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  It was repealed when the Constitution was amended again with the addition of the 21^st Amendment, which provides in part, “The transportation or importation into any State,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

In two recent cases, the Supreme Court has come close to completely eviscerating the 21^st 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.

The Second Circuit Court of Appeals recently upheld a decision by the lower court dismissing Total Wine’s challenge that three of Connecticut’s price-posting provisions violate federal antitrust law. At issue were three regulations under Connecticut law that bear on the price at which alcoholic beverages may be lawfully sold.  The three provisions were: (1) Connecticut’s “post-and-hold” provision; (2) Connecticut’s minimum retail pricing provisions; and (3) Connecticut’s provision prohibiting price discrimination and volume discounts.

Total Wine argued the Sherman Act preempted Connecticut’s regulatory scheme because it eliminated incentives for alcoholic beverage wholesalers to compete on the basis of price and invited wholesalers to maintain prices substantially above what fair and ordinary market forces would dictate. Total argued that this inhibited meaningful price competition at the retail level. 

Connecticut’s “post-and hold” provisions require wholesalers to post a bottle price and a case price every month for each alcoholic product it intends to sell.  Once the posted prices are made available to the industry, wholesalers have four days to match competitors’ lower prices. Wholesalers must then hold those final prices for the remainder of the month.  Importantly, Connecticut’s price posting requirements are nearly identical to New York.

Under Connecticut’s minimum retail pricing provisions, retailers are required to sell customers at or above a statutorily defined cost.  Cost, however, is determined by adding the wholesaler’s posted bottle price, plus a markup for shipping and delivery. 

The last provision challenged by Total Wine was Connecticut’s law prohibiting price discrimination and volume discounts.  Essentially, this provision bars wholesalers from offering discounts to retailers, like Total Wine, who buy a high-volume of product.  

The Second Circuit upheld all three provisions, finding that they did not violate the Sherman Act. In upholding the post-and-hold provision, the Second Circuit relied heavily on Battipaglia v. New York State Liquor Authority (1984) which was a case where the court upheld New York’s price-posting provision that was nearly identical to the Connecticut statute at issue.  The New York law in Battipaglia contained post-and-hold provisions that obliged wholesalers to file monthly price schedules with the state liquor authority by the fifth day of the preceding months, and authorized wholesalers to amend their filed schedules to meet lower competing prices and discounts “provided such amended prices and discounts are not lower and discounts are not greater than those to be met.”

The Second Circuit Court of Appeals covers the Eastern, Northern, Southern and Western Districts of New York. So all relevant courts are bound by this decision unless it is overturned by the Supreme Court of the United States. Therefore, many  see this case not only as a victory for Connecticut but New York as well.  For New York, the victory was twofold. First, if the Second Circuit overturn Connecticut’s price posting law, a changed to New York’s similar statute would be imminent and thus threaten the laws aim to create a more level paying field within the industry. Second, while many states have primary source laws which protect the consumer from counterfeit products or products that have been tampered with, New York’s primary source laws are imbedded in its price posting laws.  As a consequence,  there was a genuine fear that if the price posting laws were struck down the primary source laws would go as well.  

Total Wine is one of the largest retail chains in the country and continues to challenge the nation’s alcohol laws. Lawsuits brought by Total Wine were the basis for overturning a restriction on the number of liquor store licenses issued to a single person or entity in South Carolina as well as overturning a ban on volume discounts in Maryland. Most notably, Total’s challenge to a Tennessee residency requirement in Tennessee Wine & Spirits Retailers Association v. Zackary Blair, made its way to the Supreme Court and the parties now wait (along with the entire industry) for the Court’s decision this spring.  Arguments in this case went well beyond the Tennessee residency requirement encompassing the existential question: how powerful is the 21st Amendment?  Thus, while many in the industry can breathe a sigh of relief today, as the Second Circuit protects foundational elements of beverage alcohol law, we are reminded that regulatory shakeups continue may be just around the corner. 

Section 99 of New York’s Alcoholic Beverage Control Law (“ABC Law”) allows an on premise licensee to obtain a permit to remain open past 4 a.m. The permits are generally referred to as all-night permits and are usually associated with New Year’s Eve, although an application may be accepted for other holidays or events.  The law was amended effective immediately. Now, before a permit will be issued, the applicant must give notice to the local police department or, if none exists, the county sheriff. In addition, in the five boroughs of New York City the licensee must give advance notice to the local community board.

MEAD AND BRAGGOT

“Braggot”  (which is both singular and plural) means a malt alcoholic beverage made primarily from hone, water and malt and/or hops. It may also contain fruits, spices, herbs, grain and other agricultural products. Honey must “represent at least fifty-one percent of the starting fermentable sugars by weight of the finished product.”  Under the ABC Law braggot is designated and sold as beer.

A new definition has been added for a “Farm Meadery.” It includes “any place or premises, located on a farm in New York State, in which New York state Labelled Mead or New York State Labelled Braggot is manufactured, stored or sold, or any other place or preise in New York State in which New York State labelled med or New York State Labelle Braggot is manufactured, stored and sold.”  The definition of farm has been expanded to include “the land, buildings and equipment used to prepare and market honey and apiary products as a commercial enterprise.

Mead made a big comeback in 2018 as a result of consumer awareness of the plight of the honeybee and popular books and movies such as The Game of Thrones and the Harry Potter series. In New York, the beverage alcohol industries is keeping pace.  Section of the ABC Law has been amended to add definitions for “broggot” and “Mea” and to create a new license for a farm meadery.

In essence, if one treats a product as mead or braggot, it can be distributed through beer wholesaler. If the product is wine or is treated as wine, it must be distributed by a wine or liquor wholesaler.

“Mead” means “A wine made primarily from honey and water. It may also contain hops, fruits, spices, herbs, grain or other agricultural products. Honey shall represent at least fifty-one percent of the starting fermentable sugars by weight of the finished product.”  If the product contains more than eight and one half percent alcohol by volume, it must be marketed and sold as wine. If the alcohol content is less, the brand owner may elect to treat it as Mead for all purposes.

The statute creates licenses for mead producers, which authorizes its holder to produce Mead and Braggot. There is also a new Farm Meadery license, which authorizes its holder to product New York labeled Mead and Braggot.  Like other producers of New York labeled products, the holder of a Farm Meadery license has broader rights to deal with other New York Labeled products.

One last point is worth noting. The TTB has its own rules relating to mead or as they call it, honey wine.  “Blending Honeywine and beer is disalled at a winery premise, period.l If you have a winery license you cannot make any category of braggot. If you have brewery license, you may use honey as an adjunct fermentable suger with malt. Such products fermented with both honey and malt cannot be labelled mead because the law considers “mead’ and “Honeywine” to be synonyms not to be used as a designation for a malt beverage.” See FAQ HW 27 & HW 28.

Last session the Legislators passed a new law expanding the allowable sale in the State of New York of ice cream and other frozen desserts. Frozen desserts can now be made with wine, beer or cider.

Because these desserts were removed from the definition of alcoholic beverages, it appears that on a state level they may distributed and sold without a license.  To qualify the dessert must contain more than one-half of one percent and less than five percent alcohol by volume.   A frozen dessert that has more than 5 percent alcohol by volume is still considered an adulterated food, the sale of which violates section 199-a of Agriculture and Markets Law.

Even qualified frozen deserts may not be sold unless, in the case of sales for off-premise consumption, each sealed package is received from the manufacturer or distributor and contains a label, approved by the commissioner of Agriculture and Markets, that prominently notifies the purchaser that (i) the sale to persons under twenty-one is prohibited, (ii) the product is made from wine (or beer or cider as the case may be) (iii) the package contains alcohol of up to 5% by volume, (iv) alcohol is used as a flavoring, (v) consumption while pregnant creates a risk of birth defects and (vi) consumption of alcohol impairs one’s ability to operate a car, machinery and may cause health problems.  An approved warning sign must also be placed at each location where the frozen dessert is to be sold.  In establishments offering these frozen desserts for consumption on the premise similar information must be placed on the printed menus or menu boards immediately adjacent to the listing of the items for sale.

Any person who manufactures or distributes these frozen desserts must include written notice that these requirements exist along with a copy of the requirements.

One final warning. Beverage alcohol is regulated on both a state and federal level. The TTB requires a manufacturer to submit a nonbeverage product formula  and a sample of the ice cream to our Nonbeverage Products Lab for analysis to determine whether the product will be considered an alcoholic beverage.  In general, the TTB has determined that ice cream products containing alcohol at or below 2% by weight are not beverages and do not come under its jurisdiction.  However, depending on the characteristics of the frozen dessert product, it may be considered an alcohol beverage even if it has less than 2% alcohol.  After such an analysis, the TTB may determine that ice cream and other frozen desserts with alcohol levels of 3 to 5 per cent are an alcoholic beverage. In that case, the TTB would require that the plant that manufacturers the product have the appropriate permits and that the products’ distributors have a basic wholesale permit. This would raise another interesting problem.  A New York wholesalers are not permitted to engage in other businesses on its license premise. New York could find itself in a position in which licensed wholesalers are forbidden by state law from selling these desserts while federal law mandates that only wholesalers with federal basic permits may do so.

COMBINATION PACKAGES

In order to make the sale of these desserts legal, the definition of “Alcoholic Beverage” in section 3 of the Alcoholic Beverage Law was amended to exclude certain ice cream and other frozen desserts. Interestingly, the manner in which the definition was amended only excludes these desserts if they are sold, delivered or given to a person aged twenty-one or older. This means that if the frozen dessert is given to an underage person, a charge of sale to a minor will still lie. 

At the full board meeting of the New York State Liquor Authority held on July 11, 2018, the members voted to amend Advisory 2016-9 relating to sealed, prewrapped combination packages. Section 101-B 3(b) of the Alcoholic Beverage Control Law requires that prices posted, “in each instance, shall be individual for each item and not in “combination” with any other item.” The Members of the Authority have the power to grant variations from the statutory requirement, “for good cause shown and for reasons not inconsistent with the purpose of this chapter.”  In Advisory 2016-9 the Members used that power to permit distributors to make combination packages consisting of wine and spirits from a single supplier provided that not more than one such package was sold in any month to any retailer and further provided that one such package was made available to any retailer that requested one.   At the July 11^th meeting, the Members voted to increase the number of such combination packages that a distributor could sell to a retailer in any month to two. Replacement Advisory 2018-3 is not intended to require a distributor to sell two such combination packages to each retailer. However, if the distributor elects to do so, it must be prepared to sell two to any retailer that orders two.  Other types of combination packages are discussed in the advisory. The full advisory is available at https://www.sla.ny.gov/system/files/Advisory_2018-3_-_Sealed_pre-wrapped_packages.pdf. 

HOW WILL NEW YORK REGULATE WEED? PROPOSED LEGISLATION HOLDS CLUES.

As the New Year begins, recreational adult-use marijuana is legal in ten states and the District of Columbia.  Several of these states have adopted marijuana regulatory schemes mimicking its alcohol beverage control law and have appointed alcohol beverage regulatory agencies to oversee marijuana licensing and enforcement.  In part one of this two-part series, we explore from the “front lines”, the origin of this relationship and whether New York will follow in the footsteps of its sister states.  In part two, we explore whether alcohol and marijuana can be “married” by being infused together to create a single product.  Approaching our six-year wedding anniversary, we are an alcohol beverage attorney (Arielle Albert) and a cannabis attorney (Neil Willner) who deal with these issues on a daily basis- in both our professional lives and at the dinner table!

Why are State Alcohol Agencies Regulating Marijuana too?

Most of the state agencies that regulate alcohol were created immediately following the demise of prohibition in 1933. The 21^st Amendment granted states the independence to regulate the sale, manufacture and transportation of alcohol within their jurisdictional limits.  Understanding the importance of “getting it right,” states like New York enacted stringent laws and regulations to prevent the nationwide drunkenness (or perception thereof) that served as a basis for prohibition, and the rampant corruption during the 13 years in which the manufacture, sale and transportation of alcohol was illegal.  Recognizing prohibition’s failures, the states realized that the country drank alcohol despite the federal ban on booze. When drafting alcohol regulations, the states understood that it was better to strictly regulate alcohol to promote orderly distribution and safe consumption.  The additional tax revenue was also welcomed by cash-strapped states in the midst of the Great Depression.

With this history in mind, many adult-use marijuana states see clear parallels between marijuana prohibition, alcohol prohibition, and the causes which led to its demise.

There are many questions on how New York will regulate adult-use marijuana, particularly since legislation is on the horizon. Will New York regulate marijuana with the same principles by which it regulates alcohol? Will there be tied house laws restricting vertical integration to prevent consumer deception and corruption? Will public convenience and advantage be a factor when determining whether a license should be issued? Will retail franchises be allowed?

Will New York Regulate Marijuana like it Regulates Alcohol?

 Quite possibly. The current proposed adult-use legislation is called “The Marihuana Regulation and Taxation Act.”  Under the draft legislation, the New York State Liquor Authority (“NYSLA”) would be tasked with overseeing the production and distribution of marijuana and would create the Bureau of Marihuana Policy to carry out licensing and enforcement.

 Community Board Requirements

 The proposed adult-use legislation requires applicants for all marijuana licenses to notify the town, city, or village in which the premises is located 30 days before filing their applications.  This is similar to New York’s Alcohol Beverage Control Law (the “ABCL”), which also requires a 30-day Standardized Notice to Community Boards but with one key difference – under the ABCL, only on-premise retailers need community board approval.

This begs the question; Does the New York legislature view the manufacture, distribution and off-premise sale of marijuana differently from alcohol?  If so, why?  Alcohol beverage retailers understand the need for balance between the community and businesses. Those licensees sell alcohol to consumers at various hours with methods of operations that may be disruptive at times to the neighborhood.  One may assume that the requirement for all marijuana licensees, including producers, processers and non-retail distributors, is an oversight that may be realized only upon implementation of the law.  Others may wonder if the legislature views marijuana as having a greater impact than alcohol on the local community.

 Tied House Restrictions

Like the ABCL, the proposed adult-use legislation contains tied house restrictions, which prevent the vertical integration of license types.  For example, a marijuana retail licensee cannot hold any other marijuana license; a marijuana microbusiness licensee cannot hold any other marijuana license; and a marijuana nursery licensee can only hold a marijuana producer or marijuana processor license, but no other marijuana license.  Similarities between alcohol beverage tied house laws, which strictly prohibit vertical integration between the three tiers, and the proposed tied house regulations for marijuana, indicate the legislature’s attempt to create an “even playing field” within the industry.  The restrictions prevent a small number of well-capitalized industry participants from dominating the market, limit unfair inducements between tiers and ensure that retailers maintain a vested interest in the communities that they serve.

One notable difference in this arena, under the proposed adult-use legislation, a retail licensee cannot hold more than three retail licenses.  This differs from New York’s restriction on alcohol package store licensees to one license per person.  The NYSLA strictly enforces this law which effectively prohibits franchise stores from operating within the state.  Does this mean that franchise marijuana stores are in New York’s future?

 Similar but not Similar Enough

Even with the similarity in regulatory framework, under the proposed adult-use legislation, a business may not sell marijuana and alcohol products at the same premise. One might wonder why a licensee of one commodity could not sell the other, if both alcohol and marijuana can be regulated for safe consumption, by the same agency.  Some might argue that New York retailers are best suited to sell marijuana, based on their understanding of the law and ability to operate in this regulated space.  Alcoholic beverage package stores are separated from other business so that only adults enter and shop in them.  They regularly check purchasers for proof of age and most are equipped with special devices that verify that driver’s licenses are genuine. In any event, New York alcohol retailers are fighting for their piece of the pie.

Cheers to the Future

Some of these questions may be answered if and when the adult-use legislation passes while other questions will surely arise.  Until then, those with a vested interest in marrying the two industries will be working hard to maintain a happy and healthy relationship.

[1] Arielle Albert is an attorney representing members of all three tiers of the Beverage Alcohol Industry and partner of the firm of Danow, McMullan & Panoff, P.C. 275 Madison Ave, NY, NY. 10022.  (212.370.3744). Website: dmppc.com; email: aalbert@dmppc.com. Arielle Albert is a partner of the firm of Danow, McMullan & Panoff, P.C. and is admitted in New York. This article is not intended to give specific legal advice. Before taking any action, the reader should consult with an attorney familiar with the relevant facts and circumstances.

Neil Willner is an attorney representing medical professionals, growers, processors, insurers, distributors and vendors within the legalized cannabis and industrial hemp industry. He is an associate at Wilson, Elser, Moskowitz, Edelman & Dicker LLP; 1133 Westchester Ave., White Plains, New York 10604. (914.323.7000). Website: wilsonelser.com; email:neil.willner@wilsonelser.com.  Neil is admitted in New York.