases. Rather than applying the balancing test announced in Brown- Forman, 476 U.S. at 584-85, the opinion relied on the early-twentieth Century position that a state has virtually unlimited power to regulate alcohol under the Twenty-first Amendment. Rather than considering the federal interest in promoting competition through interstate commerce and preventing state barriers to trade, see California Retail Liquor Dealers Assn. v. Midcal Aluminum, 445 U.S. 97, 110 (1980), the opinion suggested there is no such constitutional interest. Rather than analyzing the state s Twenty-first Amendment powers in light of its purpose, the opinion rejected intent of the framers as a legitimate issue in constitutional analysis. Thus, the opinion stands apart from the constitutional law mainstream. 4. The Seventh Circuit relied on a taxation rationale that has generally been rejected by other courts. The opinion declared without citation to any legitimate authority 7 that effective collection of taxes was the state interest justifying a prohibition against direct shipments of wine to consumers in Indiana. The opinion did not acknowledge the existence of recent Supreme Court cases holding that state power to tax mail-order and catalog sales is severely limited; e.g., Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Camps Newfound/Owatonna v. Town of Harrison, 520 U.S. 564 (1997); and did not attempt to distinguish them. Other courts have 7 The panel cites North Dakota v. United States, 495 U.S. 423, 432 (1990), which mentions taxation as a purpose only in dictum in a plurality opinion; and Joseph E. Seagrams & Sons, Inc. v. Hostetter, 384 U.S. 35, 47-48 (1966) which does not mention taxation and has in any event been overruled by Healy v. The Beer Institutue, 491 U.S. 324, 342-43 (1989). 7

questioned whether tax collection is a legitimate Twenty-first Amendment purpose; e.g., Quality Brands v. Barry, 715 F. Supp. 1138, 1142-43 (D.D.C. 1989), aff d, 901 F.2d 1130 (D.C. Cir. 1990) (Taxation...[has], possibly, a tangential, attenuated, connection with temperance...; but any relation to the promotion of temperance which may be traced to that source is hardly the direct promotion of temperance which is required to invoke the Twenty-First Amendment. ). Each of these arguments is more fully developed in Plaintiffs Response to Supplemental Brief in Support of Defendants Motion for Summary Judgment. III. THE DIRECT SHIPMENT LAW DOES NOT PROMOTE TEMPERANCE Intervenor makes one assertion about the direct shipment law not made by the state of Michigan -- that the law seeks to promote temperance. Interv. Br. at 7. The Wholesalers Association does not explain just how the law serves this purpose, however, other than to imply that all liquor regulations are justifiable because the state has the power to promote temperance. Intervenor describes how other regulations might promote temperance, such as laws creating dry areas, requiring adequate labeling, regulating advertising, and preventing sales to minors and visibly intoxicated persons, but not how the law at issue serves that purpose. Id. at 12. It argues that requiring licensing of wine sellers might promote temperance, but not how the law limiting licenses to residents serves that purpose. Id. The temperance assertion is grossly misplaced. Michigan s direct shipment law does not restrict the amount of wine that can be purchased, consumed, or delivered to a resident s home; it only requires that such sales and deliveries be made by in-state businesses. Indeed the law makes no reference at all to temperance or to quantity of wine, although it would have been simple to do 8

so. 8 Such a provision is included in the very statute under challenge, which provides that when Michigan residents personally carry wine back from out of state, they are limited to 312 ounces at a time. 9 The Wholesalers Association concedes that a wide variety of wine is available to Michigan consumers. The Defendants admit they have no evidence that the direct shipment law affects Plaintiffs drinking habits. Stewart Answer to Interrog. # 14, Ex. 6. There are no dry areas of Michigan in which consumption of wine is illegal. Stewart Answer to Interrog. # 18, Ex. 6. Michigan residents can buy as much wine as they want, take it home and get as drunk as they want, as long as they buy the wine locally rather than having it shipped from an out-of-state seller. Clearly, Intervenor has not shown that the direct shipment law promotes temperance. 10 IV. THE WHOLESALERS ASSOCIATION MISSTATES THE FACTUAL POSTURE OF THIS CASE Intervenor has brought a Rule 12 motion to dismiss the complaint, unaccompanied by any affidavits or other evidence. In this situation, the court must take the facts alleged in the complaint as true and base its decision on those facts. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Although the Wholesalers Association concedes this principle (Interv. Br. at 2, n.2), it does not follow it. Instead, Intervenor bases several of its key arguments on misstatements of the 8 See Haw. Rev. Stat. Ann. 281.33.1 (Michie 1996) (limiting direct shipment to five gallons per year); Neb. Rev. Stat. Ann. 53-194.03 (Michie 1995) (limiting direct shipment to nine liters per month). 9 MCL 436.1203(2). The new version of this statute which became effective in 2000, recodifies the personal importation rule as MCL 436.1203(7)(a). 10 See Vijay Shanker, Alcohol Direct Shipment Laws, the Commere Clause, and the Twenty- First Amendment, 85 Va. L. Rev. 353, 381 (1999) (in 21st Amendment cases, courts are requiring that a proffered rationale be borne out by evidence ). 9

facts of the case, often asserting that the true facts are the exact opposite of those alleged in the pleadings. A number of these incorrect characterizations relate directly to the resolution of the main issues, and therefore need to be pointed out. A. THE CASE INVOLVES ONLY PRIVATE INDIVIDUALS BUYING WINE FOR PERSONAL CONSUMPTION, AND DOES NOT INVOLVE EITHER COMMERCIAL PURCHASES OR HARD LIQUOR Plaintiffs allege that all the Michigan Plaintiffs are private individuals, (Compl. 6), who wish to purchase, consume and collect wine for their personal use, (Compl. 8-12), and have it shipped directly to their residences. (Compl. 18, 20, 21). There is no allegation or complaint made on behalf of any Michigan bar, restaurant, hotel, private club, liquor retailer, or other business that buys wine for re-sale, and there is no issue in the case concerning any kind of alcoholic beverage other than wine. Nonetheless, the Wholesalers Association attempts to recast the case as an attack on Michigan s entire alcohol regulatory system. Intervenor states that if Plaintiffs win the case, it would effectively eviscerate Michigan s long-standing, licensed three-tier distribution system for alcoholic beverages. Interv. Br. at 1. Although only wine shipments are at issue, the Association states that if plaintiffs prevail... out-of-state beer and liquor suppliers... would claim the right to sell and ship alcoholic beverages directly to Michigan residents. Interv. Br. at 4. See also Id. at 3 (lawsuit seeks to eviscerate state regulation of alcoholic beverages ). This distortion of the case is material to its resolution. Under the Webb-Kenyon Act, commercial resellers like bars and restaurants are treated differently than private individuals buying wine for personal use. The Supreme Court has held that the Webb-Kenyon Act clearly 10

... was not intended to interfere with personal use... since its only purpose was to give effect to state prohibition laws. Clark Dist. Co. v. Western Md. Ry., 242 U.S. 311, 322 (1917). The Act s purpose was merely to prohibit using the Commerce Clause as a defense to the re-selling of alcohol in a dry state. Id. at 323-24; Adams Express Co. v. Kentucky, 238 U.S. 190, 199 (1915). If the Plaintiffs were in fact bars and restaurants seeking to destroy the regulatory environment in which they operate, the argument that the Webb-Kenyon Act requires dismissal of the Complaint might have some merit. However, since the case actually involves only private consumers, the Webb-Kenyon Act does not apply. See Plaintiffs Br., supra, at 27-29. Intervenor s attempt to cast this case as one implicating regulations concerning the sale of hard liquor also goes to a material issue. Under Brown-Forman, the constitutionality of state regulations affecting interstate commerce in alcoholic beverages is determined by balancing the importance of the state s interest against the extent of the infringement on interstate commerce. Recasting the case as one involving direct shipments of hard liquor rather than wine changes both sides of the balance. The state undoubtedly has a greater interest in regulating hard liquor than wine because of its higher alcohol content. At the same time, the extent of the infringement on interstate commerce of a ban on direct shipments of hard liquor would be considerably less than for wine because the nature of wine commerce is unique. Much of the fine wine Plaintiffs wish to obtain is produced by small wineries who produce limited quantities and sell it only by mailorder and at tasting rooms. The practical effect of Michigan s laws is to completely exclude many such wines from the state. See Bridenbaugh aff., Ex. 3, 4-17, 23. 11 The same is not true 11 The affidavits and other exhibits referred to are contained in the Appendix to Plaintiffs Response to Defendant s Motion for Summary Judgment. 11

for hard liquor. There is no evidence that many small distilleries exist which sell their spirits only by direct shipment. Thus, the balances are entirely different for the two types of alcoholic beverages. B. PLAINTIFFS LIVE IN COUNTIES WHERE WINE MAY LEGALLY BE POSSESSED AND CONSUMED, NOT IN DRY COUNTIES The Plaintiffs allege that they live in areas of Michigan where the sale, possession and consumption of wine is legal. (Complaint 7-8). No Plaintiff lives in a dry area of Michigan. Indeed, there appear to be no dry areas of Michigan. The Liquor Control Commission could name no area of Michigan in which possession and consumption of wine is illegal. 12 Stewart Answer to Interrog. # 18, Ex. 6. The Wholesalers Association, however, attempts to recast the case as involving shipments of alcohol into dry areas of Michigan E.g., Interv. Br. at 12 ( if plaintiffs prevail, out-of-state suppliers would be able to sell and deliver their products into dry areas of the state ). The Association s misstatement is material to the resolution of the case. The language of the Webb-Kenyon Act only prohibits shipments of wine into a state in violation of any law of such state. The Supreme Court has construed that phrase to mean that the personal possession or use of alcohol must be prohibited or limited by a state dry law. If a state permits personal use and consumption of alcohol, Webb-Kenyon is irrelevant; Seabord Airline Ry. v. North Carolina, 245 U.S. 298, 303 (1917); but only if a state or locality prohibits consumption would Webb-Kenyon apply. Clark Dist. Co. v. Western Md. Ry., 242 U.S. 311, 316-17 (1917). See also Florida Dept. 12 According to the LCC, eight small towns have ordinances prohibiting the sale of alcohol, but not its possession, under MCL 436.2109. 12

of Business Reg v. Zachy s Wine & Liquor, Inc., 125 F 3d 1399, 1401 (11th Cir. 1997) (Webb- Kenyon Act authorized states to prohibit shipments when personal consumption was illegal). If the case involved importation into dry counties of Michigan, the state would have a much stronger argument that the Webb-Kenyon Act applies. If Intervenor s assertion about dry areas were true, it would also affect the Commerce Clause/Twenty-first Amendment balancing test. A state would surely have broader power under the Twenty-first Amendment to restrict direct shipping that threatened to undermine local-option prohibition than it does when there are no such areas in the state to be preserved. C. MUCH OF THE WINE THE PLAINTIFFS WANT TO PURCHASE IS NOT AVAILABLE IN MICHIGAN AND CAN ONLY BE OBTAINED BY MAIL-ORDER AND DIRECT SHIPMENT. Plaintiffs allege that much of the wine they want to collect and enjoy is not available in Michigan and cannot be obtained through Michigan retailers (Compl. 19, 24). Those wines can be acquired only from suppliers outside the state by direct shipment (Compl. 18-21). These allegations are fully supported by evidence submitted in the Appendix to Plaintiffs Response to Defendant s Motion for Summary Judgment. See Plaintiffs affs., Exs. 2-A through 2-E, 6; Bridenbaugh aff., Ex. 3, 4-9, 17, 23. The Wholesalers Association suggests to the contrary, that the out-of-state wine Plaintiffs want can be purchased through Michigan retailers and is available locally. E.g., Interv. Br. at 11 ( a trip to any retail store specializing in the sale of wine will demonstrate the wide variety of out-of-state wines that are available to Michigan consumers ); id. ( Michigan s regulatory scheme does not prohibit out-of-state wines from being sold in Michigan;... out-of-state suppliers 13

... are free to distribute their wines in Michigan ). The misstatement is material. Under the Brown-Forman test, the court must balance the state s interests against the extent to which a law impacts interstate commerce. If it were true that most out-of-state wines were available within Michigan, the state would have a stronger argument that the impact of the direct shipment law on interstate commerce is trivial rather than significant. However, the facts as pleaded and supported by evidence show that most wines -- especially those most desired by wine connoisseurs -- are not available in Michigan. D. PERMITS TO SELL AND SHIP WINE DIRECTLY TO MICHIGAN CONSUMERS ARE RESTRICTED TO MICHIGAN RESIDENTS AND OUT-OF-STATE WINERIES CANNOT OBTAIN THEM Plaintiffs allege in their Complaint that there are licensing laws and residency requirements that prohibit out-of-state suppliers from selling and delivering wine directly to Michigan consumers, while permitting in-state vendors to sell and deliver wine directly. (Compl. 22-23). Those laws restrict the issuance of the necessary permits to Michigan residents. Nonresidents are ineligible, and must instead sell all their wine only through a separate wholesaler (if they can find one) and retailer. These allegations are fully supported by evidence submitted in the Appendix, supra. See Heald aff., Ex. A, 8; Bridenbaugh aff., Ex. 3, 14-16; Stewart Answers to Interrog. ## 8, 13, 16, 19, 20, Ex. 6. The Wholesalers Association erroneously suggests to the contrary, that out-of-state sellers could obtain permits to sell their wine to consumers in Michigan if they wanted to. In its brief, it asserts that out-of-state suppliers of wine are free to distribute their wines in Michigan, provided they... become licensed in Michigan themselves as an out-of-state seller of wine. (Interv. Br. at 14

11). See also id (if a wine is not available, it is because the supplier... chooses not to comply with Michigan licensing requirements ); id at 13 (Michigan prohibits only unlicensed suppliers (whether they be retailers, wineries or wholesalers in other states) from shipping directly ) id. at 19 ( licensed entities are allowed to ship directly to consumers, while unlicensed out-of-state suppliers are prohibited from directly shipping ). The question of license eligibility is material to the resolution of the case. The Supreme Court has held that discrimination against an out-of-state business and in favor of in-state liquor interests violates the Commerce Clause. Brown-Forman, supra. If it were true that out-of-state suppliers could get permits to ship their wines directly to Michigan residents on the same terms as in-state businesses, then the state s argument that there is no discrimination against interstate commerce would be stronger. Under a correct statement of the uncontested fact that there is a residency requirement for such permits that makes out-of-state businesses ineligible, the state s position is much weaker. See Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1994) (residency requirement for obtaining liquor permit violates commerce clause). E. IN-STATE AND OUT-OF-STATE SUPPLIERS ARE TREATED DIFFERENTLY Plaintiffs allege that Michigan law prohibits direct shipments of wine from out-of-state retailers and wineries to consumers residences in Michigan, (Compl. 20, 22); but allows instate retailers and wineries to ship wine directly to consumers residences. (Compl. 23). The state concedes this different treatment and admits that in-state wineries are exempt from having to go through a separate wholesaler and retailer. Stewart Answers to Interrogs # 6, 8, 13, 19, 20. The Wholesalers Association, however, suggests the opposite, that Michigan treats all 15

wines alike in that all wines have to be handled by licensees before they are distributed to consumers in Michigan. Interv. Br. at 13. See also id (state requires all alcoholic beverages (including wines) to pass through Michigan s licensed distribution system ); Id. at 20 (state does not unfairly single [out] out-of-state wine and require it to pass through a licensee... [A]ll wine sold in Michigan must pass through a licensee ). This mischaracterization of the facts is material to the resolution of the case. As the Supreme Court said in Brown-Forman, [w]hen a state statute... 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. 476 U.S. at 579. If it were true that Michigan treated all wine alike, the state would have a much stronger argument that its direct shipment law was constitutional. The Bridenbaugh case, on which the Wholesalers Association heavily relies, upheld Indiana s direct shipment law because the judge found that every drop of wine sold in Indiana, whether produced in-state or out-of-state, was required to go through the same three-tiered system. Michigan does not treat all wine alike, however. It exempts wine produced in Michigan from going through a separate wholesaler and retailer (each of whom adds to the cost). Thus, the Plaintiffs have made out a prima facie case of discrimination against interstate commerce that fits within Brown-Forman, and is sufficient to withstand a Rule 12(b)(6) motion. V. INTERVENOR MISCHARACTERIZES THE OVERALL ISSUE The Wholesalers Association characterizes the issue as a choice between a structured, regulated three-tiered system and chaos. It conceives of only two choices: the current anti- 16

competitive system or a totally unregulated one in which unlicensed sellers are shipping unknown alcoholic products into Michigan while the state stands by helplessly, unable to regulate, license, or collect taxes on these shipments. Plaintiffs would characterize the issue differently. There are not two but three choices: 1) the current anti-competitive system, 2) chaos (more commonly known as the free market), and 3) a middle ground in which the state continues to license, regulate and collect taxes from the sellers of wine, but opens the field to out-of-state competition from wine sellers willing to apply for licenses, agree to regulations, and collect and remit taxes. The Intervenor s mischaracterization is material to the outcome of the case. The Supreme Court s jurisprudence concerning laws regulating interstate commerce in alcoholic beverages does not say that once a state interest is identified, the state may impose any kind of regulation it wants. Rather, the court must look to whether the state s interest could be served by less restrictive alternatives that do not have as significant an impact on interstate commerce. Maine v. Taylor, 477 U.S. 131, 138 (1986).; Lewis v. BT Inv. Managers, 447 U.S. 27, 36-37, 43 (1980). Thus, it is not true that the court must decide between regulation and no regulation, but must consider whether the state s interests can be served in less restrictive ways. In the present case, the state interests advanced in the Intervenor s brief can all be accommodated without banning direct shipments. The state needs only to license out-of-state sellers on the same terms as in-state sellers and impose the same requirements on them. If an instate seller can collect and remit taxes, so can an out-of-state seller. If an in-state retailer can be required to demand proof of age before handing over a bottle of wine to a young person, so can a 17

common carrier. If an in-state business can be restricted from certain forms of advertising alcohol, so can an out-of-state business. 13 None of the legitimate state interests mentioned in the Wholesalers Association s brief requires that every bottle of wine must come to rest at an instate wholesaler before being sold to the consumer. The state could easily license, regulate, and collect taxes on direct shipments of wine, thus furthering its legitimate state interests without totally prohibiting direct shipments. Using the three-tiered system as an excuse to grant a monopoly to in-state wholesalers and protect them from competition is merely economic protectionism beyond the scope of legitimate state power. CONCLUSION If the Wholesalers Associations characterization of the case were true -- that it challenged the entire liquor regulatory structure of Michigan, that it involved the mail order sale of hard liquor, that it threatened to nullify local-option prohibition, that there were no less restrictive options for collecting taxes and limiting advertising, and that in-state and out-of-state wines were treated the same -- Intervenor might have a plausible argument on the merits that Michigan s direct shipment law is constitutional. However, the Wholesalers Association has moved for dismissal under Rule 12(b)(6), which must be decided based on the facts as alleged in the complaint and supported by Plaintiff s 100-page Appendix. Those facts make out a prima facie case that Michigan s direct shipment law discriminates against interstate commerce in wine, favors in-state wholesalers economic interest by granting them a monopoly, provides a direct 13 Intervenor also asserts somewhat ironically that the three-tiered system precludes the damage that would result from concentrating [control of alcohol] in the hands of a few powerful interests, (Interv. Br. at 8-9), but does not explain how the direct shipment law (which places control of alcohol in the hands of a few powerful wholesalers) serves this state interest. 18

competitive advantage to in-state wineries by exempting them from going through the threetiered distribution system, and does not materially advance core state interests under the Twentyfirst Amendment. For these reasons, Plaintiffs respectfully request that the Court deny Defendants motion to dismiss the complaint. Dated: October 23, 2000. Respectfully submitted: Attorneys for Plaintiffs Robert D. Epstein EPSTEIN & FRISCH One Virginia Ave, Ste 200 Indianapolis, IN 46204 James A. Tanford INDIANA UNIVERSITY SCHOOL OF LAW 211 S. Indiana Ave Bloomington, IN 47405 David A. Whitaker PHILO, ATKINSON, STEPHENS, ET AL. 2920 East Jefferson Detroit, MI 48206-4286 19