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Prohibition redux?

CNET's Declan McCullagh explains why lobbyists for alcohol distributors are fighting the legalization of direct Internet shipping.

The U.S. Supreme Court will hear arguments next month in a lawsuit that will, if successful, permit American adults to freely buy beer and wine over the Internet.

It's slightly bizarre to think that it takes the nation's highest court to guarantee online shoppers the right to order a case of fine Merlot or Pinot Noir from California. You can thank a crowd of pusillanimous state legislators for that.

Dozens of state legislatures, including those of New York, Pennsylvania, Florida, Maryland, and Michigan, have slapped severe restrictions on out-of-state shipments of alcohol. The culprits behind these rules: Lobbyists for beer and wine distributors, which currently enjoy profitable markups in the 25 percent range that they stand to lose if direct Internet shipping becomes legal and popular.

While this unfortunate situation may pad the bank accounts of distributors represented by the influential Wine and Spirits Wholesalers of America, it amounts to a tax on Internet shoppers.

No local distributor has the warehouse space to stock products from more than a fraction of the thousands of wineries and breweries that are online--which means that aficionados of a rare brew or a less-advertised vintage are likely out of luck today. The Web site of the Kendall-Jackson winery, for instance, flatly refuses to ship to prohibitionist states.

Enter the free-market paladins at the Institute for Justice, a public interest law firm in Washington, D.C., that's suing New York state to strike down its prohibition on out-of-state shipments. New York's law currently says that "no alcoholic beverages shall be shipped into the state unless the same shall be consigned to a person duly licensed hereunder to traffic in alcoholic beverages."

Alcohol shipments uncork a special legal twist that goes back to the early 20th century.

"It limits choice for consumers, it raises the costs of wine, and it inhibits the ability of thousands of small wineries to effectively grow and market their products," says Steve Simpson, an Institute for Justice senior attorney. "There's absolutely no reason to have it."

This isn't the first time that the merry band of litigators at the Institute for Justice has taken to the courts to defend e-commerce.

They successfully sued a federal agency called the Commodity Futures Trading Commission to eliminate rules requiring publishers of Internet investment newsletters to be fingerprinted. The Institute for Justice also overturned a state law that barred out-of-state funeral casket retailers from selling to Tennessee residents (but was unable to dispatch a similar law in Oklahoma). In California, the Institute for Justice is representing, which matches home buyers and sellers and is being hassled by the state government.

Repetition of prohibition?
In general, federal courts are willing to eviscerate protectionist state laws on grounds that they unduly interfere with electronic commerce. But alcohol shipments uncork a special legal twist that goes back to the early 20th century: The 21st Amendment, which ended Prohibition, granted states some authority to regulate "intoxicating liquors."

Teenagers are probably more likely to find a way to acquire a six-pack of cheap beer locally than select a $40 bottle of Cabernet Sauvignon from a Sonoma Valley winery via the Net.

Lower court rulings have been mixed. The Institute for Justice won a preliminary victory against New York in a federal district court, but the 2nd Circuit Court of Appeals didn't see things the same way. A separate lawsuit challenging Michigan's prohibitions had better luck and has been consolidated with the Institute for Justice's case for the Dec. 7 oral arguments.

The Institute for Justice is representing Juanita Swedenburg, who owns the family-run Swedenburg Winery in Middlesburg, Va., and David Lucas, who runs the Lucas Winery in Lodi, Calif. Swedenburg's total production is less than 2,000 cases a year--not enough to interest major distributors--and half of the customers who travel to her winery live in other states.

For his part, New York Attorney General Eliot Spitzer is not defending the prohibitions by saying they make much sense. Instead, Spitzer is advancing two arguments: first, that the 21st Amendment authorizes states to do whatever they want, and second, that the law is necessary to protect children. Permitting online orders "eliminates a face-to-face sale and thereby increases the risk that minors will be able to obtain alcohol through Internet sales or otherwise," Spitzer said in a Supreme Court brief.

Really? Teenagers are probably more likely to find a way to acquire a six-pack of cheap beer locally than select a $40 bottle of Cabernet Sauvignon from a Sonoma Valley winery. What's more, alcohol shipments require an adult to show ID to sign for the package.

That kind of common sense is echoed by a Federal Trade Commission report, which looked at the states that permit out-of-state shipments and found that they've had no serious problems with minors buying through mail order. California reported that "for at least 20 years there was never a problem that was brought to our attention," according to the FTC report.

Now the question's whether the Supreme Court can see past New York's and Michigan's Internet protectionism and do what's in the best interest of American consumers.