5th Circuit reverses and remands a District Court decision finding that the Texas Public Corporation ban was unconstitutional

Takeaways

The 5th Circuit took the District Court to task for ruling that the Texas ban on Public corporations owning a P-Store license discriminated against out-of-state entities in violation of the Commerce Clause and that the law placed a burden on inter-state commerce.

In Wal-Mart Stores, Inc. v. Texas Alcoholic Beverage Commission, No 18-50299 (5th Cir. 2019), the 5th Circuit reversed and remanded a Texas Federal District Court’s decision which held that a Texas law which does not allow a public corporation to own a packaged goods license was enacted to discriminate against out-of-state corporations in violation of the Commerce Clause.

Specifically, the 5th Circuit indicated that the District Court misapplied the Arlington framework which is utilized to analyze whether purposeful discrimination inspired a state legislature’s actions in violation of the dormant Commerce Clause. The 5th Circuit put the District Court’s decision through the five-part Arlington framework test, and the 5th Circuit held that the District Court’s decision misapplied 4 out of the 5 parts of the five-part test.

Further, the 5th Circuit indicated that the District Court misapplied the Pike test when analyzing whether the public corporation ban burdened interstate commerce.

Although the 5th Circuit reversed the District Court’s findings with regards to purposeful discrimination, it confirmed its stance that the Texas law did not violate the equal protection clause and that the Texas law had no discriminatory impact on interstate commerce.

Since the Court affirmed the Equal Protection issue from the lower court, we will not delve into this issue.

 

One Interesting note on Tennessee Wine effect

The State and Walmart disagreed whether the Pike test should be utilized when judging this decision. The State argued that the 21st Amendment precluded the use of the Pike test, while Walmart contended that Pike can be applied to alcohol related laws regardless of the 21st Amendment.

Although the Supreme Court has never used Pike nor have the Circuit Courts struck down an alcohol related regulation based on Pike, the 5th Circuit believed that based on the Tennessee Wine decision that is should apply the Pike test.

The 5th Circuit specifically stated that “Tennessee Wine, the Court “reiterate[d] that the Commerce Clause by its own force restricts state protectionism.” 139 S. Ct. at 2461 (emphasis added). While that is an ambiguous statement from a case involving a facially discriminatory provision, it is a signal that we need not get ahead of the Court by concluding that Pike balancing cannot be applied to a facially neutral regulation of alcohol retailing.  So we proceed with the test.”

What we can glean from this is that based on Tennessee Wine that the courts will apply the most thorough Commerce Clause test possible to state laws. And that the level of Commerce Clause analysis will become more stringent than before and that state laws will face higher scrutiny and may need to satisfy numerous tests that state legislators or administrators never foresaw when drafting legislation or regulations.

 

Facts

Texas provides P Store Permits which authorizes that sale of liquor, wine, and ale for off-premises consumption. Texas law prohibits any public corporation from obtaining a P Store Permit.

Walmart sued the State of Texas to overturn the public corporation ban in Federal District Court.

The District Court held that the public corporation ban “has a discriminatory purpose and the ban’s burden on interstate commerce is clearly excessive when compared to the local benefits, and (2) the law does not violate the Equal Protection Clause.”

Texas appealed the decision to the U.S. 5th Circuit Court of Appeals to determine whether the public corporation ban is unconstitutional pursuant to the Dormant Commerce Clause and Walmart appealed whether the public corporation ban violated the Equal Protection Clause.

 

Commerce Clause discussion
5th Circuit’s analysis of Tennessee Wine case

The 5th Circuit became of one of the first major courts to analyze the Supreme Court’s Tennessee Wine decision.

The 5th Circuit acknowledged that the Court in Tennessee Wines stated that § 2 of the 21st Amendment does not provide states the power to violate the nondiscrimination principle of the dormant Commerce Clause.  However, the 5th Circuit indicated the Court acknowledged that, under § 2, states “remai[n] free to pursue their legitimate interests” in addressing the health and safety risks associated with the alcohol trade.” Thus, each law must be judged on its own features.

The 5th Circuit went onto state that “the Court clarified the standard for evaluating a discriminatory alcohol-related regulation”. Under Tennessee Wine a discriminatory requirement must be justified as a “public health and safety measure or on some other legitimate nonprotecionist ground.”

The 5th Circuit further stated that the Tennessee Wine decision mandates hard evidence and that mere assertions or speculations are not reasons for discrimination and the predominant effect of the law is to protect public health and safety.

Although the 5th Circuit ran through the Tennessee Wine analysis, I did not utilize it in judging this case.

After the analysis it concluded that the public corporation ban statute is facially neutral and that it would focus on whether the public corporation ban was enacted with a discriminatory purpose or had a discriminatory effect on interstate commerce.

 

Discriminatory purpose analysis

The District Court misapplies the Arlington framework for judging a valid Commerce Clause challenge

Because there is dormant Commerce Clause challenge to the Texas ban on public corporations owning a packaged goods store, one major threshold issue is whether the public corporation ban was enacted with the purpose to discriminate against interstate commerce?

In the District Court decision, the Court applied the Arlington framework set down in Village of Arlington Heights v. Metropolitan Hous. Dev. Corp., 429 U.S. 252, 266– 68 (1977) to determine whether purposeful discrimination inspired a state legislature’s actions in violation of the Commerce Clause.

Arlington puts forward a five-part test for determining whether a state’s legislatures actions constitute purposeful discrimination against interstate commerce:

“(1) whether the effect of the state action creates a clear pattern of discrimination; The 5th Circuit held that the District Court “properly found that Texas has a clear history of discriminating against out-of-state alcohol retailers.”

(2) the historical background of the action, which may include any history of discrimination by the decisionmakers; The Fifth Circuit held that the District Court erred when it determined that the legislative history of Texas specific laws banning public ownership of packaged good stores includes direct evidence for discrimination. The 5th Circuit took the District Court to task for dismissing the state’s enumerated purpose of the law which was to maintain accountability by having a specific person who was personally responsible running the business in Texas. Further, the 5th Circuit held that there was no direct evidence of discrimination and that the District Court relied on circumstantial evidence for its conclusions.

(3) the “specific sequence of events leading up” to the challenged state action, including

(4) any “departures from normal procedures[;]” and

(5) “the legislative or administrative history of the state action, including contemporary statements by decisionmakers.”

The 5th Circuit criticized the District Court finding that the state violated the third, fourth, and fifth factors. It determined that the District Court failed to apply the “presumption of good faith” in the finding that the events leading to the enactments of the challenged statutes evidenced a discriminatory purpose. Specifically, the 5th Circuit took the District Court to task for placing the burden of discrimination on the state as opposed to Walmart. And it was critical of the position that the state needed to show that it changed from its historical course of action where it violated interstate commerce laws based on past discriminatory residency requirements.

The 5th Circuit acknowledged that Texas has a history of discriminating against out-of-state alcohol retailers. “That history has significant “probative value in connection” with the discriminatory purpose inquiry. Veasey, 830 F.3d at 232. However, affirming the district court’s finding of a purpose to discriminate based on the history alone would create an odd result.” The 5th Circuit indicated that history needs to be weighed with other direct and circumstantial evidence.

Because the District Court committed errors in its findings and did not partake in a complete analysis, the case should be remanded to reconsider the discriminatory purpose issue.

Discriminatory effect analysis

The Pike test analysis erroneous

The District Court utilized another method for determining whether a Dormant Commerce Clause violation could invalidate a statute, even if the statute did not discriminate facially, “in purpose or in effect.” The District Court utilized the Pike test to determine whether a statute could be invalidated under the dormant Commerce Clause if the burden it imposes on interstate commerce is “clearly excessive in relation to the “putative local benefits.”

Under the Pike test “a statute imposes a burden when it inhibits the flow of goods interstate.”

Since the District Court already ruled that the public corporation ban’s purpose was to discriminate against interstate commerce, it further held that the law imposed a burden on interstate commerce, and the public corporation ban is “clearly excessive in relation to the “putative local benefits.”

The State argued that the Pike test should not apply to a “nondiscriminatory regulation of alcohol beverage under the 21st Amendment. Walmart posits that Pike can be applied regardless of the 21st Amendment.

The Supreme Court has not considered whether Pike applies and none of the circuit courts have struck down an alcohol regulation under Pike while also stating that the 21st Amendment applied.

The 5th Circuit decided to apply Pike based on a Supreme Court statement from the Tennessee Wine case, “the Commerce Clause by its own force restricts state protectionism.” Based on this statement, the 5th Circuit opined that “while that is an ambiguous statement from a case involving a facially discriminatory provision, it is a signal that we need not get ahead of the Court by concluding that Pike balancing cannot be applied to a facially neutral regulation of alcohol retailing.”

The 5th Circuit decided that the statute did not meet the Pike’s test and was not a burden on interstate commerce.

The District Court held that under Pike there is a burden on interstate commerce because 98% of the packaged goods stores are owned by in-state residents and that Walmart provided evidence that out-of-state residents would enter the market if the ban was not in place.

The state indicated that that the ban places an equal burden on in-state public companies, “presenting evidence that the number of publicly traded companies domiciled in Texas that are barred by the ban is roughly proportional to Texas’ share of the national population and national economy.”

The District Court rejected the state evidence and held that “assessing disparate impact requires the Court to measure the effect the public corporation ban has on the in-state and out-of-state companies that would otherwise serve the market if not for the ban,” there is no authority which supports that conclusion.”

The 5th Circuit rejected the District Court’s assertions and held that the District overlooked the main principle that the Commerce Clause protects interstate markets and not particular interstate companies. Utilizing principles from the Supreme Court decision is Exxon (Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978)), the 5th Circuit held that “interstate commerce is not subject to an impermissible burden because some potential participants are shifted out of the in-state market.” Further, the Court noted that the state provided evidence that several package stores in Texas are owned by out-of-state residents.

In the 5th Circuit’s view the District Court should “have considered evidence addressing the public corporation’s ban effect on the flow of interstate goods, or how the “ban affects the flow of the potential market participant’s goods to the Texas liquor retail market.” Specifically, it should have looked at whether the Texas statutes caused local goods to constitute a larger share of the market at the expense of out-of-state goods.

Because the District Court’s judgement lacks this analysis, the 5th Circuit vacated and remanded so the District Court could properly apply the Pike test.

 

 

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