December 11, 2002 10:30 AM PST

Courts spurn state laws on caskets, wine

Two recent court decisions could help boost Internet commerce by curtailing states' abilities to enforce protectionist laws.

Both courtroom victories arose out of lawsuits brought by the Institute for Justice (IJ), a public interest law firm in Washington, D.C. And in both cases, courts ruled that state laws were unreasonably protectionist and were designed to hinder, not help, competition.

Steve Simpson, an IJ attorney, said his organization hopes to establish a two-pronged court precedent. "First, governments shouldn't be permitted to favor certain industries or businesses over others," Simpson said. "And second, they shouldn't be able to erect irrational barriers to entry. That's the common theme running through these cases."

On Tuesday, a federal judge barred New York state from enforcing a law preventing wineries from shipping to Empire State residents. Unless appealed by Attorney General Eliot Spitzer, the order from Judge Richard Berman of the Southern District of New York clears the way for the state's 19 million residents to order alcohol online and via mail order.

In that case, IJ is representing the Lucas Winery in Lodi, Calif., which sells wine over the Internet, and the Swedenburg Winery in Middleburg, Va.

In the second case, the U.S. Sixth Circuit Court of Appeals ruled last week that Tennessee could not require people selling funeral caskets to undergo an expensive, two-year licensing process.

"The licensure requirement imposes a significant barrier to competition in the casket market," the appeals court said. "By protecting licensed funeral directors from competition on caskets, the (law) harms consumers in their pocketbooks."

The case was brought on behalf of a local unlicensed casket dealer. Still, the ruling could provide a boost for e-commerce by allowing Tennessee residents to legally purchase funeral caskets over the Internet and bypass markups from local funeral homes that can run as high as 600 percent. Companies such as DirectCasket.com and FuneralDepot.com sell far cheaper caskets online, but until now would have been barred from selling their products in Tennessee unless they were licensed by the state.

IJ isn't alone in worrying about state laws that restrict e-commerce. The U.S. Federal Trade Commission filed a brief siding with IJ in another lawsuit over casket sales and held a workshop in October to investigate barriers to e-commerce.

Prohibitions vary, but products that can't be legally purchased online or via mail order in some states include cars, fine wine, and even contact lenses. eBay lobbyists say they're alarmed that some states may require sellers to buy expensive auctioneer licenses.

Economic rights
The U.S. Supreme Court has ruled as recently as 1996 that "if a law neither burdens a fundamental right nor targets a suspect class, we will uphold the legislative classification so long as it bears a rational relation to some legitimate end." Starting and operating a business is not, according to the Supreme Court, a fundamental right.

That's a far cry from the 1905 case of Lochner v. New York, in which the Supreme Court said a law regulating bakers had "no reasonable ground for interfering with the liberty of person or the right of free contract."

IJ's Simpson said the state regulations "attempt to freeze time at one point when they're passed. And they purport to apply to everybody for all time, but they can never foresee developments like the Internet that break down physical barriers to trade. They make these types of regulations all the more absurd."

In last week's decision in the Tennessee casket case brought by IJ, the appeals court stressed that it was extending great deference to the state legislature's economic regulations, saying that "even foolish and misdirected provisions are generally valid if subject only to rational basis review."

But the three-judge panel said the law was so clearly designed to protect funeral homes from competition that it did not even qualify as remotely rational. "Rational basis review, while deferential, is not toothless," the court said.

In the other case, Judge Berman ruled against New York state's ban on wine shipments to state residents in November, saying it violated the U.S. Constitution's Commerce Clause. Berman waited until a hearing on Tuesday morning to decide how to craft his order enjoining the state from enforcing the law.

The law said that "no alcoholic beverages shall be shipped into the state" unless sent to a licensed distributor. A Justice Department appropriations bill, recently signed by President Bush, permits people physically visiting an out-of-state winery to have wine shipped to them at home.

According to documents filed with the IRS, the nonprofit Institute for Justice had a budget of $5.4 million for the year ending June 30, 2001.

 

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