Will The Internet End The 3-Tier System?
 
June 1, 2000
 

The Internet is changing the manner in which America does business.  For most elements of the United States economy,  e-commerce has increased efficiencies, streamlined business communications, and transformed relationships between suppliers and end-use consumers.

However, the alcohol beverage industry is among the most heavily regulated in the United States.  The unique nature of alcohol, and the extraordinary history of its sale and consumption within the United States, have produced an industry guided more by regulations than market efficiencies.

Not surprisingly, state alcohol regulators are reacting to the challenges raised by the Internet.  In Florida v. Sam’s Wines & Liquors, Case  Nos. 97-3828, 3937, and 4060 (Consolidated) (Fla. 1st Dist. Ct. of App. 1999), a Florida appellate court affirmed a lower court’s decision dismissing the regulators’ case because the state court lacked personal jurisdiction over the out-of-state defendants.

In contrast, however, a Utah appellate court reached an opposite conclusion, deciding that Utah regulators could prosecute an Illinois supplier and its corporate president for violations of Utah’s beverage laws.  The appellate court’s decision in Utah v. Amoroso and Beer Across America, 975 P. 2d 505 (Utah Ct. App. 1999) reversed a lower court ruling that had dismissed the prosecution’s case against the defendants for lack of jurisdiction.

That split of authority is continuing among courts facing this issue.

In Butler v. Beer Across America, 83 F. Supp. 2d 1261 (N.D. Ala. 2000), parents brought suit against Beer Across America under Alabama’s Civil Damages Act, for selling beer to their minor son via the Internet.  The parents brought the suit in state court; based on diversity jurisdiction, the defendant removed the case to the federal court in the Northern District of Alabama.

The presiding federal judge declined to exercise personal jurisdiction based on the Illinois defendant’s lack of minimum contacts with Alabama, and because considerations of fairness and substantial justice did not favor the court asserting personal jurisdiction.  In rendering its decision, the federal trial judge adopted an approach which allows a court to exercise personal jurisdiction over a defendant if the defendant clearly does business over the Internet by entering into contracts with residents of other states that involve the knowing and repeated transmission of computer files.

Personal jurisdiction, according to the federal court in Butler, is not proper if the non-resident defendant has established a “passive” Internet site, which acts as little more than an electronic billboard for posting information.  According to the federal court, a Web site that allows users to exchange information with a host computer is in a grey area, and the judicial analysis will turn on the nature of the information transmitted and the degree of interaction.  In the Butler case, the court found that Beer Across America’s Web site did not anticipate the regular exchange of information across the Internet or provide for such interaction.  The court analogized the defendant’s Web site to a postal reply card in its limited interaction with customers, and found that this was insufficient to satisfy the minimum contacts requirement for personal jurisdiction.

In contrast to the success of Beer Across America before a federal court in Alabama, a similar Internet entrepreneur received an opposite result from the Missouri Court of Appeals.  In the case of State ex rel. Nixon v. Beer Nuts Ltd., 2000 WL 270671 (Mo. Ct. App.) a North Carolina corporation, licensed in North Carolina to sell alcohol, nationally advertised its microbrewery beer delivery services to consumers through various media, including the Internet.  The corporation’s Internet Web site allowed Missouri consumers to access the company’s services.

In the Beer Nuts case, the corporation initially allowed consumers to subscribe to its services directly from its Web site, without verifying that consumers were at least 21 years of age.  After the Missouri Attorney General conducted an investigation, Beer Nuts Ltd. changed its Web site so that potential customers were informed that the actual purchase and contact for delivery of its microbrewed beers would be consummated in North Carolina, rather than in the jurisdiction where the consumer resided.  Based on this predicate, the corporation continued its interstate sale of beer to end-use consumers, including Missouri residents.

The Missouri Attorney General subsequently filed a law suit, alleging that the corporation had violated Missouri’s liquor laws. A Missouri state trial court permanently enjoined Beer Nuts Ltd. from the unlicensed sale of beer to Missouri consumers and imposed a civil penalty of $1,000.00.  The corporate defendant appealed, arguing that Missouri courts did not have jurisdiction over the corporation.

The Missouri Court of Appeals upheld the trial court’s finding that Beer Nuts  Ltd. was subject to the jurisdiction of Missouri courts, as well as the provisions of Missouri’s Liquor Control Law.  The appellate court found that selling alcohol beverages without statutory safeguards presented a risk of substantial injury to Missouri’s consumers.

Armed with that finding, the state appellate court affirmed the lower court’s finding that Missouri’s long-arm statute gave it personal jurisdiction over the corporation.  The corporate defendant’s regular solicitation of customers from Missouri constituted sufficient contact with Missouri for the court to have jurisdiction over the corporation.  The Missouri appellate court expressly found that its determination complied with “traditional notions of fair play and substantial justice.”  In doing so, the Beer Nuts court concluded that the interest of the state of Missouri in regulating the sale and delivery of alcohol beverages within its borders outweighed any potential burden on the North Carolina corporation to appear as a defendant in Missouri.

How will this split of authority among jurisdictions be resolved?  The answer may be legislative, rather than judicial.

On a national level, the U.S. Congress is completing its work on federal legislation that will permit the Attorney General of any state to access the federal court system for purposes of prosecuting an out-of-state violator of state alcohol laws who otherwise might operate beyond the personal jurisdiction of the state’s judicial system.  Both the House and Senate have passed versions of the legislation, which are being reconciled via conference committee before being finalized and forwarded to President Clinton for signature.  Knowledgeable sources expect the reconciled bill to become law this year.