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A dialogue on local interests and national commerce

Ubiquity, Volume 2000 Issue December, December 1 - December 31, 2000 | BY Edmund B. Burke 

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Pat: Many people don't recognize the extent to which the U.S. Constitution protects the national market against the tyranny of local economic interests. This protection becomes more and more important as e-commerce grows and expands the scope of sales that have been made in the past by mail order.

Sandy: My, the tyranny of local economic interests, eh? That's some rhetoric.

Pat: You may think it's rhetoric, but it's not to those whose economic interests are impaired. In Sante Fe Natural Tobacco v. Spitzer, decided by the U.S. District Court in the Southern District of New York, Sante Fe brought a suit to enjoin the State of New York from enforcing Public Health Law Section 1399-II which effectively restricted cigarette sales in New York to in-state retailers. The law, in effect, prohibited any seller of cigarettes to ship its wares to any person in New York other than wholesale dealers or exporters. No sales, in short, to smokers.

Sandy: So, you think the State of New York should not have the right to try to stop people from smoking?

Pat: You can be so obtuse. The State didn't outlaw cigarettes, but only sought to prohibit direct sales (in particular via the Internet) to consumers. The Court found that the statute, on its face discriminated against out-of-state sellers and for that reason was highly suspect under the "dormant" Commerce Clause. Which I will explain if you like.

Sandy: Do I have a choice?

Pat: I'll ignore that for now. Under the Constitution, Congress is given the power to regulate interstate commerce. However, long ago the Supreme Court decided that the absence of Congressional regulation did not signal that States could do as they pleased. Instead, the Constitution has been construed to forbid State regulation that unduly interferes with interstate commerce, even though Congress has not spoken on the subject.

Sandy: So, the Congress could ban interstate cigarette sales?

Pat: That's an excellent question and it shows that you are thinking after all. The answer is, Yes, Probably So. At least, the Commerce Clause would not present an impediment. The dormant Commerce Clause is only relevant when Congress has not acted. Under the Constitution, Congress is the guardian of interstate commerce. It may opt to make it freer, and (for instance) to pass a law saying that no state or other authority shall have any power to prohibit or impede in any way the free flow of goods from state to state. It hasn't done that, but the dormant Commerce Clause is to the same effect, with plenty of caveats.

Sandy: So, what about the cigarettes?

Pat: Patience. Since the Court found that the statute discriminated "on its face" against out-of-state sellers and that it effectively required face-to-face retail sales in in-state brick-and-mortar stores, the law was subjected to the rule of "strict scrutiny." Rarely, the Court noted, can a statute survive this degree of judicial scrutiny, as the State must show that (a) there is a legitimate local interest being fostered by the law and (b) there is no other means to advance the local interest, other than the law in question.

Sandy: That second part of the test sounds hard. If the out-of-state seller could come up with one hypothetical alternative arrangement that would serve the state interest, that was less burdensome on interstate commerce, then that would seem to invalidate the law.

Pat: That is about the size of it. As my old law school professor used to say, "When the Court says "strict scrutiny" that means that the State is going to lose." But the State tried to advance various concerns, such as health benefits. New York imposes a high tax, of $1.11 per pack, on cigarettes. Of course, other states might have lower taxes (such as North Carolina), and sellers in these low-tax states could ship into New York, thus thwarting the State's plan to reduce the harmful practice by pricing it out of existence.

Sandy: Was the Court convinced?

Pat: Not at all. For one thing, each out-of-state cigarette seller is required by federal law to file a report with the taxing authorities of the buyer's state, giving full details on the orders. The tax authorities can then send a tax bill to the buyer.

Sandy: Ouch. I'm not sure I like my Internet purchases tracked by the state tax authorities.

Pat: This law in particular just applies to cigarettes. It's called the Jenkins Act and is found at 15 U.S. Code 375. But the Court observed that if the State of New York availed itself of the protections found in the Jenkins Act against the circumvention of the tax, it would serve the same purpose, and this was a "less restrictive alternative" than banning the out-of-state sales.

Sandy: What about sales to minors? Doesn't the Internet sales method allow minors to more easily buy cigarettes?

Pat: This argument was made, but Sante Fe pointed out that the State's goals could be achieved by other means, such as requiring purchases to be made by credit card, requiring a sizable minimum purchase for online sales, requiring age verification be made by faxed identification and requiring that the seller only deliver to the adult who is identified in the identification document, requiring special labels on the package (such as "Not for Delivery to Any Person Under 21"), and requiring the transporter to verify age before leaving a package. These would be "less restrictive alternatives" and since they exist, the outright ban on out-of-state sales had to fail the Constitutional test.

Sandy: So, Sante Fe prevailed?

Pat: Yes, indeed, in the trial court. The Court enjoined the enforcement of the law.

Sandy: These laws seem mainly to focus on sinful products, as it were. What about beer and wine? Aren't there different rules for those? I seem to remember something about this related to the repeal of Prohibition.

Pat: Yes, but that's been the subject of legal challenges as well. In Dickerson v. Bailey, decided by a U.S. District Court in Texas in February, Texas residents challenged a state law that prohibited the import of more than three gallons of wine for personal consumption, unless the recipient held a permit or "personally accompanied the wine . . . as it enters the state." The Court recognized that there were three legitimate state interests that militated in favor of the regulation: collection of taxes that would be circumvented by the imports, prohibition of deliveries to dry areas, and prohibition of delivery to minors. However, these interests were insufficient to justify the broad ban imposed by the statute, as there were, in the Court's view, reasonable and nondiscriminatory alternatives to the total ban on shipping to consumers.

Sandy: What about the amendment that repealed Prohibition? Doesn't this have some effect?

Pat: The Twenty-First Amendment to the U.S. Constitution has been construed several times by the Supreme Court, and while it gives a state considerable power to regulate its own sales of alcoholic beverages and to promote temperance within a State, the Amendment does not authorize a state to control sales in other states or to burden interstate commerce. The Supreme Court has invalidated state laws as violating the dormant Commerce Clause because, as it noted in Healy v. The Beer Institute, those laws have "the inherent practical extraterritorial effect of regulating liquor prices in other States." The Dickerson Court ruled that the Texas law's purpose was not to promote temperance itself, but was rather to protect in-state liquor wholesalers and retailers at the expense of out-of-state wine sellers, and as such, it was subject to the same strict scrutiny that is employed when state laws discriminate on their face against interstate commerce.

Sandy: And that means, of course, that the state regulation is going to fall.

Pat: Very good. So as the Internet expands the use of mail-order shipments, we may expect more and more challenges to the state regulations that tend to establish a protected market for in-state retailers.






Edmund B. (Pete) Burke is a partner in the Atlanta-based law firm of Altman, Kritzer & Levick, P.C., where he leads the firm's practice in the area of software and information technology transactions. He can be contacted at pburke@akl.com.

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