Intellectual Property Law

The U.S. Commerce Clause v. State Law Discriminating Against Out-of-State Shipments

By Martha L. Arias

The Commerce Clause of the U.S. Constitution prohibits states from enacting laws that benefit in-state businesses and discriminate against out-of-state businesses.  Since most e-commerce businesses tend to eliminate the middle-man and this consequently affects traditional state businesses, some state laws have protected their domestic commerce by enacting legislation under the shadow of public policy justifications.  The two most notorious examples of these legislations relate to the winery and casket industries.  E-commerce retailers in these industries offer substantial lower prices than those offered by traditional brick-and-mortar retailers and some states have enacted laws to protect their domestic industry.  This issue was addressed by U.S. Supreme Court in Granholm v. Heald, 544 U.S. 460 (2005).  There, the Supreme Court held that states cannot enact laws that "burden out-of-state producers or shippers to give a competitive advantage to in-state businesses."     

In Granholm v. Heald, the U.S. Supreme Court consolidated two cases, one from Michigan and one from New York, involving state regulations for winery retailers. The Michigan law required all out-state wine to be sold through in-state wholesaler or retailer before it could reach Michigan consumers.  In contracts, in-state wineries could ship directly to in-state consumers if they obtained a state license.  The New York's law under scrutiny was similar to Michigan's.  All wineries were required to obtain state licenses.  In-state wineries could ship directly to in-state consumers if they obtain the respective licenses; yet, out-of-state wineries were required to have an in-state distribution -warehouse or branch office- to be able to directly ship wine to New York's consumers.  Additionally, out-of-state wineries could not obtain a "farm winery" license, which made direct in-state shipments easier.  Finally, in-state wineries that did not hold direct shipping licenses could ship through other state wineries that had the license; hence, this benefit was denied to out-of-state wineries.  
After a careful analysis, the U.S. Supreme Court held that both the Michigan and the New York law discriminated against interstate commerce and violated the Commerce Clause.  Both laws, the Court held, (1) deprived citizens of access to other markets and equal terms; (2) discriminate against out-of-state wine sales that could impact other industries.  The Court also held that Michigan and New York did not demonstrate a legitimate state purpose to support this discrimination against out-of-state retailers, such as underage drinking or tax evasion. Furthermore, Michigan and New York justified their laws under the Twenty-First Amendment to the U.S. Constitution which bars importation of alcohol in violation of state laws. Some have interpreted the Twenty-First Amendment as giving state absolute control over state alcoholic beverages.  On this issue, the Court held that the Twenty-First Amendment did not allow states to regulate direct shipment of wine in terms that discriminated against out-of-state producers and benefited in-state producers.  Thus, the Commerce Clause triumphed the Twenty-First Amendment.   

Granholm v. Heald is deemed a strong precedent in favor of e-commerce and its interstate shipment of goods.  Domestic e-commerce protectionism is definitely not well rooted in the U.S. commerce system and law.

Full post as published by IBLS Internet Law Blog on December 10, 2008 (boomark / email).