Mississippi Rising Redux – the Mississippi Supreme Court decides that the state can pull out of state retailers into court in Mississippi -now its up to the court to decide whether Mississippi consumers have the right to buy wine from out of state merchants.
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Mississippi’s attempt to enforce prohibition era laws prohibiting Mississippi residents from buying wine out of state and shipping it to themselves- the sting operation.
We last reported on this case in August of 2018 when the trial court in Mississippi decided (by granting our motion to dismiss for lack of jurisdiction) that the cases could not proceed because the out of state defendant retailers and wineries served with a complaint passed title to the wine purchased in the state in which they were licensed. This was a sting operation in which state agents logged onto dozens of popular websites, lied about their ability to purchase, accepted the terms of sale without question, ordered and paid for wine, took delivery in the state of sale and asked that the wine to be shipped to them in Mississippi.
In response to the motion to dismiss, the Attorney General of Mississippi insisted that jurisdiction existed over the defendant sellers under the state’s “long-arm” statute – which provides for jurisdiction in Mississippi over actions of out-of-state persons that allegedly have an effect in Mississippi – and appealed saying that the case should not have been dismissed without a trial and evidentiary hearing on the terms of sale defense.
The case went to the Mississippi Supreme Court in 2019. The Court agreed with the Attorney General that the long arm statute applied on the record as plead and sent the case back down to the trial court on whether a sale that takes place under the law of the state of licensure of the merchant (in this case a winery making the sale in California) creates liability for violating the law in Mississippi simply because the buyer was a Mississippi resident directing that the shipping company deliver to him in Mississippi. See Fitch.
The question of law now teed up for the trial court is, can a merchant (winery or retailer) selling wine, and passing title, in its home state under the laws of its home state, be liable criminally in Mississippi because the customer (taking delivery in the state of the merchant’s licensure) shipped the product to himself or herself in Mississippi?
This question may end up before the US Supreme Court because the implications for regulatory and criminal liability when communicating with customers who reside throughout the US and the world, and who engage transportation services to deliver their products to them, take on particular importance in our pandemic era of remote commerce.
THE STING OPERATION – THE DETAILS
63 retailers from around the US were targeted in a 2018 sting operation conducted by Mississippi Attorney General Jim Hood; close to 30 reportedly sold wine to state agents posing as customers, agreeing to the terms of sale, entering orders on-line and directing delivery to themselves in Mississippi. Federal Express and UPS records were sought by the AG. The records were produced by the carriers, as reported here.
Four of the defendants (apparently randomly selected) were originally sued in Mississippi. Some of the rest were sent warning letters and threatened with prosecution, presumably to be sued after the first four defendants were found guilty; and some may not have known that they were part of the sting. Following the Supreme Court ruling two of the four original defendants settled with the state by paying a fine and agreeing that Mississippi residents could not access their websites to buy wine to be sent to any location. One of the original defendants – a California licensed winery – has asked for a trial on the original question: does a transaction in California cause liability in Mississippi because the purchaser is from Mississippi and directs that the wine purchased in California be sent to the home of the purchaser in Mississippi or as gifts to other states.
AG Hood has now decided to up the ante and is serving demand letters and complaints on many of the original wineries and retailers caught up in the original sting. We made a Mississippi public records act request and discovered a list of the 28 remaining potential defendants (many well-known merchants). We are not publicizing the list because some of entities identified on the public records act request may have been improperly included. While the actual defendants in the next phase will not be determined until they are served with a complaint and required to respond in Mississippi, we will notify any of our clients that appear on the list.
THE LEGAL ISSUE TO BE TRIED – THE UNIFORM COMMERCIAL CODE
The original defendants were represented in the Chancery court by Joel W. Howell III of Jackson, Mississippi, and John Hinman and Gillian Garret of Hinman & Carmichael LLP. John, Joel, and Gillian will continue to represent the remaining defendant as the case is sent down to the trial for determination of the underlying question. Joel’s oral argument before the Mississippi Supreme Court in the first group of cases can be accessed here. Representation of the group of defendants now being included has not yet been determined.
The basis for the original request for dismissal was that the challenged sales had all occurred in the states of licensure of the defendant (California in the case of the remaining defendant), the terms of sale mandated that title to the products passed in the state of licensure and the buyer was responsible for shipment of the goods. This is based on the Uniform Commercial Code, and carefully placing UCC terms on defendants’ website and in the transaction documentation. “Passage of title” terms are not new law. The UCC has been used for many years by almost all merchants to specify where they do (and do not) do business. The UCC applies throughout the United States (including in Mississippi) and governs all commercial transactions.
One primary question to be decided is whether the UCC law in Mississippi (which is the same as the UCC law in California and throughout the US) places responsibility for any shipment on the buyer who affirmatively accepts that responsibility (which was the case in the transactions in this case). If the buyer accepts that the transaction occurs in the state of sale may Mississippi require its law to apply in the state of sale because the buyer is a resident of Mississippi? Further, can Mississippi law enforcement agents lie on transaction documentation (by affirmatively representing that they accept that the sale occurs in the seller’s state of licensure) and then prosecute the foreign seller for relying on that lie?
One finding in the case that went to the Mississippi Supreme Court that was not the subject of the decision but will be important on the retrial is - were the defendant’s passive sellers in the sense they did not specifically advertise to Mississippi nor did they encourage Mississippi customers to visit their websites (such as by mass mailings or mass emails). The issue here is intending to do business in Mississippi. That issue will be front and center when the cases go before the trial court a second time.
WHAT'S AT STAKE FOR THE WINE CONSUMER
All citizens of the US, including those in Mississippi, may travel to other states and take possession of wine and spirits for their personal use. Getting it to themselves in restricted sale states like Mississippi is much more difficult. The personal importation laws governing consumer-controlled movement of wine and spirits from inside and outside of the US are opaque and vary from state to state.
Regardless, when consumers travel (as they may do), many states (and the federal government for international transactions) have established legislative exceptions permitting consumers to import wine and spirits for personal use. This right is commonly exercised when visiting foreign countries; but is also available for interstate travel (virtual or actual). Because of the pandemic the virtual transaction has taken new importance.
Federal Express and UPS will not officially carry wine for consumers and will not carry spirits at all. Both require that all merchants shipping alcohol have either permits in the state of delivery or a clear right to ship under state law. However, many other delivery services are not as strict.
How, when and in what manner (on their person, by common carrier or in other ways) consumers may move their wine and spirits from state to state is a larger discussion, and at its core is a consumer rights issue. However, the right to own wine and spirits in another state should be established regardless of where the consumer resides.
WHAT'S AT STAKE FOR THE US WINE INDUSTRY.
This decision (and other similar earlier decisions from other states) will impact on the business practices of merchants doing business in their own states. If the terms of sale (including all sale documentation) are carefully structured to require the buyer to pick up the goods at the seller’s location, retailers (and other sellers with the right to sell to consumers - such as breweries, distilleries, and wineries) with websites may sell wine, beer, and spirits to any consumer regardless of where that consumer may live. This removes the necessity of having to block a consumer (or all consumers from a particular state) from access to the retailer’s website simply because of where he or she officially resides. However, if the seller must drill down further into the transaction taking place in its store, tasting room or website, and make sure that the customer does not reside in a prohibited state (such as Mississippi) the citizens of Mississippi (and similar states) will be painted with the mark of Cain and must be prohibited from purchasing wine, beer or spirits when traveling (virtually or in person) to any other state or country.
This also does not address the consumer rights issues created by consumers asking for their wine, spirits, or beer to be delivered to them (or to others, perhaps as gifts) outside of the state in which the goods were purchased. This has become important in an age of Covid where delivery is one of the only safe ways to shop - either for yourself or for others.
WHAT ABOUT SALES AND USE TAXES?
Sales Taxes are collected under the sales tax regulations of the state of sale (where the seller is licensed and makes the sale). Use taxes are the responsibility of the buyer and are governed by the buyer’s state if it differs from the seller’s state. Regardless, nothing is more certain than that the states involved will collect their taxes. In the wake of South Dakota v. Wayfair, Inc, many states are evaluating and modifying their policies regarding the taxation of goods in their states. Whether any newly enacted legislation will affect “passage of title” remains to be seen on a national level but is already being felt in California with the adoption of the Marketplace Facilitator Act that requires third party websites managing the ordering process to collect and remit sales taxes in California for sales being made to California residents.
IS THIS CASE OVER?
The answer is no. This case is going back for trial on the basic question of whether a merchant may sell to any person in the state where the merchant is licensed without regard for the state of residence of the purchaser - - if the consumer takes delivery in the state of sale. This case is also important from a perspective of state investigatory practices – when a state deliberately lies when purchasing goods can it then sustain criminal charges against the unwitting seller relying on a lawful sale in the seller’s state of licensure.
to be continued….
This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.