May 16 (Bloomberg) -- The U.S. Supreme Court overturned two state laws that bar out-of-state wineries from shipping directly to customers, potentially boosting Internet and mail-order sales in the $23 billion wine industry.

The justices, ruling 5-4 today on New York and Michigan laws, said the traditional state authority over alcohol sales must yield to the constitutional requirements that states not discriminate against out-of-state businesses.

``If a state chooses to allow direct shipment of wine, it must do so on evenhanded terms,'' Justice Anthony M. Kennedy wrote for the court in Washington. The ruling threatens similar laws in at least six other states and possibly as many as 22.

The decision is a victory for small winemakers seeking to expand their businesses and a defeat for the wholesale distributors that are bypassed when wineries ship straight to consumers. Wine lovers around the country may have access to hundreds, if not thousands, of additional wines.

``The states that have this type of discrimination account for about 35 percent of the wine consumption volume in the country,'' said Steve Gross, who follows state laws for the Wine Institute, an industry trade group based in California that opposes the restrictions. ``It's a major marketplace that's potentially opening up for us.''

The decision leaves open the possibility that state legislatures can revamp their laws to ban both in-state and out- of-state direct shipments. New Jersey already takes that approach, and Nida Samona, chairwoman of the Michigan Liquor Control Commission, called for a similar ban in her state.

Protectionism Criticized

``We should let no one do it,'' Samona said. ``We should be more restrictive.''

New York Governor George Pataki signaled he wouldn't support any new restrictions. Pataki, a Republican, said today he favored allowing shipments from both in-state and out-of-state wineries.

``I think it'll be a plus for the wineries of New York,'' he said. ``It's something I've thought was the right policy for some time.''

New York Attorney General Eliot Spitzer defended the statute at the Supreme Court, arguing that the requirement that wine be sold through distributors and retailers aids tax enforcement and helps prevent sales to minors.

States now will ``have a choice between supporting face-to- face transactions by someone licensed to sell alcohol or opening up the floodgates,'' said Juanita D. Duggan, president of the Wine & Spirits Wholesalers of America, which supported the states.

Smaller Wineries

Opponents of the laws said they protect the powerful wholesale industry at the expense of consumer choice.

``This is a huge victory for consumers and small wineries over the forces of protectionism,'' said Clint Bolick, a lawyer with the Washington-based Institute for Justice who argued the case at the high court against the New York law.

The ruling will benefit smaller wineries that lack the resources to get their brands on store shelves around the country, said Eileen Fredrikson, partner at Gomberg, Fredrikson & Associates, a Woodside, California-based consulting firm to the wine industry. More than 3,000 wineries do business in the U.S., twice as many as 30 years ago.

``It's exciting for wineries at all levels, but especially for small high-end ones,'' she said. ``Right now Internet sales are pretty tiny, maybe 2 percent of sales. You can see that bumping way up.''

Retail Sales

Sales may suffer at the retail level, especially for high- end wines that are produced in small quantities, said Michael Yurch, president of Sherry-Lehmann Wine and Spirits on New York's Madison Avenue.

``Yes, there we may have a bit of a loss,'' said Yurch. Still, ``people like to come in and touch and feel and talk to people,'' at wine and liquor stores.

Some industry experts don't expect dramatic changes in the way most consumers buy wine.

``The majority will continue to move through distribution systems,'' said George Garrick, chief financial officer of San Francisco-based Wine.com, which sells wine on the Internet.

Under the Supreme Court's rules, the decision won't take effect for 25 days. The New York case then will return to the lower court level.

One possibility, though perhaps unlikely, is that a lower court judge would strip out the exemption that allows in-state shipping, rather than allow shipments by out-of-state wineries, according to Institute for Justice lawyer Steve Simpson.

Unusual Alignment

At issue in the cases was the tension between the Constitution's 21st Amendment, which repealed Prohibition in 1933 and gives states authority to regulate the sale of alcohol within their borders, and the Constitution's ban on state discrimination against interstate commerce.

Kennedy concluded that the 21st Amendment ``does not supersede any other provisions in the Constitution.'' He later said the New York and Michigan cases ``involve straightforward attempts to discriminate in favor of local producers.''

By forcing the justices to choose between free trade and state power, the case produced an unusual alignment. Joining Kennedy's opinion were Justices Antonin Scalia, often a vote for states' rights, along with three members of the court's more liberal wing: David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.

Chief Justice William H. Rehnquist and Justices John Paul Stevens, Sandra Day O'Connor and Clarence Thomas dissented.

Stevens acknowledged that the majority ruling ``may represent sound economic policy.'' He added: ``It is not, however, consistent with the policy choices made by those who amended our Constitution in 1919 and 1933.''

Thomas said the language of a 1913 law known as the Webb- Kenyon Act, along with the 21st Amendment, ``took those policy choices away from judges and returned them to the states.''

Family-Run Wineries

The New York law was challenged by three local consumers, along with the owners of two family-run wineries, the Swedenburg Winery in Middleburg, Virginia, and Lucas Winery in Lodi, California. Suing over the Michigan law were the Domaine Alfred Inc. winery in San Luis Obispo, California, and 13 Michigan residents who consume or write about wine.

Michigan's law required alcoholic beverages to be sold by licensed in-state retailers that must buy the products from distributors. An exception allowed licensed in-state wineries to ship their wine directly to customers in Michigan. Out-of-state wineries couldn't get such licenses.

New York's law was similar to Michigan's, except that it let out-of-state wineries get a license to ship wine directly if they open a branch office and warehouse in the state. No out-of-state winery did that, according to those who challenged the law.

The Cincinnati-based 6th U.S. Circuit Court of Appeals threw out Michigan's law, while the New York-based 2nd Circuit upheld the New York rules.

Shipping Directly

Of the 26 states that allow direct shipment of out-of-state wines to customers, about half allow it only from states with reciprocal laws, according to the Institute for Justice. Kennedy cast doubt on those reciprocity laws in his opinion.

``The current patchwork of laws -- with some states banning direct shipments altogether, others doing so only for out-of- state wines and still others requiring reciprocity -- is essentially the product of an ongoing trade war,'' he wrote.

States with bans on out-of-state shipping include Florida, Massachusetts and Ohio.

The cases are Granholm v. Heald, 03-1116, Michigan Beer & Wine Wholesalers v. Heald, 03-1120, and Swedenburg v. Kelly, 03- 1274.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: May 16, 2005 17:41 EDT