NCSLA Central/Western Regional Conference 2019, Portland, Part II

We heard “daddy” from the back of the room, little did we know that Brendan O’Leary actually had his hand up for a question and wanted to be heard.

The Rise of the Retail Tier and the Impact of Tennessee Wine & Spirits Retailers Association vs. Thomas

Moderator:

Jo Moak, Sr. Vice President and General Counsel, Wine & Spirits Wholesalers of America, Inc.

Panelists:

Andrea McNeely, Partner, Gordon Thomas Honeywell LLP

Bruce Turcott, Attorney, Washington State Attorney General’s Office

Josh Hammond, President, Buster’s Liquors & Wines

Sean O’Leary, The Irish Liquor Lawyer, Founder & President, O’Leary Law & Policy Group, LLC

 

A fantastic job by moderator Jo Moak in running this panel.

The panel looked at numerous issues that will be important for shaping the future of liquor and how the industry may change.

The panel came at the discussion from different perspectives, Josh is a brick and mortar retailer, Andrea represents the Wholesaler association in Washington, Bruce is a regulator who is the head liquor lawyer for the State of Washington, and Sean O’Leary, who is a former regulator in private practice.

Conflict between the 21st Amendment and the Commerce Clause

The panel started off discussing the great conflict between the 21st Amendment and the Commerce Clause.

They first discussed how to analyze a statute that facially discriminates against interstate commerce.

When statutes that regulates alcohol facially discriminate against out-of-state interests, generally we ask two questions: (1) do the statutes violate the Commerce Clause and, (2) if so, are they saved by Section 2 of the Twenty-First Amendment?

A law that discriminates against interstate commerce will be struck down unless the state can show a justification for the restriction. Namely that the law can be justified by public health and safety or some other legitimate non-protectionist grounds.

Based on recent cases including the Tennessee Wine and Missouri Broadcaster’s Association, the panel discussed how the courts will demanded that the states produce concrete evidence to back up these justifications.

The panel looked at the wine retailer shipping cases making their way through the federal court system.

The wine shipping cases challenge state laws that allow in-state wine retailer shipping but does not permit out-of-state wine retailer shipping.

Plaintiffs claim these laws violate the Commerce Clause and discriminate based on residency. The states claim these laws are a permissible exercise of their power to regulate alcohol under the 21st Amendment.

We discussed the motivations for why the plaintiffs are challenging these laws.

Do plaintiffs want to overturn state specific laws? Do they want to create a Circuit split and force the Supreme Court to take up the issue? Or do plaintiffs feel embolden based on the Tennessee Wine decision to press forward?

These cases represent ground zero in the battle between the Commerce Clause and the 21st Amendment.

Other important cases and potential groundbreaking legal developments

The panel discussed two other important cases which do not deal with wine shipping.

Missouri Broadcasters Association v. Taylor, a First Amendment and Tied-House advertising provisions case presently in the 8th Circuit. And Orion v. Applesmith¸ a California Federal District case which challenges whether requiring a wholesaler to maintain a physical presence in the state is a violation of the Commerce Clause.

The panel then discussed potential groundbreaking cases and developments.

The Missouri Broadcasters case from the 8th Circuit is a potentially groundbreaking case because if the 8th Circuit affirms the district court decision; (1) the trend will steer towards the courts requiring the state to provide hard evidence to prove their arguments on health, safety, and welfare, and (2) the district court held that “the State’s interest in maintaining an orderly marketplace through a three tier system has certainly been blurred, if not eliminated, for certain entities based on the various exemptions.”

If the 8th Circuits affirms the latter point, legal authority promulgated on the basis of preventing tied-house situations could be deemed as legally suspect.

Potential Challenges coming down the pipeline

The panel discussed the next legal challenges coming down the pipeline.

Any state law that is deemed discriminatory is subject to challenge.

The two crucial questions to ask are does the law discriminate based on residency, or does the law discriminate based on physical location?

Any area where the state grants a license to perform certain privileges but does not afford someone without a physical presence or residency the privileges granted by the license will lead to legal challenges.

The panel discussed how the challenges to state laws will expand from the retail tier to the wholesale tier.

And that the fights may shift from residency to physical presence.

Legitimate state interest for upholding a law

Any law that facially violates the Commerce Clause must have a legitimate interest to justify its existence.

Jo addressed this issue to the panel, she noted that public health and safety are the focus of legitimate state interest, are there other interest such as tax collection and revenue that a state can use to justify its laws?

Josh thought that a fair and balance marketplace is an interest, in-state and out-of-state players treated equally and fairly.

Andrea noted that all of the interest mentioned have been checked off the list as not permissible.  But whatever the government’s interest are, there needs to be anecdotal or data evidence to back up its interest.

Sean opined that government has an interest in regulating alcohol but can they prove the interest is legitimate enough to overcome a Commerce Clause challenge. The days of coming up with just a theory or justification for a discriminatory law are over, Missouri Broadcasters and Tennessee Wine shows that you need to provide evidence to prove your point.

Bruce indicated that the states have an interest in regulating. These interests include: (1) equal treatment, the ability to enforce in-state laws upon an out-of-state retailer with no physical presence in the state, especially when in-state retailers are subject to the law; (2) alcohol below cost, Washington does not allow it, retailers from other states that allow alcohol sales below cost, could ship into Washington and undercut the market; (3) product safety issues, Washington may not allow a product but other states do and Washington could be forced to take the product, via retailer shipping, even though it is not permissible; and (4) finally tax collection.

The issue of data

Jo posed the next set of questions to the panel on data and what the industry can do to help regulators defend their laws

Josh stated that we should focus on what money has been collected, and who is remitting, does that correlate to what is shipped into the state?

Andrea wanted to utilize more positive industry examples of health and safety. For example, the State of Washington issued a recall for Four Loko. Because Four Loko’s distributors were in the state and because the retailers were in the state, the product was removed from the shelf in a day or two.

Sean stated that it’s hard for the industry because they don’t know what the state is facing. He was not sure what the private industry can do. It is hard making them go out and be the enforcement mechanism, or have them develop the data. If we have a system like carrier reports that are developed, it is the better way to do things.

Sean noted that clearly there are problems out there, the State of Michigan Wholesalers noted that  1/3rd of the alcohol coming into the state is coming in illegally. It begs the question, is it better to have licensed wine shipping where we require people to comply? He thinks it is a debate we need to start looking at.

We have parties that don’t think these laws are enforceable, and they are shipping into the state.

The physical presence front

The panel moved onto the physical presence debate. With Tennessee Wine holding that Granholm was not limited to producers and applied to all out-of-state economic interest, a state cannot discriminate based on the residency of the industry member.

But could a state discriminate based on physical presence? In other words, could a law that requires physical presence be deemed constitutional even when it violates the Commerce Clause?

Jo remarked that if we lose presence, we lose a lot of things and it unravels the system as we know it.

She posed the question whether presence is overblown?

Sean didn’t think presence can be used as a justification. He based this on certain statements made in previous judicial decisions.  Specifically, he focused on Judge Wood’s opinion in the 7th Circuit where she asked how does physical presence make a difference to the Chicago community when you are in Hammond, Indiana 13 miles away and when you are in Cairo, Illinois 300 miles away? Does physical presence in the state serve the community better from 300 miles away as opposed to 13 miles? How does this argument help community safety standards?

Also, you have the Supreme Court case Pike v. Bruce Church, cited by Granholm and Lebamoff, which weakens the physical presence argument.

Sean discussed his main issue with presence, if a retailer is required to have a presence to ship into a state, it is going to be cost prohibitive for them to enter the market. This would allow Total Wine and more to use the law to dominate the market.

Josh discussed how direct shipping is the battle line. He noted that years ago, it was a three-tier system, it was really easy. Now you have direct shipping, fulfillment houses, online retailers, virtual wine clubs. Then you have common carriers that are part of the liquor industry, who is regulating them? How do you define these entities? They are not only importing then they are acting as the fulfillment house, and retailing it.

He noted that there are a lot of challenges to understand direct shipment, and there needs to be more definitions, there is nothing in Tennessee law about fulfillment houses and wine clubs.

Andrea indicated that with so many actors in the marketplace that are not licensed, she didn’t know what the proxy is for presence, it seems physical presence has a valid place to play.

Jo stated that once you have presence goes away, I don’t what else you have.

In the end it was an honor and a rare occurrence

The panel had a great discussion. And for me it was a great honor to be part of this panel. We all looked at the issue differently and came at it from different perspectives.

There is no doubt that we didn’t share the same opinion. But we discussed and all members presented themselves well.

It seems a rare and unfortunate occurrence in society these days, where people on opposite sides can have a productive discussion!

I thank our moderator Jo Moak for an outstanding job and thanks for selecting me!

 

1 thought on “NCSLA Central/Western Regional Conference 2019, Portland, Part II”

  1. While I was reading this report, I started to wonder – what party is represented by Andrea McNeely?

    This comment is mainly for Andrea: The major unlicensed actor in the marketplace is a company, that sells on-line and delivers alcohol without having any license to consumers in 25 States without any physical presence in those States, and offers shipping with common carrier in 15. The company that received nearly $50,000,000 in investments from the member of association presented wholesalers tier right at this conference. A member, who distributes in 46 States without being a resident in 45 of those States, and it is not a question. If it is the question, then why don’t you ask them first?

    For the rest of attendees: Repeal of Prohibition shifted the power to the States to regulate production, distribution and sale of alcohol inside of their respective borders, hoping they will do it better. However, nobody else, but the States, and Washington is among those States, started to allow their producers and wholesalers to retail, and their retailers to produce and distribute. Why now they complain?

    The power of Congress to regulate Commerce among the several states remains … It is Interstate commerce nexus for Federal Alcohol Administration — broad nexus that generally includes all commerce activities between two or more States. It is yet an unshakable monument of U.S. Constitution.

    Majority of marketplace players not just think. They perfectly understand that a State’s attempt to regulate interstate commerce, interstate transportation, shipping, etc., is powerless and almost never enforceable. Even if they they do violate the 21st Amendment in connection with a State law, then preponderant evidence of such violation was always a must. It is not a modern doctrine just invented in courts.

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