Transcript

IN THE SUPREME COURT OF THE UNITED STATES

JENNIFER M. GRANHOLM, GOVERNOR OF MICHIGAN, et al., Petitioners, v. ELEANOR HEALD, et al.; MICHIGAN BEER & WINE WHOLESALERS ASSOCIATION, Petitioners, v. ELEANOR HEALD, et al.; AND JUANITA SWEDENBURG, et al., Petitioners, v. EDWARD D. KELLY, CHAIRMAN, NEW YORK DIVISION OF ALCOHOLIC BEVERAGE CONTROL, STATE LIQUOR AUTHORITY, et al.

No. 03-1116, No. 03-1120, No. 03-1274

December 7, 2004

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 10:07 a.m.

APPEARANCES: CLINT BOLICK, ESQ., Washington, D.C.; on behalf of the Petitioners, Jennifer M. Granholm, et al., in 03-1274.

KATHLEEN SULLIVAN, ESQ., Stanford, California; on behalf of the Respondents, Eleanor Heald, et al., in 03-1116 and 03-1120.

THOMAS L. CASEY, ESQ., Solicitor General, Lansing, Michigan, on behalf of the Petitioners, Eleanor Heald, et al., in 03-1116 and 03-1120.

CAITLIN HALLIGAN, ESQ., Solicitor General, New York, N.Y.; on behalf of the Respondents, Edward D. Kelly, et al., in 03-1274.

PROCEEDINGS

JUSTICE STEVENS: We will now hear argument in Granholm against Heald and two related cases.

Mr. Bolick.

ORAL ARGUMENT OF CLINT BOLICK

ON BEHALF OF PETITIONERS IN 03-1274

MR. BOLICK: Justice Stevens, and may it please the Court:

For 124 years, as state power over alcohol has ebbed and flowed, one principle has remained virtually constant, that states may regulate alcohol by one set of rules, not by two. New York and Michigan consigned out-of-state wine, and only out-of-state wine, to the three-tier system for closing the market to thousands of small family-run wineries and their customers for the benefit of a liquor distributor oligopoly.

Discrimination is the core concern of the Commerce Clause, and it sends a powerful signal that the state is engaged, not in legitimate regulation, but in economic protectionism. The states and the liquor distributors make a sweeping argument that this Court has consistently rejected, that the Twenty-First Amendment creates plenary state authority.

JUSTICE KENNEDY: Well, under your view, could the three-tier system, itself, be challenged by a New Jersey wholesaler wanting to sell in New York, or a New York wholesaler wanting to sell in New Jersey?

MR. BOLICK: Yes, Justice Kennedy.

JUSTICE KENNEDY: So, under your view, the whole three-tier system has to go down?

MR. BOLICK: No, Justice Kennedy. So long as the state does not discriminate against out-of-state entities, it is free to, as this Court --

JUSTICE KENNEDY: Well, under my hypothetical. I don't know exactly how -- the way it works, you have to be a New York wholesaler to sell to a New York retailer. Under your view, a New Jersey wholesaler could sell to a New York retailer.

MR. BOLICK: That is -- or a challenge, as you ask the question, Justice Kennedy, could be mounted to that, under the same theory that we're advocating here. The state may have a different set of defenses that it doesn't have here. But --

JUSTICE KENNEDY: But so far as -- the rationale is the same.

MR. BOLICK: The --

JUSTICE KENNEDY: It seems to me that, under your rationale, that that in-state licensing system has to fall if there's a New Jersey wholesaler.

MR. BOLICK: It has to pass constitutional muster.

JUSTICE BREYER: And when you say there is no precedent -- I mean, I think a much more modest claim than you're making, the claim simply that a state cannot discriminate against out-of-state liquor -- i.e., the physical liquid -- which is really more modest and keeps the three-tier effect -- now, your -- that claim, that they couldn't do that, was really what was advanced in Young's Market. I read the briefs in that case. The briefs presented that Court -- you could have written those briefs. And the difficulty for you is, it articulated that more modest version very clearly, made a tremendously strong case, that was not forbidden by Section 2 of the Twenty-First Amendment. And this Court squarely rejected it.

MR. BOLICK: Your Honor, Young's Market -- the result in Young's Market was correct --

JUSTICE BREYER: The result, I understand, you could put on the basis of there being no discrimination.

MR. BOLICK: Exactly.

JUSTICE BREYER: Reading Justice Brandeis' opinion, I can't believe that that was the basis for his result.

MR. BOLICK: The -- the cases that followed Young's Market and purported to apply its reasoning took a very sweeping view of the Twenty-First Amendment. The Court began trenching on that very broad view immediately in 1939.

JUSTICE GINSBURG: But why wasn't that broad view appropriate, given the difference between the language of the Wilson Act, which has had the words "to the same extent and in the same manner," and the Webb- Kenyon Act, which became the second section of the Twenty-First Amendment, leaves out "to the same extent and the same manner." It just says that "alcoholic beverage so that the state can bar importation for delivery of, or use therein, in violation of laws thereof." It doesn't say "nondiscriminatory laws."

MR. BOLICK: Yes, Justice Ginsburg, the -- there was no need for the Webb-Kenyon Act to repeat the language of the Wilson Act. The Wilson Act dealt with the question of discrimination. The Webb-Kenyon Act dealt with questions that arose subsequent to the enactment of the Wilson Act. And as this Court has held in Craig versus --

JUSTICE GINSBURG: Well, maybe that's the Act, but when they put it in the Constitution, why didn't they adopt the language, "to the same extent and in the same manner"?

MR. BOLICK: I think the reason for that is because it was so obvious that the state could not, prior to prohibition, discriminate. It was not only embodied in the Wilson Act, but it was embodied in at least three cases of this Court.

JUSTICE SOUTER: But it was not obvious to the person who at least drafted the Webb-Kenyon in the first instance, because as I -- as I understand it, there was an anti-discrimination provision, and that was then dropped. And do we know why it was dropped?

MR. BOLICK: It was dropped essentially because it was redundant.

JUSTICE SOUTER: Well, but is that a -- is that on a legislative history record somewhere? Do we know that?

MR. BOLICK: No, Justice Souter, that is not expressly on the record. What is on the record, however, is that the Court was aiming -- or, excuse me, the Congress was aiming at specific Supreme Court decisions. There -- and it -- and the one case that was clearest on point on discrimination was Scott versus Donald, applying both the Commerce Clause and the Wilson Act to forbid discrimination. And there was -- there is nothing in the legislative history to indicate that Congress intended to overturn that decision. And as this Court has held in Craig versus Boren, and elsewhere, by enacting the Twenty-First Amendment, Congress clearly intended to incorporate both the Wilson Act and the Webb-Kenyon Act and to restore to the states the police power that they had before prohibition. Emphatically, discrimination was not a part of that police power. It was a very accepted context.

So, too, is it today. When the -- when the liquor distributors in the states asked this Court to overturn the Bacchus decision and to adopt a plenary view of the Twenty-First Amendment, it is not just asking you to overturn the Bacchus decision; it is asking you to overturn cases starting with the Midcal decision in 1980, the more recent Healy decision, and others, that have held that the core purposes of the Commerce Clause and the Twenty-First Amendment must be harmonized, that the Commerce Clause was never intended to be obliterated.

And when you look at the core values of the two clauses, they do not clash. The core purpose of the Commerce Clause is nondiscrimination. The core purpose of the Twenty-First Amendment is temperance. And if you have a discriminatory statute, it sends a very strong signal that, in fact --

JUSTICE KENNEDY: Well, it's not only temperance, but it's control over revenues.

Can you tell me, is the -- is there a New York State excise tax on alcohol?

MR. BOLICK: Yes, Your Honor.

JUSTICE KENNEDY: And is it collected by the wholesaler?

MR. BOLICK: Yes, it is.

JUSTICE KENNEDY: All right. What is it, ten dollars a gallon, or what?

MR. BOLICK: It's -- it turns out to --

JUSTICE KENNEDY: Is it on one --

MR. BOLICK: -- a few cents a bottle, yes.

JUSTICE KENNEDY: It is on one --

MR. BOLICK: It's on -- it's -- and all alcohol.

JUSTICE KENNEDY: Under our cases, can the California winery be required to remit the tax to the New York State revenue authorities?

MR. BOLICK: We believe so, Your Honor.

JUSTICE KENNEDY: Is that consistent with Quill?

MR. BOLICK: It is consistent with Quill. The way that the states -- there are 26 states that allow direct interstate shipment of wine, and the FTC has examined their record to see if they are doing okay. And one of the things that they do -- are able to do is tax collection. New Hampshire, Louisiana, and Nevada do collect taxes. The way they do it is by requiring a permit in order to ship wine into the state. That takes care of a number of problems, including all sorts of accountability concerns that the state may raise.

JUSTICE SOUTER: What --

MR. BOLICK: Under --

JUSTICE SOUTER: -- what do you make of the argument that there's no practical way, except at great expense, to audit compliance if they're out of state?

MR. BOLICK: Justice Souter, this is one of the most regulated industries in America, of course, and the model legislation that has been adopted by a number of states includes record-keeping provisions, it requires that wineries --

JUSTICE SOUTER: Well, I will grant that's required, but the argument, as I understand it, is, to find out whether they're doing what they are required to do, you've got to drop in unexpectedly and make an audit. And that's one thing in the state; it's another thing across the country.

MR. BOLICK: No, it's important to recognize, Justice Souter, that under the three-tier system, which is -- which is where the states of New York and Michigan are saying that the other state wineries have to go -- the three-tier system does not do that. The states already rely on the Federal Government and the other states to police the wineries.

JUSTICE SOUTER: So you're --

MR. BOLICK: Should they --

JUSTICE SOUTER: -- saying they are not dropping in to local wineries to do audits, in fact?

MR. BOLICK: They may, in some instances. It is primarily a federal -- a federal activity.

JUSTICE SOUTER: What do we have in the record on that?

MR. BOLICK: There is not -- there is not a great deal on the record, either way, on that, Your Honor.

JUSTICE SCALIA: I don't know what you mean by "it's primarily a federal activity," that the Federal Government polices compliance with the state tax laws?

MR. BOLICK: That's correct, Your Honor. Under the --

JUSTICE SCALIA: How does that occur?

MR. BOLICK: -- under the Federal Alcohol Administration Act, any violation of a state law is a federal offense and it is a violation -- so basically, whether it's under-age access, whether it's taxation, whatever --

JUSTICE KENNEDY: But does the federal authority make a routine audit to see that the state tax has been paid?

MR. BOLICK: Basically, every single time that there is a transaction, it is recorded by the U.S. Trade and Tax Bureau.

And if it may please the Court, I'd like to reserve the rest of my time --

JUSTICE STEVENS: Yes.

MR. BOLICK: -- for rebuttal.

JUSTICE GINSBURG: I have just one further question. Justice Kennedy asked you, "What about the wholesaler? What about the retailer?" What about alcoholic beverages other than wine?

MR. BOLICK: Justice Ginsburg, very important question. We are here today because a majority of states have chosen to regulate wine distinctively. And a handful of them, including Michigan and New York, have chosen to do so in a discriminatory manner. So long as states do not discriminate, in terms of direct shipping with regard to other alcohol -- and they don't; there's a flat prohibition across the United States, in terms of beer and other types of spirits -- we will not be here, because there would be no discrimination; there would be a single rule, and that rule would be, no one gets to do it.

JUSTICE GINSBURG: Thank you.

JUSTICE STEVENS: Ms. Sullivan?

ORAL ARGUMENT OF KATHLEEN SULLIVAN

ON BEHALF OF RESPONDENTS IN 03-1116 AND 03-1120

MS. SULLIVAN: Justice Stevens, and may it please the Court:

Nothing in today's case, Justice Kennedy, requires you to take on the three-tier system, for the issue that is presented here is a very narrow one.

JUSTICE KENNEDY: Well, it's very narrow, but the rationale is sweeping, and that's why I asked. I just don't know if the in-state licensure system, which is the cornerstone of the three-tier distribution system, can survive under your rationale, assuming the hypothetical where a New Jersey wholesaler has all of the -- you know, the physical facilities and so forth that the New York wholesaler does.

MS. SULLIVAN: All that we ask in this case, Justice Kennedy, is that you strike down Michigan and New York's decision to apply the three-tier system to everyone except their own in-state --

JUSTICE KENNEDY: Well, I know, but what --

MS. SULLIVAN: -- producers of wine --

JUSTICE KENNEDY: -- but you're -- all you're asking is for a rationale that's sweeping.

MS. SULLIVAN: Justice Kennedy, in our case, we want to suggest that it is -- just as in Healy and Bacchus -- that a law that discriminates in favor of in-state producers and against out-of-state producers loses its immunity afforded by the Twenty-First Amendment. As Justice Scalia said in concurrence in Healy, a liquor law's discriminatory character eliminates the immunity afforded by the Twenty-First Amendment.

It's really the state's position, aided by their wholesaler allies, that it is the sweeping one. Their position is that every state law that regulates the importation of liquor is, per se, valid if it has any conceivable rational connection to a state purpose. So, for example, if Michigan wanted to simply bar all California wines, facially exclude California wines, saying, "There are too many of them, it interferes with" --

JUSTICE GINSBURG: Your answer to Justice Kennedy, I glean from what you said, that if New York took away the direct-sale privilege that in-state wineries get, then out-of-state wineries wouldn't be any better off, but they'd have nothing to complain about.

MS. SULLIVAN: That's exactly correct, Justice Ginsburg. As you've said in the context of gender discrimination, you can cure an equal-protection problem by leveling up or leveling down. In this case, we would suggest that the principle of free trade that was the reason, the principal reason, for the framing of the Constitution and has been reflected in over a century of dormant Commerce Clause jurisprudence, suggests that you should -- the remedy should be to open the markets to out-of-state producers --

JUSTICE GINSBURG: But that's a decision for the state to make. I mean, the -- what --

MS. SULLIVAN: Correct, Your Honor.

JUSTICE GINSBURG: Not for this Court.

MS. SULLIVAN: That's correct, Your Honor.

JUSTICE STEVENS: You don't deny that a state -- that Michigan could bar all out-of-state wine -- not just -- not just California, but they could bar all out-of-state wines?

MS. SULLIVAN: That's correct, Justice Stevens, if it were in aid, and only if it were in aid, of the states -- and necessary to serve the state's internal purposes.

JUSTICE STEVENS: The only reason being given to give a monopoly to local producers, that's their --

MS. SULLIVAN: That's --

JUSTICE STEVENS: -- whole purpose. But could they do that?

MS. SULLIVAN: The state can have a monopoly if it's, itself, a market participant. What the state may --

JUSTICE STEVENS: No, I'm saying just to look at the -- just limit to the market to -- the only market participants would be Michigan wine --

MS. SULLIVAN: Private --

JUSTICE STEVENS: -- wineries.

MS. SULLIVAN: Justice Stevens, a state may not discriminate against out-of-staters for the sole purpose of economic protectionism.

JUSTICE BREYER: Well, I'm trying to think of what Brandeis could have been thinking.

MS. SULLIVAN: In Young's Market.

JUSTICE BREYER: Yes, that's right. And this is a reconstruction, because I have no doubt, and you have no doubt, that Section 2 was meant to end that part of the dormant Commerce Clause that would come under the name of original package doctrine --

MS. SULLIVAN: Correct.

JUSTICE BREYER: -- which meant that the foreign liquor has to be treated better than domestic liquor. Now, he's thinking, "Why is that? What is that package doctrine?" And the answer is, the dormant Commerce Clause -- it's part of the dormant Commerce Clause -- the dormant Commerce Clause is the implication from the existence of the commerce power in the Constitution. So if we have an amendment that says "that aspect of the dormant Commerce Clause doesn't apply," that means the dormant Commerce Clause doesn't apply, because you can't divide the dormant Commerce Clause into six different parts, or even two.

MS. SULLIVAN: But Justice --

JUSTICE BREYER: Now, maybe -- I think that's how he's reasoning.

MS. SULLIVAN: But --

JUSTICE BREYER: And if he is, and even if he isn't, why isn't that right?

MS. SULLIVAN: Justice Breyer, the Young's Market language permitting state discrimination is, indeed, broad, but it's been superceded by 40 years of this Court's jurisprudence harmonizing the Twenty-First Amendment with the rest of the Constitution. Remember, Justice Brandeis, in Young's Market, didn't even think the Equal Protection Clause applied to liquor imports, a position that's inconsistent with Craig against Boren. And nobody would suggest today that equal protection permits a state to import only from male-owned wineries or only import wine from white-owned wineries.

So there -- the 40 years of jurisprudence --

JUSTICE STEVENS: But Craig against Boren was --

MS. SULLIVAN: -- has been --

JUSTICE STEVENS: -- had nothing to do with the Commerce Clause.

MS. SULLIVAN: Correct, Your Honor, but if -- if there were a law -- the states are claiming that any law governing --

JUSTICE STEVENS: Nothing to do with importation, either.

MS. SULLIVAN: But the dormant Commerce Clause reflects a fundamental structural principle that is every bit as much a part of the Constitution as the Equal Protection Clause upheld in Craig v. Boren. Indeed this Court, in cases from McCulloch to the Eleventh Amendment cases and state sovereignty cases, has recognized that a principle of the Constitution is no less fundamental because it is a structural implication of the text. So the dormant Commerce Clause stands on the same footing as the affirmative power of Congress and on -- it's the same footing as the Equal Protection Clause at issue --

JUSTICE STEVENS: Do you think Congress --

MS. SULLIVAN: -- in Craig v. Boren --

JUSTICE STEVENS: -- could enact a statute authorizing the states to do just what they've done here?

MS. SULLIVAN: Absolutely, but it has not. And the Wilson Act -- to go back to Justice Souter's question and Justice Ginsburg's question -- Congress could authorize it as it has done, for example, in the McCarran-Ferguson Act, allowing the states to discriminate against out-of-state industry with respect to the industry of insurance. It has not done so here. Webb-Kenyon did not authorize discrimination, and the Wilson Act forbade discrimination for just -- reasons Justice Ginsburg described. It said you may regulate imports of liquor in the same manner as local liquor laws. And, of course, the purpose of Section 2 was to allow to the dry states to keep dry by preventing all those original packages from piling up in the railway stations and being open to bootleggers throughout the state, undermining the dry policies of the state. Wilson forbade discrimination. Web Kenyan didn't authorize it.

And in Congress' most recent articulation of its view of the harmony between the Twenty-First Amendment and the rest of the Constitution, the Twenty-First Amendment Enforcement Act, passed in 2000, enacted in 2000, Congress has a rules-of-construction section that says, "We view any state plea to the federal courts to enforce their laws as reflecting the jurisprudence of this court." And, in fact, floor debate on that rules-of-construction section reflected allusions to Bacchus, Healy, and the other cases that said dormant commerce -- the negative implications of the Commerce Clause, no less than the Equal Protection Clause or the Due Process Clause or the Establishment Clause, constrain the states in their regulation of importation of liquor.

So with all respect to Justice Brandeis, Justice Breyer, the Young's Market statements about discrimination have been superceded.

What New York and Michigan have done here is say that one set of exceptions apply only to in-state producers, just as Connecticut, in Healy, said, "If you just sell beer within our state, you don't have to face price ceilings that you have to face if you do business over in Massachusetts or Rhode Island." Just as in Bacchus, the -- you struck down a decision -- an excise tax exemption that said, "If you're an importer of liquor, you have to pay an excise tax, but if you're a local producer of locally produced wine and spirits, you get out of that restriction."

JUSTICE SOUTER: Okay, we've got one difference from Bacchus, because the claim that's being made here, which I gather was not made, or made seriously, in Bacchus, is there really is a need for differential treatment for purposes of enforcement. Go back to the enforcement of the tax law.

MS. SULLIVAN: Justice --

JUSTICE SOUTER: How are we supposed -- what standard are we supposed to use to judge that argument? And, by that standard, how good is the argument?

MS. SULLIVAN: Justice Souter, we believe the standard should be strict scrutiny, though there must be a necessity to serve --

JUSTICE SOUTER: Because --

MS. SULLIVAN: -- a legitimate --

JUSTICE SOUTER: -- it's facial discrimination.

MS. SULLIVAN: Because it's facial discrimination. It's absolutely undisputed. Michigan -- in fact, Michigan state concedes that they have flatly banned out-of-state wineries from shipping directly to consumers. There's no question that this is facially discriminatory. But even if the standard were a more deferential one in which all the state needed to show was a reasonable need for discrimination, it can't come close to doing that here. Neither Michigan nor New York has shown that the facial discrimination here is necessary to protect minors or to protect the collection of taxes.

Let's start with minors. The Michigan claim that it's protecting against under-18 sales is belied by the fact that Michigan is allowing 40 Michigan wineries and, at last count, 7500 Michigan retailers to deliver directly to consumers. The way to protect my -- so just as in Craig v. Boren, the exception for young women to drink 3.2 beer, as opposed to young men, belied the state's interest in temperance. So the pattern of exceptions here that Michigan has created belies any notion that it's protecting under-18-year-olds from drinking. And, of course --

JUSTICE SOUTER: But what about audits for revenue --

MS. SULLIVAN: On revenue, the nondiscriminatory means that's available to the state that Michigan and New York have not shown any reason to reject -- 26 states have adopted some version of this -- is to require an out-of-state winery to get a permit. And that's a -- Justice Breyer, one thing that's still left of Brandeis. You can require a permit from an out-of-state winery, which would be unusual to acquire from widgets or milk. But you can require a permit, and, as a condition of the permit, Justice Souter. The out-of-state winery has to agree to submit to the state's jurisdiction, to submit to the state's tax jurisdiction.

And, Justice Kennedy, whether or not Quill would permit taxation if you were simply sending by common carrier, our clients want to -- want to pay taxes, want to sign up for permits, want to play on a --

JUSTICE KENNEDY: Well --

MS. SULLIVAN: -- level playing field --

JUSTICE KENNEDY: -- well, they do today, I'm sure, but --

[Laughter.]

MS. SULLIVAN: But, Justice Souter, to -- look at the experience --

JUSTICE SOUTER: They -- you say they don't want to go to California to do an audit.

MS. SULLIVAN: They certainly don't, Justice Souter, but New Hampshire is a state that has actually -- your own state is a state that has on its Web site a set of out-of-state wineries. It requires that they keep and supply sales records on a monthly basis, that they keep those records for three years --

JUSTICE SOUTER: Maybe we're getting ripped off.

MS. SULLIVAN: I --

[Laughter.]

MS. SULLIVAN: -- think New Hampshire's done very well collecting taxes from out-of-state producers, Justice Souter. It's a leader --

JUSTICE KENNEDY: Ms. Sullivan --

MS. SULLIVAN: -- in the field.

JUSTICE KENNEDY: -- may I -- may I -- I just want to clarify one point. It was just -- the question Justice Stevens asked. It's your position that if Michigan allows Michigan wines to be sold and possessed and consumed, that it must also allow out-of-state wine to be sold, possessed, and consumed. Would --

MS. SULLIVAN: That's correct.

JUSTICE KENNEDY: That is your --

MS. SULLIVAN: That's correct, Justice Kennedy.

But to go back to the physical-presence question, Justice Souter, Michigan is not now -- Michigan officials are not now traipsing up to the upper peninsula and all around the state to inspect wineries. The record is clear on that. What Michigan does is require that wineries in Michigan send samples and records to their offices. And the Internet actually, if anything -- the states say that the Internet increases the danger, but the Internet also increases, in parallel, the power of the states to police out-of-state wineries without an in-state presence. Just as, Justice Stevens, the Internet may make every speaker with a PC a town crier, as you said --

JUSTICE SOUTER: Could --

MS. SULLIVAN: -- in Reno versus ACLU --

JUSTICE SOUTER: -- could a state --

MS. SULLIVAN: -- so it makes every interstate --

JUSTICE SOUTER: -- could a state require an out-of-state winery to keep its books online, subject to a password, so that, with a password, they could go in and audit the books across the country, by wire?

MS. SULLIVAN: Yes, Justice Souter, if it were part of a -- an agreement to a permit that the -- that the out-of-state winery is willing to make, then there's no extraterritorial regulation there, that would be just fine. So, yes, the state can, through Internet, so to speak, -- Internet monitoring, through virtual monitoring -- do all the work it needs to do to make sure that the out-of-state winery is paying taxes.

And, by the way, Michigan does not collect taxes, Justice Kennedy, through the distributors. Michigan collects taxes from the wineries, whether they're in-state or whether they're out-of-state wine shippers. So Michigan can give no justification for why out-of-state wineries have to go through the distributors for tax purposes. They're not using the distributors as their tax-collection agents now.

JUSTICE KENNEDY: Commerce Clause, in effect, protects consumers in states from entrenched business interests that want to have protectionism, and you're -- you object to that and invoke the Commerce Clause to do it. Under that rationale, aren't all the California reciprocity laws invalid, as well?

MS. SULLIVAN: Justice Kennedy, reciprocity laws -- yet -- possibly. They may be a necessary requirement now that so many states are closed to states. They may be a necessary mechanism for some states trying to get wines to market in the way that the framers envisaged. It may be a necessary, for now, to get into closed states. In a world that we hope that you create, in which discrimination is not allowed, they would be completely unnecessary and possibly unconstitutional.

But to return to the key point here, Michigan and New York may not facially discriminate in favor of their own producers unless they can show that reasonable nondiscriminatory alternatives are unavailable. And here, Justice Souter, on any standard of heightened scrutiny, they have not come close to making that kind of showing, because there are all these other means -- means that have been recognized by the 26 states that don't discriminate, means that have been proven in states from New Hampshire to Virginia, means that are not based on facial discrimination. It's the discrimination that has to be shown to --

JUSTICE STEVENS: Let me just --

MS. SULLIVAN: -- be necessary here.

JUSTICE STEVENS: -- be sure I heard your answer to Justice Kennedy correctly. You'd concede that the reciprocity laws are all unconstitutional?

MS. SULLIVAN: Not -- they are subject to heightened scrutiny because they discriminate against out- of-staters in a way that you could not -- for example, in New Energy, you said that you can't have a preference for -- you can't have a discrimination in Ohio in reciprocity for Indiana. Reciprocity laws normally do violate the principle of dormant Commerce Clause invalidation.

JUSTICE STEVENS: And you contend that they do -- the liquor reciprocity laws, all of them are unconstitutional.

MS. SULLIVAN: Not -- we contend that they would be subject to strict scrutiny, and they could be upheld if the state could show that they are closely tailored in a --

JUSTICE STEVENS: They can -- that they can be --

MS. SULLIVAN: -- way that these laws are not.

JUSTICE STEVENS: -- upheld by making a showing that you say is virtually impossible to make.

MS. SULLIVAN: Your Honor, that's not before, and if there were other reasons --

JUSTICE STEVENS: No, but I think it is --

MS. SULLIVAN: -- the state could --

[Laughter.]

JUSTICE STEVENS: -- it is an interesting question as to whether that's a -- that's a -- you know, that's a necessary consequence of this decision, in your view.

MS. SULLIVAN: Nothing in this decision requires you to reach the question of whether there are other state defenses in other cases. The justifications the states have given here are so terribly weak in relation to their discriminatory laws that you should strike down these laws, you should invalidate them, you should affirm the judgement of the Sixth Circuit and reverse the judgements of the Second Circuit.

Thank you very much.

JUSTICE STEVENS: Thank you, Ms. Sullivan.

Mr. Casey.

ORAL ARGUMENT OF THOMAS L. CASEY

ON BEHALF OF PETITIONERS IN 03-1116 and 03-1120

Mr. Casey: Justice Stevens, and may it please the Court:

For more than 70 years, the Twenty-First Amendment has permitted states to restrict the importation and delivery of alcohol by out-of-state vendors. There are substantial differences between licensed in-state vendors of alcohol and out-of-state vendors that are not subject to the full extent of state regulatory and taxing powers. Because of those differences, Michigan requires that sales, including direct shipment of alcohol, be performed only by licensed, strictly regulated, in-state vendors. This importation regulation is a power expressly conferred by the text of the Twenty-First Amendment. It's consistent with the entire history of alcohol regulation in this country, and it's consistent with this Court's jurisprudence interpreting the Twenty-First Amendment --

JUSTICE O'CONNOR: Now the Bacchus case cuts against you, to some extent.

MR. CASEY: The Bacchus case was a very unique situation that we believe is not in any way controlling in the present case. It was not an importation case; it was an exemption from a state excise tax on wholesalers for alcohol that was already within the state's stream of commerce.

JUSTICE KENNEDY: Well, but I think what's fairly implied in Justice O'Connor's question, you have to look at the language of Bacchus, and the language of Bacchus, in effect, restored the anti-discrimination component of the Commerce Clause to liquor control. I think that's a fair and necessary reading of the case. Now --

MR. CASEY: I disagree that that is a necessary reading --

JUSTICE KENNEDY: And I know it --

MR. CASEY: -- of the case.

JUSTICE KENNEDY: -- involved pineapple wine and all that. I know that, but --

[Laughter.]

JUSTICE KENNEDY: -- what we're talking about is the language of the Court in that case.

MR. CASEY: Correct, but you're -- you have to understand that language in light of the actual context. There, the state did not even assert a Twenty-First Amendment defense.

JUSTICE KENNEDY: Well, then you have to understand Young in the light of its context, where there was no discrimination --

MR. CASEY: There was discrimination in Young, Your Honor, and I'd like to get to that. But to focus on Bacchus for a moment, the state never asserted the Twenty-First amendment, and it was undisputed --

JUSTICE STEVENS: No, but the question was before the Court, because the dissent certainly raised the question.

MR. CASEY: Correct. And we have suggested, in our brief, that the Bacchus case is distinguishable and not controlling here. We have also suggested that Bacchus was incorrectly decided. We can prevail in this case without overruling Bacchus, but we have suggested that --

JUSTICE O'CONNOR: Well, why don't you focus on that? Because it's a little hard to plan on overruling that case.

[Laughter.]

MR. CASEY: Well --

JUSTICE O'CONNOR: So why don't you at least address how you would distinguish Bacchus? Because there is a lot of language in there that cuts against your position.

MR. CASEY: The only justification for the statute in Bacchus was what the Court characterized as "mere protectionism." That's not the situation with the Michigan statute. Again, the Michigan statute involves the paradigm -- or the quintessential Twenty-First Amendment power of regulating importation; it's not an -- attacks on alcohol that's already an exemption from a tax for two particular products.

JUSTICE SCALIA: Well, no -- I mean, that --

MR. CASEY: Do you --

JUSTICE SCALIA: -- that rather lengthy statement you made earlier, that the Bacchus case didn't involve the importation of alcohol. But it did. I mean, the only reason that the in-state exemption was held to be unconstitutional was because you were treating out-of-state sellers differently. How can you possibly say that --

MR. CASEY: It was treating --

JUSTICE SCALIA: -- the case didn't involve it?

MR. CASEY: -- it was treating two particular items of in-state production differently than all other in-state items and out-of-state items; but it was a taxation issue, not an importation issue. And as the Court said in Bacchus and in Capital Cities, the correct analysis in the -- in evaluating this kind of case is to determine, first, whether the activity of the regulation at issue is an exercise of a power conferred by the Twenty-First Amendment --

JUSTICE GINSBURG: Well, why don't we focus on the Court's rationale, which was stated very concisely by Justice White. He said, "Hawaii's discriminatory tax cannot stand." And then he said, "Whatever you can say about the Twenty-First Amendment, one thing is certain, the central purpose was not to empower the states to favor local liquor industries by erecting barriers to competition." That was this Court's explanation for ruling the way it did, even though there was this infant industry of pineapple whatever.

MR. CASEY: That was the first stage of the Court's analysis. The Court went on to say it was not supported by any clear concern of the Twenty-First Amendment in combating the evils of an unrestricted traffic in liquor --

JUSTICE SOUTER: Well, your opponents have said that there isn't any clear countervailing interest here. They're saying you can't claim you're protecting kids, because you're selling to the kids at home; there's no serious audit-collection problem; and the other regulatory interests -- they didn't say this, but are, sort of, gauzy the way they're stated. I mean, they're saying that, by a process of elimination, what you get down to is nothing but discrimination and protectionism. What is -- what is your answer to that? Where is --

MR. CASEY: We --

JUSTICE SOUTER: -- the substantial interest?

MR. CASEY: -- we disagree wholeheartedly with that. The Michigan --

JUSTICE SOUTER: I know, but --

MR. CASEY: -- the Michigan regulations do promote the state's interest in temperance. They do give the state a better --

JUSTICE SOUTER: Well, you -- I mean, you say that, but how? The very activity that you don't want them to engage in, you're engaging in, or your local wineries are engaging in, for example.

MR. CASEY: But the key is, with an in-state licensee, the state has the ability to enforce against that licensee, to inspect, to punish the licensee --

JUSTICE SOUTER: Do we --

MR. CASEY: -- to hold them accountable.

JUSTICE SOUTER: -- do we have a record of what the state is doing with respect to its in-state licensees, indicating what it could not do effectively to out-of-staters? What do we have in the record?

MR. CASEY: The record in this case consisted of a small number of affidavits, answers to interrogatories, some surveys that were submitted as exhibits to motions for summary judgement. Both sides submitted that type of evidence. The District Court decided this was a question of law, and specifically said that he did not consider any of the factual evidence. So the record --

JUSTICE SOUTER: Well, should --

MR. CASEY: -- was not fully developed.

JUSTICE SOUTER: -- should we send it back for -- if we disagree with the rationale, should one or the other of these cases go back for evidence on what, in fact, the state is doing in relation to its in-state licensees and evidence that it could not effectively do the same with respect to out-of-staters?

MR. CASEY: Yes, if --

JUSTICE SOUTER: And what would you show? What do you, in effect -- make an offer of proof.

MR. CASEY: We would show that the Michigan requirement limiting sales and direct shipping to in-state licensees is required because the state only has effective enforcement authority over in-state licensees. But --

JUSTICE O'CONNOR: Well, but wait a minute. You -- it was suggested that the state could require a license of an out-of-state supplier, and that that license could be conditioned upon submission to Michigan's jurisdiction in all respects. Is that not feasible?

MR. CASEY: Michigan does have a current license for out-state seller of wine. You know, these players --

JUSTICE O'CONNOR: But could you not require submission to --

MR. CASEY: We --

JUSTICE O'CONNOR: -- Michigan's jurisdiction for all purposes of enforcement?

MR. CASEY: Certainly, we could pass a law to that effect. The problem is --

JUSTICE SOUTER: And if you -- if you did that, could you require, as I suggested of Counsel on the other side, that you -- that, as a condition of the licensing, that the business records of these companies be placed in some secure online fashion, that, with a password, you could get into and do an audit across the continent just as readily as you could do an audit next door? Could Michigan not do that?

MR. CASEY: But there is no guarantee that such an audit would be just the same as an audit of an in-state --

JUSTICE KENNEDY: Well, let me ask, once we accept the proposition -- I think this is the necessary reading of Bacchus -- that the Commerce Clause applies to liquor and prevents discrimination, it seems to me it's just like any other commodity -- food, milk, et cetera -- and, in this case, you have a very substantial burden to show that this discriminatory treatment is justified -- maybe strict scrutiny, maybe heightened scrutiny. And this trial has occurred. You have had that opportunity. I don't see why you have a right to go back.

MR. CASEY: Despite the lack of evidence in the record and the fact that District Court did not consider that evidence, the Sixth Circuit dismissed all of those claims of the state and remanded for entry of judgement on the Plaintiffs without giving us an opportunity to develop that record. I also want to say --

JUSTICE SCALIA: See, I don't -- I don't understand. Didn't you have an opportunity to develop the record? I mean, this was --

MR. CASEY: There was --

JUSTICE SCALIA: -- a discriminatory matter. It was your burden to show that whatever discrimination existed -- assuming that we find the law the way Bacchus seemed to say it is -- it was your burden to show that there was some justification for that discrimination.

MR. CASEY: There --

JUSTICE SCALIA: You had your chance to show it.

MR. CASEY: -- there was evidence in the record. There were affidavits from Michigan enforcement officials about stings, about problem with enforcing --

JUSTICE SCALIA: All right, well --

MR. CASEY: -- against Internet --

JUSTICE SCALIA: -- tell us what those -- what that material is, and if we find that material sustains your burden, that's fine, you win; and if it doesn't, you lose. I don't know why we have to let you go back and --

[Laughter.]

JUSTICE SCALIA: -- and retry the case.

MR. CASEY: Our key position is that before you get to that kind of evidentiary burden, the legal question --

JUSTICE SCALIA: That's what I'm interested in. You win, either way. If it -- maybe if the Commerce Clause -- dormant Commerce Clause discrimination principle applies, you win, if we scrutinize strictly and say you have a good justification. Whether you do or not, I guess I'll find out from reading the record, but I'm more interested in the first half, which is -- doesn't apply at all.

Now, your opponent said, in response to my pointing to Brandeis on this, that to support you, as to precedent, Bacchus. Young's Market isn't any good anymore. As to concept, you can divide the dormant Commerce Clause into a -- you have to favor out-of-state principle, which was the original package doctrine, which has long since disappeared, and the anti-discrimination principle, which hasn't disappeared. And her third part, implicit, is, historically, this whole Section 2 was aimed at the original package part; there is not a word in any brief I saw that suggests any motive in Section 2 to get rid of the anti-discrimination principle. I haven't found a word in support on your side on that. So she says, "Put those three things together, and we win." That's her point. Now, what's your response?

MR. CASEY: We disagree with that entire position. The text --

JUSTICE BREYER: I know you do.

[Laughter.]

MR. CASEY: -- the text of the Twenty-First Amendment -- the text of the Twenty-First Amendment gives states the right to control imports. The history of the Twenty-First Amendment in the Webb-Kenyon Act clearly demonstrate -- the purpose of the Webb-Kenyon Act was to eliminate alcohol shipments from --

JUSTICE KENNEDY: Do you think --

MR. CASEY: -- the Commerce Clause.

JUSTICE KENNEDY: -- that Michigan can prohibit the importation of any wine, but still allow its own wine to be produced, sold, and consumed?

MR. CASEY: Yes. That's precisely what situation was with --

JUSTICE BREYER: I know you do, but the principle of Webb-Kenyon, which was enacted when the Wilson Act was already there -- very clear -- is to stop the original package doctrine, stop favoritism of the out-of-state liquor shipment, which meant, in a dry state, you had to sell less. I mean, that's what it's there for. I didn't find a word, in other words, contrary to what I've just said; and if there are such words, now is the time to point them to me -- to point them out.

MR. CASEY: The title of the Webb-Kenyon Act is, "It is in -- an act divesting intoxicating liquors of their interstate character in certain cases. The clear intent of the Webb-Kenyon Act was to remove alcohol from the Commerce Clause. The Constitution -- the Twenty-First Amendment constitutionalized that Commerce Clause framework." That's what this Court said in Craig v. Boren. Craig v. Boren also said, "The Twenty-First Amendment creates an exception to the operation of -- the normal operation of the dormant Commerce Clause."

JUSTICE GINSBURG: Well, then you are asking us, I guess, not only to reject Bacchus, but who was the first one that said that the Commerce Clause remains alive and well? Was it Justice Stewart? And I forgot which case it was. It was --

MR. CASEY: That may be. The Commerce Clause remains alive and well, but the Commerce Clause --

JUSTICE GINSBURG: In the context of alcoholic beverages.

MR. CASEY: In the context of powers expressly conferred upon the states by the Twenty-First Amendment, that's an exception to the operation -- the normal operation of the dormant Commerce Clause. Commerce Clause has to be read in light of the Twenty-First Amendment, just as the Twenty-First Amendment has to be read in light of the Commerce Clause and other provisions of the Constitution.

JUSTICE GINSBURG: But that's a different argument than the one you made before, which seems to be saying the Twenty-First Amendment trumps, not that the two have to be harmonized.

MR. CASEY: When you read the two in light of each other, the purposes of each, it is clear that the purpose of the Twenty-First Amendment was to remove alcohol from interstate commerce as a constitutional matter, to prevent Congress from tampering with it in the future, to give the judgement to the states as to --

JUSTICE KENNEDY: Well, you --

MR. CASEY: -- the necessity for --

JUSTICE KENNEDY: -- you say further than that; you say the purpose was to allow that the states discriminate in favor of home industry, if it chooses.

MR. CASEY: That is one of the purposes, yes. In that -- in the case that was decided immediately after the Young's Market, Mahoney, and Indianapolis Brewing, the Court said, "Discrimination is permissible in this narrow context, where the state is acting pursuant to its Twenty-First Amendment powers and regulating importation of alcohol."

JUSTICE O'CONNOR: But that gets us back to Bacchus and what to make of that.

MR. CASEY: I -- as I indicated, I don't believe Bacchus overrules those cases; it didn't even cite most of those cases. But --

JUSTICE O'CONNOR: Well, the dissent seemed to think so --

[Laughter.]

JUSTICE O'CONNOR: -- didn't it?

MR. CASEY: That's correct. But, as I said, we believe Bacchus is distinguishable, because that was mere protectionism, the state does have other justifications here --

JUSTICE KENNEDY: Well, we've also said that mere protectionism is permitted.

MR. CASEY: Mere protectionism is permitted. In this case, if we have to present other justifications, we have, and there are other justifications, unlike the situation in Bacchus. So even if the Bacchus rationale is good law, we still prevail on that.

Thank you, Your Honor.

JUSTICE STEVENS: Ms. Halligan?

ORAL ARGUMENT OF CAITLIN HALLIGAN

ON BEHALF OF RESPONDENTS IN 03-1274

MS. HALLIGAN: Justice Stevens, and may it please the Court:

In answer to your question first, Justice Breyer, the Twenty-First Amendment does not propose a nondiscriminatory ban. The Court rejected that position, not just in Young's Market and Mahoney in Indianapolis, but also in Clark Distilling, the case in which the Court upheld the constitutionality of the Webb-Kenyon Act, itself. It held that the Webb-Kenyon Act operated to remove any immunity that had been conferred by the dormant Commerce Clause. Bacchus is not to the contrary. In North Dakota, which follows Bacchus, the Court relied again on Young's Market to say that the states could impose different rules on out-of-state vendors where they were necessary to protect the integrity --

JUSTICE KENNEDY: Do you -- do you take the position that your colleague on your same side takes, that a state can permit only the sale, consumption, and -- of its own wines, and bar all out-of-state wines?

MS. HALLIGAN: The express terms of the Twenty-First Amendment would allow that if -- particularly if it were necessary to advance the concerns of the Twenty-First Amendment. For example --

JUSTICE SCALIA: No, no, don't --

JUSTICE KENNEDY: No --

JUSTICE SCALIA: -- don't put in the qualifications.

JUSTICE KENNEDY: -- just for local protectionism.

MS. HALLIGAN: Simply for mere protectionism?

JUSTICE KENNEDY: It's just for local protectionism. We want to promote our wines, and not anybody else's.

MS. HALLIGAN: The terms of the amendment would allow that, but I don't think the Court needs to explore the outer parameters of the Twenty-First --

JUSTICE KENNEDY: Well, I'm trying to understand what your --

MS. HALLIGAN: -- the Twenty-First --

JUSTICE KENNEDY: -- what your theory is. And so you are in agreement with your colleague that this could be done, if New York chose. You can only drink New-York-grown wines in -- sell and consume -- in the state of New York.

MS. HALLIGAN: It could be done, but that question really isn't presented here, because --

JUSTICE BREYER: But could Congress pass a law forbidding it?

MS. HALLIGAN: That's a difficult question, because --

JUSTICE BREYER: Yeah. All right. But I need an answer to it.

[Laughter.]

JUSTICE BREYER: Because, you see, what's going to come next is, if you say yes, I'm going to say, "Well, didn't it pass that law with the Wilson Act?"

MS. HALLIGAN: Let me answer both of those questions, if I can, Your Honor. Certainly, this Court has held, repeatedly, that the Twenty-First Amendment did not, in any substantial way, completely repeal Congress' affirmative power under the Commerce Clause. It said that in Midcal and Capital Cities. But we would argue that if Congress acted in a way which completely removed state authority to determine whether or not alcohol could be sold and the terms under which it could be sold -- for example, if Congress said all states must be dry -- then we would argue that the Twenty-First Amendment wouldn't allow that, because that would completely eviscerate any state authority.

JUSTICE SCALIA: How can that be? I mean, if this is a constitutional elimination of the Commerce Clause, how can Congress bring it back in simply by enacting a statute?

MS. HALLIGAN: The legislative history makes clear that the Twenty-First Amendment was intended to eliminate the impediments posed by the dormant Commerce Clause and authorize states to regulate it.

JUSTICE SCALIA: But you -- you want us to read it by its terms. It doesn't say anything about the dormant Commerce Clause. If we read it absolutely the way one of your arguments wants us to do, surely it excludes Congress.

MS. HALLIGAN: By terms of our --

JUSTICE SCALIA: So you don't want us to read it absolutely.

MS. HALLIGAN: Your Honor, I don't think that -- again, I don't think that you need to decide those questions in this case. This case goes to what's at the very core of the Twenty-First Amendment, whether states can decide who can sell liquor to their citizens and whether or not states --

JUSTICE KENNEDY: But it also goes to the very core of the Commerce Clause. And there are really two classifications of dormant Commerce Clause cases. One is -- and I think it's an improper use of the term "dormant clause" -- is where there's discrimination. Only the Congress can allow discrimination against out-of-state products. That's one whole classification. And that's what's -- and that's what's involved here.

MS. HALLIGAN: North Dakota indicates otherwise, I believe, Your Honor. In North Dakota, this Court said that, because, when alcohol flows across the border, it poses unique risks to the regulatory regime, because the state can't bring the alcohol within the full extent of its regulatory and supervisory powers, that it may be appropriate and necessary for states to impose unique rules on out-of-state vendors. In North Dakota, the Court did not say --

JUSTICE SCALIA: Well, but that's fine. And the other side isn't denying that here, that if, you know, they're -- discrimination means treating out-of-state people differently without good reason.

MS. HALLIGAN: But there is good reason --

JUSTICE SCALIA: Now, if you're willing to -- okay, if you're willing to acknowledge that, then we're halfway there and we're just arguing about whether there is good reason here or not.

MS. HALLIGAN: There is good reason here, Your Honor. What's critical about New York's law, as well as Michigan's law, is that it requires that any alcohol vendor have a physical presence in the state. And that's important for a couple of reasons. The state can't meaningfully oversee traffic in alcohol with an out-of-state entity. Petitioner suggested --

JUSTICE SOUTER: What is it doing with the in-state entities? I mean, one of the claims is that nobody is posting officers outside the in-state wineries, no one's making substantial physical audits of in-state wineries. Is that wrong?

MS. HALLIGAN: It is wrong, Your Honor. It's certainly not the case that we have an SLA inspector outside every entity that sells liquor. That would not be possible. But it is true that the state liquor authority can, and does, physically inspect the premises. They do so to determine whether --

JUSTICE SOUTER: What do they inspect them for? Their books, I suppose.

MS. HALLIGAN: Well, more than that, and this is why the physical presence is important and why the Internet hypothetical that Your Honor raised would not -- would not satisfy the state's concerns. What the state can do is, it can go onto a premises, and it can count whether the bottles on the shelves of that premises match the records. That's the best way to detect whether or not there is evasion. Because if you have --

JUSTICE SOUTER: And is there a record that the state is doing that?

MS. HALLIGAN: There is not clear evidence in the record with respect to that -- to that level of detail, but that --

JUSTICE SOUTER: Well, isn't that the end of that issue, then? I mean, it is your burden, isn't it?

MS. HALLIGAN: Your Honor, there is material in the McKeon affidavit, which is in the Joint Appendix -- Mr. McKeon is the Chair of the state liquor authority -- but it's also the case that to suggest that because there is some option out there -- and there's no firm evidence that a less prescriptive rule would, in fact, satisfy the state's concerns in preventing diversion and tax evasion --- but the possibility that's there's some rule out there, because other states have adopted more lax rules, is to treat alcohol like any other product. And the Twenty-First Amendment reflects a consensus by this nation that alcohol is unique, that it should not be open to --

JUSTICE SOUTER: Well, the Twenty-First Amendment at least recognizes that alcohol can be treated as unique, and the issue here is whether you're really doing that in a way that supports your claim of interest.

MS. HALLIGAN: Yes --

JUSTICE SOUTER: And, so far, the one specific thing I've heard from you is that state inspectors do go on winery premises, and they count bottles, and they see if they match what's on the written record.

MS. HALLIGAN: They also draw on the assistance of local law enforcement. And this is also --

JUSTICE GINSBURG: But if that's --

MS. HALLIGAN: -- set forth --

JUSTICE GINSBURG: -- if that's really what New York's concern is, then why does New York say, "Ah, but out-of-staters, if only you establish an office here -- not a winery; an office -- you can operate, and you can make the direct sales from that office, and even in" -- I think your brief told us that, well, these small wineries, out-of-state wineries, haven't got all that much to worry about, because, after all, they could join together -- a group of them could open an office. Now, that office, owned by a group of out-of-state vintners is not going to have bottles on the shelf, is it?

MS. HALLIGAN: Yes, Your Honor, it would. That's -- the state laws requires that any licensed winery have a government-bonded storehouse or ware-room -- storehouse -- storeroom or warehouse, pardon me --

JUSTICE GINSBURG: Well, isn't the --

MS. HALLIGAN: The reason for that is because physical products --

JUSTICE GINSBURG: How do you envision this combination of small wineries? You said that in-state establishments might be jointly maintained by out-of-state wineries.

MS. HALLIGAN: Yes, Your Honor. The state liquor authority has not issued any regulations on this, but presumably what they would say is, you could share a space, provided that the physical property of each winery, the bottles, is segregated so that the states can come in and check whether or not each winery's products conform with their records.

There are other reasons why a physical presence is important, as well. First of all, the state draws on local law enforcement extensively to identify illegal activities, and that would not be possible with any entity located out-of-state. Additionally --

JUSTICE SOUTER: What illegal -- I'm sorry -- you've got to be specific. What illegal activities? Selling to minors?

MS. HALLIGAN: It could be selling to minors, but it could also simply be sale out of an unlicensed premises, where you are selling outside the proper hours of sale, or sale outside of the three-tier system --

JUSTICE SOUTER: Yeah, but if licensed premises don't serve a state interest, then you can't require a licensed premises, so that argument doesn't get too far.

MS. HALLIGAN: But, Your Honor, the principle that having entities that sell liquor be licensed, is one that is at the heart, not just at the --

JUSTICE SCALIA: How does -- how does requiring them to have an in-state office somehow prevent them from shipping to minors from out of state --

MS. HALLIGAN: It --

JUSTICE SCALIA: -- or from shipping to consumers from out of state without paying you their tax?

MS. HALLIGAN: It --

JUSTICE SCALIA: How does the opening of an --

MS. HALLIGAN: Right.

JUSTICE SCALIA: -- an office in New York State at all prevent that?

MS. HALLIGAN: It can't prevent it a hundred percent, but no --

JUSTICE SCALIA: It can't prevent it at all.

MS. HALLIGAN: Your Honor, it can deter it, and it can deter it significantly, because, first of all, there is a much more significant opportunity to identify the illegal activities; and, secondly, if a retailer or a wholesaler or a manufacturer knows that, that operates as a powerful deterrent --

JUSTICE BREYER: What did --

JUSTICE SOUTER: We seem to be talking -- may I just ask one -- we seem to be talking about two different things. Justice Scalia was assuming that, if you have the license and some in-state warehouse, you can ship from outside. And I -- is that the assumption? Or is your argument that New York can require -- does require the in-state warehouse, and you can ship into -- in New York, you can ship only from that warehouse?

MS. HALLIGAN: To be clear, the state has not issued regulations that specifically address that point, because --

JUSTICE SOUTER: So the -- we don't know yet.

MS. HALLIGAN: We don't know. But in talking with the state liquor authority, they have made it clear that their intent would be to require that the liquor come first to the in-state premises --

JUSTICE SCALIA: Well, even if -- I'm willing to assume that. How does that guarantee that the out-of-state winery will not, in violation of New York State law, ship directly to minors or ship directly to consumers, just simply bypassing its cache of wine in New York?

MS. HALLIGAN: There is no guarantee, Your Honor, but there is never any guarantee --

JUSTICE SCALIA: There's no guarantee.

MS. HALLIGAN: -- that people won't --

JUSTICE SCALIA: It doesn't -- it doesn't enable you to enforce your law any more rigorously than without having a requirement for a local office.

MS. HALLIGAN: That, I would respectfully disagree with. It does operate as a powerful deterrent and --

JUSTICE SOUTER: Well, your argument there is that --

MS. HALLIGAN: -- as an investigative aid.

JUSTICE SOUTER: -- if they break the law, you can shut down the warehouse; whereas, you can't effectively do that if the warehouse is in California. Isn't that your point?

MS. HALLIGAN: That's one of the points, but also that we're much more likely to be able to identify the illegal activities in the first place. The suggestion that we would send inspectors to California or any other place to look at books and count bottles is completely infeasible. And the Twenty-First Amendment was intended to allow states to deal with the regulatory challenges that are posed when liquor comes across the border. If we had to demonstrate that there was a hundred-percent compliance, then we couldn't have any regulation at all. That's not, I would submit, a --

JUSTICE GINSBURG: Well, to what --

MS. HALLIGAN: -- reasonable measure.

JUSTICE GINSBURG: -- to what extent does New York take account of, say, the rigorous regulation in the states from which this wine is coming? You say we must do this to police for all kinds of things. But don't other states -- California, Virginia -- don't they have laws that their local wineries must meet?

MS. HALLIGAN: They --

JUSTICE GINSBURG: And is New York just saying, "We're going to treat this thing as though it's totally unregulated, anyway"?

MS. HALLIGAN: We're not suggesting that, Your Honor. What we are suggesting is that relying on other states to enforce law violations in New York State is not a very feasible alternative. Additionally, there are 33 states that have agreed with New York, a number of whom are states that have either reciprocal or unrestricted shipping statutes, and said to this Court, "Please do not prohibit the kinds of laws that are at issue in New York and Michigan." So it's obviously important to the regulators in those states, as well.

JUSTICE SCALIA: What about the states that do a allow shipment from out of state? They don't care about their --

MS. HALLIGAN: I can't --

JUSTICE SCALIA: How many are there that allow shipment from out-of-state wineries?

MS. HALLIGAN: I believe that the current number is 26 states. I certainly can't speak to the regulatory motivations of each of those states, or the reasons why those laws might have been passed.

JUSTICE SCALIA: It certainly suggests that what -- that what you're arguing is not essential to the state's enforcement of its alcohol laws.

MS. HALLIGAN: Well, a number of those states have, in fact, joined New York and Michigan in asking the Court not to --

JUSTICE SCALIA: States don't like federal regulation --

MS. HALLIGAN: -- restrict that.

JUSTICE SCALIA: -- of any sort, of course. I know that.

[Laughter.]

MS. HALLIGAN: Your Honor, I think that all the Twenty-First Amendment requires the states to demonstrate is that the regulatory regime that they have chosen has some relationship to their goals of protecting the integrity of the state's system. And that's certainly what the Court suggested in North Dakota.

JUSTICE SCALIA: Well, I'm not sure. When you have facial discrimination against out-of-state products, I think you're -- the bar is a little higher than that.

MS. HALLIGAN: Well, that was the case in North Dakota, as well. In North Dakota, the state imposed regulations on out-of-state vendors that were extremely onerous, so onerous that some vendors said they wouldn't ship products at all. That was alcohol that was not even destined for consumption within the state; but on a federal enclave. And the mere risk of diversion into unregulated and unlawful channels was enough to allow the state to impose those discriminatory rules. The same is true here.

Justice O'Connor, you also asked about Bacchus, as well, and I would like to take a moment to address that.

Bacchus is distinguishable in several ways. First of all, Bacchus was a tax. And while we would argue that taxes could be used to further states' interest in suppressing consumption, for example, it is certainly not at the heart of the -- of the Twenty-First Amendment in the way that the direct regulation of alcohol across the border is.

JUSTICE STEVENS: No, but if you can't grant a tax exemption -- and it seems to me, a fortiori -- you can't grant a prohibition about importing at all.

MS. HALLIGAN: I, respectfully, would disagree with that, Your Honor. If you can't address the alcohol that flows across the border, which was precisely why the Twenty-First Amendment was enacted, as well as Webb-Kenyon, because the --

JUSTICE STEVENS: No, I'm suggesting a tax on imports is less restrictive than a prohibition on imports.

MS. HALLIGAN: Well, we would certainly, you know, welcome the authority to do both, but importation is what is at the heart of the Twenty-First Amendment. Bacchus is also different, because, there, the state made no effort whatsoever to defend the statute with reference to any concerns related to the Twenty-First Amendment. And Bacchus --

JUSTICE GINSBURG: And according to the District Court, in this very case, the State Attorney General conceded that New York's measure allowing direct sales by in-state wineries was designed to benefit local farmers.

MS. HALLIGAN: That was an off-the-cuff remark by a single attorney, Your Honor, and that can't be taken as dispositive, given the state's vigorous defense of this statute. It also was regarding a provision that is not even directly before the Court right now which confers no different shipment privileges than are conferred on any winery, whether in-state or out-of-state, that would obtain a license to sell in New York.

JUSTICE STEVENS: Thank you, Ms. Halligan.

MS. HALLIGAN: Thank you, Your Honor.

JUSTICE STEVENS: Mr. Bolick, you have, let's see, about four minutes left.

REBUTTAL ARGUMENT OF CLINT BOLICK

ON BEHALF OF PETITIONERS IN 03-1274

MR. BOLICK: Thank you, Justice Stevens. Three very brief points.

There his a panoply of tools available to states to police out-of-state wineries in direct shipping, as the Federal Trade Commission has recognized. They can, if they issue a permit, revoke that permit. And New York has authority to issue such permits under Section 105-9. The Twenty-First Amendment Enforcement Act, for which the liquor distributors and states lobbied very hard, gives injunction authority in the home federal courts. And, of course, the federal agency, the Tax and Trade Bureau, can revoke a permit if state law is violated. In the --

JUSTICE SCALIA: Who's going to count the bottles?

[Laughter.]

MR. BOLICK: Your Honor, the state -- the Federal Government is able to count those, but the evidence is that they don't. And that goes back to a question, I believe, Justice Souter asked. In the Michigan case, a question was posed in an interrogatory, "What enforcement by -- is done of in-state wineries." In that regard, the answer was, "None."

JUSTICE BREYER: How do you count bottles? I would have thought the consumers have all the bottles.

[Laughter.]

MR. BOLICK: That's exactly right. And, certainly in the directly shipping context in-state, that is emphatically the case.

JUSTICE SCALIA: I think they were referring to full bottles. I guess --

[Laughter.]

MR. BOLICK: With direct shipping --

JUSTICE STEVENS: They've all been drinking --

[Laughter.]

JUSTICE STEVENS: -- to arbitrators.

MR. BOLICK: With direct shipping, Justice Scalia, we can personalize things.

In terms of the Bacchus case, as Justice Ginsburg pointed out, New York, like Hawaii, conceded protectionism. It is very rife in the legislative record in 1970, when the direct shipping was extinguished. In 1995, when Governor Pataki vetoed a bill that would have solved this problem, he said, and I quote -- and this is in the record, the Joint -- the Second Circuit Joint Appendix, at 442 -- he said, and I quote, "Since the vast majority of this country's wines are produced in California, I believe that this bill would inevitably lead to a significant increase in mail-order wines from that state into New York. This increase could, in turn, lead to a decrease in sales for New York liquor stores and their distributors, and shrink New York wineries' market share. That is protectionism."

And, finally, the notion that small winemakers could go to all 50 states and open offices in order to do this -- if you could drive out to Middleburg and visit Juanita Swedenburg's winery -- and she invites you to do so --

[Laughter.]

MR. BOLICK: -- you will find Mrs. Swedenburg selling wine, harvesting grapes, and bottling. This is a ban on -- this is market foreclosure, sure and simple -- fewer than 600 wineries are represented on the stores of New York's shelves, out of over 3,000 wineries --

JUSTICE STEVENS: The question --

MR. BOLICK: -- in the United States.

JUSTICE STEVENS: -- really is whether the plain language of the Twenty-First Amendment allows that very protectionism.

MR. BOLICK: And I would refer you, in my brief time remaining, to the brief, the Carter-Phillips brief for the Napa Valley Vintners Association, the DKT Liberty brief, which go into the history of the Twenty-First Amendment, which was intended to restore the police power, which did not include the power to discriminate. Our clients cannot compete with the liquor distributors in the political marketplace in their -- in their -- in their home states. They can, however, compete in the economic marketplace. The Commerce Clause protects that right, that level playing field. The Twenty-First Amendment was never intended to take it away.

We ask this Court, respectfully, to honor 124 years of precedent in the National Economic Union.

If there are no further questions, thank you.

JUSTICE STEVENS: Thank you, Mr. Bolick. The case is submitted.

(Whereupon, at 11:08 a.m., the case in the above-entitled matter was submitted.)