Sean O’Leary is an authoritative source on the liquor regulatory system, and has successfully defended DTC shipping models against numerous state regulatory challenges. He authors the influential blog Irish Liquor Lawyer.
Wine lovers and people who believe the U.S. Constitution’s limits on government powers are important to society should be concerned: An unelected commission threatens to tear up the Constitution in the name of limiting wine shipping.
Over the last several years the Uniform Law Commission (ULC) considered an Act — the Alcohol Direct-Shipping Compliance Act Draft (ACT) — which started out as a project on how to facilitate direct shipping for beer and spirits, and then morphed into a project on how to punish the direct shipping of wine. Ironically, the ULC met in Philadelphia, the same location where the Constitutional Convention of 1787 occurred. But that is where the similarities end. The ACT is riddled with constitutional issues and usurps safeguards against government overreach in the name of meeting policy goals.
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This article will demonstrate how the ULC ignores the Constitution in the name of enforcing wine shipping laws, and why this should concern us as citizens.
What Is the Uniform Law Commission?
The ULC exists to draft model acts that provide states with a road map for shaping legislation. In terms of the ACT, the ULC has provided a template for enacting legislation to deal with the direct shipping of wine.
The ULC is a well-respected and nonpartisan commission consisting of members appointed by each state. The members are volunteer attorneys and serve as public servants in their role to provide clarity and stability to critical areas of statutory law. In the past, the ULC has drafted landmark model acts such as the Uniform Commercial Code, which governs the sales of commercial transactions in America, and has been adopted and followed by all 50 states.
Based on the history of states adopting the ULC’s model acts on important issues, one should not underestimate the probability of the ACT’s language becoming state legislation in the near future. The ACT’s contents should therefore be taken very seriously.
The Impact of Licensing Fulfillment Houses
Among the ACT’s provisions is a requirement that fulfillment houses become licensed, which raises multiple concerns.
Fulfillment houses work on behalf of client wineries and provide services such as storage and packing. A winery sends its product to the business for storage, and when a customer places an order, the winery requests that the fulfillment house take a bottle out of storage, pack it in a box, and prepare the package for common carrier pickup. The winery utilizes the fulfillment house’s common carrier account to ship products to its customers.
The ACT’s fulfillment house provision requires these businesses to submit to state jurisdiction. This is done under the guise that licensing fulfillment houses will aid the states in tracking unlicensed shippers of products. Problematically, the ACT believes its overarching policy of tracking wine shipping is more important than preserving constitutional standards of jurisdiction.
For a state to assert constitutional jurisdiction over an entity, that entity must maintain “minimum contacts” with the forum state. Minimum contacts means that in order for the government to haul a person into court, that person must have some connection with the state — either through physical presence or economic activity with the state’s residents. If there is no requisite connection with the state, the government is prohibited from taking action against a person.
Jurisdiction is a tricky gambit and a court’s interpretation of minimum contacts differs depending on the ruling. But what is undeniable is that an entity only establishes minimum contacts if it targets the state and has economic activity there. The fulfillment house is paid by the winery for its services and does not derive any funds from the in-state customer. The fulfillment house is only doing business at its location and typically does not do business in any other state, nor does it target the forum state.
In discussions over the draft language, one of the committee members indicated that fulfillment jurisdiction was justified based on a 7th Circuit case, where jurisdiction was established over an out-of-state cigarette seller with no physical presence in the state and a small amount of in-state sales.
However, this is not an apples-to-apples comparison to the fulfillment house, as the cigarette seller targeted the market and made sales to the state’s residents. A fulfillment house does not make in-state sales. The entity that sells the wine to the in-state resident is the one the state has jurisdiction over and not the fulfillment house.
If required to become licensed in every state, the fulfillment house would face a massive compliance burden. Unlike a winery that handles only its own products, a fulfillment house handles hundreds and even thousands of wineries. If licensing becomes the norm, and the fulfillment house needs to provide compliance data for the 46 states that allow winery direct shipping, the licensing and compliance requirements become expensive and burdensome.
As a result, many fulfillment houses may go out of business based on the expense, and compliance will act as a barrier to entry in the marketplace. What will be left are massive fulfillment houses surviving and small to medium players leaving the marketplace. With fewer fulfillment options available, small wineries will pay a higher price to ship products across the states.
Why Should We Care?
Constitutional jurisdiction is of paramount importance because it acts to protect us from government overreach. Jurisdiction acts as a barrier against arbitrary and capricious enforcement by government entities and requires a government entity to justify its action against a person. Without the Constitution’s jurisdictional limitations on government, there are no limits to the government bringing an action against someone, even if that person had no minimum contacts with the state.
The ACT unfortunately permits this constitutional violation because it solves a policy problem — being able to track unlicensed shippers of wine. Fixing policy problems by eliminating constitutional limitations on government powers should concern every citizen who believes the Constitution plays an important role in preventing governmental overreach.
Extending the State’s Powers
Although the fulfillment house provision is terrible, it is not the ACT’s most alarming provision.
Under Section 9 of the ACT, a state commission can suspend, revoke, or not renew a license of a winery or retailer if the state commission rules that its in-state entity unlawfully shipped product into another state. It is the commission that holds a hearing to determine if the in-state entity violated another state’s shipping laws.
Yes, that is correct: A winery or retailer’s home state will hold a hearing to determine if the business has violated the laws of another state, and can take actions against them in-state for the violation. A judge trained under the laws of one state is all of a sudden deemed fit to pass judgment on laws of another in which he or she may not be admitted.
Clearly, the provision makes no sense, but we must ask what is behind this — what is the method to the madness?
Again, this is motivated by jurisdictional issues. If State A deems a shipment does not meet its legal standards, but the shipper’s business activity is not enough to establish jurisdiction in State A, the ACT envisions a workaround by inventing a dubious legal concept, which allows an extra-jurisdictional sanction against the business entity.
I think we should be careful of legal workarounds, which result in a state forum punishing its businesses by imposing the laws of another state. We are trained as lawyers and admitted to practice in a specific jurisdiction. This is especially so of people judging the legality of issues before them. Before taking away a business’s license, the matter will eventually need to come before a judge, who is trained according to the laws of a specific state. Yet the ACT would require the judge to adjudicate a case according to the laws of a state in which the judge is not trained nor qualified as attorney under. Under the ACT’s provision, the concept of how the legal world operates — judges adjudicating violations of their own state laws — would become weakened based on achieving policy goals.
Moving Toward the Constitutional Abyss
As I look at the ACT, I see excessively troubling provisions. The ULC, which adopted the ACT, did a great disservice to the legal system and the Constitution.
Problematically, the ULC provided credibility to the ACT’s constitutionally dubious principles for stopping wine shipping. And furthermore, it provided the states a road map for regulating direct shipping, even if that regulation comes at the expense of the Constitution.
When the founding fathers met in Philadelphia, they imposed certain restrictions on government powers and the Supreme Court affirmed these restrictions. As the Uniform Law Commission met in Philadelphia 235 years later, it proposed to the states a way to ignore the Constitution and the Supreme Court’s mandates limiting government overreach.
It is up to the citizens of the states to take a stand on this issue. If constitutional fidelity is important, speak up against state legislation enacting the ACT’s language. If constitutional protections against government overreach are important, and the absence of these protections is harmful to our country, then speak up against state legislation enacting these changes.
Achieving policy goals should never justify eliminating constitutional protections, but as long as the populace is not watching, important special interests will try their best to achieve their policy goals at all costs. It is up to the public to educate their legislators about the constitutional road to perdition that threatens our way of life.
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