[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
LEGAL ISSUES CONCERNING
STATE ALCOHOL REGULATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND
COMPETITION POLICY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 18, 2010
__________
Serial No. 111-125
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr., TRENT FRANKS, Arizona
Georgia LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois TED POE, Texas
JUDY CHU, California JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Courts and Competition Policy
HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman
JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia JASON CHAFFETZ, Utah
CHARLES A. GONZALEZ, Texas F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MELVIN L. WATT, North Carolina BOB GOODLATTE, Virginia
MIKE QUIGLEY, Illinois DARRELL ISSA, California
DANIEL MAFFEI, New York GREGG HARPER, Mississippi
[Vacant]
Christal Sheppard, Chief Counsel
Blaine Merritt, Minority Counsel
C O N T E N T S
----------
MARCH 18, 2010
Page
OPENING STATEMENTS
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Chairman, Subcommittee
on Courts and Competition Policy............................... 1
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Ranking Member, Subcommittee on
Courts and Competition Policy.................................. 2
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michiigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Courts and Competition
Policy......................................................... 3
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Ranking Member, Committee on the Judiciary. 10
WITNESSES
The Honorable Bobby L. Rush, a Representative in Congress from
the State of Illinois
Oral Testimony................................................. 12
Prepared Statement............................................. 14
The Honorable Mike Thompson, a Representative in Congress from
the State of California
Oral Testimony................................................. 17
Prepared Statement............................................. 19
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee
Oral Testimony................................................. 22
Prepared Statement............................................. 24
The Honorable George Radanovich, a Representative in Congress
from the State of California
Oral Testimony................................................. 28
Prepared Statement............................................. 30
Mr. James C. Ho, Solicitor General of Texas, Office of the
Solicitor General, Austin, TX
Oral Testimony................................................. 33
Prepared Statement............................................. 35
Ms. Nida Samona, Chairperson, Michigan Liquor Control Commission,
Lansing, MI
Oral Testimony................................................. 36
Prepared Statement............................................. 39
Mr. Stephen Hindy, Chairman and President, Brooklyn Brewery,
Brooklyn, NY
Oral Testimony................................................. 45
Prepared Statement............................................. 47
Ms. Pamela S. Erickson, Chief Executive Officer, Public Action
Management, Scottsdale, AZ
Oral Testimony................................................. 51
Prepared Statement............................................. 53
Mr. Darren Bush, Associate Professor of Law, University of
Houston Law Center, Houston, TX
Oral Testimony................................................. 84
Prepared Statement............................................. 87
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Courts and Competition Policy............................... 4
APPENDIX
Material Submitted for the Hearing Record........................ 157
LEGAL ISSUES CONCERNING
STATE ALCOHOL REGULATION
----------
THURSDAY, MARCH 18, 2010
House of Representatives,
Subcommittee on Courts and
Competition Policy
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:10 p.m., in
room 2141, Rayburn House Office Building, the Honorable Henry
C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee)
presiding.
Present: Representatives Johnson, Conyers, Gonzalez,
Jackson Lee, Quigley, Maffei, Coble, Chaffetz, Smith,
Sensenbrenner, Goodlatte, and Issa.
Staff present: (Majority) Christal Sheppard, Subcommittee
Chief Counsel; Anant Raut, Counsel; Rosalind Jackson,
Professional Staff Member; and (Minority) Stewart Jeffries,
Counsel.
Mr. Johnson. This hearing of the Committee on the
Judiciary, the Subcommittee on Courts and Competition Policy
will now come to order. Without objection the Chair is
authorized to declare a recess.
Let me start off by saying that as Chairman of the
Subcommittee on Courts and Competition Policy, I strive to keep
all of our hearings balanced. I like for our Members to hear a
variety of views, so that they can make informed decisions. So
you can imagine my disappointment when a number of groups whom
we invited to testify declined the opportunity.
My staff reached out to the Wine Institute, Wine America,
and the Specialty Wine Retailers Association. Collectively,
they represent more that 1,000 wineries, yet they couldn't find
a single person to come here today and testify.
This would have been an excellent opportunity for them to
express their point of view. If I were one of their members, I
would not be happy.
We also solicited the input of a number of trade
associations and retailers, including Costco. I thank them for
their cooperation.
Let me assure all of you that my door remains open. I
invite all of the institutions whom we talked to that were
unable to participate today to submit statements for the
record.
The central question of this hearing is: What is the ideal
balance between state regulation and Federal oversight over the
alcoholic beverage industry? Now, I have heard that some people
already have legislation in mind. I think that is premature.
A system that is working should continue as it is, so if
there is a compelling reason to change the applicable laws in
this country let us hear it. Let us bring everything out from
behind closed doors.
In the early part of the last century, this country
prohibited alcohol. Ultimately, we reversed course. The 21st
Amendment overturned prohibition and affirmed the important
role of states in the regulation of the alcoholic beverage
industry.
A number of states developed a three-tier system for
alcoholic beverage distribution: licensed manufacturers sell
exclusively to licensed wholesalers, who in turn sell
exclusively to licensed retailers. Some say that this system
has been responsible for minimizing alcohol abuse and
consumption by minors. There are others who say that this
system favors distributors and reduces choice and increases
prices for consumers.
The three-tier system has been challenged on antitrust and
constitutional grounds in a number of states. In one of these
decisions, Granholm v. Heald, the Supreme Court struck down
discriminatory treatment of out-of-state wineries under the
dormant Commerce Clause of the Constitution. This decision
allowed for the direct shipment of wine from out-of-state
vineyards, providing a huge sales boost to small wineries
lacking the scale or resources to work with large national
distributors.
In another case, Costco v. Marin, the Ninth Circuit upheld
a number of Washington State alcohol regulations but struck
down the post and hold pricing system. The court of appeals
held that unlike the other state regulations, this one fell
outside of the traditional antitrust immunity enjoyed by state
regulations because it allowed private parties to fix the
retail prices of certain alcoholic beverages in violation of
Federal antitrust laws.
So today we ask our experts, why do we need to change
anything? Aren't these decisions just clarifying the applicable
law or are they creating ambiguity?
Yes, Congress had one intent in mind when it passed the
21st Amendment, but it also had a specific intent in mind with
every antitrust law it passed, just as the original framers had
an intent in mind when they wrote the Commerce Clause of the
Constitution. I hope that today's hearing will shed some light
on what the proper balance among these laws should be.
And I now recognize my colleague, Howard Coble, the
distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Coble?
Mr. Coble. Thank you, Mr. Chairman, for calling this
hearing. We have two full panels so I will be brief, Mr.
Chairman, but today's hearing, as you know, is on the legal
challenges to state alcohol regulation.
I am an advocate for state regulation in this area. States
are generally, without--perhaps an occasional exception--but
generally the states are in the best position to determine what
the appropriate level of regulation is for their citizens.
I am also an advocate of the three-tier system because I
believe that it provides an efficient means to maintain quality
control on alcohol and helps to ensure that alcohol is sold
only to adults. These are important and laudable goals, and
anything that Congress does in this area should be done with an
eye to ensuring that we are keeping our constituents safe.
That said, I am also an advocate in competition and giving
consumers more choices. Fortunately, in the last few decades we
have seen a proliferation of small wineries and breweries.
These new players have helped expand Americans' palates.
I have heard from some of my constituents in the producer
industry, and they support alcohol regulation, particularly
those requirements--strike that--those regulations that promote
quality and safety. I think this is encouraging to be aware of
that.
However, they express concern that some alcohol state laws
serve not to protect consumers but rather to protect the
business interests of in-state producers, wholesalers, and
retailers, sometimes at the expense of competition from out-of-
state vendors. Others who are small producers of beer and wine
depend on the ability to market their products directly to
consumers throughout the country. While they may have become
regional economic engines we should not overlook their
interests simply because they cannot operate like other mass-
produced.
December 25, 2008, Mr. Chairman, marked the 75th
anniversary of the 21st Amendment, and since that time they
have taken their responsibility to regulate alcohol very
seriously and should be recognized for this.
I expect our distinguished panels to highlight instances
within the three-tier system that warrant our attention. These
are complicated matters, and as we begin to wade through these
issues we should not overlook the significance of the 21st
Amendment and remember there is always room for improvement,
particularly in the area of safety. I am grateful that we have
such an excellent panel of Members to begin with, and then
expert witnesses following, here today who can shed some light
on the complicated legal and factual issues that surround state
alcohol regulation.
Mr. Chairman, we have all heard many stories--some
humorous, some sad--involving alcohol. One of the towns I
represent back home has long been a traditionally dry town. The
voters, however, voted to approve the lawful sale and
consumption in that town a few months ago. It is reported that
one of my constituents once said, ``There will be beer and wine
sold in Asheboro when pigs fly.'' Well, there is a pub in
Asheboro now entitled ``The Flying Pig,'' so one never knows
what will happen.
Thank you, Mr. Chairman. I yield back.
Mr. Johnson. Thank you, Mr. Coble.
I will now recognize Mr. John Conyers, a distinguished
Member of this Subcommittee and also Chairman of the full
Committee on the Judiciary.
Chairman?
Mr. Conyers. Thank you very much, Chairman Johnson. I ask
unanimous consent to put my remarks in the record.
Mr. Johnson. Without objection, so ordered.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Courts and Competition Policy
__________
Mr. Conyers. And, you know, as Chair of the Committee I am
supposed to know a lot about everybody on the Committee, and it
is only appropriate that I announce that today is the birthday
of Howard Coble. He is now 40 years old. [Laughter.]
Mr. Coble. Mr. Chairman, would you yield? [Applause.]
Thank you. I thank you very much.
Mr. Chairman, I thank you.
And thank you all for the generous reception, but for the
gentleman from Michigan's information, I am only 39.
[Laughter.]
Mr. Conyers. This is an issue before us about the 21st
Amendment and the Commerce Clause, and I have just mentioned to
some friends earlier today that there is something happening in
our digital age that more and more modern machines, and
techniques, and Web pages, and Internets, and Web sites are
creating new challenges. In intellectual property, for example,
we spend a lot of time here trying to persuade not just
youngsters in college but a lot of people that you may not be
able to download property that is not your own without the
permission of the creator.
And so here, in this area, we now find out that there are
some people in the business that are saying, ``The rules that
you have in this state are different from the people that are
outside trying to do business and the people that are inside
trying to do business,'' and so we--I just feel I am just
redescribing the nature of the challenge before us. And so I
look forward to this panel.
Thank you so much.
Mr. Johnson. Thank you, Mr. Chairman.
And I think I should note for the record that two of our
witnesses before us have green on today, so--even the Chairman
does--so I believe that the activities of yesterday have
continued on into today and will continue tonight as well.
Next, I would like to recognize the Ranking Member of the
full Committee on Judiciary, Mr. Lamar Smith, out of Texas.
Mr. Smith. Thank you, Mr. Chairman. Let me confess that the
Chairman of the full Committee beat me to it because I was
going to thank you, Chairman, for holding this hearing to help
celebrate Howard Coble's birthday, but I am glad it was
recognized earlier, and better to have it recognized twice than
not at all. Glad to have Howard here.
Mr. Chairman, America has a long and complicated history
with alcohol. In 1794 President George Washington sent troops
to western Pennsylvania to quash the Whiskey Rebellion, which
was fought in opposition to the Federal Government's tax on
alcohol to pay for the American Revolution.
Of course, America's most famous battle with alcohol was
the prohibition era, from 1920 to 1933, which began with the
adoption of the 18th Amendment in 1918. While the ban on
alcohol was well-intentioned, in practice it led to flaunting
of the laws, with many citizens patronizing speakeasies and
consuming bathtub gin. Further, while prohibition was meant to
promote public safety, the proliferation of illegal alcohol
distribution by organized criminal enterprises led to an
increase in alcohol-related violence.
In 1933 Congress passed, and the states ratified, the 21st
Amendment, which repealed prohibition. Section 2 of the 21st
Amendment sets forth the power of states to regulate alcohol
providing that ``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
laws thereof is hereby prohibited.''
The 21st Amendment, in conjunction with the Wilson Act and
the Webb-Kenyon Act, supplies the basis for state regulation of
alcohol. The Wilson Act provides that alcoholic beverages
transported into a state are subject to the state's laws to the
same extent and in the same manner as those such liquids or
liquors have been produced in such state or territory. The
Webb-Kenyon Act prohibits the transportation of alcoholic
beverages into a state from outside the state if received,
possessed, sold, or in any manner used in violation of the
receiving state's laws.
I say all this for a number of reasons: In response to the
21st Amendment most states have enacted several--some form of
the three-tier system for alcohol distribution. This system
separates alcohol producers from alcohol wholesalers from
alcohol retailers. The inclusion of wholesalers as middlemen in
the transaction makes it easier for states to regulate alcohol;
it makes it possible for states to ensure that alcohol is safe;
it makes it simpler to ensure that alcohol is sold only to
individuals over 21 years old; and it provides a
straightforward alcohol tax collection system for the states.
These are all laudable goals, and for those reasons I am
supportive of the three-tier system.
Naturally, some alcohol producers and retailers are
concerned about state liquor regulations that they perceive
hurt their ability to compete in a particular state. Such
concerns have led to a number of legal challenges to various
states' laws on antitrust and dormant Commerce Clause grounds.
This hearing gives us the opportunity to examine these
current legal challenges to the Post-Prohibition practices of
state regulation of alcohol. In doing so we are forced to
reconcile the 21st Amendment, Federal statutes, state laws, and
judicial doctrines.
Mr. Chairman, these are complicated legal questions and not
susceptible to quick solutions. However, I hope that this
hearing will start to give Congress the information necessary
to ensure that state regulation of alcohol remains robust.
Those regulators are best-positioned to determine that alcohol
consumption in their states is both safe and lawful.
Thank you, Mr. Chairman. I will yield back.
Mr. Johnson. I thank the gentleman for his statement.
And now I will start with introductions, and I am pleased
to introduce the first panel for today's hearing, which
consists of four distinguished Members of Congress. The first
is Representative Bobby Rush, representing the first district
of Illinois; next is Representative George Radanovich,
representing California's 19th district; and after that we have
my esteemed colleague from the Judiciary Committee, the
Chairman of the Subcommittee on Commercial and Administrative
Law, Mr. Steve Cohen; and finally we have Representative Mike
Thompson, representing California's first district.
Thank you all for your willingness to participate in
today's hearing. Without objection, your written statements
will be placed into the record. We ask that you limit your oral
remarks to 5 minutes. You will note that we have a lighting
system that starts with a green light; at 4 minutes it turns
yellow; then red at 5 minutes.
Congressman Rush, will you begin your testimony, please?
TESTIMONY OF THE HONORABLE BOBBY L. RUSH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Rush. Thank you, Mr. Chairman, and Ranking Member
Coble, and Chairman of the full Committee, Chairman Conyers,
and Ranking Member of the full Committee, Ranking Member Smith.
I see my colleague from Illinois----
I am delighted to see you here this afternoon.
And I want to thank you for granting me the opportunity to
testify today on state alcohol regulation. I want also to
acknowledge my colleagues who are participating on this first
panel with me.
Mr. Chairman, as I considered coming before this
Subcommittee to testify I certainly came to recognize that this
is not a matter that has been at the forefront of the issues
that I am normally associated with in the Congress. However, as
I began to examine this matter with greater scrutiny I quickly
discovered that there existed many underlying causes that are
or could be greatly impacted by the undertaking of this
Subcommittee as it seeks to examine state-based regulation of
alcoholic beverages. This Subcommittee's decision to review
this matter in light of the 2005 Granholm Supreme Court case is
both wise and necessary.
Mr Chairman, in my state of Illinois we have a three-tier
system of distribution in which, as you are aware,
manufacturers or producers sell to licensed wholesalers or
distributors, who in turn sell to licensed retailers such as
bars, packaged-good stores, and restaurants. This system in
Illinois is currently under attack in Federal court as a result
of a decision last week by the Illinois Liquor Control
Commission to deny a wholesaler license to an alcohol
manufacturer who was seeking to acquire 100 percent of a
Chicago alcohol beverage distributorship.
While alcohol laws vary by state, Illinois law is viewed as
one of the strongest in the Nation as it relates to the three-
tier system of alcohol distribution. Many observers believe
that this case and others like it will have a profound effect
on the regulation of the industry in Illinois and beyond. While
regulation or deregulation may be viewed by many through the
lenses of what is in the best ``competitive interests'' of
industry, I submit that there are broader aspects of this issue
to consider as well.
Prior to my election to Congress in 1992 I served for 9
years as a member of the Chicago city council. As a local
alderman I cam to appreciate the value of local control of the
sale and consumption of alcoholic beverages. Indeed, an
effective tool of local neighborhoods in Chicago has been the
ability to, through ballot referendum, to vote an area dry.
Communities plagued by bad actors in the alcoholic industry at
the retail level have the ability to, absent local liquor
control action, to seek remedies as a result of the ability of
states to regulate the industry.
My objective is not to protect wholesalers or hurt
producers, but rather to protect the people of my community who
are, in many cases, disproportionately overwhelmed with
marketing and promotional advertising designed to get them to
drink.
Additionally, I would express a concern about the direction
the industry is going relative to deregulation and its impact
on minority ownership at the wholesaler-distributor level.
Certainly there is strong belief in Illinois--and I suspect
this would be the case elsewhere in our Nation--that regulation
or the removal of state regulatory authority of the alcohol
industry would have an adverse, negative impact on minority
ownership, and I certainly would be in opposition to such a
move.
I believe while there may be some imperfections with the
levels of regulation state by state, there is significant value
to having an aggressive not passive role--state role--in the
regulation of the alcohol industry.
The 21st Amendment, which provides states the authority to
regulate alcohol within their own boundaries, has been
operating since the 1930's, and I believe should Congress
decide to act it should be to more fully clarify its intent
that states be allowed to regulate alcohol sales within their
borders.
With that, Mr. Chairman, I thank you and I yield back the
balance of my time if I have any.
[The prepared statement of Mr. Rush follows:]
Prepared Statement of the Honorable Bobby L. Rush,
a Representative in Congress from the State of Illinois
__________
Mr. Johnson. Thank you, sir.
We will next go with the seating order, so Representative
Thompson, please proceed with your testimony, yes.
TESTIMONY OF THE HONORABLE MIKE THOMPSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Thompson. Well, thank you, Mr. Chairman and Ranking
Member Coble, and Members of the Committee. I appreciate the
opportunity to testify today, and I appreciate, Mr. Chairman,
your opening comments when you mentioned that you are going to
be with open mind to see if there are any compelling reasons
why we should change existing law. And I know some will try and
make that compelling argument--I know some would like you to
believe that this is an issue between beer wholesalers and beer
producers, but by opening remarks of the different Members of
the Committee, I know that you understand that the reach is far
greater than that.
You will hear testimony today regarding the power of the
21st Amendment versus other constitutional rights. Wholesalers
will argue for a proposal that would tip the scale completely
in the favor of state control over alcohol. I have, in my
prepared testimony--written testimony that I submit for the
record--an address on that regard, but I would like to spend my
time trying to explain how adopting this type of proposal
would, in real time, disadvantage two groups that all of us in
Congress are very concerned about: American businesses,
particularly small businesses, and American consumers. This
proposal is asking Congress to pick them, the wholesalers, as
winners, and America's consumers, wineries, and breweries as
losers.
My district is home to hundreds of wineries, and I have
more microbreweries than any other congressional district, and
I can tell you firsthand that state regulation of alcohol is
alive and well. States can and states do regulate alcohol
sales.
Few products, if any, come under such heavy regulation. But
the Supreme Court has ruled that while states can regulate they
cannot discriminate. Unfair and discriminatory regulation hurts
producers and it directly hurts consumers.
We have seen this movie before, and in the sequel, a return
to past practices, the ending is not going to be any better.
Hawaii used to charge in-state wineries a penny per gallon tax
and out-of-state wines 85 cents for tax. Arkansas would only
allow Arkansas wine to be sold in grocery stores. And in Rhode
Island they disallowed retailers from advertising the prices of
their products.
A return to these practices means less choice for consumers
and unfairly hurts producers. Take wine as an example: All 50
states make wine now. There is more than 500 percent growth in
wineries over the past 30 years. They support well over 1
million jobs, and I don't believe we should be discriminating
against business and reduce competition that has made our great
country and American enterprise so fantastic.
Mr. Chairman and Members, the 21st Amendment does not trump
the rest of the Constitution; 40 years of court decision has
made that clear. The 21st Amendment must be balanced with the
Commerce Clause, Due Process Clause, First Amendment, and it
can't violate the Sherman Act.
Congress backed this up in 2003 when we passed legislation
that said states can go to Federal court on the 21st Amendment
but must be consistent with other provisions of the
Constitution. States have strong rights under the 21st
Amendment, but states cannot discriminate. I urge you, don't
give one side--the wholesalers--license to harm American
consumers and other businesses. It is unconstitutional and it
is wrong.
And I want to reference something that I understand is
going to be mentioned today, and that is this U.K. study that
was done. And I want to urge the Members of this Committee,
please don't compare apples to lemons. Our system is very
different than that of the U.K. The idea that wholesaler
control reduces underage drinking is pretty farfetched.
The entire industry is interested in preventing underage
drinking, but don't forget kids get alcohol from adults. They
get alcohol from parents and from friends who buy it legally.
And kids who are drinking aren't drinking $80 or even $20
bottles of wine that are made in my district or any other wine-
producing area in the country. Any mention of kids' access to
alcohol and its relationship to state control is no more than a
smokescreen.
I appreciate you taking time to hear these concerns and I
urge you to move with caution in trying to change a system that
is working fairly well. Thank you very much.
[The prepared statement of Mr. Thompson follows:]
Prepared Statement of the Honorable Mike Thompson,
a Representative in Congress from the State of California
__________
Mr. Johnson. Thank you, Representative Thompson.
Representative Cohen?
Mr. Cohen. Thank you, Chairman Johnson, Ranking Member
Coble, and the full Committee Chairman and the Ranking Member,
Mr. Smith, who deserves recognition that he didn't receive
yesterday properly on the floor.
Mr. Johnson. And I see we are still receiving the effects
of St. Patrick's Day on the panel also.
TESTIMONY OF THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TENNESSEE
Mr. Cohen. Thank you for the opportunity to testify today
on this important topic. I served as a Tennessee senator for 24
years, and 22 of those years were on the State and Local
Government Committee, which regulates alcohol, and for 15 of
those years I chaired that committee. From that position I
learned about the three-tier system and a great appreciation
for the need to regulate alcohol.
America has had a relationship, I think, as Mr. Smith
mentioned, since our Nation's earliest days, but that
relationship has not been without significant challenge. The
marketplace has changed a lot in 100 years, and 100 years ago
we had temperance movements and attempts to get involved and
change the way we imbibed alcohol or the opportunity.
Much of the attention in the United States was paid to the
growing problems, real or perceived, that alcohol consumption
might of had, and possible abuse. Significant concern about how
the product was sold in retail arose around saloons and
taverns, largely unregulated, and it became the focus of public
ire, and I think those saloons and taverns of those years were
nothing like what we know today.
On-premises establishments not known as ``family friendly''
venues 100 years ago were becoming what the journalists of the
time referred to as dens of iniquity. Retail outlets were often
owned by out-of-town people or out-of-state people who really
didn't care too much about the community values, they only were
concerned about selling alcohol.
Because there was no effective system of regulation in
place a grassroots movement began to take hold that focused on
the problems associated with alcohol and the proposals that the
sale, manufacture, and transportation of intoxicating beverages
should be prohibited. As a result of this, in 1920 America
began a 13-year failed experiment known as prohibition.
In 1933, due to a need to collect revenue through taxation
and a period of lawlessness that had given rise to organized
crime--Mr. Quigley, I know in his city they had Al Capone and
the Untouchables, Eliot Ness and all that--and to decriminalize
the behavior many Americans had continued to participate in
illegally because Americans like to drink and to end much
hypocrisy and much governmental corruption that we looked the
other way about prohibition was repealed through the 21st
Amendment.
Prohibition was a serious mistake and an attempt at
controlling adult behavior, which governments really shouldn't
be doing and continue to do in Mr. Thompson's districts and
throughout this country with other products. But nevertheless,
that was a problem, and then the repeal took place, and we had
certain problems we wanted to cure.
Prohibition had certain reasons that it arose because
problems do exist with alcohol and they were ameliorated--there
was a desire to ameliorate them after prohibition. Two goals
that they had in repeal: one was to promote temperance, which
is another way to say moderation, and the second was to
maintain an orderly market.
These goals continue in the U.S. today as we work to
facilitate a healthy marketplace for alcoholic beverages
through effective regulation. In order to promote temperance
states can use a variety of laws that work to control alcohol
consumption and levy taxes to collect revenue. Giving states
primary authority over alcohol ensures those attitudes about
the product can be more directly reflected in community
standards.
Citizens in my home state of Tennessee have different
thoughts about alcohol than citizens do, say, in Nevada or
Louisiana, even though sometimes that is regrettable to me.
When policy problems arise around the alcohol sale or
consumption states are better equipped to deal with those
problems than the Federal Government is.
Additionally, having states regulate alcohol helps
facilitate an orderly market. The state-based alcohol
regulatory system in place, known as the three-tier system, has
done a good job of achieving those 21st Amendment goals of
promoting temperance and an orderly market. Alcohol suppliers,
distributors, and retailers have operated successful businesses
within this scheme for more than 75 years, and at the same time
consumers of alcoholic beverages had an unrivaled selection of
products available to them at fair prices.
Effective regulation strikes a balance between competition
in the marketplace and the concerns of public health and
safety. Unfortunately, over the last several years many states
have begun facing deregulatory challenges that cease to strike
down effective, time-tested state alcohol regulations.
If we allow the systematic deregulation of the alcohol
industry to continue we already have an idea of what our
regulatory system could look like a few more years down the
road. I won't go into details about the dangers of alcohol
deregulation the United Kingdom experienced, but Ms. Pamela
Erickson, who is going to appear on the next panel, will be
discussing that; I will let her fill in the details, but it
doesn't seem like it has been very effective or good in the
United Kingdom.
I am troubled that we are looking at stopping a system that
has worked for 75 years, that has been effective, and that the
public at large has not complained about. In Tennessee there is
an expression, and I think it is other places as well, ``If it
ain't broke don't fix it.'' And this one is not broke, and it
doesn't need fixing.
I commend the Subcommittee for holding today's hearing and
look forward to the outcome of this matter in this Committee,
and thank you for the opportunity to testify.
[The prepared statement of Mr. Cohen follows:]
Prepared Statement of the Honorable Steve Cohen,
a Representative in Congress from the State of Tennessee
__________
Mr. Johnson. Thank you, Mr. Cohen.
Next, Mr. Radanovich? We have 5 minutes and 50 seconds of
votes with 41 people having voted already.
Proceed, sir.
TESTIMONY OF THE HONORABLE GEORGE RADANOVICH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Radanovich. Thank you, Chairman Johnson.
Thank you very much, Chairman Conyers, Ranking Member
Coble, and Ranking Member Smith of the full Committee. Thank
you for the opportunity to testify.
The business of wine is far from the bucolic splendor of
the vineyards. It is difficult to sell wine--perhaps more
difficult than selling most other products or services in the
United States--and much of that is due to the level of
diversity--and diversity of regulation and control of all
aspects of the business.
The U.S. Department of Treasury's Tax and Trade Bureau's
production regulations establish uniform baseline standards of
identity and allow wineries from any state to know where their
product is categorized on the Federal level. TTB's permitting
system for wineries and distilleries, their antitrust-based
trade practice laws, and their label approval processes all
provide a uniform framework from which state laws build.
Despite the current diversity in state control I truly
believe that the inconsistencies among state control systems
would be much greater without this important Federal framework.
People in the wine business here a lot about three-tier
distribution, but all know that a pure three-tier distribution
does not exist in the United States.
Instead, over the years since prohibition was repealed,
states have chosen to exercise their powers under the 21st
Amendment to create a hybrid distribution systems that use
three-tier principles as a framework. In at least 39 states,
for example, state laws allow in-state wineries to self
distribute.
Self-distribution laws permit the in-state winery to act as
its own distributor, allowing sales by the winery directly to
retail on-and off-sale licenses. In California the number of
wineries could not proliferate without self-distribution, but
self-distribution stops at the state line and the privilege is
only available for in-state wineries.
Self-distribution and winery direct sales are not three-
tier concepts. They are methods of distribution that would not
be categorized as three-tier. In California as well as in some
other states these methods of distribution exist in addition to
the three-tier distribution method, and wineries can choose to
exercise any combination of methods in California to sell their
wine. Even in the Granholm state of Michigan laws have been
changed to allow out-of-state wineries to sell wine direct to
retailers.
There is draft legislation floating around the House that
is associated with this hearing today. It is being promoted by,
I believe, the beer wholesalers, and it is a very long, broad,
and quite frankly, outrageous wish list.
Number one, they want Congress to grant states an antitrust
exemption. They also want states to allow--they want state laws
to override Federal and constitutional mandates. They want
Congress to overturn a long line of judicial decisions that
have consistently recognized states' rights to regulate alcohol
beverages as long as they don't discriminate. And they want
states to be relieved from having to prove that their own
statutes and regulations are constitutional.
As a Member of the Energy and Commerce Committee, I urge
this Committee to listen carefully and respectfully to today's
testimony, especially to see if what is being proposed here is
innovation or monopoly protection, whether the marketplace or
the government is to decide winners and losers, and whether
free market economy or one that is controlled by promoting
discriminatory legislation to state legislatures will determine
how a legal product is marketed to legal consumers.
I ask you to be on the side of states' rights, but states'
rights that are measured by the principles of our country's
Constitution and antitrust laws. It is right that they have
access to Congress to make their request and it is right to
allow them a forum to express their fears about the holdings in
the current series of judicial decisions. They ask a lot, but
what they ask is not justified.
What they fear is nothing less than the U.S. Constitution
and antitrust laws. There must be extraordinary reasons why
states should be allowed--or should get a free pass from the
Constitution or antitrust laws, and I predict that you will not
hear any such reasons in your hearing today.
Thank you, Mr. Chairman. I yield back.
[The prepared statement of Mr. Radanovich follows:]
Prepared Statement of the Honorable George Radanovich,
a Representative in Congress from the State of California
__________
Mr. Johnson. Thank you.
With that, we will take a recess. We have got about 35 to
40 minutes worth of votes, and I appreciate you all testifying
and look forward to hearing the persons on the second panel. We
shall return.
[Recess.]
Mr. Johnson. We now turn to our second panel and ask them
to prepare to testify. I draw the gallery's attention to the
first seat, which is an empty seat which is for the wine
industry, and so unfortunately no one being here from the wine
industry means that they will not need to prepare to testify.
Our first witness is Mr. James Ho. Mr. Ho is the solicitor
general for the state of Texas, the first Asian-American to
hold the office.
Welcome, Mr. Ho.
Next is Ms. Nida Samona, chairperson of the Michigan Liquor
Control Commission.
Welcome, Ms. Samona.
Next, Steve Hindy, cofounder, chairman, and president of
the Brooklyn Brewery.
Welcome, Mr. Hindy.
Next we have Pamela Erickson, president and CEO of Public
Action Management. She was formerly the executive director of
the Oregon Liquor Control Commission.
Thank you for being here, ma'am.
And finally, we have Professor Darren Bush. Professor Bush
is an associate professor of law at the Houston Law Center. He
as also a consulting member of the Antitrust Modernization
Commission, a bipartisan taskforce established by the Judiciary
Committee to critically evaluate antitrust law.
Welcome, Professor Bush. Any relation, just for the record?
All right, without--but you would still be welcome.
Without objection your written statement will be placed
into the record. And as before, we ask that you limit your oral
remarks to 5 minutes, and our lighting system starts with the
green light, then the yellow light with 1 minute left, and then
red.
So with no further adieu, Mr. Ho?
TESTIMONY OF JAMES C. HO, SOLICITOR GENERAL OF TEXAS, OFFICE OF
THE SOLICITOR GENERAL, AUSTIN, TX
Mr. Ho. Good afternoon, Mr. Chairman and Members. Thank you
very much for the invitation to appear before the Subcommittee
today. My name is Jim Ho. I serve as the solicitor general of
the state of Texas under the leadership of Texas Attorney
General Greg Abbott, but just to be clear, I am appearing today
solely in my personal capacity, not on behalf of the state.
I know the Subcommittee's time is short, so I am just going
to give a shortened version of my written remarks. It is my
understanding that there is some discussion of possible
legislation to clarify the authority of states to regulate
commercial activities involving alcoholic beverages.
Mr. Chairman, you noted at the outset your--the importance
of balance in your view. In that spirit I will just make very
clear, I don't have a particular dog in this fight. I have no
position on the legislation; I am certainly not here to express
any position on the merits of the legislation. But I can
certainly testify with respect to the constitutional issues--
the constitutionality of any proposed legislation based on my
experiences litigating in this area.
As the Subcommittee knows, the power of states to regulate
commerce in alcohol has been the subject of hotly contested
litigation in numerous courts around the country in recent
years. Our office has handled a number of such matters on
behalf of the state of Texas. We won the most recent round in
the court of appeals in Texas--Louisiana, but there are similar
cases being fought in communities across the Nation.
These cases involve constitutional objections to state
laws, but make no mistake, this is a unique area of
constitutional litigation, and I say that because Congress has
the power to step in and resolve the litigation itself at any
time. In this unique area of constitutional litigation Congress
can seize the reins and decide for itself whether a particular
constitutional challenge should succeed or fail simply by
passing a Federal statute, and that is because these cases
involve a doctrine known as the dormant Commerce Clause.
Courts invoke this doctrine, the dormant Commerce Clause,
as a constitutional limit on states, but courts invoke this
doctrine only because they are presuming that Congress would
prefer that states stay out of a particular area of regulation.
So let me say that again: It is only a presumption about
what Congress wants in a particular area, and what that means
is that Congress at any time has the power to make its actual
views in a particular area known to the courts. And if Congress
expresses those views courts will follow them.
What is more, congressional action in this area would
reinforce important constitutional values. After all, alcohol
is the only consumer product to receive special constitutional
status, in the form of special recognition of state authority
to regulate under the 21st Amendment.
Let me also add that--my conclusion here today--that
Congress has full authority to regulate in this area if it
chooses to. That conclusion I don't really regard as
controversial, and if it is a controversial constitutional
position, I look forward to hearing why. But amongst the
community of constitutional lawyers this is pretty much a
settled issue.
Courts across the country, including the U.S. Supreme
Court, have repeatedly acknowledged that if Congress speaks
clearly it can eliminate entirely constitutional challenges to
state laws under the dormant Commerce Clause. After all, let us
remember the whole premise, the whole point of the dormant
Commerce Clause is to allow courts to step in and fill certain
gaps only when Congress has failed to speak. But if courts--I
am sorry, if Congress does choose to speak the courts will
listen.
Thank you again for the invitation to testify. I would be
delighted to answer any questions.
[The prepared statement of Mr. Ho follows:]
Prepared Statement of James C. Ho
__________
Mr. Johnson. Thank you, sir.
Next, Ms. Samona?
TESTIMONY OF NIDA SAMONA, CHAIRPERSON, MICHIGAN LIQUOR CONTROL
COMMISSION, LANSING, MI
Ms. Samona. Thank you. Mr. Chairman, Ranking Member Cole,
Members of the--Coble, I am sorry--and Members of the
Subcommittee, I want to thank you. I am the chairperson of the
Michigan Liquor Control Commission, and I thank you for the
invitation to discuss Michigan's system for regulating
alcoholic beverages and the need to preserve state control over
the health, safety, and the welfare of our citizens.
Experience has taught us that government regulation can be
in the best public interest. Whether it is financial markets,
food safety, mortgages, government has a role in protecting the
public. This is especially true when it comes to alcohol.
In 1941 Supreme Court Justice Jackson stated that liquor is
``a lawlessness unto itself.'' That was true then, and it is
certainly true today.
Because of their potential abuse and their importance as a
source of tax revenue for states alcoholic beverages must be
highly regulated. History has taught us that regulation is most
effective and accepted when it is done at the state level.
The harmful effects on individuals, families, and societies
as a whole that result for intemperate or underage consumption
of alcoholic beverages are dramatically different from those
related to the use of other products, whether they are measured
by scale, severity, nature, or remedy. So, as a consequence
states attempt to mitigate these problems through regulation.
Indeed, alcoholic beverages have always been and remain one
of the most heavily regulated products in the country, and for
good reason. Localities and states have enacted a variety of
restrictions on the manufacture, distribution, and sale of
alcoholic beverages--the three-tier system.
Alcohol is the only product that has been the subject of
two constitutional amendments. The first was the 18th
Amendment, which established national prohibition of alcohol;
and the second was the 21st Amendment, which returned primary
responsibility for alcohol regulation to the states. State of
Michigan was the first one to enact the 21st Amendment, of all
the states.
Community norms and standards across the country differ
widely regarding alcohol. This fact underscores the soundness
of the constitutional and congressional decisions to rest
regulatory authority primarily at the state and local level.
Under the authority provided by the 21st Amendment the
Michigan legislature created the Michigan Liquor Control
Commission and granted it plenary powers to control alcoholic
beverages traffic in Michigan, including the manufacture,
importation, possession, transportation, and the sale of
alcoholic beverages within the state. Among the goals of the
commission are controlling the traffic in alcoholic beverages
within the state, collecting tax revenue, and protecting both
the consumer and the general public from unlawful consumption
and use of alcohol.
Michigan's Liquor Control Code provides for strict
regulation and control over the alcoholic beverage industry as
opposed to fostering the significant degree of free enterprise
that was afforded to other products. This regulation is
achieved through a transparent system that requires that all
alcoholic beverages need to be distributed through the
commission or its licensees, who are subject to extensive
oversight and regulation.
This system has worked remarkably well for over 75 years.
Through the delicately balanced and historically tested
regulatory scheme Michigan has been able to address critical
state interests, such as preventing illegal sales to minors,
inhibiting overly aggressive marketing and consumption,
collecting taxes, creating orderly distribution and importation
systems, and preventing a recurrence of the problems that led
to the enactment of the national prohibition. These are all
recognized as core interests of the 21st Amendment.
In 2004 the Heald v. Granholm case struck down the
Michigan--the New York and Michigan laws which banned wineries
from being out--from shipping out--from allowing out-of-state
wineries to ship directly to the doorsteps of customers. The
Granholm decision did not invalidate the three-tier system. In
fact, Justice Kennedy called it ``unquestionably legitimate,''
in his opinion.
State regulatory systems are under siege, and these
lawsuits are gutting out the effective state regulation that we
are asking for Congress to come in and to address. Thank you.
[The prepared statement of Ms. Samona follows:]
Prepared Statement of Nida Samona
__________
Mr. Johnson. Thank you, Ms. Samona.
Now, Mr. Hindy?
TESTIMONY OF STEPHEN HINDY, CHAIRMAN AND PRESIDENT, BROOKLYN
BREWERY, BROOKLYN, NY
Mr. Hindy. Thank you, Chairman Johnson, Representative
Coble--happy birthday--Members of the Subcommittee. I am
pleased to present this testimony on behalf of 1,500 small
brewers in the United States.
I started my company in 1988. I employ 40 people in
Brooklyn and am currently expanding my brewery and adding 20
jobs. I also brew at an upstate brewery which employs 120
people.
I am a member of the Brewers Association, the trade
association of small brewers, and the Beer Institute, the trade
group representing large and small brewers and importers of
beer in the United States. I have had the honor of serving on
the boards of both organizations.
Virtually all the beer produced, distributed, and sold in
this country passes through the three-tier system. Three-tier
has served our country well in both regulating the safe
production and distribution of high-quality beers and in
helping to foster the craft brewing renaissance that has seen
the genesis of 1,500 small breweries in the past 25 years.
There has been no comparable renaissance in many countries
around the world where large brewing companies dominate
production, distribution, and retailing.
The three-tier system is not broken, but consolidation at
the distributor level has made it difficult for some small
brewers to get to market. Some states make exceptions to the
three-tier system to address this problem.
When I started Brooklyn Brewery none of the large New York
City distributors were interested in carrying my beers. I was
able to distribute my own beer and build my brand and
eventually sell the rights to my brand to one of those big
distributors.
There have been many similar success stories among small
breweries in other states, such as Samuel Adams in
Massachusetts, Sierra Nevada in California. Without the right
to self-distribute it is doubtful we could have established our
businesses.
We do not see any need for a drastic change in the balance
between state and Federal authorities that has served the
public for many years. There has been talk of ceding Federal
control of alcoholic beverage regulation to the states. That
would be a disaster for small brewers and consumers.
Separate state regulations on formulation, labeling, or
advertising would be incredibly expensive for all brewers. Last
year in my own state of New York, for example, the courts
wisely struck down a law that would have required brewers to
create separate, New York-specific labels for any beer sold in
that state. This would have effectively closed the New York
market to smaller brewers who could not afford the expense of
special, New York-only labels.
The current system has also served the public interest in
controlling the abuse of alcoholic beverages. My review of
available national statistics shows that our Nation has made
significant progress in reducing drinking by underage youth and
in drunk driving. Brewers, wholesalers, and retailers alike are
committed to making further progress in these areas. It is not
clear--to me at least--what a radical change in the Federal-
state balance would do to these very positive trends.
The number one issue facing small brewers is state
franchise legislation that gives distributors virtual absolute
control of our brands. In some states non-performing
wholesalers sit on our brands to ensure their competitors do
not get them. Talk about stifling competition. Beer
distributors have significant clout in all state legislatures,
and there is fear among small brewers that a switch to
exclusive state regulation would only exacerbate this problem.
In spite of challenges, the three-tier system is alive and
well in the United States. We want to see that system continue
without radical changes that could harm the interests of
American consumers who responsibly enjoy our products.
Representative Cohen, I think, said it best this morning: If it
ain't broke, why fix it?
Thank you.
[The prepared statement of Mr. Hindy follows:]
Prepared Statement of Stephen Hindy
__________
Mr. Johnson. Thank you, sir.
Last but--not last, but next, Ms. Erickson, please?
TESTIMONY OF PAMELA S. ERICKSON, CHIEF EXECUTIVE OFFICER,
PUBLIC ACTION MANAGEMENT, SCOTTSDALE, AZ
Ms. Erickson. Thank you, Mr. Chairman and Members of the
Subcommittee. It is a pleasure to be here and talk about this
very important issue.
I am a former alcohol regulator and current alcohol abuse
prevention advocate that is deeply concerned about alcohol
regulation issues. And I am the author of this some what
infamous report, called ``The Dangers of Alcohol Deregulation:
The United Kingdom Experience.''
I would like to say that the gentleman that suggested that
we are comparing apples and oranges is quite correct--lemons
and oranges, however you want to say it. That is correct, and
the reason is that in the United States we have a comprehensive
system that does control alcohol in a way that fosters
moderation and consumption; the United Kingdom no longer has
such a system.
Over a period of 4 decades they slowly deregulated to the
point where you can sell alcohol 24 hours a day, 7 days a week
in bars and all kinds of stores. Alcohol has become 70 percent
more affordable in just 20 years, which means the marketplace
is flooded with cheap alcohol that has encouraged people to
drink.
As deregulation occurred over 4 decades consumption rates
went up, and up, and up. They are now paying the price for
deregulation, and let me just give you a couple of statistics.
Hospital admissions for alcohol liver disease and acute
intoxication have doubled over just 10 years. Underage drinking
rates are twice what ours are. Problems around bars and clubs
are so severe in London that London has two buses equipped as
field hospitals to take care of people who have been victims of
alcohol-fueled violence or alcohol intoxication every weekend.
Could this happen to us? Again, I want to emphasize the
major difference with us.
We have a comprehensive alcohol regulatory system that
regulates the price, it keeps the price not too cheap to push
consumption or too high that would encourage bootlegging. We
have--usually have limits on outlets. We have limits on
promotions that would encourage volume consumption. We have
measures that address age. We have measures that address drunk
driving.
We have a really good, comprehensive system. So as long as
we maintain that system and keep it strong we should be okay.
Our policy is alcohol moderation--moderation in
consumption. It is a very good policy. If we follow this
policy, if people drink in moderation there is rarely any harm
and there is some health benefit for some people. So it is a
good policy.
There are threats to our system. If we had a court system
that determined our regulatory measures to be unconstitutional
we could be quickly deregulated. Also, if market forces became
so strong that there was domination by large, big box stores
that were able to offer large quantities of alcohol very
cheaply that could create major problems for us.
So those are things to be concerned about. When I work with
various states I see deregulation efforts in the retail sector,
and it is--I worry about the slow drip-drip-drip kind of
deregulation occurring here.
I believe that our current system is good for business. In
my native state of Oregon there is a strong system of
regulation, yet a flourishing industry of small wineries, craft
brewers that produce some of the best beer in the world--and
that is a fact--and a growing micro-distillery business. Big
box stores, independent grocers, convenience chains are all
able to operate in this flourishing business environment.
Thank you so much for your attention.
[The prepared statement of Ms. Erickson follows:]
Prepared Statement of Pamela S. Erickson
__________
Mr. Johnson. Thank you.
Last but not least, Professor Bush?
TESTIMONY OF DARREN BUSH, ASSOCIATE PROFESSOR OF LAW,
UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, TX
Mr. Bush. Mr. Chairman, Ranking Member Coble, and other
distinguished Members of the Judiciary Committee's Subcommittee
on Courts and Competition Policy, I want to thank you for
giving me the opportunity today to speak about the
interrelationship between antitrust laws and state regulation
of alcohol consumption. My remarks today are my own; I speak
for no one apart from myself. And I speak today based on my
experience as a former antitrust division trial attorney, as an
economist, and as a law professor whose research and writing
has focused on antitrust issues arising in the context of
regulated and deregulated industries.
Rather than repeat the highlights of my written testimony I
want to walk through the methodology the Supreme Court employs
in examining whether a state regulation violates the antitrust
laws or is worthy of a judicially-created exemption from the
antitrust laws.
The first fundamental question, as told by the Supreme
Court in Fisher v. City of Berkeley, is whether the restraint
in question is unilaterally imposed or is what the Supreme
Court has described as a hybrid restraint. While state
government is free to impose regulation which compels
particular conduct for private actors, the regulation must not
be ``hybrid'' in that non-market mechanisms merely enforce
private marketing decisions. Where private actors are thus
granted a degree of private regulatory power the regulatory
scheme may be attacked under the antitrust laws.
There is a relationship between the Court's description of
hybrid restraints and the notion of what it calls active
supervision under the State Action Doctrine cases. The Court
stated that in order for a state to create statutory restraint
that is exempt from the antitrust laws, one, the challenge
restraint must be one clearly articulated and affirmatively
expressed as state policy; and two, the policy must be actively
supervised by the state itself.
The history of antitrust enforcement in the realm of liquor
is a history of state inaction in the second prong of this
test, and thus a long list of hybrid restraints. In each case
the conduct at the crux of the case is resale price
maintenance, the foreboding of competition at wholesale level.
In the bulk of these cases the state allowed private actors
to set prices which were then enforced by a state rule. The
typical post and hold regulation employed by states that has
been subject to antitrust challenge involved requirements
designed to eliminate all price competition from the market.
With the states engaging in this ``regulation''--I place
the word regulation in quotes here--has elected to do is to
facilitate tacit or overt collusion. These laws serve to
facilitate collusion by compelling transparent prices with
notification to competitors, the ability of competitors to
detect and punish deviations from prior listed prices, by
increasing cost to any competitor seeking to attract market
share via price incentives, and by barring wholesalers from
being able to employ economies of scale. Whether tacit or overt
collusion, states employing such devices have given carte
blanche to coordinated anticompetitive behavior without any
regulatory restraint or oversight.
Antitrust challenges to such regulation do not impinge on
the state's authority to regulate under the 21st Amendment. As
a beginning point, I note that the cause of antitrust challenge
here is an abdication of state regulatory authority in favor of
the whims of a private collusive agreement, whether tacit or
overt.
Secondly, while according to advocates of such schemes the
goal purportedly advanced is temperance, suggesting that the
cheaper the cost of alcohol the more is consumed, the question
becomes whether the goal is to eliminate alcoholism or to
injure consumers who are social drinkers and already self-
regulate to some degree. Regardless, the constitutional
balancing to me heavily weighs in favor of competition policy,
particularly when there are less restrictive alternatives more
readily available to the state, namely to actively supervise
the regulation in question.
In light of the foregoing, it is difficult to conceive of
this pattern of conduct requiring or justifying any sort of
statutory immunity. And indeed, this is the only type of
regulation that has been successfully challenged in the courts.
I have written elsewhere and submitted to your Subcommittee
the standards I believe applicable in establishing any
statutory immunity under the antitrust laws, which I and my
coauthor submitted as consultants to the Antitrust
Modernization Commission. There are numerous questions that
ought to be answered in granting such an immunity, and the
burden should be upon those seeking to alter our magna carta of
free enterprise.
In my opinion, no immunity is justified here. The states
have only been successfully challenged in their regulatory
authority to the extent they have advocated--abdicated such
authority to private actors. Such abdication is not state
regulation but the absence of regulation and the protection of
private actors who may be seeking solely monopoly rents and are
not vested in a public interest.
I will stop here but would like to discuss at some point
sort of what the standards might be for statutory immunities.
Thank you.
[The prepared statement of Mr. Bush follows:]
Prepared Statement of Darren Bush
__________
Mr. Johnson. Thank you, sir.
We will now move to questioning of the witnesses. It will
proceed in accordance with the 5-minute rule.
Ms. Samona, what does--what would you, based on your
experience, recommend that any legislation include? We have
already talked about an antitrust exemption. Is that something
that you would support?
Ms. Samona. Mr. Chairman, thank you for the question. What
I would propose is for some law or legislation to reaffirm the
right of states to regulate alcohol as they deem appropriate
for their state.
Mr. Johnson. Now, is there any particular method or
language that you would find most appealing?
Ms. Samona. I don't have any language that is prepared. I
would be happy to work with--anything to that. At this point I
would be happy if Members of this Committee are open to that
idea and that suggestion to do that.
Mr. Johnson. How would you see it--what exactly would you
be seeking?
Ms. Samona. Well, the two major cases that exist involved
the state of Michigan. The first one was the Granholm decision,
in Heald v. Granholm. That case, wineries--out-state wineries--
sued the state saying that in-state wineries are given this
exclusion because they are able to deliver to consumers in the
state of Michigan, out-state wineries are not. The argument
that we made--and we think it is a valid argument and it
supports the 21st Amendment--is that those wineries or those
businesses that exist in the state of Michigan and licensed by
the Michigan Liquor Control Commission are those that we have
complete control over. We have--we can go and----
Mr. Johnson. Okay, well, now let me stop you. I want you to
respond precisely to the--the question is, how exactly--what
exactly would you be proposing with respect to state versus
Federal regulation? Would it be a ban on Federal regulation?
Would it be a ban on state regulation? What exactly is it that
you would propose?
Ms. Samona. I would not, certainly, look for a ban on any
kind of Federal legislation. I think that the Federal
legislation that applies to all the states--I think that
probably solves many of the problems that we are dealing here
with.
At this point we have courts that are issuing orders that
are contrary in different areas. The----
Mr. Johnson. Okay, so you want to try to avoid any and all
litigation that may arise from the operation of the three-tier
system?
Ms. Samona. Absolutely. I think the clearer Congress speaks
the----
Mr. Johnson. All right.
Ms. Samona [continuing]. The less probability of
litigation.
Mr. Johnson. Okay. Can I get the views of the other----
Ms. Samona. Absolutely.
Mr. Johnson [continuing]. Members on this?
Mr. Ho?
Mr. Ho. Sure. We have heard a couple of times the phrase,
``If it ain't broke don't fix it.'' I would just modify that
comment slightly and say, that is wonderful. If it ain't broke,
don't sue.
Congress has the complete authority to end all of this
litigation and to say, ``What the states are doing, that is
within the states' rights to engage in that regulation and you
all just keep doing that''----
Mr. Johnson. Do you think that----
Mr. Ho [continuing]. Control.
Mr. Johnson [continuing]. Any circumstance where the courts
can anticipate any legal arguments that could be good faith
arguments supported by evidence and a lawsuit filed? Do you
think there are any areas where the legislature can accomplish
that feat, or are we always going to be a litigation society
utilizing the third coequal branch of government?
Mr. Ho. I think I would respond by saying, the clearer
Congress can be in setting out what it wants states to be able
to do, and not to be able to do, the less litigation we will
have. The laws that the courts are struggling with right now
are really just very few words. The 21st Amendment----
Mr. Johnson. It is pretty----
Mr. Ho [continuing]. And some of these other laws.
Mr. Johnson [continuing]. Pretty clear stuff, but I will
tell you----
Mr. Ho. Sure. I mean, you can expand it and sort of
explain----
Mr. Johnson. Right. And you can do that with anything.
The other witnesses--Mr. Hindy, Ms. Erickson, and Professor
Bush?
Mr. Hindy. Well, you know, I am not an attorney, but from
what I have heard there are plenty of attorneys in this town,
so probably that is okay. It is interesting to hear Mr. Ho, who
I believe is an attorney, calling for people not to sue.
You know, it just seems to me that the primary role of
regulation of alcoholic beverages right now is with the states,
and the Federal Commerce Clause just seeks to ensure that there
are no discriminatory laws enacted by the states. That seems to
me to be a good foundation for regulation of alcoholic
beverages, served us well for 75 years, and there is bound to
be litigation on any of these arenas where there are suppliers
who can't get their products to market.
Mr. Johnson. Thank you.
Ms. Erickson and Professor Bush, you all are in favor or
opposed to an antitrust exemption for the alcohol-based
products?
Ms. Erickson. Let me give a brief response. I am not a
lawyer either, so I am going to give you a layperson's
response.
I think there needs to be recognition that there are
legitimate reasons for not selling alcohol in a free market,
that the marketplace rules need to be somewhat different for
alcohol. For example, if you are a businessperson you will put
in your business plan a plan to identify your best customers,
those people that buy the most of your product, and you are
going to aggressively promote to those people. But with alcohol
a lot of those people who are your best customers are
alcoholics, so your promotional activities need to be somewhat
muted.
So I think some of those specific concerns where the free
marketplace creates problems with the sale of alcohol there
needs to be a clear recognition of that.
Mr. Johnson. All right, thank you.
And Professor Bush?
Mr. Bush. I believe to a large degree they already have an
immunity from the antitrust laws. It is called the State Action
Doctrine. It is a judicially-created exemption that so long as
the state has a clearly articulated policy and it actively
supervises that policy it exempts them from the antitrust laws.
Where they have run into trouble is where they have not
actively supervised their alcohol regulation and have delegated
that authority to private actors who are not vested in the
public interest.
In creating a statutory immunity there is a great concern
that I have written on extensively, and so have others, that
the immunity goes beyond what might be necessary. There may not
be any reasonable justification for the immunity, and there is
no telling what kind of harm the immunity will do. Moreover,
there doesn't seem to be any sort of legitimate justification
for the immunity in that the one instance of antitrust attack
is an instance where the states have actually utterly abdicated
their authority to private actors.
Mr. Johnson. Thank you, Professor Bush.
Now I will yield the floor to the Chairman of this
Committee, Chairman Conyers.
Mr. Conyers. I thank you for your courtesy. I only have one
question, and it is to Nida Samona, who has been the Michigan
Liquor Control Commissioner and chairperson of that commission.
Here is what I would like to know: Since the Granholm
decision has there been any noticeable effect, from your
perspective, on Michigan's ability to regulate alcoholic
beverages?
Ms. Samona. Thank you for that question. I appreciate that.
I, too, am a lawyer that sits on this panel, though, you know,
my role is a little different, but my lawyer hat is not always
quite removed.
Yes, we do see a big difference in regards to what happened
with the Granholm decision, named after our governor, my boss,
and that was when the independent business owners--or the
independent wineries in the state of Michigan, we had to face
an issue of the legislature of, do we allow them to ship to
customers in the state of Michigan, consumers or not, based on
the fact that out-state wineries wanted to be able to do the
same thing even though we had no control or regulatory
authority over these out-state wineries as we did the in-state
wineries.
We could go to the in-state wineries and check on them
daily if we wanted to. We licensed them; we could take that
license away from them at any time if we suspected they did
anything that was against the laws and the rules of the Liquor
Control Commission in the state of Michigan.
What we have had to do is we had to open up the door and
allow all wineries to ship, through a permit system, to
consumers. So if you are a winery that is--whether you are in
California and Oregon or anywhere else, you can get a permit
system--you fill out a form, you pay $100, and you ship the
wine away.
Do we have control over it as far as taxes are concerned?
Not necessarily, because we don't know if everything is being
reported. It is an honor system.
Does it work? We think that we are losing millions of
dollars of revenue as a result of that.
And then to piggyback on that, a few years later we had
another lawsuit that was called the Siesta Village lawsuit
against the state of Michigan, and that one wanted an out-state
retailer to be able to ship directly to a consumer in the state
of Michigan.
Again, that retailer is out-state, not licensed by our
agency. We have not control over them. We don't know who they
are shipping to. Are they checking ID? Are they selling
products that would be products that we would approve in the
state of Michigan? We really don't know.
And again, the rule--the district court ruled against the
state of Michigan, and so in effect what we had to do was we
had to shut down all delivery to all customers in the state of
Michigan by any retailers, in-state or out-state. The millions
of dollars that these lawsuits have cost the state of Michigan
where we could have put them in enforcement and other things
has been dramatic and crippling, quite honestly.
And so as a result, our in-state licensees have had to
suffer as a result of these losses that have existed. We have
an open market. You can bring in any product in the state of
Michigan. If it is a beer or wine product bring it through a
beer and wine wholesaler who is licensed by us and we have
control and authority over them; if it is a spirits product
bring it in through a liquor vendor that is licensed and we
have authority over them. That is what we are talking about is
that ability.
Mr. Conyers. Thank you, Chairman Samona. Would you please
keep us abreast of this--of what is happening in Michigan as a
result of the decision and your chairing the Michigan Liquor
Control Commission, because I think the Committee would be
interested in that?
Ms. Samona. I would be happy to. Thank you.
Mr. Conyers. And I thank you, Mr. Chairman and Ranking
Member, for your courtesy.
Mr. Johnson. Thank you, Mr. Chairman.
Next, we will turn to Mr. Coble?
Mr. Coble. Thank you, Mr. Chairman.
Good to have you all with us this afternoon.
Ms. Samona, the Internet has changed a great deal in this
country. How has the Internet changed your ability to
effectively regulate alcohol at the state level and what do you
perceive to be your greatest threat to effective regulation
going forward?
Ms. Samona. And that is our greatest threat, is the
Internet, because we know that many of these companies, whether
they are wine companies or spirits companies, are up 2 or 3
days a week, and by the time we are ready to track them and try
to find the source of them they are down and a new company is
up. And we are not, you know, blind to the fact of, we know
alcohol is coming it, whether it is beer, wine, or spirits,
illegally through the state of Michigan.
We know that there is millions of dollars that are lost to
our state as a result of revenue and that there is no system of
checking where that alcohol is being delivered to, who it is
being delivered to. Is it a, you know, college town kid that is
ordering it for the party that is for that weekend? We don't
know. And we have really no way of effectively following that
ability to do that. We need more money, more resources.
Unfortunately, much of that is used on these lawsuits.
Mr. Coble. Thank you, Chairman Samona.
Ms. Samona. Thank you.
Mr. Coble. Ms. Erickson, some states are control states, as
we all know, that as the alcohol is dispensed through state-
administered or state-owned stores. Other states, conversely,
allow private parties to sell alcohol.
Have you ever conducted or have you ever seen a study that
showed the correlation between the level of state involvement
in the sale of alcohol and the level of alcoholism in a
particular state?
Ms. Erickson. Mr. Chairman--Mr. Coble--I believe that there
are studies that show that generally consumption and problems
are fewer in control states, and the level of problems in any
given state is a very, very complicated formula. There are so
many things that impact it.
For example, the lowest drinking state in the Nation is
Utah. Clearly the Mormon Church has a great influence over the
drinking patterns in that state. Weather seems to have
something to do with it because drinking tends to be higher in
northern states.
We don't know a lot about exactly what makes one state's
drinking patterns a lot different, but I have seen some studies
that generally say that problems are somewhat less and that
drinking patterns are somewhat less in control states.
Mr. Coble. Mr. Hindy, did you say when you opened your
brewery you had 14 employees?
Mr. Hindy. No. When I opened my brewery I had three
employees----
Mr. Coble. I thought----
Mr. Hindy [continuing]. At the end of this year I will have
60 employees.
Mr. Coble. Okay, 60.
Mr. Hindy. Yes.
Mr. Coble. Well, that is encouraging, given the harsh
climate that plagues us today. In your view, Mr. Hindy, should
states be free to discriminate in favor of their own state's
breweries?
Mr. Hindy. No, I don't think so. In New York State I
distributed my own product at the beginning of the company. Any
brewer has that same right in New York State, so that exception
to three-tier is legal and appropriate and it has not been
challenged.
Mr. Coble. I got you.
Finally, Mr. Ho, you state that--you may have already
addressed this previously--but you state that Congress has the
power to regulation interstate commerce and put to rest some of
the legal challenges that have been directed at state alcohol
regulation. As a state litigator, what tools, if any, do you
need from Congress to successfully litigate the cases that come
before you?
Mr. Ho. Well, I am pleased to say that the main case we are
litigating right now we have won, so far. But having said that,
it is burdensome, obviously, to have to go through this
litigation process.
Congress could pass legislation, if that is what you are
asking me, kind of modeled on previous enactments. Just a few
years ago my understanding is Congress passed legislation in
the hunting and fishing area where a court of appeals had
struck down some state regulations in that area, Congress
disagreed with that Ninth Circuit ruling and decided to
essentially stop that kind of litigation from taking place.
That is the kind of legislation that, if Congress wanted
to, it could easily pass in this area so that states wouldn't
have to deal with the burdens of this kind of litigation.
Mr. Coble. Professor Bush, you want to add anything to
that? Don't want to snub you; I want to examine you as well.
Mr. Bush. It is okay if you snub me, sir. There are a
couple of things that I think I want to separate out. When we
are talking about regulation of alcohol there are some pretty
basic principles of regulation that are typically followed and
the Federal Government has followed when it has regulation
industries, and one of those principles has been one of open
access and nondiscrimination so that people further up the
bottleneck can actually get their products to market. That a
pretty standard principle in regulation.
And to the extent that states have sort of followed those
principles of regulation, have actively regulated alcohol
beverages and have followed those regulatory principles, I
think they have been relatively safe. Where the states run into
trouble, I think, is where they sort of don't follow those
tenets and act more protectionist, and I am not quite sure that
is a good tenet of regulation.
Mr. Coble. Thank you.
Thank you all.
I yield back, Mr. Chairman.
Mr. Johnson. Thank you, Mr. Coble.
Next we will have questioning from Mr. Quigley?
Mr. Quigley. Thank you, Mr. Chairman.
The earlier panel mentioned that I am from Chicago and its
unique history on such things. I will tell you, though, that
the only hearing previous to this one in which we have talked
about regulating alcohol was in Chicago, and the question was
whether or not we should have more 4 o'clock liquor licenses.
Most bars are forced to close at 2 o'clock, so the issue
was, should more bars be allowed open later? It gets to many of
these issues. And the first person who testified really put it
in the right perspective. He said, if you don't know how to get
drunk by 2 o'clock you don't know what you are doing.
[Laughter.]
It gets to the same point, though, Ms. Erickson, when it
came to consumption and cost, and the price that something
costs.
Now, we did do smoking bans there, and we were told that
numerous studies show that beyond good parenting the number one
deterrent to kids smoking was cost. Can you point to anything
that would help--or if not now, later, as it--how this could
be--the cost issue could be more pointed as it relates to kids?
Granted, obviously, they are not getting them--they are not
going in, for the most part, and buying; they are getting it
from other people. But does it still have that impact?
Ms. Erickson. Representative Quigley, the same thing is
true for alcohol. Professor Alex Wagner, from the University of
Florida College of Medicine complete a review of over 100
studies of the relationship of price to consumption and came
out with a very strong statement that says, when the price goes
up people drink less. And it is true for all categories of
drinkers: heavy drinkers, moderate drinkers, very definitely
for underage drinkers.
Price is probably the most powerful driver of consumption,
and there is a--research is very clear about the connection
between high consumption and alcohol problems. So the same
thing is true for alcohol.
Mr. Quigley. Very good. Thank you.
Mr. Johnson. Okay. Next we will have Mr. Lamar Smith.
Mr. Smith. Thank you, Mr. Chairman.
First of all, it is nice to have a friend from Texas here
on the panel, and Mr. Ho, let me direct my first question to
you. In regard to the Granholm decision, that created a lot
more litigation than it was expected to, and what was our
experience in Texas as a result of that decision? Has it
increased litigation, reduced litigation, and what has been the
aftermath?
Mr. Ho. We are definitely seeing an increase in litigation
after Granholm, not just in Texas but across the country, and
that is for the simple reason that different litigants and
different courts and different states are trying to figure out
exactly how to interpret the Granholm decision.
We just had a case recently--so far we have won in the
Fifth Circuit--where we were able to make clear to the court
that Granholm talks about producers and restricts state
authority with regard to producers, but it also holds that
states have a lot more authority with respect to distribution.
Mr. Smith. Okay. Thank you, Mr. Ho.
Ms. Samona, I know you went into it in your testimony a
little bit, but tell us a little bit in greater detail some of
the advantages of the three-tier system, both in regard to
protecting those underage, to health, to safety, to quality of
liquor itself, and so forth.
Ms. Samona. Thank you for the opportunity. Yes, some of the
main things that we look at and that we think we believe we
have to control the plenary power that was given to us by the
legislature when we created our--the Michigan liquor control
system is that ability to bring in the product, to make sure
that that product is a safe product that can be brought in and
we can track it, where it came from, who it came through, where
it can go to; the ability to collect revenue on it is
fundamental for our state and for all states----
Mr. Smith. So it helps states collect revenue and increases
their revenue to them, right?
Ms. Samona. Sure. That is one factor of it. But we never
lose the health, safety, and welfare aspect of it, and that is
fundamental to that, is that we make sure that the licensees
that exist in the state of Michigan are responsible, they
understand that overconsumption, serving to minors are things
that are critical to what we do as an agency and it hurts the
entire, you know, industry by having licensees like that.
We have that ability and that power to bring those
licensees in, to suspend them for a few days if we need to, to
take away the license, to go onsite and visit their premises to
make sure, to have decoy operations that go in, either through
us or that local governmental police unit, to make sure that
they are not selling to minors, that they are conforming with
the laws that exist in the state of Michigan and the rules of
the Michigan Liquor Control Commission. And they understand,
and we have hearings on a weekly basis for those that don't
comply, that they have to come in, and understand that there is
consequences.
If I can just piggyback one moment on the specific case
that Mr. Ho spoke of, we were sued--Michigan--for that, under
the same premise, and that is the Siesta Village case in 2008,
and that is what we speak about, is that we lost that case.
Same argument, same principle, things Mr. Ho in Texas, the
Fifth Circuit, they ruled in favor of the state. The Second
Circuit, New York, ruled in favor of the state. So it is the
incontinuity of this interpretation that courts have of these
laws that exist that we are asking for a more fair, balanced
way of approaching that and making it clearer.
Mr. Smith. Great. Thank you.
Ms. Samona. Thank you.
Mr. Smith. Ms. Erickson, I was here for the earlier panel,
and if you were you heard one of our witnesses say that we
really shouldn't look to the Untied Kingdom for any lessons.
And I think--whether you said apples and oranges or apples and
lemons, I am not sure, but the idea was that it wasn't a valid
comparison.
I just wanted to know whether you agree with that or not
and if you thought there were lessons that we should learn from
Great Britain's deregulation of alcohol, what are they?
Ms. Erickson. Thank you, Representative Smith.
Actually, I think he has got a point, and that point is
that it is not a fair comparison because of the fact that we
currently have a comprehensive regulatory system and the United
Kingdom no longer does. So it seems unlikely that we will
experience the same problems that the United Kingdom has unless
we deregulate in the way that they do.
So, you know, it is a way to compare lemons and oranges in
a way that gives us, I think, a good lesson.
Mr. Smith. Okay. Thank you.
Thank you, Mr. Chairman.
Mr. Johnson. Thank you, Mr. Chairman.
Now we will recognize Representative Sheila Jackson Lee.
Ms. Jackson Lee. Mr. Chairman, thank you very much. I think
the work of this Committee is a very important element of
fixing and improving the laws of this Nation, but I also like
the fact that you have presented to us a balanced perspective
on some of the concerns dealing with this question and this
industry.
First of all, I would like to put on the record the
obvious, which is that all of us--and I guess that is what Ms.
Erickson is trying to emphasize--have concern about public
health and safety. I was listening to a news report this
morning where they were--I think the U.S. News Report was
listing the top safe cities for teenage driving. Interestingly
enough, we can all be happy that D.C. was the number one. And
with all this powerful drinking and competition here, I am glad
that D.C. allows us to walk the streets and not be run over by
teenagers, so we are grateful for that.
But we don't want to play into ignoring the power of
alcohol, no matter what level it is, and I want to get that on
the record, that I believe that regulation has its place. And I
also believe that competition has its place.
So with that in mind, Ms. Erickson, I am not going to
demonize what is happening in Britain. I feel for them and hope
that they will rally around their own physical and health
issues that need to be addressed.
But, Professor Bush, I am going to pose a question to you
and Mr. Ho, who I understand is here on his own reconnaissance
and not been released by the state to represent them. But,
Professor Bush, how do I strike that balance of the question of
state regulation where states would subject outside companies
to their regulations, which may pose a sense of unfairness, to
the question of the value of state regulation and to the--
juxtaposed to the value of competition? How do we strike that
balance?
Mr. Bush. Well, that is an excellent question, and the--
there are principles of regulation that the states could and
should adopt that could strike that balance well. For example,
when--I will confess that I get wine shipments from outside the
state--I am forced to sign that I am over 21 and the UPS driver
asks for my ID when I sign for these wine shipments, and there
is, at least from that aspect of distribution, you know, some
degree of detection of whether I am a minor or not.
The problem I have is, is the purpose of the restraint to
protect in-state interests, private interests in terms of
creating some monopoly power or is it, in fact, some sort of
seeking of restraint so that we have temperance? When I was
traveling through Utah for the first time, a state that is very
clearly not liquor-oriented, I was marking on a NPR story about
how teenagers were consuming Nyquil as a substitution away from
liquor, which they could not get. Probably not the most
exciting parties.
But the notion here is that there is substitution and you
have to, when you look at these sort of temperance issues, what
effects on temperance do cartel-type behaviors or collusion-
type behaviors have on those? Prices go up, and that may
generally decrease consumption of alcohol, but is there
substitution away to other products, perhaps more dangerous
products?
Those are the kinds of things I would be interested in
knowing more about. But----
Ms. Jackson Lee. So you could see us striking a balance to
respecting the state's regulatory scheme and also keeping the
opportunity for competition?
Mr. Bush. Yes. From my perspective there is already a
provision for doing that, called the State Action Doctrine. So
long as the states actively regulate and they have a clearly
articulated state policy, from an antitrust perspective there
is no attack.
Now, if we go the route of advocating some sort of
statutory immunity from the antitrust laws the question
becomes, where does that lead us? And courts have demonstrated
time and time again with respect to other express immunities
that it leads us to someplace that Congress didn't intend.
Ms. Jackson Lee. Mr. Ho, let me ask you--and I got my voice
in to you before the light, if the Chairman would indulge--you
were the victor of a decision out of the state of Texas, but
tell us how you--and I guess it is somewhat challenging because
your work role is to speak the voice of the state, so I will
just hope that you can balance it, but how do you strike this
Supreme Court decision of Granholm and its holding and what it
did not hold, and how you can balance what is a reasonable
request, which is that there be a free flow of commerce?
For example, we have wine country in Texas. I am excited
about it. I would be happy for their wine to be sold elsewhere.
So let me yield to you, Mr. Ho, and welcome. It is a
delight to see you.
Mr. Ho. Thank you.
Let me first hasten to add that the litigation we are
talking about we have won so far, but it remains pending in
higher courts, so that is still an ongoing matter----
Ms. Jackson Lee. And forgive me--higher Federal courts, or
you are in the--where are you in the jurisdiction?
Mr. Ho. We won a three to zero opinion in the Fifth
Circuit----
Ms. Jackson Lee. Fifth Circuit. Thank you.
Mr. Ho [continuing]. That is now going to the en banc
court.
Ms. Jackson Lee. Right.
Mr. Ho. The plaintiffs have filed with an en banc. We will
see what happens there.
You have asked me how we might strike the balance between
state authority and other values. If I may, I would defer to,
frankly, the policymakers here and in Austin and in state
capitals as to how we should strike that policy. But what I do
want to say, though, is----
Ms. Jackson Lee. I appreciate that.
Mr. Ho [continuing]. It is as important to ask who should
strike that balance as it is to ask how that balance should be
struck. Should state legislatures and Congress strike that
balance or should courts be in the business of striking that
balance? Right now it is essentially a mix.
I mean, state legislatures obviously are passing laws--have
laws on the books--but Federal courts are--in different
settings--I think Ms. Samona very well mentioned that different
courts are coming to different conclusions, and it is really
confusing and costly in terms of a litigation burden on states
and on industry. If somebody else were to strike the balance
and to take that issue out of the courts that might provide
some clarity to the entire industry.
Ms. Jackson Lee. Well, I will just finish by saying, you
just--that is the hook that I am going to hold on to: clarity.
And I think we need to be deliberative in how we assess that
clarity, because in addition to the Congress acting we have
juxtaposed against state legislatures acting. The one thing we
don't want to do is to kill what, in a reasoned manner of use,
is the right of the American people to consume, and we don't
want to do that, we don't want to kill business.
So I thank you and I thank the Chairman for his indulgence.
And I thank you for giving us the real question, which is how
do we strike a balance but how do we get clarity?
And I yield back.
Mr. Johnson. Thank you.
Next, we will have questions from Congressman Bob
Goodlatte.
Mr. Goodlatte. Well, thank you, Mr. Chairman. I thank you
for holding this hearing.
And I would like to direct this first question to Professor
Bush and Mr. Ho. If anybody else wants to join in that is fine.
And it follows up on the comments of Mr. Smith.
Lawsuits have been brought challenging state alcohol
beverage regulation. How successful have these suits been and
how big an impact are they having on the states' ability to
regulate alcohol?
Professor Bush?
Mr. Bush. I will disclose that I am going to stay safely on
the side as being an antitrust expert, so I will address the
antitrust cases and let Mr. Ho discuss the rest. The antitrust
cases that have been brought against the states have been quite
limited in success.
And as I described in my written testimony and my oral
opening statement, it is quite limited to where the states have
not actively supervised state regulation. For example, the post
and hold system pretty much delegates the authority over
pricing to private actors in the market with a rubber stamp at
the--coming at the end from the state. In those instances, in
any sort of price restraint that is delegated to private
actors, the states have not fared well. But that is a very
small, limited number of antitrust cases, and in most instances
the blanket of the State Action Doctrine protects the bulk of
state regulation.
Mr. Goodlatte. Mr. Ho?
Mr. Ho. Thank you for the question. I think the record of
litigation has, frankly, been mixed. Different states are
fighting different issues with litigants, and so different
issues result in different results, even on the same issue.
As my colleague just mentioned, on the very same issues
different states are getting different results from different
courts on precisely the same issue, and that is, frankly, a big
part of the burden that we are seeing and the clarity that we
were talking about earlier--the importance of that clarity.
There is no question, to answer your question about burden
on states, we would--I am not here to testify on particular
legislation, but if you are asking me the effect of this area,
we would love, obviously, to free up our resources elsewhere
and not have to defend these suits.
I had the honor of serving on Capitol Hill some time ago. I
am familiar--just to use an example, I am familiar with the
fact that each and every Member of Congress has a wide area of
responsibility and jurisdiction, and you are only given certain
limited resources, limited staff.
Imagine if you were told, ``You have to designate one of
your staff persons exclusively to doing nothing else other than
to just defend your right to hold your seat.'' Would that be a
burden on your office? I think it would be. And that is sort of
analogous to the burden that we are dealing with. We are having
to devote resources just to defend the right to enforce these
laws.
Mr. Goodlatte. Anyone else want to say anything?
Ms. Samona. If I could?
Mr. Goodlatte. Ms. Samona?
Ms. Samona. Thank you very much.
As a state regulator, the chair of the Michigan Liquor
Control Commission, I think that the issue that you touched
upon is the critical issue that we are dealing with here,
Congressman, is that, for example, the lawsuit that Mr. Ho just
spoke of, the same issue or the same lawsuit--in the state of
Michigan that is the Siesta Village case that followed
Granholm--the court ruled against us. In Texas, the court ruled
in favor of Texas. In New York, the court ruled in favor of New
York.
The same arguments on all three cases and you have got a
difference in mix. And now the New York ruling seems like it is
going to be challenged, so who knows what is going to come up
with that? The fact is that, you know, there are a lot of holes
that need to be filled in, and I think Congress is the right
person or group set to do that.
You know, Professor Bush talks about this protectionism
argument and that if you have--you know, if your protection--
you know, the State Action Doctrine says if you protect or you
give the ability of, you know, independent businesses to
operate then that is where you lose. Well, that is clearly not
the case in the Heald--in the Siesta Village case, where it is
the same argument in three different courts--three different
states, three different courts, different rules.
Mr. Goodlatte. I have to cut you off because I have got
more questions----
Ms. Samona. Thank you.
Mr. Johnson. Mr. Goodlatte, may I ask you to yield the
floor on that point?
Mr. Goodlatte. Sure.
Mr. Johnson. If one state regulates its alcohol
distribution what does it care if it is not in a different--if
it is in a different circuit from--a different circuit court
ruling, what does that matter to the other state? What does
that matter to you, being that the law does not apply to you as
rendered by that other circuit?
Ms. Samona. Well, because what the state--what the court
told Michigan is that, ``What you are doing is inappropriate
and you can't do it anymore.'' What the court in Texas told
Texas is, ``What you are doing,'' which was the same thing as
Michigan, ``you can do. Continue to do it.'' And so now you
have got differences of how do you apply this? It is all the
21st Amendment. It is all alcohol we are regulating. How----
Mr. Johnson. Well, then it goes on up to the U.S. Supreme
Court from there.
Ms. Samona. It could, yes, if it continues in that
direction. The problem is, we as a state suffer millions of
dollars that we have to give away for these lawsuits to
continue. And as a result, you know, we are burdened with that,
and at a time when economy is hurting everybody you just don't
have that person power to be able to defend those lawsuits and
still continue to operate business and protect the health,
safety, and welfare of your citizens.
Mr. Johnson. Okay.
I will yield back, Mr. Goodlatte.
Mr. Goodlatte. Thank you, Mr. Chairman.
To follow up on that--and I will ask this to Mr. Ho and Ms.
Samona or Mr. Bush--Professor Bush, you want to--you indicated,
Mr. Ho, in your testimony that the Congress can amend the
dormant Commerce Clause. Can you give us any examples of the
Congress having done this in recent times?
Mr. Ho. Certainly. I think it was just a few years ago that
Congress reacted to a Ninth Circuit decision--I think it was
the Ninth Circuit--that dealt with striking down a state
regulation of hunting and fishing. It was Congress' judgment at
that time that that decision was incorrect, that states should
have those regulatory powers, and I believe Congress passed
legislation to authorize those state laws.
Congress has done this in any number of other industries--
insurance, banking, various other industries where it wanted to
preserve state authorities, state regulatory power, and the
courts have consistently upheld and enforced those Federal
statutes.
Mr. Goodlatte. So if the Congress wanted to exempt the
beer, wine, and spirits from the dormant Commerce Clause and
Federal antitrust laws we could do that?
Mr. Ho. Certainly.
Mr. Goodlatte. What would be the disadvantages of doing
that?
Mr. Ho. I think there would be policy arguments back and
forth that I would respectfully refer to the policymakers on,
but there is no question that Congress has that power. Frankly,
Congress exercised that power already when it ratified or
proposed the 21st Amendment and passed other laws before and
after that.
The question is, what do those laws mean in specific areas?
Courts have struggled to interpret those very few words that
Congress has sent so far, and so I think the question before
the body is, do you want to send some more instructions so that
courts know what Congress wants and will simply follow that in
a very clear way?
Mr. Goodlatte. Professor Bush, you want to comment on that?
Mr. Bush. Yes. First of all, I just want to point out,
there is a great risk when you enact any sort of statutory
immunity from the antitrust laws. I mean, keep in mind that the
antitrust laws are magna carta free enterprise, as the Supreme
Court has said.
And the risk is, you have to weigh the benefits of the
immunity with the potential costs. And in this instance an
antitrust immunity carves out one particularly really small
area of state regulation from what is already protected from
the State Action Doctrine.
In the history of statutory immunities rarely has the
immunity actually just been limited to what Congress intended;
there is usually some unintended consequences. When you are
dealing with the--in the realm of state regulation and
protecting state regulation through the statutory immunity
there may be external effects outside the state from imposition
of a statutory immunity which protects state regulation that
has, potentially, effect on interstate commerce.
Market conditions often change, and in the context of
changing market conditions the statutory community may give
way, may no longer be valid, and the statutory immunity may
never actually go away because they rarely have any sort of
limiting time restraint on them.
I should also point out that when we are contemplating the
risks of litigation here keep in mind that when you pass
Federal legislation involving state regulation of alcohol that
will also open doors for potential lawsuits. We all know of
examples where legislation, either contemplated or enacted, has
immediately been challenged in courts, and I would expect that
the states would have to fact that kind of litigation challenge
as well.
Mr. Goodlatte. Yes, Mr. Hindy?
Mr. Hindy. Congressman, also if----
Mr. Goodlatte. You might want to hit your microphone. I
don't----
Mr. Hindy. Okay. If states were exempted from the Commerce
Clause, I think it would open the door for every state having
different rules for labeling, for formulation of beers, for
licensing, for marketing of beer. It would be prohibitive for
most brewers to ship anywhere but in their home state. It would
be disastrously expensive for all brewers.
And also, imagine----
Mr. Goodlatte. Let me--I am not sure I quite understand
that. Doesn't the 21st Amendment to the Constitution give the
states that authority when it comes to alcohol anyway?
Mr. Hindy. Yes, but right now they tend to observe the
general guidelines of the TTB. In other words, labeling is
approved by state governments, but the--most of what we have to
put on a beer label is determined by the Federal Government,
and it is uniform across the country: the warning--the
government warning, you know, the place where the product is
brewed, et cetera.
New York State recently tried to require a specific label
for the state because distributors were concerned about people
shipping empties into the state from other states and getting a
deposit. That would have been incredibly expensive for small
brewers to do, and large brewers as well.
I think the Federal oversight of our industry means there
is a level of safety and a level of licensing that is uniform
across the 50 states, and ceding that to every state I think
would be chaotic.
Mr. Goodlatte. I think the Chairman is indicating that my
time is expired.
Mr. Johnson. Well, you can reserve the balance if you would
like.
Next we will hear from Mr. Darrell Issa, a congressman from
California.
Mr. Issa. Thank you, Mr. Chairman. And since the wine
industry isn't represented here I might mention that Temecula
wine country is in my district, and so I come with 30 years of
business experience and 10 years of representing wine producers
who there, but for the ability to ship wine around the country,
would probably--the small wineries would have no business.
So I find myself in an odd situation of caring about this
issue, wanted to ensure that underage drinking is not promoted
nor any of the other unintended causes of repealing
prohibition, or for that matter I don't want to get back to the
unintended causes of prohibition. So I am going to sort of jump
around here.
But, Mr. Hindy, you are a beer equivalent of my wine
constituents, and this is a Committee that looks at the
Constitution in every aspect, every direction, not just the
21st Amendment. Is it your belief that you have a reasonable
right to sell anywhere in the world, as a manufacturer of
product, unless otherwise restrained by Federal law?
Mr. Hindy. Yes.
Mr. Issa. And, Mr. Ho, would you say that if there was a
Texas brewery that you would have an expectation that that
brewery should be able to ship its products to the four corners
of the earth as a promotion of commerce intended by the
Constitution?
Mr. Ho. I think as an employee of the Texas attorney
general's office I would say that any business should have the
right to engage in their business consistent with the laws of
the jurisdiction they are selling to.
Mr. Issa. That wasn't the question, Mr. Ho. Should Dell be
able to sell their computers manufactured in Austin everywhere
in the world and export them without any unreasonable restraint
or prejudiced treatment because they simply come from Texas,
and we don't like Texans in California? That is what I am
asking.
Mr. Ho. I understand and appreciate the spirit of the
question very----
Mr. Issa. That is why as an individual--you were here as an
individual--I wanted your individual interpretation, on behalf
of Dell. [Laughter.]
Mr. Ho. As a constitutional matter--and I can speak
personally as a constitutional lawyer--there is a huge
difference between computers and, frankly, every other
product--huge difference from that and alcohol, because alcohol
does have this very unique----
Mr. Issa. Yes, but that wasn't the question. The rest of
the world does not regulate alcohol the way we do. The
exporting of alcohol to many of the four corners of the earth
is exactly the same as Dell computers. As a matter of fact,
Dell computers may be more restricted in some countries, like
China.
So back to the same question: Do you see, on behalf of
Dell, any problem with their having a reasonable right to enjoy
the same opportunities anywhere they choose to sell their
product in the four corners of the earth against domestic
interests of that state or that Nation?
Mr. Ho. I don't mean to frustrate you, sir. I speak
primarily in a legal capacity; I am a lawyer. If the people of
the United States, for that matter, want to repeal the 21st
Amendment that is entirely, entirely within the right of this
Congress and, obviously, through the state----
Mr. Issa. Okay. I will take that as I am not going to get a
square on behalf of Dell, and when you go home to Austin, good
luck.
Ms. Samona, maybe I can get a better answer from you.
Automobiles are highly regulated around the world. Do you
think, within reason, if I want to make a General Motors car
and ship it to Great Britain, that as long as I comply equally
in Great Britain with what Great Britain companies do I should
have reasonable access, notwithstanding trade barriers that are
artificially imposed, but generally, do you believe that
Michigan companies should have that right?
Ms. Samona. I think within reason yes, they should.
Mr. Issa. Okay. So can we all ask one question and get a
fairly quick yes or no? Ultimately, the 21st Amendment was a
bargain to repeal prohibition but to grant to the states the
right to protect individuals from harm from alcohol. Is that--
could I just get yeses from everyone and a no from someone that
just disagrees with the intent of the 21st Amendment?
Ms. Samona. That was one of its intents, yes.
Mr. Issa. Well, they allowed states to stay dry if they
wanted, but nowhere in the 21st Amendment was there any
language that intended individuals--or individual states to be
able to truly violate the Commerce Clause other than that which
was for protection--uniform protection of their people. Maybe
some of the more professorial folks could help me.
Mr. Bush. Actually, one of the shipments of wine I get is
from Mount Palomar in your district. Yes, it----
Mr. Issa. And thank you.
Mr. Bush. There is an issue here of--there is a tension in
the Constitution between the 21st--the Commerce Clause, of
course, and I agree with you that the purpose is for the
health, safety, and welfare of the 21st, of citizens of the
state.
And I certainly do not take--ask states for regulating
alcohol, per se. I have issues when they regulate alcohol in a
way that is not consistent with--where they allow some degree
of competition but in a discriminatory manner or where they
totally delegate their authority to private actors.
Mr. Issa. Right.
We certainly could pass a law and let the men and women
across the street decide whether we are within our authority of
reconciling various constitutional clauses. But wouldn't it,
Mr. Bush, be--Professor Bush--be reasonable to think that we
here on the dais may want to make it clear that states can
protect individuals--meaning the retail, distribution, and so
on--while in fact interstate clauses should be just as
supported? As long as they comply with whatever in-state people
do, out-of-state people should have the same opportunity, and
is there any reason to believe that we shouldn't consider
defining that if the courts will not?
And that means there will be no more questions, only
answers to anyone that wants to answer that question.
Ms. Samona. I would like to answer that. I think the 21st
Amendment, with all due respect, Congressman, trumps the
Commerce Clause. The Commerce Clause--21st Amendment gives the
rights of those states to be able to regulate alcohol in a way
that those states feel is safe and appropriate so they can
bring it----
Mr. Issa. That wasn't the question for Professor Bush. The
question had to do with out-of-state entities being allowed, so
long as they complied as in-state entities did.
Ms. Samona. And that takes me to the next thing: Commerce
Clause allows you to bring commerce, or goods, back from one
state to the other as long as that doesn't harm that state's
laws, rules, and/or existing health, safety and welfare issues.
So those are two separate issues, yet they work together.
However, the Commerce Clause does not trump the 21st
Amendment, and unfortunately we are getting court rulings that
say exactly that----
Mr. Issa. Okay, Professor Bush, you get the last word
because I truly am out of time, about whether or not
protectionism among the states was justified in the 21st
Amendment.
Mr. Bush. Protectionism--I define----
Mr. Issa. That is what you call it when you let people in
state have an advantage over people out of state. We call it
protectionism when it is us versus another country. It is
protectionism if this 21st Amendment allows that as to a
product that we are discussing here today.
Mr. Bush. I think that that is not the purpose of the 21st
Amendment. And I think the problem that the states are getting
in trouble with is engaging in that kind of activity, which may
or may not have a derivative benefit of temperance. But the
fact of the matter is, we are an increasingly interstate
economy, and these state regulations have an interstate effect.
And therefore, we have to be careful about those kinds of
interstate spillovers and the effect on other states' economies
from those type of price restraints.
Mr. Issa. Thank you so much, Mr. Chairman, for your
indulgence. I yield back.
Mr. Johnson. Thank you, sir.
I appreciate the testimony from the witnesses today.
Without objection Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask that you answer as promptly as you can
to be made part of the record. Without objection the record
will remain open for 5 legislative days for the submission of
any other materials.
Today's hearing raised a number of important issues. Moving
forward we must ask ourselves whether state regulation of
alcohol has been clarified or undermined through recent dormant
Commerce Clause and antitrust litigation. Robust state
regulation of alcohol is important for the public good, but so,
too, are the antitrust laws in the United States Constitution.
And with that, this hearing of the Subcommittee on Courts
and Competition Policy is adjourned.
[Whereupon, at 4 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record