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Bolick v. Roberts

United States District Court, E.D. Virginia, Richmond Division
Jul 27, 2001
Civil Action No. 99CV755 (E.D. Va. Jul. 27, 2001)


Civil Action No. 99CV755

July 27, 2001


GEORGE WALERIAN CHABALEWSKI, WILLIAM HENERY HURD, Attorneys' for the Defendants, CLARENCE W. ROBERTS, Chairman, Virginia Dept. of Alcoholic Beverage Control, SANDRA CANADA, Commissioner, Virginia Dept. of Alcoholic Beverage Control, CLATER MOTTINGER, Commissioner, Virginia Dept. of Alcoholic Beverage Control.



MARY CHOPECKI, Attorney for Defendant, COALITION FOR FREE TRADE, amicus.


This matter was referred to the undersigned by the District Cour pursuant to 28 U.S.C. § 636(b)(1)(A), (C) and Fed.R.Civ.P. 72 for resolution of various non-dispositive issues and a report and recommendation on cross-motions for summary judgment. It is recommended for the reasons stated that the following be adopted as the opinion of the Court.

Plaintiffs seek related relief in the form of a declaratory judgment. There are also several pending motions that are addressed herein and which are the subject of a separate order.

Plaintiffs have properly pled causes of action which invoke the Court's federal question jurisdiction under the United States Constitution and relevant statutes. 42 U.S.C. § 1983, 1988; 28 U.S.C. § 2201, 2202. The case, reduced to its essence, is a constitutional challenge to the Virginia regulatory scheme which prohibits the shipment from outside Virginia of any beer, wine or distilled spirits directly to a consumer inside Virginia (direct shipment) without it passing through a Virginia licensed wholesaler or retailer while at the same time it allows shipment of beer and wine from Virginia producers within the state directly to consumers inside and outside of Virginia.

There are additional, related arguments as identified and discussed herein, but the primary challenge concerns what is referred to for simplicity sake as the "direct shipment" issue. See discussion at 17-18, infra.

The practical effect of the "Virginia preference" is that as many as two steps (wholesale and retail) are eliminated in the otherwise required three-step (tier) regulatory process that requires all alcoholic beverages originating from out of Virginia to pass from producer to wholesaler (first tier), from wholesaler to retailer (second tier), and then from retailer to legally-authorized consumer (third tier). The significance of the multi-tiered system is, according to the Defendants, that it allows for maximum degree of control and oversight to inspect (prevent adulteration), track (prevent diversion and promote temperance), tax, and enforce (prevent illegal production and consumption) pursuant to the comprehensive regulatory scheme in effect that deals with the manufacture, importation, distribution, and sale of alcoholic beverage products. Coleburn Aff. ¶¶ 18-19.

Plaintiffs Clint Bolick and Robin Heatwole are individual consumers of wine, beer, and distilled spirits while the Plaintiffs Dry Comal Creek Winery, Miura Vineyards, and Hood River Vineyard are all out-of-state growers and producers of wine. (Pls.' Am. Notice and Mot. for Summ. J., or in the Alt. for Decl. J. at 8)(Pls.' Mot. Summ. J.). The issue of standing for the named Plaintiffs to maintain the action has been resolved by earlier order of the District Court which also defined the scope of the Plaintiffs' claims to encompass the state regulatory scheme affecting the shipment and sale of all alcoholic beverages, namely, beer, wine, and distilled spirits. (Order, Feb. 7, 2000). The Defendants — Clarence W. Roberts, Sandra Canada, and Clater Mottinger — are all appointed members of the Virginia Alcoholic Beverage Control Board (ABC Board or Board) who are sued in their official capacities as proper party defendants. Va. Code Ann. §§ 4.1-102-103 (1950 Supp. 2000); Monell v. Dep't of Soc. Serv., 436 U.S. 658 (1978).

Procedural History

This is a complex case because of the constitutional issues involved and the necessity in the interest of judicial economy and efficiency, to allow the parties a full opportunity to explore all possible evidentiary considerations before a final determination was made of relevancy and materiality. To preclude piecemeal litigation, the scope of the case was expanded to encompass a challenge to the state regulatory scheme involving the shipment and distribution of all alcoholic beverages as opposed to the initial focus by the Plaintiffs solely on wine. As a consequence, amended pleadings were permitted with an extended discovery period and several hearings were held. Numerous discovery disputes were resolved by the Court during multiple depositions which were conducted in the Court's conference facilities to further expedite the process. In addition, several motions in limine and related evidentiary objections have been submitted in addition to the pending motions for summary judgment. A final hearing on all motions was held on January 19, 2001, and the transcript of the proceeding was docketed on March 16, 2001. The Court closed the record at the conclusion of the final hearing and took all matters under advisement. Leave was granted for various interested parties to submit briefs amicus curiae. The Court also awaited a decision by the Supreme Court as to whether it would grant certiorari in a recent case primarily relied on by the Defendants and Intervenor. Because the Supreme Court denied certiorari in the case for, as usual, unstated reasons, and all issues have been thoroughly explored by brief and in oral argument, the matter is ready for disposition.

Wine and Spirits Wholesalers of America, Inc. and The Coalition For Free Trade.

Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000), cert. denied sub nom. Bridenbaugh v. Carter, ___ U.S. ___ (Apr. 23, 2001). The initial decision in another case involving relevant issues is not final, pending a motion for reconsideration. Dickerson v. Bailey, 87 F. Supp.2d 691 (S.D. Tex. 2000). Additional actions in what appears to be a coordinated national effort to challenge similar regulatory schemes in other states are pending in several federal courts, but the litigants here are entitled to a resolution within a reasonable time and the vagaries among different state regulatory schemes are such that there would undoubtedly be distinguishing features among the several actions in any event. See Bainbridge v. Bush, 2001 WL 826642, at * 5-6 (M. D. Fla. July 19, 2001) (although the statutory scheme in Bainbridge appears comparable to Virginia's, the Court respectfully disagrees with the court's interpretation and application of key precedent, including North Dakota v. United States, 495 U.S. 423 (1990), Kronheim v. District of Columbia 91 F.3d 193 (D.C. Cir. 1996). and the Bridenbaugh decision).

Standard of Review

The standard of review for resolving a motion for summary judgment is well-known. Summary judgment is to be granted only if there is no genuine issue as to any material fact when the evidence and all justifiable inferences are viewed in the light most favorable to the non-moving party and the moving party is entitled to relief as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Anderson v. Liberty Lobby. Inc., 477 U.S. 242. 251 (1986). The court must undertake a "dual inquiry into the genuineness and materiality of any purported factual issues."Ross v. Communications Satellite Corp. 759 F.2d 355, 364 (4th Cir. 1985). "Genuineness means that the evidence must create fair doubt; wholly speculative assertions will not publicly suffice." Id. "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, disposition by summary judgment is appropriate." Teamsters Joint Council No. 83 v. Centra. Inc., 947 F.2d 115, 119 (4th Cir. 1990). It is not the court's role to weigh the evidence, but instead to decide whether there exists a genuine issue for trial.Anderson v. Liberty Lobby. Inc., 477 U.S. at 249. In addition, where there is federal jurisdiction, declaratory judgment relief pursuant to Fed.R.Civ.P. 57 and 28 U.S.C. § 2201 is appropriate to resolve the legal rights of the parties if there is no dispute as to material facts. See Columbia Gas Transmiss'n Corp. v. Drain, 237 F.3d 366, 370 (4th Cir. 2001).

The parties have filed motions for summary judgment from which the Court has determined that no genuine issue of material fact exists in regard to essential issues. This case is essentially a facial challenge to a state statutory and related regulatory scheme. While the discovery in this matter has been voluminous, taking over a year to develop, and certain facts are necessary to place the matter in proper context, the basic issue of whether the challenged statutory and regulatory scheme may stand is a question of constitutional law.

Material Facts Not in Dispute

The Court finds that the following constitute material facts that are not in dispute:
1. Congress enacted the Federal Alcohol Administration Act to regulate interstate and foreign commerce in distilled spirits, wine and malt beverages and to enforce the Twenty-first Amendment. Federal law requires that all importers, sellers, distillers, rectifiers, producers, bottlers, warehousers, and purchasers for resale of beer, wine and distilled spirits hold a basic permit issued by the Secretary of the Treasury. 27 U.S.C. § 203-204.
2. State liquor control of wine, beer and distilled spirits (alcoholic beverages) in Virginia is authorized by the ABC Act and by regulations promulgated by the ABC Board (Board). Va. Code Ann. §§ 4.1-100 — 516; and 1934 Va. Acts ch. 94. The Board was created to be the agency with "the exclusive power to issue all state licenses for the manufacture, sale and distribution of alcoholic beverages in this State, and should be given broad authority to refuse, grant or revoke such licenses." ( Liquor Control (Jan. 1934), Sen Doc. 5 at 8).
3. Virginia instituted what is commonly known as a three-tier system of alcohol distribution in response to the national repeal of Prohibition. The Board requires that only state licensees may import beer or wine into Virginia from out-of-state sources, including producers (first tier). Most wine and beer is imported into the state by wholesalers and then sold to retail licensees (second tier). Retail licensees may only sell alcoholic beverages to individuals entitled to purchase alcohol for consumption (third tier).
4. Wholesalers must conduct their businesses under Board regulation and operate from approved locations with approved warehouses. They must keep accurate account of the disposition of such wine and beer and show on their records whether and to whom wine and beer was transferred. Wine purchase orders, for example, must include specific language prescribed by law and when a wholesaler orders wine, it must notify the Board so that ABC agents can track incoming shipments and collect a tax.
5. Distilled spirits are primarily imported into Virginia because there are few distillery operations in the state and such products are received exclusively by the Board before shipment to state-owned and operated ABC stores for retail sale.
6. The ABC system, with a few minor exceptions. is the entity in Virginia authorized to acquire, store. distribute and sell distilled spirits in Virginia. The Board operates its own off-premises liquor stores for sales to the general public and also distributes to on-premises licensees such as bars and restaurants which sell spirits by the drink. Va. Code Ann. § 4.1-310.
7. Virginia requires Virginia wineries and farm wineries to be licensed. Retail off-premises winery and beer licensees, including retail stores, are authorized to ship their products directly to purchasers both inside and outside of Virginia in accordance with Board regulations. Va. Code Ann. §§ 4.1-209(2), (5).
8. Virginia wine producers may therefore ship directly to Virginia consumers without having to first ship the product to a wholesaler or other licensee, but all out-of-state wine sources must ship their product to a licensed wholesaler or other licensee.
9. Virginia law requires that ABC stores only market and sell Virginia-produced wine. Va. Code Ann. § 4.1-119(A).
10. Virginia ABC stores do not market any beer, including Virginia-produced beer.
11. Alcoholic beverages originating from out-of-state may not be distributed in Virginia unless they have been consigned to a wholesaler or a retailer licensed by the Board.
12. No out-of-state producer may be a licensed Virginia wholesaler or retailer. Va. Code Ann. §§ 4.1-206-211; 223; 310.
13. Virginia licensees are subject to jurisdiction and enforcement by the Board as well as the Bureau of Alcohol, Tobacco and Firearms of the United States Treasury Department.
14. Both Virginia and federal law require strict adhesion to enforcement provisions which were designed to promote temperance and prevent vertical integration. See generally 27 U.S.C. § 205-208; Coleburn Aff. ¶ 16.
15. It is a misdemeanor criminal offense for any entity to ship alcoholic beverages into Virginia without a Virginia license. It is also a misdemeanor criminal offense for any Virginia consumer to receive out-of-state direct shipments of alcoholic products. Va. Code Ann. § 4.1-310.
16. ABC stores sell approximately 2000 different alcoholic products including distilled spirits manufactured in Virginia and elsewhere; Virginia-produced wine; vermouth manufactured outside of Virginia: and both in-state and out-of-state manufactured mixers. Coleburn Aff. ¶ 5. ABC stores sell alcohol by the bottle or by the case. Va. Code Ann. §§ 4.1-103, 119, 122; and Adam's Aff. ¶ 5.
17. If the ABC store does not have a particular product in stock, consumers currently may special order any of approximately 315 limited demand items in the ABC special order catalog which are available by the bottle or case. These products are stored at a central ABC warehouse in Richmond, Virginia and are available at any ABC store throughout the state within approximately five days.
18. The ABC system will seek to fulfill consumer requests for products that are neither sold in ABC stores nor held in storage by the ABC at its warehouse, as long as it can be "legally imported into and purchased anywhere within the Continental United States" and the consumer is willing to buy at least an entire (or multiple) case(s). Adam's Aff. ¶ 6 ( See Defs.' Am. Mem. at 16).
19. The Board not only controls the importation and delivery of alcohol into the Commonwealth through its licensing, distribution and retail/wholesale functions, it also functions as the law enforcement agency responsible for inspection, investigation and enforcement of the Virginia ABC Act.
20. Virginia ABC law enforcement jurisdiction is confined to Virginia.
21. Title 27 of the U.S. Code grants enforcement jurisdiction to the Secretary of the Treasury who oversees delegated law enforcement responsibilities to the Bureau of Alcohol, Tobacco and Firearms. See generally 27 C.F.R. part 1.
22. Distilled spirits typically available in Virginia have an alcoholic content by volume of 30% to 60%. Coleburn Aff. ¶ 11.
23. Beer typically available in Virginia has an alcoholic content by volume of 3% to 5%. Coleburn Aff. ¶ 12.
24. Wine typically available in Virginia has an alcoholic content by volume of 5% to 12%. Coleburn Aff. ¶ 13.
25. State law requires that an individual be at least twenty-one years of age to legally purchase or consume alcoholic beverages of any kind. Va. Code Ann. § § 4.1304(i), 305.
26. Congress enacted a national minimum drinking age law by which it authorized the Secretary of Transportation to withhold federal funds from states that did not enact legislation establishing the drinking age at twenty-one by September 30, 1985. 23 U.S.C. § 158.
27. Taxation through liquor regulation was originally intended for social control, not to raise revenue. (Sen. Doc. 5 at 2). The ABC system is self-sustaining and obtains revenue from the collection of excise taxes on wine and beer sold at wholesale and liquor sold at retail; profits from sales of distilled spirits, wines, mixers and lottery tickets; license fees; fines and other penalties assessed for ABC law violations. Coleburn Aff. ¶¶ 6-9. The funds either support ABC operations or are transferred to the state's General Fund to be used for a variety of unrelated purposes, including educational objectives. Id.
28. While the ABC system is not funded by appropriation, it receives approximately $1.2 million in grant money from organizations such as the Office of Juvenile Justice and Delinquency Prevention (OJJDP), the National Highway Transportation Safety Administration, and the Century Council (a private foundation funded by distilleries). (Defs.' Am. Mem. at 31; ¶¶ 81). The Board reports that it uses such funds to promote temperance and fund campus and community prevention efforts.

Accordingly, the resolution of all pending motions constituting an objection to the consideration of certain evidence or asserting admissibility on some stated basis such as judicial notice is set forth in a separate order companying this report and recommendation, the Court concluding that the basic claim consists of a facial challenge to a statutory scheme for which a detailed factual predicate is neither necessary nor appropriate.

Unless otherwise noted, affidavits, reports and transcript citations can be found attached to Defendants' and Intervenor's Joint Appendix filed with their respective Motions for Summary Judgment.


This case presents the Court with the issue of whether certain of Virginia's regulatory statutes and implementing regulations concerning the distribution of beer, wine, and distilled spirits are violative of the "dormant" Commerce Clause and, if so, are they nevertheless sanctioned by the Twenty-first Amendment or other controlling authority. The Defendants and Intervenor argue that the central issue does not concern a dormant Commerce Clause question, but simply whether the challenged statutory scheme is authorized by the Twenty-first Amendment and/or other pertinent federal statutes. (Defs.' Mem. in Opp'n to Pls.' Mot. for Summ J. and in Supp. of Defs.' Mot. for Summ. J. at 4-6, 35-37.) The Supreme Court of the United States, the court of appeals for this circuit, and the courts of record of the Commonwealth of Virginia have provided a substantial body of case law by which this Court is guided.

Method of Analysis

Article I, section 8, clause 3 of the United States Constitution, the Commerce Clause, grants to Congress the sole authority to regulate commerce among the several states. The Commerce Clause is the primary source of federal regulatory power over matters concerning interstate commerce. See New York v. United States, 505 U.S. 144 (1992) (discussing the historical and analytical approach to defining the scope of federal and state authority under the Constitution). Generally, where Congress can articulate a nexus to interstate commerce, it may impose constitutional regulation on almost any activity having potential multi-state impact. The Commerce Clause has also been interpreted to have a "negative" or "dormant" effect with respect to a state's capacity to regulate commerce with other states. See New York v. United States, 505 U.S. at 156-157 (describing the interrelation of the Commerce Clause, the Tenth Amendment, the Guarantee Clause, the Spending Clause and the Supremacy Clause); Gibbons v. Ogden, 9 Wheat. 1,231-232,239 (1824) (Johnson J. concurring) (agreeing that the Commerce Clause is more than a grant of power to Congress to regulate interstate commerce and includes a negative effect that prohibits states from interfering in interstate commerce): see also South Carolina State Highway Dept. v. Barnwell Bros. Inc. 303 U.S. 177, 185 (1938) (holding that the Commerce Clause "by its own force" precludes state interference with interstate commerce).

The Commerce Clause powers are not without bounds. United States v. Lonez, 514 U.S. 549, 557, 568 (1995) (limiting federal power to regulate traditionally state-regulated firearms possession). However, the Commerce Clause is the source of authority to regulate a wide range of national concerns from comprehensive civil rights legislation, Heart of Atlanta Motel. Inc. v. United States, 379 U.S. 241, 256 (1964), to the disposal of low-level radioactive waste, New York v. United States, 505 U.S. 144, 156-157 (1992). But see United States v. Morrison, 529 U.S. 598, ____, 120 S.Ct. 1740, 1754 (2000) (discussing the general areas where Congress may regulate in interstate commerce, but holding the Commerce Clause did not vest Congress with the power to enact a federal private right of action to victims of gender-motivated violence in the Violence Against Women Act).

The Supreme Court's interpretation of state taxation as a burden under the dormant Commerce Clause, like all constitutional law, has evolved over time. For instance, early on the Court steadfastly held that states had no right to tax interstate commerce in "any form." Quill Corp. v. North Dakota, 504 U.S. 298, 309 (1992) (citations omitted) (discussing the historical interpretation of a state's power to tax interstate commerce and what form a tax may take). Later, the Court developed a distinction between direct and indirect burdens, generally proscribing the former but permitting the latter. Id. The Court observed that the current view is "`with certain restrictions, interstate commerce may be required to pay its fair share of state taxes.'" Id. at 310, n. 5 (citing D.H. Holmes Co. v. McNamara 486 U.S. 24, 31 (1988)).

The dormant Commerce Clause prevents a state from implementing isolationist trade policies and practices between it and other states.Wyoming v. Oklahoma, 502 U.S. 437, 469-70 (1992). Dormant Commerce Clause doctrine protects the national free market from protectionist state legislation unless Congress has acted specifically to establish a national policy or has authorized states to engage in otherwise discriminatory trade practices. Envtl. Tech. Council v. Sierra Club, 98 F.3d 774. 782 (4th Cir. 1996) (citing Oregon Waste Sys. Inc. v. Dept. of Envtl. Quality, 511 U.S. 93 (1994)). That the dormant Commerce Clause is the firm law in this circuit was reconfirmed in a recent decision of the Fourth Circuit. Waste Mgmt. Holdings, Inc. v. Gilmore, 2001 WL 604325, at * 10 (4th Cir. June 4, 2001 (recognizing it is well-settled that the Commerce Clause "denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce") (citation omitted).

The Defendants and Intervenor do not question the existence of the dormant Commerce Clause; rather, they assert it has no application to this case in light of what they argue is clear Congressional authority that controls all relevant issues involving commerce in alcoholic beverages. There can be no dispute that it has long been the law, even prior to the enactment of the Eighteenth Amendment, that beer, wine, and distilled spirits are articles of interstate commerce. Louisville Nashville R. R. Co. v. F. W. Cock Brewing Co., 223 U.S. 70, 82 (1912); see also the Federal Alcohol Administration Act, 27 U.S.C. § 201-205 (referring generally to intoxicating liquor with respect to its interstate commerce nature.) Given such ample authority, there is no doubt but that the dormant Commerce Clause exists and that it must be the basis for analysis in this case unless it is outweighed by the Twenty-first Amendment or other superceding authority. The Court must therefore initially determine whether the dormant Commerce Clause has been explicitly rendered inapplicable by express authorization of Congress in an abdication of its power to regulate commerce in alcohol so as to specifically authorize the states to erect absolute barriers to other states to trade in alcohol. Envtl. Tech. Council v. Sierra Club, 98 F.3d at 782. If so, then the analysis ends and the Defendants prevail.Northeast Bancorp. Inc. v. Bd. of Governors of the Fed. Reserve Svs., 472 U.S. at 159. If, however, Congress has not made such an explicit grant, then the analysis as mandated by the Supreme Court and the Fourth Circuit requires further inquiry into whether the subject statutes and related regulatory scheme may nevertheless survive despite the dormant Commerce Clause's apparent bar to such state action. Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. at 579.

As explained more fully, infra, Defendants argue the court may not apply the dormant Commerce Clause analysis and its strict scrutiny standard. (Defs.' Mem. in Opp'n to Pls.' Mot. for Summ. J. and in Supp. of Defs.' Mot. for Summ. J. at 10, note 9, (Doc. 140) citing Maine v. Taylor, 477 U.S. 131 (1986), North Dakota v. United States, 495 U.S. 423, 424 (1990)). However, these cases do not support Defendants' proposition and the Court finds that the sole appellate court decision in Bridenbaugh v. Freeman-Wilson, 227 F.3d 848, that does support the argument is distinguishable. See discussion, infra at 21-30.

The Court must apply strict scrutiny in evaluating dormant Commerce Clause claims. City of Philadelphia v. New Jersey, 437 U.S. 617. 624-627 (1978) (holding that state regulations that facially discriminate are virtually per se invalid); accord Bacchus Imports. Ltd. v. Dias, 468 U.S. 263, 271 (1984). The Supreme Court "has adopted a two-tiered approach in analyzing state economic regulation . . . `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 interest, we have generally struck down the statute without further inquiry.'" Healy v. Beer Inst., 491 U.S. 324, 337, n. 14, (1989) (quoting Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986) and striking down price affirmation statutes). The Fourth Circuit has also confirmed its adoption of the "two tier approach in determining the constitutionality of a statutory provision challenged under the dormant Commerce Clause":

The first tier, a virtually per se rule of invalidity, applies where a state law discriminates facially, in its practical effect, or in its purpose. In order for a law to survive such scrutiny, the state must prove that the discriminatory law is demonstrably justified by a valid factor unrelated to economic protectionism, and that there are no nondiscriminatory alternatives adequate to preserve the local interests at stake. . . .
Waste Mgmt. Holdings, Inc. v. Gilmore, 2001 WL 604325, at *10 (citing authority).

Supreme Court precedent directs further analysis focused on whether the challenged statutory scheme, if deemed constitutional, were "enacted throughout the country, would [it] create just the kind of competing and interlocking local economic regulation that the Commerce Clause was meant to preclude." Healy v. Beer Inst., 491 U.S. at 337. The challenged statutory scheme in this case facially discriminates against interstate commerce by prohibiting direct shipments of alcoholic beverages from out-of-state sources to Virginia consumers while permitting direct shipment by and from in-state producers and by mandating that only Virginia-produced wines be sold in its state-owned and operated stores. As such, the relevant statutes and implementing regulations constitute per se invalid restrictions on commerce.

If the Virginia statutes are per se invalid because they impose barriers to free trade among the states, the burden shifts to Defendants and Intervenor to establish that they nevertheless address a legitimate state interest so as to support the conclusion that the discriminatory law "is demonstrably justified by a valid factor unrelated to economic protectionism," New Enery Co. of Indiana v. Limbach, 486 U.S. 269, 274 (1988), and that there are no other nondiscriminatory means of addressing the problem. Healy v. Beer Inst., 491 U.S. at 340-341(holding there was no neutral justification for the statute which applied solely to interstate brewers and beer shippers while allowing intrastate breweries to freely set prices); Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 353 (1977) (there must be no other means of addressing the state's interest). If, however, a statutory scheme is neutral on its face or only indirectly affects interstate commerce, the Court must apply a balancing test and find the law to be valid unless the burden on commerce is "clearly excessive in relation to the putative local benefits." Pike v. Bruce Church. Inc., 397 U.S. 137, 142 (1970). This case requires the Court to engage in both analyses because some of the Virginia ABC laws in question are facially-discriminatory while others appear neutral.

Because the statutory scheme involving wine and beer is facially-discriminatory, the more flexible balancing test is unavailable in analyzing attendant issues. Bacchus Imports. Ltd. v. Dias, 468 U.S. at 271. However, the Virginia state-controlled monopoly on distilled spirits (hard liquor) without any preference for in-state direct shipments does not appear discriminatory on its face and therefore it does not involve the more stringent test. See discussion, infra.

Historical Perspective

Virginia's approach to regulating liquor following the repeal of Probibition is embodied in Senate Document 5, reported on December 13, 1933, and submitted to the General Assembly of Virginia in January, 1934. A legislative committee was designated to consider whether to recommend continuation of the state as a "dry state" or to develop a comprehensive liquor control plan. The committee deemed the repeal of federal prohibition as having "wipe[d] the slate clean for a new experiment in liquor control" with "no vested or proprietary interest to be considered." (Sen. Doc. 5 at 2).

A majority of the committee agreed upon "General Principles" on which the plan was to be based which included: (1) promoting temperance, social betterment and respect for law, with taxation only as a means for social control and not as a primary source of state or local revenues; (2) the need to gamer the respect and support of a large majority of the citizens while having broad discretionary power to modify details as conditions demand; (3) providing for local option as a cardinal principle whereby voters in each community would be able to restrict the sale of liquor (with the exception of 3.2 % beverages); (4) causing alcoholic beverage sales be "brought out in the open and placed upon a decent plane" and eliminating the bootlegger by making the sale of alcoholic beverages available "at such prices and under such conditions as will make it economically unprofitable and difficult for the bootlegger to compete with the lawful dispenser"; (5) minimizing private profit and discouraging sales and consumption by preventing integration among manufacturers from holding interest in retailers; (6) preventing the "return of the saloon"; (7) prompting temperance by discouraging the consumption of hard liquor by making it harder to obtain while encouraging the consumption "of light fermented beverages, such as beers and wines" by making them easier to obtain; (8) and otherwise providing for the "greatest good to the greatest number of citizens as a whole." (Sen. Doc. 5 at 2-3).

The committee deemed beer and wine with 3.2% alcohol by volume as "nonintoxicating" and thus subject neither to state liquor regulation nor local prohibition. (Sen. Doc. 5 at 1). Over time, the definitions of beer and wine came to include 3.2% beverages, namely, that which contains "one-half of one percent or more of alcohol by volume." Va. Code Ann. § 4.1-100.

The committee believed, and based its findings on the belief, that temperance would be achieved primarily through limiting access to the acquisition of hard liquors by selling only through state-run stores, by discouraging the consumption of hard liquor, and by promoting beer and "vine consumption. In fact, the committee went so far as to disapprove allowing hotels and restaurants to serve hard liquor by the drink, analogizing such a practice to a saloon without "the bar and the swinging doors." (Sen. Doc. 5 at 4). Although it recognized the experimental nature of setting up a state-run liquor monopoly, the committee reasoned that the state control plan would promote temperance by, among other things, eliminating the private profit motive of private licensees. Id. at 5. Further. the committee opined that by establishing experimental state-run liquor stores, "should a change prove necessary," a private license plan could be still substituted. Id. at 6. At the time, the committee wanted minimal penalties for infractions by licensees because the threat of license forfeiture was deemed sufficient, and it therefore also recommended that local police should be "intrusted" with enforcement and that "[o]nly a limited force of inspectors need be employed." Id. at 9.

The committee report also contained two concurring statements dealing with revenue disbursement and tax allocation. Id. at 10-11. The minority portion of the report is interesting because it opposed putting the state "squarely in the liquor business" which "has a corruptive influence." Id. at 12. The minority opined that "[i]f the state goes into the [liquor] business, judging by the past, its tendencies will be to corrupt the State itself," the constitutionality of which it questioned under the Commerce Clause of the United States Constitution. Id.

The basic question that drove the creation of Senate Document 5 and its plan for liquor control, which was ultimately adopted by the General Assembly, was whether and how to repeal the state prohibition and whether and how to institute state regulation over liquor control in order to allow localities to decide by referendum whether to remain dry. The legislature clearly made a fundamental decision to legalize the manufacture, distribution, sale and consumption of alcoholic beverages. In the process, the committee made another fundamental determination to transform commerce in liquor from dealing with contraband to dealing with a legal product, to promote temperance by encouraging the consumption of wine and beer as opposed to hard liquor, and at the same time to provide a safe delivery mechanism for hard liquor. Despite some differences, the committee was clear and uniform in its resolve to minimize the importance of collecting and disbursing taxes as indicated by its de-emphasis of sanctions as well as its criticism of private financial interests in the liquor trade, all of which would enhance tax efforts and revenues. The report barely dealt with wine and beer, and excluded 3.2% beverages entirely.

Plaintiffs' Contentions

Plaintiffs advance several related arguments challenging the Virginia statutory scheme related to alcoholic beverages based on the dormant Commerce Clause. First, Plaintiffs challenge Virginia's ban on the direct shipment of wine and beer to Virginia consumers from out-of-state entities while Virginia not only permits, but encourages, direct shipment to consumers by in-state wineries, farm wineries and to a lesser extent, Virginia breweries. (Pls.' First Am. Compl. ¶ 58(a), (c)). Second, the Complaint alleges that the Virginia statutes unconstitutionally permit the ABC Board to refuse to grant to out-of-state entities Virginia wholesale or retail licenses based solely on out-of-state status. Id., and Va. Code Ann. §§ 4.1-223(1), (2). Third, Plaintiffs assert that the Virginia statutory scheme impermissibly prefers instate off-premises retailers (including such entities as hotels, grocery stores and gift shops) to the exclusion of all other out-of-state retailers by permitting direct delivery or shipment of beer and wine to consumers by state licensees while forbidding participation by out-of-state retail establishments. (Pls.' First Am. Compl. ¶ 57) Fourth and finally, the Plaintiffs challenge the statutory mandate that the state-operated ABC stores sell only Virginia-produced wines. 14., ¶ 58(d).

Va. Code Ann. § § 4.1-207(4) (5) grant to winery and farm winery off-premises licensees the authority to deliver and ship wine "in closed containers" to "purchasers in accordance with Board regulations." Va. Code Ann. § 4.1-207(2) requires out of state producers to distribute their goods through a Virginia licensed wholesaler. Virginia-licensed retailers, gift shops, wineries and farm wineries may deliver or direct-ship wine and beer to Virginia residents. Va. Code Ann. §§ 4.1-209(2) (3). As part of its statutory mandate to promote Virginia agricultural products, the Virginia Department of Agriculture and Consumer Services actively promotes the Virginia wine industry. Va. Code Ann. §§ 3.1-1060 — 1064. Off-premises licensed Virginia breweries may sell and ship beer directly to Virginia consumers. Va. Code Ann. § 4.1-208(7). Out-of-state beer may not be shipped into Virginia other than to a Virginia licensee, but no out-of-state producer may be granted a license. Va. Code Ann. § 4.1-208(4), 209(2). There seems to be no similar governmental entity that actively promotes the Virginia beer industry as the Virginia Wine Advisory Board promotes in-state wineries.

The Board may refuse to grant a wholesale wine or beer license to any person without an existing place of business or plan to establish a place of business within the Commonwealth. Va. Code Ann. § 4.1-223(1). Out-of-state wineries and breweries are functionally forbidden to hold a new wholesale license under Va. Code Ann. § 4.1-223(2) because the statute prohibits any manufacturer of beer or wine to hold a wholesale license. Virginia wholesaler wine licensees are required to either maintain an importers' license or buy only from licensed importers. Va. Code Ann. § 4.1-207(2).

Va. Code Ann. §§ 4.1-208(3)-(8); 209; 302; 303; 310.

Undisputed Factual Predicate

It is a crime to import, ship. transport or bring alcoholic beverages into Virginia except when such shipment is to a distillery or licensee or to the Board. It is likewise illegal for a person to import wine into Virginia unless consigned first through a wine licensee. It is likewise illegal to import beer except to licensees. The state does permit an individual to carry small amounts of alcoholic beverages into Virginia for personal consumption and a "reasonable quantity" of alcoholic beverages if they are part of household goods of a person relocating a personal residence to Virginia.

Va. Code Anm § 4.1-310(A), (B) (C) make it a Class 1 misdemeanor.

Va. Code Ann. § 4.1-310(E) sets the limit for personal importation at "an amount not to exceed one gallon or four liters" and also makes exceptions for common carriers traveling through or into the state. Va. Code Ann. § 4.1-311 sets the parameters for transporting lawfully-purchased alcoholic beverages and makes it a misdemeanor to violate the section.

Virginia strictly controls the sale of distilled spirits through its government-owned and operated ABC stores. A consumer may not purchase hard liquor except through a state liquor store. Va. Code Ann.§§ 4.1-103, 119(A). State liquor stores are authorized to sell "alcoholic beverages (other than beer and wine not produced by Virginia farm wineries), vermouth, and mixers, in such counties, cities, and towns considered advisable by the Board." Va. Code Ann.§ 4.1-119(A). State liquor stores are prohibited from selling any wine other than that produced in Virginia by Virginia farm wineries. Id.

Twenty-first Amendment

The Twenty-first Amendment was ratified pursuant to Article 5 of the United States Constitution. It repealed the Eighteenth Amendment which prohibited the manufacture, sale and transportation of intoxicating liquors within, the importation into, or exportation from the United States and its territories. The prohibition of the Eighteenth Amendment was in "force thirteen years. Clause two of the repealing amendment on which the Defendants and Intervenor base their arguments states: "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."

A state enjoys constitutional protection for no other article of commerce like the authority that it has under the Twenty-first Amendment to control the regulation of alcoholic beverages within its borders. The dormant Commerce Clause prohibition against discriminatory state trade statutes is rendered inapplicable when the Constitution or Congress has authorized what would otherwise be impermissible state action that interferes with the free flow of commerce with other states. Northeast Bancorp. Inc. v. Bd. of Governors of the Fed. Reserve Sys., 472 U.S. 159, 174 (1985). However, when a state law "regulates the sale of alcoholic beverages . . . its discriminatory character eliminates the immunity afforded by the Twenty-first Amendment." Healy v. Beer Inst., 491 U.S. at 344 (Scalia, J., concurring) (citations omitted); City of Newport v. Iacobucci, 479 U.S. 92, 95 (1986) (balancing the State's interest and power to license liquor retailers with the First Amendment right to individual freedom of expression to dance nude); South Dakota v. Dole, 483 U.S. 203, 206 (1987) (holding that even when a state exercises one of its "core powers," the Twenty-first Amendment is not implicated where Congress has acted under its spending power).

Resolving the tension between the Twenty-first Amendment and the dormant Commerce Clause has been the subject of constitutional challenge since the repeal of Prohibition. However, time and again, the Supreme Court has held that "[t]he reach of the Twenty-first Amendment is not without limit." The Supreme Court has upheld discriminatory laws in only a few instances and it has effectively overruled earlier decisions on the issue so as to compel the rejection of any argument as urged by the Defendants and Intervenor that a facially discriminatory statutory scheme that constitutes a barrier to the free trade of alcohol products among the states is conclusively shielded by the Twenty-first Amendment or any other existing authority. Healy v. Beer Inst., 491 U.S. at 342 (overruling Joseph E. Seagram Son v. Hostetter, 384 U.S. 35 (1966). to the extent that it held (1) affirmation statutes were too conjectural to show extraterritorial effect and (2) that the Twenty-first Amendment grants states "wide latitude in the field of liquor regulation . . . [a]lthough such state regulation might violate the Commerce Clause in some extreme instances").

The Twenty-first Amendment to the United States Constitution was ratified on February 6, 1933. See also Bridenbaugh v. Freeman-Wilson, 227 F.3d at 849, 853 (Easterbrook, J. for the quorum of the panel) (holding Indiana's statutory prohibition on direct shipment of wine to consumers from out-of-state producers was constitutional because it was authorized by the Twenty-first Amendment). Judge Easterbrook reasoned from a premise that the tension is resolved in favor of upholding the state statute because the Twenty-first Amendment. "which appears in the Constitution" trumps the "`dormant commerce clause,' which does not." Id. at 849.

The Court has consistently viewed such cases in the interstate commerce context "[t]his is not to say that the Twenty-first Amendment empowers a State to act with total irrationality or invidious discrimination in controlling the distribution and dispensation of liquor within its borders . . . [i]t most assuredly is not to say that the Twenty-first Amendment necessarily overrides in its allotted area any other relevant provision of the Constitution." City of Newport v. Iacobucci, 479 U.S. at 95 (quoting California v. LaRue, 409 U.S. 109, 120 (1972) (Stewart, J., concurring)). In City of Newport, the city council made specific findings to support its legitimate interest in curtailing the injurious effects of "nude dancing in establishments that serve liquor." Id. at 96-97.

Maine v. Taylor 477 U.S. 131 (1986) (holding Maine's statute prohibiting the introduction of live bait fish into the state was not violative of the dormant Commerce Clause because protection of the health of its inland fisheries was a legitimate state interest which could not be addressed by nondiscriminatory means); Clason v. Indiana, 306 U.S. 439(1939) (holding that the state could properly prohibit transportation of dead animals without a license because of the threat of disease); City of Philadelphia v. New Jersey, 437 U.S. at 626 (Rehnquist, J., dissenting) (observing that the Supreme Court has upheld certain quarantine laws because the very movement of contagious would risk transmission of "disease, pestilence, and death such as . . . substances infected with the germs of yellow fever").

Relying on the decision in Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (which the Supreme Court has recently declined to review), the Defendants assert that this case can only be properly reviewed under the Twenty-first Amendment and not the dormant Commerce Clause. (Defs. Mem. in Opp'n to Pls.' Mot. Sutum. J. at 4-6, 35-37). Defendants also argue not only are the state statutes exempt from any dormant Commerce Clause analysis, they are expressly validated under such case precedent as North Dakota v. United States, 495 U.S. 423, and Kronheim v. District of Columbia, 91 F.3d 193 (D.C. Cir. 1996). For reasons discussed herein, the Defendants and Intervenor have failed to persuade the Court that the analysis urged by them is proper not only in this circuit, but under controlling Supreme Court case law.

Bridenbaugh v. Freeman-Wilson held that the Twenty-first Amendment "directly authorizes state control over imports, while the premise of dormant commerce clause jurisprudence is an inference that the grant of power to Congress in Art. I § 8 cl. 3 implies a limitation on state authority over the same subject." 227 F.3d at 849. While there are some parts of the analysis in Bridenbaugh with which this Court concurs, there are several reasons why Bridenbaugh is not dispositive of this case.

First, the Bridenbaugh court refused to apply the dormant Commerce Clause analysis whereas this Court feels compelled to do so under the guidance of both the Fourth Circuit and the Supreme Court. See generally Bacchus Imports. Ltd. v. Dias, 468 U.S. 263 (1984) and TFWS. Inc. v. Schaeffer, 242 F.3d 198. 204 (4th Cir. 2001) (explaining that because federal interests survived the passage of the Twenty-first Amendment, the state's power to regulate alcohol "`may be subject to the federal commerce power'" through "`careful scrutiny'") (citations omitted). Second, the Bridenbaugh court found that there was no functional discrimination resulting in the creation of trade barriers, although the state of Indiana allowed local wineries to ship wine directly to Indiana consumers: "Indiana insists that every drop of liquor pass through its three-tiered system and be subjected to taxation." Id. at 853 (emphasis in original). However, Virginia's statutes specifically authorize direct shipment of beer and wine by in-state producers and off-premises licensees without requiring that the shipment pass through its three-tier system while. at the same time, it absolutely prohibits such shipments from out-of-state sources. Third, the Bridenbaugh court interpreted not only the Twenty-first Amendment, but also the Wilson and Webb-Kenyon Acts and their respective impacts on the required analysis in ways that this Court understands to be inconsistent with the law as it has been developed by the Supreme Court. Finally, the Bridenbaugh court focused on a very narrow analysis of the history and language of clause 2 of the Twenty-first Amendment and that of the implementing regulations in Title 27 provisions, rather than seeking a logical synthesis among the many interstate commerce, Twenty-first Amendment, and dormant Commerce Clause cases that have evolved for over a century.

Indiana requires liquor to pass through a permit holder whether a retailer or wholesaler, but does not require it to actually pass through all three tiers of its system.

The novel approach in the Bridenbaugh decision is that the Seventh Circuit Court of Appeals refused to apply the analysis established by the Supreme Court because, it reasoned, the passage of clause 2 of the Twenty-first Amendment meant that "no longer may the dormant commerce clause be read to protect interstate shipments of liquor from regulation." Id. at 853. This Court understands that every dormant Commerce Clause question must be addressed — even with respect to the Twenty-first Amendment — with a consistent analysis. Justifying its refusal to engage in the dormant Commerce Clause analysis, the Seventh Circuit rejected the well-settled constitutional parameters of the dormant Commerce Clause as it has been developed ever "since Chief Justice Marshall, for the court, delivered the judgment in Gibbons v. Ogden." See Adams Express Co. v. Kentucky, 238 U.S. 190, 196 (1915) (citations omitted). Instead, the Bridenbaugh court employed a historical analysis of the Twenty-first Amendment and the related acts of Congress pertinent to the state regulation of intoxicating liquor while dismissing altogether the interstate commerce issues raised by the facts of the case. In fact, the court stated "[n]o decision of the Supreme Court holds or implies that laws limited to the importation of liquor are problematic under the dormant commerce clause." 227 F.3d at 853. "What the Court has held, however, is that the greater power to forbid imports does not imply a lesser power to allow imports on discriminatory terms." Id. (citing Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986)). The Court agrees with this conclusion to the extent that it means that even under the Twenty-first Amendment, a state cannot discriminate against interstate goods under the dormant Commerce Clause. However, if a state chooses to exercise its "greater power" to forbid the direct importation of alcohol, it must also be consistent in dealing with domestic production, delivery and use so as not to discriminate for purely economic advantage.

The Seventh Circuit interpreted Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573 (1986) and Bacchus Imports. Ltd. v. Dias, 468 U.S. 263, 267 (1984), as applications of "an unconstitutional-conditions approach to use of the § 2 power . . . eliminating economic discrimination against in-state commerce of the sort caused by" the Supreme Court's 19th century cases and the original package doctrine "without authorizing discrimination against out-of-state sellers." 227 F.3d at 853. The Court again partially agrees with this conclusion inasmuch as the Supreme Court has over time set forth different tests for analyzing liquor regulation as it confronts claims of unconstitutionality; for instance, as against free speech, the Supremacy Clause, federal preemption, the Sherman Act, and many others. In this case, the Court is confronted with such an "unconstitutional-conditions" question where Virginia grants to its own farm wineries, wineries and other off-premises licensees the authority to direct-ship wine and beer to consumers while out-of-state entities are forbidden by statute to independently obtain Virginia licenses or to ship the same types of beverages directly to Virginia consumers. Although Virginia does not prohibit the importation of alcoholic beverages into its three-tier system, the preference given to in-state entities by allowing direct shipment to the consumer presents a case of actual discrimination that distinguishes this case from Bridenbaugh.

See, infra, note 27.

The Bridenbaugh court also found it decisive that its interpretation of clause 2 "closed the loophole" created by the earlier "original package" cases of 1880 and 1890 and the Supreme Court's interpretation of the Wilson and Webb-Kenyon Acts which followed as authorizing states to prohibit any direct shipment which does not first pass through its three-tier system. But see Adams Express Co. v. Kentucky, 238 U.S. 190, 199-200 (holding that the Webb-Kenyon Act was only applicable where the possession or consumption of alcohol was prohibited by state statute — if liquor was legal, then a direct shipment io the consumer was permissible).

Developments in both dormant Commerce Clause and Twenty-first Amendment analyses by the Supreme Court within the relatively recent past represent the current and thereby controlling measure of the scrutiny that these cases require. See, e.g., California Retail Liquor Dealers Ass'n v. Midcal Aluminum. Inc., 445 U.S. 97, 109 (1980) (noting that the Court recently began to emphasize federal concerns to a greater extent than it ever had in its previous cases); and Bacchus Imports. Ltd. v. Dias, 468 U.S. 263. 275 (quoting Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 331-332 (1964, "`[t]o draw a conclusion . . . that the Twenty-first Amendment has somehow operated to `repeal' the Commerce Clause wherever regulation of intoxicating liquors is concerned would, however, be an absurd oversimplification."). Nevertheless, theBridenbaugh court seemingly ignored the Supreme Court's admonition that "we have recognized the obscurity of the legislative history of § 2 [and] [n]o clear consensus concerning the meaning of the provision is apparent Bacchus Imports, Ltd. v. Dias, 468 U.S. at 274-275 (citations omitted). Although any analysis of the elusive legislative history of not only clause 2 of the Twenty-first Amendment, but also the Wilson and Webb-Kenyon Acts, is necessarily less than precise, it must result in the conclusion that all were passed with one common goal and understanding, namely, that without the express authority of Congress, those states that wished to remain dry after the repeal of prohibition would be powerless to do so. While more current social, health, safety and taxation concerns relating to alcohol may have evolved and transformed over the years, the legislative history of relevant constitutional and Congressional authority firmly indicates an historical context of desiring to preserve a state's local option to remain prohibitionist. At the same time, the conclusion also follows that if a state, like Virginia, decided not to remain dry, it cannot "hide behind" legislative history to protect any discriminatory scheme.

The plaintiffs in Bridenbaugh complained that the state statutory scheme discriminated against out-of-state products because it permitted Indiana wholesalers and retailers to directly deliver intoxicating beverages to consumers' homes, 227 F.3d at 854 (citing Indiana Code §§ 7.1-5-11-1.5(a); 7.1-3-13-3(a); 7.1-3-14-4(c)), but only after passing through an Indiana licensed wholesaler or retailer. Id. The Indiana statutory scheme "has its anomalies" where an out-of-state license holder is permitted "to ship directly to Indiana consumers by § 7.1-3-14-4(c), and [is] forbidden to do so by § 7.1-5-1 1-1.5."Id. The court declined, however, to comment on the disparity or otherwise reconcile it with its analysis, stating only that "Indiana's judiciary has yet to consider how, if at all, these statutes may be reconciled."Id. The court simply held that the statute requiring out-of-state producers to pass through the Indiana "wholesale system was authorized by clause 2 "unless the state has used its power to impose a discriminatory condition on importation, one that favors Indiana sources of alcoholic beverages over sources in other states, as Hawaii did in Bacchus." 227 F.3d at 853. In this case, Virginia's statutory scheme does just that by creating and preserving a preference for state-produced wine over out-of-state wine by allowing the direct shipment from the Virginia winery or off-premises licensee to the consumer on the one hand, with the commensurate economic advantage of convement and expeditious marketing and delivery without price increase, while requiring out-of-state sources to consign their goods only to in-state wholesalers or licensees, resulting in adverse economic impact including price increase because they are deprived of the benefit of direct-shipment. The Court finds the situation to be analogous to the discriminatory tax levied by Hawaii inBacchus and therefore distinguishable from the Seventh Circuit's interpretation of the state statutory scheme in Bridenbaugh.

Furthermore, and clearly significant in further distinguishing this case from Bridenbaugh the Virginia Supreme Court has addressed the specific issue involving a statutory preference for in-state producers and found it to be unconstitutional in violation of the dormant Commerce Clause. See Heublein, Inc. v. Dep't of Alcoholic Beverage Control, 237 Va. 192. 198, 376 S.E.2d 77, 80 (1989). The Heublein case is important not only because the Virginia Supreme Court struck down as unconstitutional an act that exempted Virginia farm wineries from the prohibitions of the Commerce Clause, but also because the Virginia Supreme Court made specific findings as to the General Assembly's motivation in passing the legislation. Id. In that case, Heublein, Inc., was a nationwide wine distributor that challenged the validity of Virginia's Wine Franchise Act which, notwithstanding the rights under existing contracts, retroactively limited an out-of-state supplier's ability to amend its contracts with Virginia wholesalers unless it amended all of its contracts in all states. Id. at 194. Not only did the statute require a supplier to have uniform agreements, it also exempted Virginia farm wineries from the restrictions of the Act. Id. at 195. The Virginia Supreme Court recognized that "every statute `carries a strong presumption of validity' and unless it `clearly violates a provision of the United States or Virginia Constitutions, we will not invalidate it.'"Id. (citations omitted). Nevertheless, the court found that the statute clearly violated the Commerce Clause because it mandated a preference for in-state wineries over all others. Id. at 198.

Like the price affirmation statutes, the Heublein court held that the Virginia Wine Franchise Act attempted to force the control of commerce entirely outside of Virginia and was thus invalid. Id. (citingBrown-Forman Distillers v. New York Liquor Auth., 476 U.S. at 584-584). Next, the court held that "exempting Virginia farm wineries . . . is a violation of the commerce clause because it discriminates against out-of-state wineries." Id. Having found that the Act was facially invalid, the court then analyzed whether the statute served a legitimate government purpose or was otherwise authorized by the Twenty-first Amendment. Id. (citing California Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. at 110). The court held that the exemption for Virginia farm wineries did not promote temperance or serve a legitimate interest unrelated to economic protectionism, but instead was specifically created for the purpose of fostering the local wine market.Id. at 198-199. The court found accordingly that the exemption constituted an "invalid attempt to favor local wineries over out-of-state wineries in violation of the Commerce Clause." Id. at 199. Although the specific provision under challenge in Heublein is different from that under attack here, the Virginia Supreme Court's rationale is consistent with regard to the in-state preference allotted to the Virginia wine industry for direct shipment and exclusive ABC store marketing.

The court recounted the history of the Wine Franchise Act and other acts of the legislature such as amendments to expand local winery exclusions, the legislature's establishment of the Winegrowers Advisory Board, and its avowed policy to promote and market Virginia wine. See also Va. Code Ann. § 3.1-1060 (establishing the Winegrowers Advisory Board).

This Court disagrees with the Bridenbaugh court's rejection of any need to analyze whether the Indiana statute in question addressed a "core concern" of the Twenty-first Amendment. Instead, the Seventh Circuit stated it was guided by the "text and history of the Constitution, not the `purposes' or `concerns' that may or may not have animated its drafters . . . [o]bjective indicators supply the context for § 2; suppositions about mental processes are unilluminating." 227 F.3d at 850. In doing so, the court diverged from the evolving trend of Twenty-first Amendment and dormant Commerce Clause cases by favoring "the text and history of the Constitution" over consistent interpretation.Id. However, the Fourth Circuit has applied established constitutional analysis when it has been presented with Twenty-first Amendment issues, and this Court is bound by that interpretation and application which includes a core concern analysis in what must be viewed as a dormant Commerce Clause question. See TFWS, Inc. v. Schaefer, 242 F.3d 198, 212 (holding where state liquor laws violate the Sherman Act in contravention of the Commerce Clause, state liquor regulatory policies must "directly serve the interests it proffers under the Twenty-first Amendment," citing California Liquor Dealers Ass'n v. Midcal Aluminum. Inc. 445 U.S. 97, 109 (1980)); see also Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 267 (1984)).

See discussion of core concern analysis, infra at 46.

To accept the Bridenbaugh court's decision as dispositive would require explicit rejection of the applicability of the dormant Commerce Clause. Such a result would constitutionally marginalize and dismiss the dormant Commerce Clause on the basis that because it does not appear in the Constitution, it is only an inference that must be discarded. 227 F.3d at 849. That conclusion is unacceptable in light of the Supreme Court's decisions resolving the conflict between the Twenty-first Amendment and the rest of the Constitution.

"Although the Twenty-first Amendment limits the effect of the dormant Commerce Clause on a State's regulatory power over the delivery or use of intoxicating beverages within its borders, `the Amendment does not license the States to ignore their obligations under otherprovisions of the Constitution.' Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712 (1984). That general conclusion reflects our specific holdings that the Twenty-first Amendment does not in any way diminish the force of the Supremacy Clause, ibid.; California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97, 112-114 (1980), the Establishment Clause,Larkin v. Grendel's Den. Inc. 459 U.S. 116, 122, n. 5 (1982). or the Equal Protection Clause, Craig v. Boren, 429 U.S. 190, 209 (1976). We see no reason why the First Amendment should not also be included in that list. Accordingly, we now hold that the Twenty-first Amendment does not qualify the constitutional prohibition against laws abridging the freedom of speech embodied in the First Amendment. The Twenty-first Amendment, therefore, cannot save Rhode Island's ban on liquor price advertising."44 Liquormart v. Rhode Island 517 U.S. at 484.

This Court chooses to abide by the rule of constitutional law that holds that "there is no principled basis on which to create a hierarchy of constitutional values." Valley Forge Christian College v. Americans United for Separation of Church State. Inc., 454 U.S. 464, 484 (1982). It may be that the Bridenbaugh court simply deemed the dormant Commerce Clause inapplicable because it started from the premise that there was a lack of functional discrimination which diverted the traditional analysis. However, this Court rejects the concept that the dormant Commerce Clause lacks the force of the Constitution only because it does not explicitly appear in its text.

Defendants and Intervenor also cite extensively to North Dakota v. United States in support of their mutual positions. 495 U.S. 424. North Dakota involved a question under the Twenty-first Amendment and the Supremacy Clause (intergovernmental immunity and preemption doctrines) relating to state labeling and reporting laws applicable to all alcoholic beverages brought into the state — even onto federal enclaves — to prevent diversion. 495 U.S. at 426. The case is instructive in many ways, but not for all the propositions urged by the Defendants and Intervenor.

Of particular significance is that the Supreme Court was not confronted in North Dakota with a dormant Commerce Clause question. Rather, the focus was on the North Dakota system of regulation that required all out-of-state suppliers, including those shipping to federal enclaves, to report the amounts shipped into the state each month and affix labels to bottles not destined for state-licensees. The federal government challenged the reporting and labeling law under the Supremacy Clause to the Constitution, claiming the North Dakota statute had the effect of raising the price of liquor sold on federal property and that such an impact was in contravention of federal law. The Court found that the system of regulation by which North Dakota chose to enforce liquor distribution within in its jurisdiction was "unquestionably legitimate," that the labeling and reporting laws served the legitimate purpose of preventing diversion, were not tantamount to state regulation of the federal government or discrimination against it, and that the state's legitimate interests are entitled to a strong presumption of validity.Id. at 432-433. The Court explained that among the state's core powers under the Twenty-first Amendment was the state's power to prevent diversion by enforcing both reporting and labeling requirements on out-of-state suppliers of alcoholic beverages to military posts. Id.

While the Court analyzed the facts under the principles of the Supremacy Clause, it also expressly considered whether reporting and labeling laws constituted direct regulation of the United States or discrimination against the federal government and "those with whom it deals." Id. at 435. Since the law regulated suppliers and not the government, the Court found that the laws did not comprise direct regulation of the United States. Id. at 437-438. However, since the law effected the government's suppliers of alcohol, the law must be "imposed equally on other similarly-situated constituents" in its broad context.Id. at 438. Labels were not required of suppliers whose products passed through North Dakota's licensees, but the Court found that the labeling and reporting restriction were part of an "extensive system of statewide regulation" that furthered legitimate interests in promoting temperance, preventing diversion and raising revenue. Id. at 439. Although in-state wholesalers were not subject to the reporting and labeling law, all in-state retailers were still required to obtain all alcoholic beverages from in-state sources. The federal government was therefore free to choose to purchase its liquor from out-of-state wholesalers who abided by the labeling and reporting requirements instead of in-state wholesalers.Id. Because the United States did not suffer an adverse economic impact compared to in-state retailers, the Court found that the regulatory regime was not discriminatory under the economic burden concept of the Supremacy Clause. Id. The Court also considered whether a federal law requiring the Department of Defense to obtain alcoholic beverages from the most competitive source operated to exempt the regulation from state taxation. Id.; see 10 U.S.C. § 2488. The Court held that incidental increases in price did not impair the military's ability to secure liquor at the most competitive price. Id. at 440.

The law required that beer and wine be purchased from only in-state sources which has been interpreted to apply only to installations in Alaska and Hawaii.

One of the most interesting aspects of the North Dakota case is that it confirms that North Dakota found a way to tax interstate commerce occurring wholly outside the state by instituting a labeling and reporting requirement pursuant to its clause 2 powers. At the very least, the Court finds the case is instructive because it demonstrates that a state can monitor the direct shipment of goods, including liquor, into the state and require such imports to bear labels to prevent diversion without having to implement a full scale bar to all importation through discriminatory means.

The problem with rote application of North Dakota v. United States to this case is that such an analysis suggests that one should go no further than to recognize that a state is afforded "special protection" in setting liquor control policies within its jurisdiction and that those policies enjoy "a strong presumption of validity" that "should not be set aside lightly." Id. at 433. A closer analysis, however, includes the caveat that although such policies and implementing laws "should not be set aside lightly," they can and must be invalidated in the face of constitutional infirmity. Though substantial conflicts were resolved between the state of North Dakota and the United States in North Dakota to enforce labeling and reporting requirements, the primary issues were focused on the application of intergovernmental immunity doctrine, the Supremacy Clause, and federal preemption — not a facially-discriminatory statutory scheme as here. The Supreme Court held North Dakota's reporting and labeling laws were permissible in the interest of promoting temperance and preventing diversion, but the Court never sanctioned discriminatory barriers to trade.

At the same time, the North Dakota case has significance to this case, but not as the Defendant and Intervenor would have one believe. Under the force of the Commerce Clause, the Supreme Court has held elsewhere that a state has no right under the Twenty-first Amendment to prevent the shipment of intoxicating liquors onto a military installation or to require such beverages to pass through its tier system. United States v. State Tax Comm'n of Mississippi, 412 U.S. 363, 375-3 76 (1973) (holding Mississippi lacked jurisdiction to regulate the importation of intoxicating liquors into federal enclaves). Accordingly, it is appropriate to conclude that the Court applied a different analysis inNorth Dakota than it would have had the question before it been whether it was permissible for the state to erect a barrier to interstate commerce. City of Philadelphia v. New York, 437 U.S. at 623-624.

Another case decision urged by the Defendants and Intervenor in support of their position is Kronheim v. District of Columbia which the Defendants and Intervenors argue supports a finding in their favor because the court there recognized "`the plenary power [of the states] to regulate and control . . . the distribution, use, or consumption of intoxicants within her territory after they have been imported.'" 91 F.3d 193, 203 (D.C. Cir. 1996)(Defs.' Am. Mem. in Supp. of Mot. Summ. J. at 45). Like Bridenbaugh, the Kronheim case is outside of this judicial appellate circuit and is therefore not binding — especially in light of the adequate precedent available from the Supreme Court and Fourth Circuit on the relevant issues. The question inKronheim was whether it was constitutional for the District of Columbia to impose a local warehousing requirement upon all liquor imported by wholesalers licensed by the District. The Court of Appeals for the D.C. Circuit held that the dormant: Commerce Clause was implicated by the question presented and applied the very same analysis discussed throughout this report and recommendation. Id. As in this case, applying the strict scrutiny analysis, the Kronheim court held that the statute — the local warehousing requirement — was facially discriminatory and thus per se invalid. Id. As it was required to do, the court examined whether the local purpose offered by defendants was legitimate and could not be adequately served by reasonable nondiscriminatory means. Id. (citing New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988)).

The Defendants would have the Court look only at the result of this case and ignore the analysis. The defendants in Kronheim argued that there were two local purposes advanced by the discriminatory statute in question: (1) the "storage requirement serves important inspection and enforcement interest"; and (2) "the storage requirement is integral to both maintaining its `three-tier system of distribution,' which strictly separates the function of supplier, wholesaler and retailer, and discouraging the creation of a `tied house,' in which one firm controls the entire chain of distribution." Id. at 202. The court acknowledged that Kronheim could credibly argue that the "local warehousing requirement is protectionist . . . we cannot say with any assuredness that protectionism is not a purpose of the legislation." Id. at 203. However, the court found that even though the legislature's motive was mixed, both for protectionist and for legitimate purposes, the "nonprotectionist side of the District's mixed motive placed [it] squarely within the [Twenty-fist] Amendment's ambit." Id. However, in the Fourth Circuit, a discriminatory state statute or regulation that does not directly serve the state interest proffered is unconstitutional.

See TFWS, Inc. v. Schaefer 242 F.3d 198, 212 (4th Cir. 2001) (striking down state liquor regulation which did not "directly serve the interests it proffers under the Twenty-first Amendment").

The D.C. Circuit abruptly ended its inquiry in Kronheim by deciding that the legitimate interests within the Twenty-first Amendment's core concerns outweighed the illegitimate protectionism involved without adequately analyzing whether the enforcement concerns could be achieved by non-discriminatory means. Id. at 203-204. The premature end to the analysis is inconsistent with this Court's understanding of dormant Commerce Clause jurisprudence that must be applied in cases such as the present one. Because Kronheim v. District of Columbia does not go far enough in its analysis, is relatively fact-specific, and because it is not binding in this case, the Court finds its conclusion to be inapplicable. However, at the same time, the decision does provide some support for the Plaintiffs' position, but not the Defendants' or Intervenor's, in that although the Kronheim court found that the statute in question ultimately survived the dormant Commerce Clause analysis, it nevertheless held that it had to be analyzed under the dormant Commerce Clause strict scrutiny standard. 90 F.3d at 201-202.

The present case is not a resale price maintenance case, it is much less complicated. However, because of the Twenty-first Amendment, it is not a garden-variety Commerce Clause case either. The Twenty-first Amendment's plain language gives states the "control over the `transportation or importation' of liquor into their territories" which "logically entails considerable regulatory power not strictly limited to importing and transporting alcohol." California Retail Liquor Dealers Ass'n. v. Midcal Aluminum. Inc., 445 U.S. 97, 107 (1980) (striking down California's wine price maintenance statute as violative of the Sherman Act). But both the Defendants and Intervenor misread the Supreme Court's holding in Midcal and seemingly ignore later decisions that clarify the Supreme Court's interpretation of the Twenty-first Amendment's limitations in light of the Commerce Clause.

First, the Midcal court first looked at the Twenty-first amendment by interpreting the "language of the provision rather than the history behind it" and found that the states enjoyed an explicit grant of authority. Id. at 106-107. Next, the Court explored the early decisions that interpreted the Twenty-first Amendment as holding "each State holds great powers over the importation of liquor from other jurisdictions," but it specifically refused to agree that "§ 2 `freed the States from all restrictions upon the police power to be found in other provisions of the Constitution.'" Id. at 107-108, (citing State Board v. Young's Market Co., 299 U.S. 59, 63-64 (1936)). The Court cited cases that held "important federal interests in liquor matters survived the ratification of the Twenty-first Amendment." Id. (citing Dep't of Revenue v. James Beam Co., 377 U.S. 341 (1964); Craig v. Boren, 429 U.S. 190 (1976); andWisconsin v. Constantineau, 400 U.S. 433 (1971)). Again, the Defendants and Intervenor cite to Mideal and yet still urge the Court to forego a traditional dormant Commerce Clause analysis as did the court inBridenbaugh in which the Seventh Circuit did not conduct the full analysis because it held no functional discrimination existed ("Indiana insists every that every drop of liquor pass through its three-tiered system . . . [w]ine originating in California, France, Australia, or Indiana passes through the same three tiers and is subject to the same taxes."). 227 F.3d at 853.

The Court also cited Joseph E. Seagram Sons. Inc. v. Hostetter, 384 U.S. at 35, to support the premise that the Court has "given `wide latitude' to state liquor regulation" on which the defendants rely to support the statement that states have "virtually complete control over whether to permit importation and sale of liquor and how to structure the liquor distribution system." California Liquor Dealers Ass'n. v. Midcal Aluminum. Inc., 445 U.S. at 110. The Court later overruled Joseph E. Seagram Sons, Inc. v. Hostetter, however, to the extent that the discriminatory nature of a state law causes it to lose the protection of the Twenty-first Amendment. Healy v. Beer Inst., 491 U.S. at 342.

As Justice Stevens observed in his dissent in City of Newport v. Iacobucci, the problem with straying from a firmly-established constitutional analysis is that it leads to internal inconsistency. 479 U.S. at 99-100. In balancing the Twenty-first Amendment against the First Amendment, the Court has a duty "to `assess the substantiality of the governmental interests asserted [and] determine whether those interests could be served by means that would be less intrusive on activity protected by the First Amendment." Id. (citing Shad v. Mount Ephiraim, 452 U.S. 61, 70 (1981)). This has likewise been observed by the Supreme Court of Virginia: "`there is no bright line between federal interests and state powers over liquor . . . [t]he competing state and federal interests can be reconciled only after careful scrutiny of those concerns in a `concrete case.'" Heublein, Inc. v. Dep't of Alcoholic Beverage Control, 237 Va. 192, 198, 376 S.E.2d 77, 80 (1989) (quoting California Liquor Dealers Ass'n. v. Midcal Aluminum Inc., 445 U.S. 97, 110 (1980)).

Federal Statutory Analysis

The Defendants and Intervenor argue that the ABC Act is not only expressly saved by Section 2 of the Twenty-first Amendment, it is also expressly authorized by the Wilson Act, the Webb-Kenyon Act, the Federal Alcohol Administration Act and the Twenty-first Amendment Enforcement Act. To find that Congress has authorized the challenged state action, congressional intent must be "unmistakably clear" and "expressly stated."South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 91 (1984) (holding that "Congress affirmatively contemplate otherwise invalid legislation is mandated by the policies underlying dormant Commerce Clause doctrine . . . `to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.'") (citations omitted). In fact, Congress has never in any law exempted intoxicating liquors from the realm of interstate commerce, although it has obviously authorized that commerce in liquor products can be addressed in special ways. In no law has Congress expressly authorized discrimination, and, in fact, the Twenty-first Amendment Enforcement Act of recent vintage specifically denies to the states any power in excess of that "which states already possessed as decreed by the Supreme Court. 27 U.S.C. § 122a(e)(1) (2).

The Wilson, Webb-Kenyon. and Federal Alcohol Administration Acts comprise the bulk of the federal statutes that regulate intoxicating beverages. Codified at Title 27 of the United States Code, these acts provide federal regulation of intoxicating liquors in two parts: (1) Transportation in Interstate Commerce, §§ 121-122; and (2) Federal Alcohol Administration, §§ 201-219(a).

The combined legislation comprises one of the shortest titles in the United States Code. Both the Wilson and Webb-Kenyon Acts were enacted prior to passage of the Eighteenth Amendment. They were "re-enacted" along with the passage of the Twenty-first Amendment to allow "dry states" to remain so following the repeal of national prohibition. of course, Virginia chose not to remain dry.

Though not relevant here, Title 26 of the United States Code governing the Internal Revenue Service also contains provisions for taxation relating to intoxicating liquors.

The regulations promulgated pursuant to Title 27 are voluminous and address everything from the federal regulation of the types of premises upon which a producer may establish a manufacturing plant to federal taxation of alcoholic products from point of origin to ultimate consumption. See, e.g., 26 U.S.C. § 5001, 7652: 27 C.F.R. § 19.21-26, 19.46-53, 19.152; and parts 22 (tax-free alcohol) and 194 (liquor dealers). The regulations strictly regulate, among other things, the proper methods for producing, storing, labeling, distributing, bonding and disposing of wine, beer and distilled spirits, including how instruments are to be gauged and standards for weights and measures of intoxicating liquor. 27 C.F.R. parts 24, 25 and 30.

Congress has expressed a particular concern with national conformity of labeling in order to inform the public "about the health hazards that may result from the consumption or abuse of alcoholic beverages . . ." 27 U.S.C. § 213. In fact, "[i]t is therefore the policy of the Federal Government in promoting the health and safety of the Nation's population . . . to exercise the full reach of fits] constitutional powers in order to establish a comprehensive Federal program . . ." to provide warnings "not impeded by diverse, nonuniform, and confusing requirements for warnings or other information on alcoholic beverage containers . . . sold in interstate commerce, but not. . . . within a single State." Id.

The Wilson Act

The Supreme Court held in Leisy v. Hardin, 135 U.S. 100 (1890), that the states could not prohibit the importation of alcohol In the absence of Congressional permission." 135 U.S. at 124-125. Congress enacted the Wilson Act in direct response to that decision in order to define when state statutes are operative. Section 121 therefore provides:

All fermented, distilled, or other intoxicating liquors or liquids transported into any State or Territory or remaining therein for use. consumption, sale, or storage therein, shall upon arrival in such State or Territory be subject to the operation and effect of the laws of such State or Territory enacted in the exercise of its police powers, to the same extent an in the same manner as though such liquids or liquors had been produced in such State or Territory, and shall not be exempt therefrom by reason of being introduced in original packages or otherwise.
27 U.S.C. § 121.

The statute permits the state, in an exercise of its police power, to regulate alcohol traffic after the liquor is transported into the state in interstate commerce as if it were a product that had been produced within the state. The Wilson Act "simply removed an impediment to the enforcement of the state laws in respect to imported packages in their original condition." In re Rahrer, 140 U.S. 545 (1891) (holding the Wilson Act constitutional). However, the Wilson Act did not prevent the shipment of alcoholic products in interstate commerce to an ultimate purchaser as long as the purchaser did not make it available for resale in violation of state law and, therefore, it does not have a direct impact on the statutory scheme under consideration. Rhodes v. Iowa. 170 U.S. 412 (1898).

The Webb-Kenyon Act

Congress later passed the Webb-Kenyon Act as a further aid to the states "to extend the prohibition against the introduction of liquors into the states by means of interstate commerce." Adams Express Co. v. Kentucky, 238 U.S. at 199 (interpreting as meaningless the title of the Act that indicates it divests liquor of its interstate character in certain cases where the language of the provision could not "more plainly indicat[e] the purpose of Congress [was] not to prohibit all interstate shipment of liquor into so-called dry territory, and to render the prohibition of the statute operative only where the liquor is to be dealt with in violation of the local law of the state . . . [s]uch shipments are prohibited only when such person intends that they shall be possessed, sold, or used in violation of any law of the state wherein received.") The purpose of the Act was to allow dry states to prohibit the importation of liquor if the manufacture, possession and consumption of liquor was totally prohibited in those states. Cong. Rec. 2792 (Feb. 8, 1913); and Cong. Rec. 2914 (Feb. 10, 1913).

Section 122 of the Act therefore provides in pertinent part:
The shipment or transportation, in any manner or by any means whatsoever, of any spirituous, vinous, malted, fermented, or other intoxicating liquor of any kind from one State . . . or from any foreign country into any State . . . which said spirituous, vinous, malted, fermented, or other intoxicating liquor is intended, by any person interested therein, to be received, possessed, sold, or in any manner used, either in the original package or otherwise, in violation of any law of such State . . . is prohibited.
27 U.S.C. § 122.

By interpreting the shipment of liquor via a common carrier from an out-of-state supplier directly to a consumer as an interstate transaction, the Supreme Court held that the Webb-Kenyon Act "has no application and no effect to change the general rule that states may not regulate commerce wholly interstate." Adams Express Co. v. Kentucky," 238 U.S. at 202 (also holding the common carrier was "bound before delivery . . . to be circumspect and to use ordinary care to learn the purpose for which it was to be used.") The legislative history and the Supreme Court's interpretation of the Act therefore result in the conclusion that the purpose of the Webb-Kenyon Act was to allow dry states to remain so by prohibiting direct shipment in interstate commerce — a right the state would not otherwise have under the Commerce Clause without the specific authority of Congress. Of course, Virginia chose a different course and the Webb-Kenyon Act is therefore of no avail to the Defendants and Intervenor.

The Supreme Court has also relied on the reasoning and legislative history of alcohol regulation in Kentucky where the consumption of liquor had always been legal, noting that the Kentucky Court of Appeals even held that possession and personal use of liquor "for his own comfort" was an individual's constitutional right, provided it did not interfere with the rights of others. Adams Express Co. v. Kentucky, 238 U.S. at 200-201. Only in America.

The Federal Alcohol Administration Act

Sections 201 through 219a of Title 27 comprise what is known as the Federal Alcohol Administration Act, vesting the Secretary of the Treasury with enforcement powers and creating the Bureau of Alcohol, Tobacco and Firearms. The Act's purpose is "to regulate interstate and foreign commerce in distilled spirits, wine, and malt beverages, to enforce the Twenty-first Amendment, and to protect the revenue and enforce the postal laws with respect to distilled spirits, wine, and malt beverages" by establishing a basic permit scheme to accomplish its goal. 27 U.S.C. § 203. Sections 203(a)(1)-(') make it unlawful. except by federal permit, to import, or, for an importer to sell or transport intoxicating liquors — directly or indirectly — in interstate or foreign commerce. Sections 203(b)(1)-(2) require a federal permit in order to produce, bottle, warehouse, or, for such producer to sell to sell or transport intoxicating liquors — directly or indirectly — in interstate or foreign commerce. Sections 203(c)(1)-(2) require a federal permit to purchase intoxicating liquors for resale at wholesale, or, for such a retailer to sell to sell or transport intoxicating liquors — directly or indirectly — in interstate or foreign commerce. The statute specifically exempts from the permit requirements "any agency of a State or political subdivision thereof" and its agents.

Section 204(a)(1)-{2) defines persons who are entitled to be issued basic permits and § 204(b) sets out a due process appeal when a permit is refused. Permits may be refused upon a finding by the Secretary of the Treasury that the applicant or, with respect to corporate applicants, any officer, director or major stockholder, has a state or federal felony conviction within the previous five years or a misdemeanor conviction within three years. The statute grants further discretion in the Secretary to allow refusal of a permit if it is likely that the applicant's business experience, financial standing, or trade connection is not likely to allow for operation to begin in a timely way or for operations to be maintained in compliance with the law. 27 U.S.C. § 204(a)(1)-(2).

Notably, § 205 addresses "unfair competition and unlawful practices" and is a clear Congressional emphasis on the competitive nature of interstate commerce as it relates to "any person engaged in business as a distiller, brewer, rectifier, blender, or other producers, or as an importer or wholesaler, of [intoxicating liquors] or as a bottler, or warehouseman and bottler, of distilled spirits, directly or indirectly or through an affiliate." 27 U.S.C. § 205. The section prohibits such a person from engaging in exclusive agreements while engaging in interstate commerce or any practice that has a restrictive effect on interstate commerce. 27 U.S.C. § 205(a). "Tied houses," also prohibited by the statute, are structural inducements designed to cause exclusivity such as a manufacturer holding a license or interest in the retailer itself or its premises; acquiring interest in real property owned, occupied, or used by a retailer in the conduct of his business or by furnishing the retailer with any "thing of value; by paying or crediting the retailer for advertising and promotions; by guaranteeing a loan; by extending extraordinary credit; or by requiring the retailer to take and dispose of a product quota. 27 U.S.C. § 205(b); 27 C.F.R. § 6.1-6.153. Among other things, the statute further prohibits commercial bribery that restrains activity in interstate commerce; consignment sales agreements (other than bona fide returns after a sale) as they substantially restrain interstate and foreign commerce; and deceptive advertising. 27 U.S.C. § 205(c)-(d), (f). The statute includes a substantial and strict labeling requirement that addresses both consumer protection and promotion of interstate commerce. 27 U.S.C. § 205(e): 27 C.F.R. Ch. 1. Part 4. The Act also includes several criminal offenses relating to bulk sales, bottling and interlocking directorates. 27 U.S.C. § 206-207. Accordingly, it is clear that the Federal Alcohol Administration Act does not sanctify or shield the state action at issue in this case.

In the C.F.R. § relating to Title 27, there are also instances where the regulations' scope specifically note that compliance with the federal regulation does not "exempt any person from the requirements of any State law or regulation." 27 C.F.R. § 6.1.

Bulk sales are sales of intoxicating liquors in containers of more than one wine gallon or a liquid measure of 231 cubic inches. 27 C.F.R. § 1.10, 4.10. An interlocking directorate occurs when an individual is an officer or director in more than one company engaged in the production of alcoholic beverages. 27 U.S.C. § 208(a). With a few exceptions, an interlocking directorate is forbidden in order to prevent any restraint or limit in competition in interstate or foreign commerce.

The Twenty-first Amendment Enforcement Act of 2000

On October 28, 2000, President Clinton signed into law a congressional amendment to Title 27 that includes a provision that Defendants read as having "clearly and positively spoke[n] to the issue of alcoholic beverage commerce in the states. thereby rendering the `dormant' or `negative' Commerce Clause inapplicable." (Defs.' Am. Mot. in Supp. of Summ. J. at 2); see Pub.L. 106-386. effective Jan. 25, 2001; codified at 27 U.S.C. § 122a. The Act creates a civil cause of action to enforce state laws in federal court by way of injunction. However, §§ 2(e)(1)(2) of the Act specify that the statute is to be construed as applicable to state law as the Twenty-first Amendment has been interpreted by the Supreme Court, including as it relates to other constitutional provisions. Therefore, the statute cannot possibly be interpreted as the Defendants assert as "render[ing] the `dormant' or `negative' Commerce Clause inapplicable." (Defs.' Am. Mem. at 2). Although the legislative history of the Act includes communications from many state attorneys general (including the Attorney General of Virginia) that support the need for the statute in order to prevent, among other things, underage drinking and driving, the plain language of the statute creates only a federal forum for states to seek injunctive relief to enforce their otherwise valid constitutional statutes relating to intoxicating beverages.

Dormant Commerce Clause Not Pre-Empted

Barriers to trade are analyzed under the dormant Commerce Clause where Congress has not acted. The Defendants and Intervenor argue that Congress "clearly and positively spoke to the issue of alcoholic beverage commerce in the states, thereby rendering" the dormant Commerce Clause inapplicable. (Def.'s Mem. in Opp'n to Pls.' Mot. Summ. J. at 4). However, this Court concludes that while Congress has expressly exercised its Commerce Clause power to regulate interstate and foreign commerce in alcoholic beverages, including licensing, labeling, integration, and other areas including importation and distribution, it has never abdicated to the states its power nor has it expressly and unmistakably legislated authorization for the states to erect unconstitutional barriers involving the free flow of commerce, including that involving alcoholic products. See generally, Title 27, United States Code.

Lamenting the derogation of the broad power of regulation once thought endemic to the Twenty-first Amendment, Justice Stevens observed the "decisions of Brown-Forman and Bacchus demonstrate, however, that [the Twenty-first Amendment] is toothless except when freedom of speech is involved." City of Newport v. Iacobucci, 479 U.S. at 99 (Stevens, J., dissenting). Justice Stevens also criticized the City of Newport court for its decision in light of its rejection of "the notion that a State may `exercise its power under the Twenty-first Amendment in a way which impinges on the Establishment Clause . . ." Id. (citing Larkin v. Grendel's Den, Inc., 459 U.S. 116, 122, a 5 (1982)).

Core Concerns

If the state can articulate that it has a legitimate state interest under the core concerns of the Twenty-first Amendment that are unrelated to economic protectionism and can demonstrate that there are no other nondiscriminatory means of accomplishing the same legitimate goals, then the statutory scheme will survive the strict scrutiny analysis. Hunt v. Washington State Apple Adver. Comm'n, 432 U.S. at 353; Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714 (1984) (analyzing "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, not withstanding that its requirements directly conflict with express federal policies"). If, however, the state cannot show that the statutes are designed to promote the core concerns of the Twenty-first Amendment or such concerns are overshadowed by economic considerations, the statutory scheme is rendered unconstitutional. See TFWS, Inc. v. Schaefer, 242 F.3d 198, 212 (4th Cir. 2001) (holding where state liquor laws violate the Sherman Act in contravention of the Commerce Clause, state liquor regulatory policies must "directly serve the interests it proffers under the Twenty-first Amendment," citing California Liquor Dealers Ass'n v. Midcal Aluminum, Inc. 445 U.S. 97, 109 (1980)). In addition, if the state shows legitimacy, but the court finds that there are other nondiscriminatory means of accomplishing the same goals, then the statutory scheme will likewise fail. Bacchus Imports, Ltd. v. Dias 468 U.S. 263, 267 (1984); North Dakota v. United States 495 U.S. at 432 (holding that states possessed the power to promote temperance through regulation); South Dakota v. Dole, 483 U.S. at 210 (while not a core power itself, states set the minimum drinking age and Congress may create a funding incentive under its spending power to induce states to conform with a national minimum drinking age).

Virginia's interest in temperance is firmly rooted in the history of the ABC Act as well as the Twenty-first Amendment. In its promotion of temperance, Defendants argue that it has "virtually limitless" state control over the distribution process as its core power under the Twenty-first Amendment. (Defs.' Am. Mem. at 37-40). The state clearly has authority to regulate the importation and distribution of liquor consistent with its Twenty-first Amendment authority and the legitimate exercise of its police powers. However, Defendants propose an interpretation of limitless regulation, regardless of other constitutional provisions and specific acts of Congress. That concept is too restrictive where, at best, the Supreme Court has relied on the tenet that the state has "`virually complete control' over the importation and sale of liquor and the structure of the liquor distribution system," but that its carte blanche only extends "within the area of its jurisdication." North Dakota v. United States, 495 U.S. at 432 (emphasis added).

Intervenor misstates that the Plaintiff is the party with the burden to prove that Virginia could accomplish its legitimate goals through nondiscriminatory means. (Intervenor-Defendant Mem. in Supp. of Mot. Summ. J. at 22). Once Plaintiffs have met their burden on the facial challenge to the ban on out-of-state direct shipments as they have, it is Defendants' burden to prove that there is no other nondiscriminatory means of accomplishing its duty. See Waste Mgnt. Holdings v. Gilmore, 87 F. Supp.2d 536, 544 (holding that it was the state's duty to show that no reasonable alternatives existed), aff'd, 2001 WL 604325 (confirming the burden is on the defendant).

When Virginia's ABC Act was originally enacted in 1933 and it adopted its General Principles for state liquor control, temperance was the first item on the list. While promotion of temperance through strict control is a legitimate state interest, Virginia's professed interest in this core concern as justification for the subject statutory scheme is fraught with contradictions that lead the Court to conclude its means are not justified by its temperance policy. For instance, on the one hand, the ABC stores purvey a variety of distilled spirits that are produced both domestically and internationally. The stores do not carry all brands of distilled spirits that a consumer may wish to purchase but, if available, special orders can be placed if the consumer agrees to purchase a full case, a dozen 750 milliliter bottles. This scenario obviously has one of two practical effects. The consumer will either abandon his or her search for the brand of choice because of the large quantity required for a special order or the consumer will capitulate to the requirement and order the full case. If the consumer chooses the former, the state may have achieved a temporary goal of promoting temperance with respect to a certain brand — but there is no reason to believe that the consumer will abandon his or her desire for the variety of liquor being sought. If the consumer chooses the latter course, then the state has woefully failed to promote temperance by forcing a consumer to buy a whole case of hard liquor. Either way, it is a fiction to argue that this arrangement promotes temperance. It may make business sense to preserve the state's monopoly on liquor, but the policy cannot reasonably promote temperance.

It may be that a consumer may not be able to persuade an out-of-state manufacturer or distributor of their preferred brand of hard liquor to direct ship by the bottle if the direct shipment ban were not in effect, but if so, it would be a permissible commercial decision made in the free market arena unrestrained by a state-erected barrier to interstate commerce.

It is also a legitimate concern, of course, that the Commonwealth be able to collect taxes on sales of alcoholic beverages to fund ABC operations, prevention and enforcement activities. However, such a concern cannot be the driving force behind the statutory scheme. While the Plaintiff wineries profess that they will "collect and remit to Virginia the taxes arising" out of the interstate shipment of wine (Am. Compl. at 23, ¶ 52), the Commonwealth is concerned not only because of the difficulty in collecting state-levied taxes from out-of-state entities, but also because it has no right to collect such sales taxes extraterritorially. Quill Corp. v. North Dakota, 504 U.S. at 309. Virginia's concern is well-taken in this regard; however, this concern operates to debase the argument that the ban on importation is anything more than economic protectionism which, of course, is a prohibited rationale for upholding the statutory scheme in the face of the Commerce Clause.

Distilled Spirits Direct Shipment Prohibition

The Plaintiffs' efforts to fashion their arguments regarding the importation and distribution of distilled spirits (hard liquor) into a dormant Commerce Clause question must fail under a consistent application of the required constitutional analysis. While it may be frustrating to consumers that they may not be able to seek out, bargain for, and purchase by direct shipment, goods of their choosing in quantities they desire, the requirement that all distilled spirits pass through the state-controlled three-tier system is required of all distilled spirits, regardless of the source. Therefore, that part of the statutory scheme, dealing with distilled spirits, is neutral on its face and does not present a dormant Commerce Clause issue because in-state and out-of-state entities are treated exactly the same. Accordingly. because there is no local preference and instate competitors must enter the market in the same way as out-of-state sources of hard liquor, there is no discriminatory impact and hence no constitutional dilemma. While it is true that Virginia consumers are deprived of the ability to purchase the distilled spirits of their choosing directly from a vendor for direct shipment to their homes, any reasonable balancing test must result in the conclusion that the impact on interstate commerce is not "clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). Therefore, it is unnecessary to consider whether there are other nondiscriminatory means of addressing the legitimate state concerns of promoting temperance, inspection and tax activities while preventing diversion and illegal possession and consumption as touted as the objectives of the three-tiered system. Moreover, even if such an analysis were involved, the required acceptance of the factually-based assertions of the Defendants and Intervenor on the purposes of the three-tier system so as to establish a genuine dispute as to material fact are enough to preclude summary judgment. Accordingly, this Court finds that the state statutory scheme regarding distilled spirits to be constitutional.

At the same time, factual issues raised by or at least reasonably inferred from the Plaintiffs' assertions likewise present a genuine dispute of material fact so as to preclude summary judgment on the issue of whether there are other nondiscriminatory means to achieve the same legitimate objectives involving the distribution of distilled spirits if the issue was to be reached in the analysis. For example, there is the basis to assert on the strength of the North Dakota precedent alone that there are other nondiscriminatory means to achieve the same legitimate goals whereby, for example, the state may properly demand that the common carriers that deliver the direct shipments hand deliver to a person and confirm that the recipient is a person of legal drinking age before relinquishing control of the alcoholic beverages. There is no practical difference from requiring such a procedure and that required of store clerks or bartenders who regularly check customers for valid identification to verify age before allowing the sale of alcoholic beverages. Furthermore, common carriers routinely are required by the terms of some delivery agreements to hand-deliver packages to the named recipient, to see picture identification, and to obtain signature. In any event, it is not necessary or appropriate to evaluate such alternatives in this analysis.

In-state Wine and Beer Preference

Though Virginia's alcoholic beverage control regulations serve many legitimate interests such as promoting temperance, preventing diversion and collecting taxes, the preference for instate producers and local markets with respect to direct shipments of wine and beer does not serve this end. Heublein, Inc. v. Dep't of Alcoholic Beverage Control, 237 Va. at 199. While the state undoubtedly has an interest in preventing all of the alcohol-related abuses it enumerates in its arguments, the preference for in-state wineries and breweries cannot be sustained because it is but a pretext for exclusion. Defendants and Intervenor advance what appears to be a cogent argument that because Virginia licensees are subject to inspection and enforcement, the ABC can monitor and prevent such things as direct-shipment sales to minors and distribution of adulterated beverages. However, in-state direct shipments are subject to the same perils as out-of-state shipments, and the Defendants and Intervenor are not arguing that there are any problems in regard to the state's legitimate core concerns with the former system. The Defendants would have the Court believe that the only way to enforce Virginia's drinking age, purity and diversion laws is by forbidding out-of-state direct shipments because those business premises cannot be physically monitored by Virginia ABC Agents. However, their arguments ring hollow because of the apparent lack of any problems with existing in-state direct shipments and the fact that the degree of control that is exercised under the state's authority of inspection in regard to the instate preference is significantly less than what exists in regard to the full force of the three-tier system that applies to all out-of-state sources. Though the Court finds that enforcement is a valid and important concern, banning direct shipments from out-of-state while permitting the same activity in-state is not the only means of exercising the state's police power and performing its public safety duty. See Bacchus Imports, Ltd. v. Dias, 468 U.S. at 272.

Furthermore, the existence and activities of the Winegrowers Advisory Board cannot be disguised. It is comprised of officers appointed by the Governor and includes as an ex officio member the Chairman of the Alcohol Beverage Control Board. Va. Code Ann. § 3.1-1060. State law authorizes funding for "viticultural and enological practices and promotion, marketing, and education programs deemed necessary or advisable to accomplish the objectives set forth in this chapter." Va. Code Ann. § 3.1-1061. The Commissioner of the Winegrowers Advisory Board is vested with the "power and duty," among other things, to handle the funding; to enter agreements to develop "new or improved markets or marketing methods for wine and grape products"; and to enact regulations as may be necessary to accomplish the purposes of this chapter with respect to vines and wined used or produced in Virginia. Va. Code Ann. § 3.1-1062. Given the law and the stated policy. Virginia cannot claim with a "straight face" that its ban on direct shipment is for any reason other than economic protectionism.

It is the Defendants' and Intervenor's burden to prove that there exists no other means of promoting temperance, preventing diversion, and addressing the other legitimate public safety and health objectives involved. They have failed to meet this burden. They have not produced any meaningful evidence which the Court can accept as creating a genuine dispute of a material fact regarding any justification for the discriminatory policy. See Waste Mgnt. Holdings, Inc. v. Gilmore, 87 F. Supp.2d at 543; 2001 WL 604325, at *18, (holding that the Defendants must produce sufficient evidence to prove that no nondiscriminatory alternatives exist that are adequate to protect local interests.)

The Court even extended the discovery period by ninety days, long after the case had commenced, in response to the Defendants' and Intervenor's pleas that they had not understood that the Plaintiffs' claims applied to all alcoholic beverages as had been previously ordered and reiterated by the Court on repeated occasion. Yet, even with the additional opportunity, the Defendants and Intervenor failed to present evidence that there are no other nondiscriminatory means to promote the same core concerns supposedly promoted by the discriminatory system that is in place. Perhaps they failed to produce such evidence because if they had attempted such an offer, they would have been confronted with the daunting task of explaining why there are no apparent problems in achieving the same goals with the existing system allowing in-state direct shipment.

Out-of-State Wine and Beer Direct Shipment Prohibition

A state can prohibit the direct shipment of an alcoholic beverage as long as there is no distinction based on place of origination. The in-state preference for the Virginia wine and beer industry therefore is impermissible as violative of the dormant Commerce Clause. Although it is the ban on interstate direct shipment imposed by the Virginia regulation scheme that impacts on commerce and which therefore is subject to constitutional challenge, it is the Virginia exception that is part of the scheme that causes the ban to have other than a neutral effect. Therefore, if the Virginia exception or preference can be stricken, or otherwise rendered neutral, the remaining portions of the regulatory scheme would equal in practical effect the regulatory scheme involving distilled spirits that is neutral and not subject to a strict scrutiny analysis. However, it is not clear that the non-violative portion of the statutory and regulatory scheme can be so interpreted and it is not appropriate for the Court to infer legislative will. Therefore, it is appropriate to only recommend that the constitutional challenge to the entire ban be rejected as long as the in-state preference in all its various forms and applications is found to be constitutionally impermissible.

Virginia Wine Only For Sale

One final issue remains to be addressed in regard to the preference given to the Virginia wine industry where, by law, only ABC stores sell distilled spirits and ABC stores only sell Virginia farm wines. The Defendants and Intervenors argue it is a permissible activity and therefore constitutional practice because the state is simply choosing which brands that it chooses to offer for sale as does any free market participant. See Wyoming v. Oklahoma, 502 U.S. at 459 (citingReeves Inc. v. Stake, 447 U.S. 429, 436-437 (1980)).

The issue regarding the prohibition against any out-of-state manufacturing or distribution source being eligible for licensure in Virginia clearly involves a neutral ban that is further protected from constitutional challenge by the legitimate interest of the state in having control over such sources which it can do only within its borders while also precluding vertical integration of producer and retailer. Moreover, it is fair to assume that the issue is rendered moot in any event by the elimination of the in-state preference for wine and beer because there would be no incentive for out-of-state licensure if everyone and everything is subjected to a direct shipment ban.

Whether the ABC can avail itself of the "market participant exception" to the dormant Commerce Clause is not an easy question. It is correct to assert on the one hand that there is nothing in the Constitution that prohibits a state from favoring its own citizens when the state is acting as a market participant rather than a market regulator. Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810 (1976). Indeed, strong public policy concerns support the market participant exception from application of the Commerce Clause where each state is vested with the responsibility "as guardian and trustees for its people." Heim v. McCall, 239 U.S. 175, 191 (1915) (citations omitted). However, in this instance, not only does the ABC Board control the state-run monopoly on liquor distribution and act as the sole distributor and proprietor of hard liquor, it also regulates all aspects of the beer, wine and distilled spirits marketed under the ABC Act which is a comprehensive state statute with the primary purpose of controlling all alcohol distribution in the state.

Undoubtedly, the state directly participates in the market for distilled spirits through its ABC stores. However, it also maintains a monopoly by way of its regulatory power and thus competes against no one. The state is therefore not entitled to a market participant exception with respect to its monopoly on distilled spirits so that one must examine whether its limited selection of offerings of distilled spirits together with a ban on direct shipment is violative of the dormant Commerce Clause. Based on the facts and the questions before the Court, the monopoly in regard to distilled spirits appears neutral with respect to the treatment of in-state and out-of-state product. While it is true that the ABC stores do not carry all brands of liquor a consumer may want, the stores nevertheless treat all distilled spirits alike regardless of origin. The statutory scheme is neutral because there is no in-state preference as there is with wine and beer, there are no distilled spirits licensees which the state is promoting to the disadvantage of out-of-state purveyors, and, therefore, there is no facial or effective discrimination involving distilled spirits.

However, the role of the ABC and how it treats in-state wineries and off-premises beer and wine licensees is quite different. As with distilled spirits, the ABC is the exclusive regulator of wine and beer in Virginia, but it is also a purveyor of wine in Virginia. Virginia law compels the ABC to sell only Virginia wine in its state liquor stores. The state is therefore both a regulator and a competitor which prevents the application of the market participant exception in regard to the state's sale of wine because the Commerce Clause acts as an "implied restraint upon state regulatory powers . . . involving interstate commerce." United Bldg. Const. v. Camden, 465 U.S.208, 220 (1924). Though the state competes with other wine retailers — which is closer to the free market which undergirds the exception — the state's preference for in-state wine clearly has the purpose of subsidizing the local wine market to the exclusion of all others. See New Energy Co. of Ind. v. Limbach, 486 U.S. at 277. While the wine preference is "a discrete activity focused on a single industry," it is nonetheless a discriminatory scheme favoring local winegrowers and producers. See Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. at 591 (citing Bacchus Imports, Ltd. v. Dias, 468 U.S. at 270-27 1, and West Lynn Creamery Corp. v. Healy, 512 U.S. at 199, to explain why discriminatory regulatory schemes designed to protect local industries cannot fall within the market participant exception as otherwise legitimate subsidies.).

The ABC stores do not sell beer of any kind regardless of origin.

Defendants argue that the state's dual role of retailer and regulator can be bifurcated — that its regulatory power is separable from its role as a market participant. (Defs.'Am. Mem. in Supp. of Mot. Summ. J. at 51: Defs.' Reply Mem. in Opp'n to Pls.' Mot. Summ. J. at 8-9). To the contrary, the ABC's dual roles as regulator and wholesaler/retailer cannot be separated. The ABC. by law. is vested with expansive regulatory and enforcement power which is intertwined with its function as the sole liquor retailer in the state. At the same time, with respect to wine, the state is a retailer competing with other retailers. State law and the ABC's own statutory regulatory power give rise to the facial discrimination against out-of-state wine products which renders its sale of only in-state wine in state liquor stores to be a per se violation of constitutional proscriptions. Furthermore, the Court need not inquire into the extent or impact of the discrimination, only whether the discrimination exists in order to conclude that the roles of regulator and market participant cannot be separated to a sufficient extent to preserve the market participant exception for Virginia.

The state does have a legitimate interest in promoting its local products and should do so vigorously. Hughes v. Alexandria Scrap Corp., 426 U.S. at 809, 816. The state, however, has not shown — nor have they offered any argument whatsoever — that there are no other non-discriminatory means of promoting the local wine industry except through a ban on out-of-state wine sales at state liquor stores. The Supreme Court has offered ample guidance on the types of permissible subsidies and promotions in which a state may engage in advancing local concerns. See, e.g., Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. at 593-594 (discussing cases in which the Court upheld preferential subsidies to promote local industry or advance local concerns). The Virginia scheme is not such a subsidy, but an impermissible form of economic protectionism that is prohibited by the dormant Commerce Clause.

There are several courses of action the General Assembly may take to rectify its impermissible preference for in-state wine. The ABC can do what is done now with distilled spirits by offering an array of choices (including special order items); or as with beer, not offer any wine for sale and defer to the private licensee. of course, the decision is the legislature's in any event.

Possible Remedies

Having decided that in-state preferences for Virginia wine and beer are unconstitutional forms of discrimination, the Court must decide whether the related statutory provisions are severable from the rest of the ABC Act or whether the entire statutory scheme must be stricken. Plaintiffs go so far as to argue that the offensive provisions cannot be severed from Title 4.1 because the entire ABC Act is fraught with discrimination against out-of-state interests and, therefore, must be stricken.

Whether unconstitutional provisions of state statutes are severable from the rest of an act is a question of state law. United States Dept. of Treasury v. Fabe, 508 U.S. 491, 510 (1993). Under Virginia law, the Court must determine whether the Virginia General Assembly would have passed the ABC Act without the preference for in-state wine and beer in order to conclude whether only certain offending sections can be excised or whether the entire statutory scheme fails. The current version of the Act contains no severability clause manifesting the legislature's intent that should any provision of the Act be declared invalid that the rest of the Act should survive. Even where the legislature supplies such a severability provision, the Court must still determine whether the true intent of the legislature would be to pass a law absent the unconstitutional provision. Heublien, Inc. v. Dept. of Alcoholic Beverage Control, 237 Va. at 200, 376 S.E.2d at 81 (citing Richmond v. Beltway Properties, 217 Va. 376, 379, 228 S.E.2d 569. 572 (1976)). While the original bill contained substantially similar provisions as § 4.1209(2) permitting retail off-premises licensees to direct ship beer and wine to consumers (and also to persons outside the state unless forbidden to do so by the law of the receiving state), the proposed bills contained no ban on out-of-state direct shipment as in the current version of the Act. (App. A to Sen. Doc. 5, sections 18(b).(c) (h)). At that time, the law contemplated all importation of alcoholic beverages — including wine destined for local licensees — be consigned first to the Board. (Id., sections 43, 58(a)-(c)). Currently, not only may off-premises licensees receive and send shipments directly, farm wineries, wineries and breweries may produce beer and wine and ship their product directly to consumers. §§ 4.1-207(1), (5); 4.1-208(1), (4). These are but a few examples of developments in the ABC Act since the original inception of the law in 1933. It therefore appears that the Virginia General Assembly did, in fact, pass the offending provisions separately after passing the comprehensive Act regulating alcohol without direct shipment preferences. Heublien, Inc. v. Dept. of Alcoholic Beverage Control, 237 Va. at 200, 376 S.E.2d at 81 (citing Bd. of Sup. James City County v. Rowe, 216 Va. 128, 147, 216 S.E.2d (1975)).

Fortunately, there is also, again, guidance for the Court from the most authoritative source for interpreting an issue concerning Virginia law — the Virginia Supreme Court. Indeed, citing the Acts of Assembly, 1934, Chapter 94, § 68, the Virginia Supreme Court has held that other unconstitutional provisions of the Act are severable. Booth v. Virginia, 197 Va. 177, 88 S.E.2d 916, (1955) (striking down on due process grounds the statutory prohibition on alcohol possession by "an improper person" by holding the language to be unconstitutionally vague). It is therefore clear that the unconstitutional provisions can be segregated from the Act as a whole and while the Plaintiffs object to the constitutionality of the entire Act's closed system, the case law on which this opinion is based does not require the Court to recommend that the entire statutory scheme be declared unconstitutional. Nor does the Court choose to do so.


Virginia law authorizes Virginia wineries, breweries and off-premise licensees to direct ship their product to anyone, anywhere, if it is otherwise legal to do so. At the same time. Virginia law discriminates against out-of-state sources by prohibiting them the same ability to ship directly to Virginia purchasers. In addition, Virginia law permits only Virginia-produced wine to be sold in its state-operated stores while it regulates the distribution of all wine sold and distributed throughout the state. Such an obvious preference for equally-obvious economic advantage violates fundamental principles involving the Commerce Clause, even taking into consideration the nature of the goods involved and the impact of related constitutional and statutory mandates.

Whether a foreign state permits the direct importation of Virginia wine and beer products does not negate the impact of the Virginia scheme on interstate commerce.

The Court does not relish its duty to recommend that the portions of the ABC Act that violate the dormant Commerce Clause be declared unconstitutional, thereby eliminating the authority obviously intended by the legislature to permit Virginia farm wineries, breweries, and off-premise licensees to direct ship. However, there is no alternative, except to also recommend that the District Court stay a final order pending further appeal because it is less than clear that there would automatically be a statutory mechanism in place if the violative language were stricken from the various provisions, e.g., "other than wine or beer," for Virginia wine and beer sources to know what to do with their product if its direct shipment is prohibited. Presumably, the legislature would want to address the issues involved as it has over time. In doing so, the Virginia General Assembly may choose to abide by the elimination of the in-state preference if the Court's recommendation is adopted and clarify its statutory mandate so as to clearly subject Virginia farm wineries, breweries and off-premise licensees to the same restrictions as apply to all imported alcoholic beverages. On the other hand, the legislature may prefer to eliminate the ban on direct shipments of all alcoholic beverage products from whatever source altogether by following the lead of the state's current governor, the Honorable James S. Gilmore, III, who as Chairman of the Advisory Commission on Electronic Commerce espouses the concept of no state taxation on interstate electronic commerce activities. In any event, that decision is for the legislature to render and a stay of any final order declaring the subject provisions unconstitutional will allow sufficient time for the legislature, if it so chooses, to fashion a constitutionally-sound legislative remedy.

The qualifying phrases in such sections as §§ 4.1-310 ("other than wine or beer"), §§ 4.1-207(1), (3), (4), (5); § 4.1-208(6); and § 4.1-209(2), together with implementing Board regulations that authorize or otherwise relate to the in-state preference for direct shipment of Virginia wine, are examples of the offending provisions which must be stricken. Given the multitude and interrelationship of relevant statutes and regulations, it is not clear to the Court at present that the remedy is simply to strike offending language. Perhaps the submissions of the parties in their anticipated objections to this report will provide the clarification necessary to render a stay unnecessary or otherwise inappropriate. However, this Court prefers to await such clarification and defer to the District Court before concluding that the solution is so readily available.

The violative requirement restricting wine sales in ABC stores to Virginia products does not present such a problem as addressed in footnote 45.

The Commission was appointed by special act of Congress and issued its report and recommendation in April 2000. ADVISORY COMM'N ON ELEG. COMMERCE, REPORT To CONG., APRIL, 2000.

It is therefore recommended that the Plaintiffs' Motions for Summary Judgment and declaratory relief be GRANTED to the extent that those portions of the Virginia statutory scheme that create an in-state preference for wine and beer by permitting direct shipment of product to the consumer without having to first pass through a licensed wholesaler or retailer and requires that only Virginia-produced wine be marketed in state-owned and operated stores be declared unconstitutional as violative of Article I. section 8, clause 3 of the United States Constitution; that the remaining portion of the Plaintiffs' motions seeking to declare as unconstitutional the ban on direct shipments from out-of-state on beer, wine and distilled spirits be DENIED; and that the reciprocal portions of the Defendants' and Intervenors' motions for summary judgment be DENIED and GRANTED accordingly.

Let the Clerk forward a copy of this report and recommendation to the Honorable Richard L. Williams, Judge, United States District Court, and to all counsel of record. Because of the complexity of the issues and the length of this report and recommendation, counsel are granted an enlargement of time to August 29, 2001, pursuant to Fed.R.Civ.P. 6(a) and the local rules of this Court, to submit any written objections to the recommendation as provided for in 28 U.S.C. § 636(b)(1)(C).

It is so Ordered.


This matter is before the Court on several pending, non-dispositive evidentiary motions by all parties. In the interest of clarity, the Court's report and recommendation (report) for the District Court's review as to the dispositive cross-motions for summary judgment is provided separately.

In order to develop a full record, to avoid piecemeal litigation and to account for the complexity of the potential issues of fact and law, the Court granted the parties broad latitude in the discovery process despite the Court's initial perception, now confirmed, that the case is a facial challenge to a state statutory scheme that does not necessitate the resolution of any material factual dispute. The pending motions (not including the cross-motions for summary judgment) are identified generically as follows:

This Court extended the period for discovery by ninety days, even though the matter bad already been pending for many months.

A. By the Plaintiffs —

1. Motions to exclude the reports and/or testimony of defense expert witnesses, Dr. James Koch, William T. McCollum, Chris Custis, Roger Stevens, Nancy Schulte, and W. Samuel Sadler (docket entry nos. 130-131, 133-134, 135-136, 137-138);
2. Motions for the Court to take judicial notice of various facts certified as true and correct by counsel or other identified source (docket entry nos. 164-165).

B. By the Defendants —

1. Objections and motions to strike or otherwise exclude certain testimony and exhibits offered in support of Plaintiffs' motion for summary judgment (docket entry nos. 141, 152).

C. By the Intervenor —

1. Motion to exclude hearsay, previously undisclosed expert testimony, and other identified evidence provided in support of Plaintiffs' motion for summary judgment (docket entry nos. 144-145).

The Court has reviewed all relevant materials and the reasons for consideration of related issues and standards are further addressed in the accompanying report on the cross-motions for summary judgment to be considered in conjunction with this Order. It is accordingly ORDERED that:

1. The Plaintiffs' motions to exclude the proposed expert reports and related testimony of Dr. James Koch, William T. McCollum, Chris Custis, Roger Stevens. Nancy Schulte, and Samuel Sadler are GRANTED in part and DENIED in part. The motions to exclude are granted to the extent that such proposed evidence that is not referenced in the Court's report is irrelevant to the resolution of a facial constitutional challenge (Fed.R.Evid. 402) or lack a sufficient foundation (Fed.R.Evid. 702) to validate what is otherwise viewed as mere speculation on such issues as what impact the direct shipment of alcoholic products from out-of-state sources would have on legitimate public health, welfare and safety concerns of the Commonwealth of Virginia or the supposed "ease" with which out-of-state producers can compete in Virginia. See, e.g., Aff. of Dr. James Koch, at 7 ("[I]t is relatively easy for out of state wineries to enter the Virginia market . . . it is relatively easy for them to leave the market.") The same motions are DENIED to the extent that any of the subject information is referenced in the accompanying report;
2. The Defendants' and Intervenor's various objections and motions to strike or exclude evidence are likewise GRANTED in part and DENTED in part to the extent that the subject information is or is not referred to in the report concerning the cross-motions for summary judgment; such evidence that is not referenced in the report is irrelevant (Fed.R.Evid. 402). without proper foundation, lacks probative value (Fed.R.Evid. 702). or has been offered in violation of rule and procedure such as the requirement for the timely designation of proposed expert witnesses ( Fed.R.Civ.P. 26);
3. The Plaintiffs' motion to take judicial notice of "a variety of facts" (docket entry nos. 164-165) is DENIED in its entirety because even though several specifications (nos. 1, 2, 3, 4, 6, 11, 13, 14, 15 and 22) constitute official records which could provide the basis for taking judicial notice pursuant to Fed.R.Evid. 201, the information contained therein is either irrelevant (Fed.R.Evid. 402), without proper foundation, or otherwise lacks probative value Fed.R.Evid. 702) to be admissible; and
4. All remaining motions, if any, are DENIED as moot inasmuch as they are not necessary for a resolution of the substantive motions for dispositive relief.

Including all evidence which the Plaintiffs have attempted to only introduce by sworn statement of counsel which is not otherwise admissible in the form presented.

It is ludicrous, for example, to suggest that the Court should take judicial notice of the factual assertion in specification 9 that is offered only by affidavit of counsel: "the fact that it is the experience of States having direct sales and delivery of wine, such as California, that the direct importation of a product that was harmful to the consumer are rare to non-existent. Plaintiff counsel's time, effort and attendant expense would have been better spent (especially with the expanded discovery opportunity provided) by obtaining such evidence in an admissible fashion. The Court could have utilized it in addition to relying on the obvious conclusion that the sale of beer and wine to minors cannot be but so much of a problem or concern to the Defendants since the in-state preference for direct shipment of those products that has been in place has allowed for such a circumstance over time without apparent problem just as much, if not more so (for geographical and timing issues) than if direct shipment were allowed from out-of-state sources as well. Another example of why the proffered records or information is inadmissible is specification number 13 which sets forth that official state documents reveal a certain level of political contributions by Virginia wine and beer wholesalers over a specified period of time. The Court takes judicial notice that the official records involved disclose such information; however, the Court finds that the information does not have any relevance to the issues under consideration without an appropriate foundation.

Let the Clerk forward a copy of this Order to all counsel of record, including counsel for amicus curaie.

It is so Ordered.

Summaries of

Bolick v. Roberts

United States District Court, E.D. Virginia, Richmond Division
Jul 27, 2001
Civil Action No. 99CV755 (E.D. Va. Jul. 27, 2001)
Case details for

Bolick v. Roberts

Case Details

Full title:CLINT BOLICK, et al., Plaintiffs, v. CLARENCE ROBERTS, et al., Defendants

Court:United States District Court, E.D. Virginia, Richmond Division

Date published: Jul 27, 2001


Civil Action No. 99CV755 (E.D. Va. Jul. 27, 2001)