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The Future of Alcoholic Beverage Law in the Hands of the Courts

Article 1, Section 8, Clause 3 of the U.S. Constitution is known as the “Commerce Clause.” It gives Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.”  The U.S. Supreme Court expanded the Commerce Clause in a series of cases that held that because the Constitution gives the right to regulate interstate commerce to Congress, states cannot pass laws discriminating against citizens of other states.  Because there is not language in the Constitution that outlines this concept, the Court referred to it as the “Negative Commerce Clause” or the “Dormant Clause.”

Prohibition became law with the introduction of the 18th Amendment to the Constitution.  It was repealed when the Constitution was amended again with the addition of the 21st Amendment, which provides in part, “The transportation or importation into any State,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.”

In early cases, the Supreme Court gave great deference to the 21st Amendment; but over time, the pendulum began to swing in the other direction and the Court began to inflate the Dormant Commerce Clause at the expense of the 21st Amendment.

In two recent cases, the Supreme Court has come close to completely eviscerating the 21st Amendment to the Constitution.  In Granholm v Held 544 U.S. 460 the Court ruled that states permitting in state wineries to deliver to in state consumers but forbade out of state wineries from doing the same, were discriminatory and violated the Dormant Commerce Clause.  In Tennessee Wine and Spirits Retailers Association V. Thomas 139 S. Ct. 2449 the Court overturned a residency requirement imposed by the state of Tennessee as a condition of issuing a license.

Although these cases recognize the State’s power to protect the health and safety of its citizens and to collect taxes, they call into question what laws, rules and regulations the states may impose in pursuit of these goals.

In Granholm, Justice Kennedy wrote:

The States provide little evidence for their claim that purchasing wine over the Internet by minors is a problem. The 26 States now permitting direct shipments report no such problem, and the States can minimize any risk with less restrictive steps, such as requiring an adult signature on delivery. The States’ tax evasion justification is also insufficient. Increased direct shipment, whether in or out of state, brings the potential for tax evasion. However, this argument is a diversion with regard to Michigan, which does not rely on in-state wholesalers to collect taxes on out-of-state wines. New York’s tax collection objectives can be achieved without discriminating against interstate commerce, e.g., by requiring a permit as a condition of direct shipping, which is what it does for in-state wineries. Both States also benefit from federal laws that supply incentives for wineries to comply with state regulations. Other rationales—facilitating orderly market conditions, protecting public health and safety, and ensuring regulatory accountability—can also be achieved through the alternative of an evenhanded licensing requirement regulatory accountability.

The question, which is expressed by Justice Gorsuch in his dissenting opinion in the Tennessee Case, remains:

What are lower courts supposed to make of this?  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? 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? Ante, at 34. The Court offers lower courts no more guidance than to proclaim delphically that “each variation must be judged based on its own features.”

We may soon find part of the answer.  In Michigan, a federal district court issued an injunction, which it stayed pending appeal that would require the state to issue licenses to out of state retailers allowing them to ship to consumers in the state. In Illinois, a federal court has allowed a similar case to proceed to discovery. If these and similar cases are successful, wholesalers and retailers will be able to obtain license to ship into states without meeting requirements to establish a local presence.  Finally, Total Wine has asked the U.S. Supreme Court to review a Second Circuit opinion on Connecticut’s price posting law.  If accepted by the Supreme Court, states with price posting laws, like New York and Connecticut will be impacted.

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