My practice focuses on businesses in the alcoholic beverage industry. Trafficking in the manufacture and sale of alcohol is heavily regulated at the federal, state and local level, presenting many unusual issues not faced by our other business clients. Today, arguments are being heard by the U.S. Supreme Court on a case that can change the state’s ability to regulate businesses involving alcohol.

January 16th is a critical date in alcohol policy history because on January 16, 1919, the United States ratified the 18th Amendment to the United States Constitution. The oral argument will be exactly 100 years to the day after the ratification of the 18th Amendment. And to add to the historical backdrop, one of the amicus curie briefs cites in several places the Dred Scott decision. The Dred Scott Decision was a landmark decision by the Supreme Court in 1857 on U.S. labor law and constitutional law that effectively ruled that slaves were property. The Dred Scott decision of 1857 ruled that enslaved African-Americans were property and had no rights.

In February 2018, the 6th Circuit in a mostly 2-1 decision to uphold a district court’s finding that the alcohol retail residency laws of the state of Tennessee violated the dormant Commerce Clause. The 6th Circuit case is captioned Byrd, et. al v. Tennessee Retailers Association 883 f.3d 608 (6th Cir. 2018). With a difference in opinion between the 6th and 7th Circuit on some of the relevant issues, the Supreme Court is hearing the case clarifying its earlier 2005 decision in Granholm v. Heald.

The heart of the issue is whether industry regulation is a federal or state matter. Since the manufacture and sale of alcohol is regulated at the federal level, states cannot enact laws that are contrary to federal law; however, they can impose additional restrictions and limitations if such addition regulations have a legitimate government interest. The 21st Amendment repealing Prohibition gave the states the power to regulated alcohol within their borders.

This case raises issues as to how far that state power to regulate businesses within its borders can go if it has an impact on interstate commerce, an area regulated by the federal government. Academically and constitutionally, this case has dusted the cobwebs off of several legal theories that have been relatively dormant on the legal landscape for many years including the commerce clause and business protectionism. It has also brought new legal arguments into the conversation such as Article 4 of the Constitution’s Privileges and Immunities, 14th Amendment Privileges or Immunities clause and a “consumer wins if the online retailer” wins theory that increased prices for alcohol would lead to harm to consumers, rather than temperance and public-health benefits.

Should there be one national alcohol policy and “integrated national economy” for alcohol instead of 50 different state policy choices reflective of the attitudes of local communities? (An interesting question given the current federal government shut-down and its obvious inability to function effectively.) Or, should there be more uniformity in the laws regarding businesses that are in interstate commerce rather than a patchwork quilt of inconsistent regulations that are burdensome on businesses and arguably are against consumer interests in free access and lower priced products? Should states be limited to narrowly tailored approaches to regulating alcohol such as increased taxes, or stepped-up enforcement?
These are big issues for the country as a whole. They are at the center of our federalist system with a balance between state and federal power. While this specific Supreme Court case is on the issue of durational residency laws, the 6th Circuit’s opinion represents a slippery slope that could extend far beyond the residency issue into areas such as physical presence laws. For those who understand the importance of this question, it exciting to observe and participate in a future a history lesson in real time. Someday, our children will be reading about this in history class and law students will be studying this case.

But in this article series, I want to focus on the real impact the outcome of this case could have on the industry from a day to day practical standpoint.

This case is interesting, especially when you look at the underlying facts and what has transpired. Here’s a brief summary:

Tennessee’s alcohol regulatory scheme centers on local control. 24 counties in Tennessee are “dry” (allowing no alcohol sales). Some counties are “moist” (allowing some but not all alcohol sales). Tennessee passed a law for licenses to operate in-state retail liquor stores (also known as “package stores”). Tennessee has enacted burdensome lengthy residency requirements for retail liquor store licenses that effectively prevent out-of-state residents from owning such stores. Tennessee’s law effectively imposes a nine-year residency requirement on license applicants. In the case of corporations, the requirement is that 100% of its officers, directors, and stockholders satisfy the nine-year rule. These provisions create a barrier to residents of other states who seek to open retail liquor stores in Tennessee. Individuals must establish residency in Tennessee and continue to maintain it for at least nine years, far exceeding the residency requirements of any other state in the country. Tennessee’s two legal provisions concerning new licenses and renewal of licenses work together such that an individual must be a resident of Tennessee for two years in order to obtain an initial one-year license that cannot be renewed unless the individual has been a Tennessee resident for ten years. This law was a “protectionist” law with the purpose of excluding nonresident owners and thereby protect in-state retailers from competition. The Tennessee State Attorney General acknowledges this is the purpose and that it is not constitutional. This residency requirement ensures that no publicly-traded corporation could ever obtain a Tennessee retail liquor store license. Notably, is that Tennessee separately licenses retailers of spirits, wine and beer for on- premises consumption (e.g., bars, hotels, and restaurants), without imposing any residency requirements. Nonresidents can and do own and operate such businesses that serve alcoholic beverages to Tennessee consumers.

That residency rule for liquor store applicants was used to deny an application to Total Wine & More, a national retail chain with locations in many states. The denial was successfully appealed, opening the doors to the chain obtaining a license to operate a location in Tennessee.

The Supreme Court appeal is brought by a trade association, not the state itself. The Tennessee Wine and Spirits Retailers challenged that appellate decision, arguing the protectionist law should be enforced by the state and the license application denied. The National Beer Wholesalers Association also supports state regulation rather than federal national regulation of the industry.

The requirements are so unconstitutional, Tennessee is not willing to enforce them (it has not done so for six years), nor defend them. The State declined to submit either a response to the petition for Supreme Court review or a brief on the merits. The Tennessee Attorney General concluded that the residency requirements “constitute trade restraints and barriers that impermissibly discriminate against interstate commerce.”
The issue for the Supreme Court, as framed by the Appellee (who won at the last appeals stage) is “whether the [Sixth Circuit] court of appeals correctly held that Tennessee’s durational residency requirements for licenses to operate retail liquor stores are unconstitutional, when the State’s Attorney General has previously admitted that the requirements are trade barriers that facially discriminate against interstate commerce and the State did not attempt to show that they serve a legitimate state interest.”

The issue for the Supreme Court, as framed by the Appellant trade association, is “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.”

36 state attorney generals joined together to file an amicus curie brief supporting the Appellants, arguing
Contrary to the Sixth Circuit’s decision, the States’ need to regulate this market is not driven by economic protectionism. Instead, States have an interest in ensuring an orderly liquor market to avoid the evils that were brought about by the pre-Prohibition practice of tied houses and the Prohibition-era infiltration of the liquor market by organized crime. States also have an interest in enforcing their liquor laws, inspecting premises and records, and holding retailers accountable for violation of state laws that are designed to protect the public health and safety. And States have an interest in promoting a system in which alcohol retailers have a connection to the local communities they serve and an understanding of those communities’ needs. Durational residency requirements such as Tennessee’s serve all of these interests by preventing absentee ownership of alcohol retail premises. Absentee owners have a lesser investment in the community than residents; States cannot effectively oversee absentee owners to ensure compliance with state 3 laws; and absentee owners are less likely to be held accountable for violating a State’s laws. For the past 85 years, States have exercised their Twenty-first Amendment power to adopt and adapt regulatory regimes to control the retail liquor market within their borders. The breadth and variety of state responses to the risks endemic to the liquor market illustrate the need for broad discretion to regulate the retail sale of alcohol…

In the next article, we will explore the impact of this case on the alcohol industry.