Beer Business Daily// June 28, 2019
The Supreme Court has delivered its opinion on the big Tennessee Wine and Spirits Retailers Assn. vs. Thomas case.
The case as you may recall involved Tennessee retailers and out-of-state retailer Total Wine, and sought to clear up whether Tennessee’s two-year residency requirement for liquor store owners is unconstitutional [see BBD 01-17-2019].
The Court said that it believes it is.
In the majority opinion (7-2) penned by Justice Samuel Alito, the Supreme Court ruled the state’s residency requirement unconstitutional, as it “blatantly favors the State’s residents and has little relationship to public health and safety.”
So if you thought the 21st Amendment gave states virtually complete control over how they want to structure their beverage alcohol laws, well, you thought wrong.
The Supreme Court says the 21st Amendment gives “each state leeway in choosing the alcohol-related public health and safety measures that its citizens find desirable,” it “is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages.”
And that’s why an 80-year-old law like Tennessee’s residency requirement, is no more. Because it is one that “expressly discriminates against nonresidents and has at best a highly attenuated relationship to public health or safety.”
The Supreme Court said they were all ears on why the Tennessee residency requirement should stand, but the Tennessee Wine and Spirits Retailers Association “relied almost entirely on the argument that Tennessee’s residency requirements are simply ‘not subject to Commerce Clause challenge,’ and the State itself mounted no independent defense.”
And because they put all their eggs into this defense, “the record is devoid of any ‘concrete evidence’ showing that the 2-year residency requirement actually promotes public health or safety; nor is there evidence that nondiscriminatory alternatives would be insufficient to further those interests.”
Therefore, the Supreme Court holds “that this provision violates the Commerce Clause and is not saved by the Twenty-first Amendment.”
THE DISSENTING OPINION
As noted up top, there were two Justices (Gorsuch and Thomas) that had a different opinion on the matter.
This dissenting opinion, penned by Justice Gorsuch, argues that states have always been able to “impose residency requirements on those who seek to sell alcohol within their borders to ensure that retailers comply with local laws and norms. In fact, States have enacted residency requirements for at least 150 years, and the Tennessee law at issue before us has stood since 1939.”
Yet, “for the first time, the Court claims to have discovered a duty and power to strike down laws like these as unconstitutional. Respectfully, I do not see it,” Justice Gorsuch wrote. “A residency requirement may not be the only way to ensure retailers will be amenable to state regulatory oversight, but it is surely one reasonable way of accomplishing that admittedly legitimate goal.”
Justice Gorsuch, the same Justice who voiced his concern during oral arguments in January that the outcome of this case could become a slippery slope to Amazon direct delivery, once again questioned whether this ruling would open up Pandora’s Box.
“What are lower courts supposed to make of this?” he asked. “How much public health and safety benefit must there be to overcome this Court’s worries about protectionism ‘predominat[ing]’?
“Does reducing competition in the liquor market, raising prices, and thus reducing demand still count as a public health benefit, as many States have long supposed?” he added.
“And if residency requirements are problematic, what about simple physical presence laws? After all, can’t States “thoroughly investigate applicants” for liquor licenses without requiring them to have a brick-and-mortar store in the State?”
Indeed, retailers shipping products from one state into another looks to be the next battlefront. Alex Koral, regulatory counsel at Sovos, told sister publication Wine & Spirits Daily that the decision “opens up the question of whether alcohol retailers will soon be able to enjoy the same direct-to-consumer benefits that wine producers have enjoyed for years. However, it will require time and dedication by interested parties to further expand the market for direct-to-consumer shipments by retailers beyond the dozen states that currently allow it.”
Alex added that “while the recent ruling by the Court presents the possibility of more entrants to the direct-to-consumer shipping market, we will have to wait and see how states actually react, whether they will expand those permissions.”
MIXED REACTION FROM NBWA AND WSWA
The NBWA and the WSWA – the two trade orgs representing beer wholesalers and wine and spirits wholesalers, respectively – both put out statements in light of the Supreme Court’s decision.
NBWA chief Craig Purser more or less said they were alright with the ruling, mainly because there was no ostensible harm done to the three-tier system.
“The Court was deliberate in clarifying that this case was not a ruling on the three-tier system,” Craig said. “It reaffirms that the basic model and essential features of the three-tier system are legitimate. It recognizes that requiring industry participants to be physically present in the states where they operate – something NBWA believes to be essential to the three-tier system – is legitimate as well. More broadly, the court’s decision establishes a framework for state regulators and responsible industry participants to advance and support legitimate state laws that are essential to an orderly alcohol marketplace.”
Adding, “We are confident based on the Supreme Court’s comments reaffirming the public interest in state-led alcohol regulation that effective state alcohol laws will continue to withstand legal scrutiny.”
Michelle Korsmo chief of the Wine & Spirits Wholesalers of America, on the other hand, said their group “disagrees” with the decision, as it “erodes the Twenty-first Amendment and primary state authority.” However, WSWA does “agree with the Court that the promotion of public health and safety is a primary function of alcohol regulation, with the three-tier system being paramount to the creation of the safest alcohol market in the world.”
This ruling by the highest court in the land was definitely a blow to the primacy of the 21st Amendment over the dormant Commerce Clause, as now retailers have the same rights to ship directly to consumers as wineries do. It’s been a long legal process: First Costco, then Granholm, now Total Wine.. Each one chipping away at the 21st Amendment. While I don’t agree with this decision, it remains to be seen what sort of practical effect it will have on beer and bev-alc direct sales in general, as there still has to be somebody at home to show identification, and remember beer is cheap relative to its weight.
But still, with Amazon having licensed brick-and-mortar stores in most states (Whole Foods), they already could deliver bev-alc to many households legally, as they buy the product from licensed distributors. The real issue, then, becomes can Amazon and others challenge state laws requiring they purchase from in-state wholesalers, (if there is even wide consumer demand for it). Remember, even online grocery deliveries and click and pick are so far slow to catch on.
LOTS OF CASES, MORE TO COME
There have been lots of court cases over the years, and as we explained in an issue nearly ten years ago, the cases can be put into four main buckets:
- Granholm Copycats – where suppliers are suing states to fix a dormant Commerce Clause issue, like laws that treat in-state entities differently than out of state entities.
- Granholm Mutants – where retailers are suing states to get Granholm-styles rights to ship directly to consumers (this case falls into this category).
- Federal Antitrust challenges – most pronounced in the Costco and TFWS cases.
- Federal Preemption cases – where an entity sues the state declaring that a federal law trumps state alcohol law, most recently in the USAir case against New Mexico.
In other words, while direct shippers got a clear win, this ain’t over.