United States: US Supreme Court Addresses Regulation Of Alcoholic Beverage Industry

In a decision rendered on Wednesday, the United States Supreme Court for the first time in over a decade waded into the question of the degree to which a state may, in regulating its alcoholic beverage industry, impose requirements that have the effect of favoring local enterprise versus businesses based in another jurisdiction. Holding that a residency requirement imposed by Tennessee upon prospective retailers discriminates against interstate commerce in violation of the Commerce Clause of the U.S. Constitution, the Supreme Court affirmed the rule that, notwithstanding section 2 of the 21st Amendment, states may not interfere with interstate commerce. Tennessee Wine and Spirits Retailers Assn. v. Thomas, No. 18-96, 2019 WL 2605555, ___ U.S. ___ (June 26, 2019).

Tennessee had adopted a variety of requirements imposed upon licensees, including that they be residents of Tennessee for two years before applying for a license, another requirement that imposed a consecutive ten-year residency requirement upon anybody seeking to renew a license, and the requirement that any corporation applying for a license have only Tennessee resident directors, officers and stockholders. When two prospective licensees who did not satisfy these requirements sought licenses, the Tennessee Attorney General issued an opinion that these requirements were unenforceable. A trade association of existing licensees filed suit when the state alcoholic beverage regulators indicated licenses would be issued. The Sixth Circuit Court of Appeals struck down all of these requirements on the grounds that they constituted "violations of the Commerce Clause." Only the two-year residency requirement was appealed to the U.S. Supreme Court, with the trade association arguing that section 2 of the 21st Amendment, which ended Prohibition at the national level, "gives each State leeway in choosing the alcohol-related public health and safety measures that its citizens find desirable." Responding to this position, the U.S. Supreme Court wrote:

§ 2 [of the Twenty-first Amendment] is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages. Because Tennessee's 2-year residency requirement for retail license applicants blatantly favors the State's residents and has little relationship to public health and safety, it is unconstitutional. Slip op. at 2.

A bit of background. The Constitution contains the Commerce Clause, which provides that "[t]he Congress shall have a Power ... [t]o regulate Commerce among the foreign Nations, and among the several States, and with the Indian Tribes." This provision has been interpreted to be both an affirmative grant of power to Congress to regulate such commerce, but as well to prohibit state laws that, even where Congress has not spoken, restrict interstate commerce. This latter aspect of the Commerce Clause is referred to as the "Dormant Commerce Clause."

Also in play is section 2 of the 21st Amendment, that being the amendment that ended nationwide Prohibition. Section 2 of the 21st Amendment provides "the transportation and importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." Over the years there has existed a conflict between the grant of authority to the states under section 2 of the 21st Amendment to regulate the alcoholic beverage industry and Congress' powers under the Commerce Clause, and especially the Dormant Commerce Clause – particularly the latter's application to prevent barriers to interstate commerce so as to avoid the "economic balkanization" of the various states. Generally speaking, early after the adoption of the 21stAmendment, it was held to control over the Commerce Clause. In more recent years, as exemplified in the 2005 decision rendered in Granholm v. Heald, 544 U.S. 460 (2005), section 2 of the 21st Amendment has been held subject to the states' obligation to not interfere with interstate commerce; effectively, provisions of alcoholic beverage law that favor local interest over interstate interest will be struck down as unconstitutional.

The analytic path is as follows: does state regulation of the alcoholic beverage industry burden interstate commerce? If the answer to that question is yes, the next question is whether that burden is a legitimate exercise of the state's powers under section 2 of the 21stAmendment? If the burden does not effectuate a legitimate state interest, then the statute is unconstitutional under the Commerce Clause. Crucial for this decision, it has been repeatedly held that protectionism in favor of in-state interests versus out-of-state interests is not a legitimate state interest under section 2 of the 21st Amendment. For example, Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Court struck down a state tax provision that favored pineapple wine made in Hawaii, it being enacted only to "promote a local industry." Likewise, in the Granholm decision, the Supreme Court struck down direct wine shipment laws that favored in-state wineries over those located out of state.

Turning to the particular question at hand, and focusing upon the in-state two-year residency requirement for an initial license, the Supreme Court wrote:

Recognizing that §2 was adopted to give each State the authority to address alcohol-related public health and safety issues in accordance with the preferences of its citizens, we ask whether the challenged requirement can be justified as a public health or safety measure or some other legitimate nonprotectionist ground. .... [W]here the predominant effect of a law is protectionism, not the protection of public health or safety, it is not shielded by §2. Slip op. at 32-33.

Answering that question, the Court held that the residency requirement "expressly discriminates against nonresidents and has at best a highly attenuated relationship to public health or safety." Id. at 33. Arguments that, for example, the residency requirements render the applicants directly subject to the state courts and afford the state a better opportunity to determine their fitness to sell alcohol were rejected on grounds including the ability to require that the applicants designate an agent for service of process and consent to suit in the Tennessee courts and the ability to investigate the background of persons irrespective of where they are located. In addition, it was noted that, with respect to any store that would be licensed, they would be physically located within the state and could thereby be monitored "through on-site inspections, audits, and the like." Id. at 35. The Court as well rejected the proposition that a retailer with local ownership, "a responsible neighborhood proprietor," would be more likely to cut off a patron abusing alcohol because no evidence had been entered in support thereof. Further, it was observed that this otherwise laudable goal would be effectuated not by the license holder, but rather the person actually making the sale. Ultimately, finding that the residency requirement does not advance interests protected by section 2 of the 21st Amendment, the Court held:

[T]he Association has fallen far short of showing that the 2-year durational-residency requirement for license applicants is valid. Like the other discriminatory residency requirements that the Association is unwilling to defend, the predominant effect of the 2-year residency requirement is simply to protect the Association's members from out-of-state competition. We therefore hold that this provision violates the Commerce Clause and is not saved by the Twenty-first Amendment. Slip op. at 36.

Immediately, this decision renders void provisions of the laws in many states that favor, within the alcoholic beverage industry, local interest over those from other states. Longer-term, this decision at least opens the door for greater interstate competition in the alcoholic beverage industry. The rationale of this decision may be cited in support of greater flexibility in the interstate shipment of alcoholic beverages for both retailers and ultimate consumers. In that regard, the Supreme Court cautioned against reading too much into the Granholmdecision's endorsement of the three tier (manufacturer/wholesaler/retailer) system utilized in most states with respect to alcoholic beverages, cautioning that section 2 of the 21st Amendment does not sanction "every discriminatory feature that a State may incorporate into its three-tiered scheme." One application may be efforts to open up the ability of retailers to purchase from wholesalers who are located out of state. Another application may be to expand direct to consumer shipment opportunities.

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