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Free to Drink Local?

December 30, 2018

Free to Drink Local? Supreme Court Will Decide Whether Liquor Retailer Durational Residency Requirements Are Valid

By: Gina Tonn, Volume 103 Staff Member

The maxim “Drink Local” is achievable for many beer and liquor connoisseurs these days.[1] But can state law require that consumers’ only option is to “drink local”? At least twenty-one states restrict out-of-state liquor industry participants—whether producers, wholesalers, or retailers[2]—from entering the market in some way.[3] This term, the Supreme Court is set to determine to what extent state liquor laws can enforce the prerogative to “drink local.” The debate centers on the tension between the commerce clause and the Twenty-first Amendment.

I. Constitutional Rivals: The Dormant Commerce Clause and Twenty-first Amendment

A well-established correlate to Congress’s power to regulate interstate commerce is that states cannot interfere with interstate commerce, a concept often called the “dormant” Commerce Clause.[4] The Twenty-first Amendment, however, explicitly grants states authority to regulate the liquor industry. [5] Immediately following passage of the Twenty-first Amendment, states had freewheeling power to regulate liquor.[6] Throughout the Twentieth Century though, the Court started relying more heavily on the dormant Commerce Clause to strike down state liquor laws.[7] Most recently, Granholm v. Heald struck down Michigan and New York laws that permitted in-state wineries to ship wine directly to consumers but prohibited out-of-state wineries from doing so.[8] The Court found that the statute discriminated against out‑of-state products without a valid Twenty-first Amendment purpose.[9] This case addressed only the regulation of alcohol products and producers, not distributors or retailers. The decision’s limited scope has led to a circuit split on application of the holding to wholesalers and retailers.

For example, the Eighth Circuit upheld three-year durational residency requirements for wholesalers in Southern Wine & Spirits of America, Inc. v. Division of Alcohol and Tobacco Control.[10] The court relied in part on a purpose clause in the statute that aligned with legitimate state goals under the Twenty-first Amendment—to protect health and welfare.[11] It also interpreted Granholm to only require equal treatment of products; unequal treatment of wholesalers as citizens was still permissible.[12] The Fifth Circuit, by contrast, struck down a durational residency requirement for an alcohol permit in Cooper v. Texas Alcoholic Beverage Commission.[13] According to the Fifth Circuit, distinctions between in-state and out-of-state entities must be an inherent part of the three-tier system, which is an established, constitutional form of state liquor regulation, in order to be valid. Durational residency requirements are not such an inherent aspect of the system.[14]

II. Local Retailers Fight Total Wine in Tennessee

Tennessee Wine & Spirits Retailer’s Association v. Byrdseeks clarification from the Supreme Court on the competing constitutional mandates of the Twenty-first Amendment and the dormant Commerce Clause. The issue before the Court on January 16, according to petitioners, will be “whether the Twenty-first Amendment empowers States, consistent with the dormant Commerce Clause, to regulate liquor sales by granting retail or wholesale licenses only to individuals or entities that have resided in-state for a specified time.”[15]

The Retailers Association, plaintiff-appellants below and petitioners here, initially sought declaratory judgment in state court. Plaintiffs sought to enforce Tennessee’s durational residency requirements for liquor retail licenses as constitutional and to block pending license applications by defendants.[16] The statutory provision at issue imposes restrictions on new licenses and license renewals:

(2) No retail license under this section may be issued or transferred to or held by, to any individual:

(a) Who has not been a bona fide resident of this state during the two‑year period immediately preceding the date upon which application is made to the commission or, with respect to renewal of any license issued pursuant to this section, who has not at any time been a resident of this state for at least ten (10) consecutive years.[17]

Defendants, the Executive Director of the Tennessee Alcoholic Beverage Commission and several national liquor retail chains, won summary judgment after removing the case to federal district court.[18] The Sixth Circuit affirmed summary judgment because the residency requirements were discriminatory against out-of-state retailers and the stated objectives of the requirement[19] could be achieved through reasonable, nondiscriminatory alternatives.[20] The court did not reject residence requirements in general, as those are essential to the three-tier system, but it said that requiring a specific duration of residency was invalid.[21]

III. The Sixth Circuit Struck the Right Balance

The Court should affirm and resolve the circuit split in favor of the Sixth Circuit’s reasoning because commerce clause limits on the state power to regulate alcohol are reasonable and do not violate the purpose of the Twenty-first Amendment. Even if there is some durational residency requirement that in theory would be permissible, Tennessee’s statute is needlessly restrictive and discriminatory. There are also reasonable policy alternatives to encourage a local liquor industry and protect the health and welfare of Tennesseans.

A threshold issue is whether the Court should even decide Twenty-first Amendment issues. Congress can waive the dormant Commerce Clause.[22] It may seem that the Twenty-first Amendment is effectively a waiver of the Commerce Clause in the liquor industry, thereby giving states totally free reign.[23] Perhaps this suggests Congress is the better branch to decide the boundaries of state’s regulatory authority.[24] But this issue is a constitutional question, which is the purview of the Court, and the Court has a history of addressing this precise issue.[25] It is therefore appropriate for the Court to weigh in again to clarify its previous jurisprudence.

Defining the balance between the dormant Commerce Clause and the Twenty-first Amendment is the crux of the Tennessee Wine and Spirits case. The Twenty-first Amendment allows states to regulate liquor for the protection of the health and welfare of the state’s citizens; it does not permit pure discrimination against interstate commerce.[26] State liquor laws are assessed based on “whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies” such as the dormant Commerce Clause.[27] The Sixth Circuit applied a two-part analysis synthesized from a variety of Supreme Court and circuit precedent: First considering whether a statute facially violated the dormant Commerce Clause. If it does, the court then considers whether the statute is sufficiently related to Twenty-first Amendment purposes to be valid nonetheless.[28] When faced with two conflicting provisions, this approach is reasonable and workable.

Tennessee’s burdensome durational residency requirements may have some tangential benefit on the health and welfare of the state’s citizens, although none has been shown or concretely alleged in Tennessee Wine and Spirits.[29] When the Tennessee legislature enacted the requirements, there was no welfare purpose identified. Despite the post hoc rationalization added in 2014,[30]articulating the purpose of the statute as to protect the health safety and welfare and use a higher level of oversight over liquor retailers, the Sixth Circuit observed that these provisions do not appear to be closely related to that legitimate interest.[31]

Considerations beyond the two-part analysis line up in favor of striking down the Tennessee requirements too. Alcohol is treated by consumers like most other articles of commerce: in the vast majority of states, a consumer can pick up a bottle of wine along with their milk and eggs.[32]The Court should decide this Commerce Clause case in light of economic realities.[33] By this metric, states should not be able to have blatantly discriminatory liquor laws. Moreover, as acknowledged by the Sixth Circuit, there are reasonable alternatives for Tennessee achieve the stated welfare and oversight goals, such as requiring retail managers to be residents but not all shareholders, public discussion of licenses, or imposing additional fees for licenses.[34]

Regardless of one’s views on federalism or state’s rights, one likely considers independent and local businesses to be valuable assets in a community. Assuming a preference for local retailers is at least part of the underlying policy rationales for Tennessee’s liquor license durational residency requirements, these goals are also likely achievable through nondiscriminatory, or at least less burdensome, means. For example, Minnesota has a thriving local liquor industry without any residency requirements on permits at any level of the three-tiered system.[35] Minnesota laws such as the “Surly Bill” encourage local production and retail sales by allowing producers to sell on premises.[36] The state permitted off-sale of growlers on Sundays well before Sunday retail liquor sales were permitted starting in 2017.[37] Although these Minnesota laws support breweries, they also create demand for local products at traditional brick and mortar retailers because many consumers try new beverages at a brewery taproom before purchasing in store.[38] Thus, the law benefits in-state participants without discriminating against out-of-state producers or retailers.

IV. Will the Court Get It Right? Perhaps.

Dormant Commerce Clause and Twenty-first Amendment decisions have not historically fallen along ideological lines on the Court.[39] Regardless of the coalition’s composition, the outcome of this case could be broad or narrow. At a minimum, the Court will likely need to articulate a standard for retail license durational residency requirements and, in doing so, will clarify whether the standard is the same or different than that for producers under Granholm. The Court could even go so far as to lay out the standard for each tier. On the narrow side, the Court could strike down Tennessee’s specific durational residency requirements—in whole or in part—without specifying a bright line rule. It could also heed Judge Sutton’s dissent at the Sixth Circuit, affirming the Sixth Circuit in part, to strike down the nine-year renewal but retain the two-year requirement for an initial license.[40] However, because this case reached the Court on a circuit split, it seems some broader legal clarifications are likely.

V. At the End of the Day, Raise a Glass to Your Local Pub, Taproom, Liquor Store or Winery

It might seem that issues surrounding Prohibition are long in the past, but the motivation for its passage and repeal continue to influence the types of liquor regulation states can impose. The questions presented in Tennessee Wine and Spirits will affect the liquor industry in many states. The latest installment of the Twenty-first Amendment versus the Commerce Clause is a rare match-up worth watching. No matter what the court decides, most of us will be able to celebrate—or commiserate—over a brew from a local producer or retailer, with or without the state mandate to “Drink Local.”

  1. See, e.g., Aaron Schacter, The Next Big Thing in Beer Is Being a Small Taproom, NPR (Sept. 27, 2017), https://www.npr.org/sections/thesalt/2017/09/27/552351664/the-next-big-thing-in-beer-is-being-a-small-taproom (describing the local brewery trend in “basically ever state in the country”).
  2. These categories are called the “three-tiered” system, which most states adopted to prevent vertical integration after passage of the Twenty-first Amendment. See Jeffrey C. O’Brien, The Craft Brewing Boom and Minnesota’s Three-Tier System: The Case for Change, 43 Mitchell Hamline L. Rev. 971, 975 (2017) (explaining the history of the three-tier system). The Court found this model constitutional in North Dakota v. United States, because it was a legitimate way to prevent unlawful diversion of liquors into states. 495 U.S. 423, 432 (1990).
  3. Petition for a Writ of Certiorari at 1–3, certiorari granted, Tennessee Wine and Spirits Retailers Ass’n v. Byrd, No. 18-96, 2018 WL 3496882 (July 20, 2018).
  4. See Gibbons v. Ogden, 22 U.S. 1 (1824) (holding that states do not have the power to regulate interstate commerce because that power is vested in Congress).
  5. U.S. Const. amend. XXI, § 2.
  6. See State Bd. of Equalization of Cal. v. Young’s Market Co., 299 U.S. 59, 62 (1936) (“The words used [in section two of the Twenty-first Amendment] are apt to confer upon the state the power to forbid all importations which do not comply with the conditions which it prescribes.”); Sherry Truong, A Tipsy Balance: Dormant Commerce Clause Limits on a State’s Prerogatives Under the Twenty-first Amendment, 44 Hasting Const. L.Q. 203, 204–17 (2017).
  7. Drew D. Massey, Dueling Provisions: The 21st Amendment’s Subjugation to the Dormant Commerce Clause Doctrine, 7 Tenn. J. Bus. L. 71, 71 (2005).
  8. Granholm v. Heald, 544 U.S. 460, 465–66 (2005).
  9. See id. at 484–85 (“The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods . . . .”).
  10. Southern Wine and Spirits of America, Inc. v. Division of Alcohol and Tobacco Control, 731 F.3d 799 (2013).
  11. Id. at 808 (identifying the stated purposes of the statute as “to promote responsible consumption, combat illegal underage drinking, and achieve other important state policy goals such as maintaining an orderly marketplace . . . .”). ↑
  12. See id. at 810 (rejecting the balancing test under the Commerce Clause and Twenty-first Amendment and instead relying on the equal treatment of in-state and out-of-state products).
  13. Cooper v. Texas Alcoholic Beverage Comm’n, 820 F.3d 730 (2016).
  14. Id. at 743. For additional analysis, see Keegan J. Shea, Tweaking the Twenty-first Amendment: An Argument Against Durational-Residency Requirements for Alcohol Beverage Wholesalers and Retailers, 62 ST. Louis U. L.J. 261, 272–75 (2017) (overviewing the split between the Eighth and Fifth circuits).
  15. Shea, supra note 14, at *i.
  16. Byrd v. Tennessee Wine and Spirits Retailers Association, 883 F.3d 608, 612 (6th Cir. 2018), certiorari granted by Tennessee Wine and Spirits Retailers Ass’n v. Byrd, U.S. (Sept. 27, 2018).
  17. Tenn. Code. Ann. § 57-3-204(b)(2)(A) (2018). The plaintiffs also challenged the provision requiring that each stakeholder in a corporation individually fulfill the retail license residence requirements in order to obtain a license for the corporation. Tenn. Code Ann. § 57-3-204(b)(3). ↑
  18. Tennessee Wine and Spirits, 888 F.3d at 612.
  19. Tenn. Code. Ann. § 57-3-204(b)(4) (2018) (“[I]t is in the interest of this state to maintain a higher degree of oversight . . . [I]t is in the best interest of the health, safety and welfare of this state to require all licensees to be residents of this state as provided herein.”).
  20. Tennessee Wine and Spirits, 883 F.3d at 625–26.
  21. Id. at 623.
  22. See, e.g., South Dakota v. Wayfair, 138 S. Ct. 2080, 2102–03 (2018) (Roberts, J., dissenting) (discussing Congress’s role in dormant Commerce Clause legislation); Massey, supra note 7, at 74–77 (explaining the roles of Congress and the Court in shaping dormant Commerce Clause law).
  23. See, e.g., Massey, supra note 7, at 80–81 (describing the rationale for why the Twenty-first Amendment could relieve states from Commerce Clause restrictions).
  24. Cf. Wayfair, 138 S. Ct. at 2104 (Roberts, J., dissenting) (“A good reason to leave these matters to Congress is that legislators may more directly consider the competing interests at stake.”).
  25. See Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 275 (1984) (rejecting the “conclusion that the Twenty-first Amendment has somehow operated to repeal the Commerce Clause wherever regulation of intoxicating liquors is concerned” as an “absurd oversimplification”).
  26. See Granholm v. Heald, 544 U.S. 460, 487 (2005) (“The central purpose of the [Twenty-first Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition.”).
  27. Bacchus Imports, 468 U.S. at 275.
  28. See Byrd v. Tennessee Wine and Spirits Retailers Ass’n, 883 F.3d 608, 624 (citing various cases in the rule explanation and synthesis).
  29. Id. at 625–26.
  30. Brief in Opposition for Respondent at *6, certiorari granted, Tennessee Wine and Spirits Retailers Ass’n v. Byrd, No. 18-96, 2018 WL 3496882 (July 20, 2018).
  31. Tennessee Wine and Spirits, 883 F.3d at 625.
  32. See Christopher Ingraham, The Bizarre Thing That Happens When Grocery Stores Can’t Sell Booze, The Washington Post (May 14, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/05/14/why-more-grocery-stores-should-sell-booze/?utm_term=.84a4d8564734 (including a map of grocery store alcohol sales across the United States showing that a significant majority of states allow at least wine and beer sales in grocery stores).
  33. Cf. South Dakota v. Wayfair, 138 S. Ct. 2080, 2097 (2018) (“[T]he real-world implementation of Commerce Clause doctrines now makes if manifest that the physical presence rule as defined by Quill must give way to the ‘far-reaching systemic and structural changes in the economy’. . . caused by the Cyber Age.”). The other parallels to Wayfair here are also notable, specifically as they relate to a growing demand for e-commerce in the liquor market and the “physical presence” concept. Although many states do restrict e-commerce in liquor, there is a growing demand for online liquor sales and states, including Tennessee, are changing laws to allow it. Tenn. Code. Ann. § 57-3-217 (requiring only a direct shipper’s license, without residency requirements, to be able to direct ship wine to customers in the state); How E-Commerce is Evolving the Alcohol Category, Winsight Grocery Business: Brand Insight (June 13, 2018), https://www.winsightgrocerybusiness.com/center-store/how-e-commerce-evolving-alcohol-category; Justin Robinson, Monthly Pulse – September 2018, Drizly: Data Distillery (Oct. 4, 2018), https://data.drizly.com/monthly-pulse-september-2018/.
  34. Tennessee Wine and Spirits, 883 F.3d at 625–26.
  35. See Minn. Stat. § 340A.
  36. See Jake Lewis, The Pint Law, a Year Later, The Growler (June 8, 2012), https://growlermag.com/the-pint-law-a-year-later/ (describing the benefits to the beer market one year after the “Surly Bill” passed, allowing breweries to sell pints to customers on-site).
  37. Minn. Stat. § 340A.28 (2018).
  38. Cf. Bart Watson, Brewery Visits Grow Beer: What Can the Whole Industry Learn? Brewers Ass’n (Nov. 9, 2018), https://www.brewersassociation.org/insights/brewery-visits-grow-beer-you-can-too/ (citing a study showing that people who went to breweries reported buying more beer afterward). This point is also supported by anecdotal evidence and personal experience within the Minneapolis beer market.
  39. See, e.g., Massey, supra note 7, at 112 (noting that the Granholm decision was the first since 1994 with the majority opinion’s alignment); First Mondays Podcast, OT2017 #30: Most Ambitious Crossovers, SCOTUSblog (Jun. 25, 2018, 8:30 AM), http://www.scotusblog.com/2018/06/ot2017-30-most-ambitious-crossovers/ (describing Ginsburg in the majority and Roberts in the dissent as an “ambitious crossover”). Justices Kennedy, Thomas, Ginsburg, Alito, and Gorsuch comprised the majority in Wayfair, with Justice Kennedy writing the opinion of the Court (although in this case the dissenters were more worried about principles of stare decisis and Congress’s role than the merits of question). In Granholm, Kennedy also authored the opinion, joined by Scalia, Souter, Ginsburg, and Breyer. The Bacchus majority also had an interesting mash-up across ideological lines. The liberal justices who dissented Wayfair may vote to strike this provision because this case reconcile a circuit split rather than overturn precedent.
  40. Byrd v. Tennessee Wine and Spirits Retailers Ass’n, 883 F.3d 608, 629,635 (2018) (Sutton, J., dissenting) (suggesting the two-year requirement fits within the “core authority delegated to the States by the 21st amendment.”).
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