Orion v. Applesmith, Director of California ABC: A decision without a resolution

 

Facts

Orion is a Florida licensed importer and wholesaler that would like to import product and sell it directly to California retailers. It seeks a license to become a California importer. A California importer can also obtain a wholesaler license and transfer the product from its importer license to its wholesaler license and then sell to retailers.

Problematically for Orion, California law will permit product to be imported into the state only when consigned and delivered to a licensed importer’s place of business in California. If the importer does not import product into a licensed California facility, then it has no rights to import product into the state and can not become a wholesaler and hence can not sell to California retailers.

Orion brought suit against California claiming that the law discriminated against it as an out-of-state entity in violation of the Commerce Clause and Privilege and Immunities Clause.

Orion attempted to enjoin California from enforcing section 23661 and to force California to allow out-of-state wine importers and wholesalers to obtain licenses under the same or similar licensure terms as in-state importers and wholesalers, as well as to import, sell and deliver wine directly to California retailers. Section 23661 states in part: “[A]lcoholic beverages may be brought into this state from without this state for delivery or use within the state only by common carriers and only when the alcoholic beverages are consigned to a licensed importer, and only when consigned to the premises of the licensed importer or to a licensed importer or customs broker at the premises of a public warehouse licensed under this division.” Cal. Bus. & Prof. Code § 23661.

Under 23661 alcoholic beverages can only be consigned and delivered to licensed importers at their licensed premises or at a licensed public warehouse in California. However, California will allow out-of-state businesses “to obtain a license to have alcoholic beverages come to rest [be] stored, and [be] shipped from a licensed public warehouse.”

 

Orion’s allegation

Orion alleges that the state’s three-tier system discriminates against out-of-state wholesalers and importers of wine. In their view, a California located business can obtain a combination license in which they can import product and sell and deliver that product to retailers. While a business not located in California cannot receive a combination license and must sell its product to in-state wholesalers or importers, who have the right to deliver product to California retailers.

 

Commerce Clause Challenge

The Court disagreed with Orion’s challenge and held that the law did not treat in-state and out-of-state entities differently.

The Court indicated that none of the challenged statutes mandated “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” According to the Court, the statutes cited by Orion did not distinguish between in-state and out-of-state entities, or provide unequal treatment because of geography.

The Court saw a justification for California’s requirement that an importer must have a location in California. The Court specifically stated, “because these premises are places for delivery of alcohol imported into California, they necessarily must be located in California.”

The driving factor in the Court’s decision was that under California law any out-of-state business could obtain either or both an importer or wholesaler’s license in California. As long as they had a place of business in the state.

As the Court stated, the law “by its terms, applies equally to in-state and out-of-state importers because the statutes at issue require all importers to have a physical premise in California at which to receive delivery of imported alcohol.”

 

Orion’s Granholm economic argument

Orion argued that the California law created an economic barrier that benefits in-state importers but not out-of-state importers. The only way Orion could benefit from the law was to open an import business with a California presence. They would need to establish a physical presence in the state to be on equal footing with California importers. In Orion’s view this ran contrary to the economic effect argument which many Post-Granholm decisions have endorsed. Which stated specifically that, “the high cost of opening a second facility in a distant state is relevant in assessing discriminatory effect” and “requiring an out-of-state firm to establish in-state premises in order to compete on equal terms” violates the Commerce Clause.”

The Judge never really addressed this point from the plaintiff, but went onto talk about matters of confusion and in the judge’s view a lack of meat in the plaintiff’s complaint.

According to the Judge the “basis for the plaintiffs’ Commerce Clause claim is unclear.” “The parties expressed confusion as to whether plaintiff can obtain the licenses they seek as out-of-state importers.”

The state asserted that an out-of-state importer could obtain a license if they leased a public warehouse in the state and sell directly to retailers. Orion’s counsel argued that they could not obtain the combination, importer-wholesaler license, even if they leased public warehouse space in the state.

The Court also indicated that confusion was further compounded by the fact that Orion’s allegations in the 2nd Amended complaint do not make a case for discrimination other than to allege that a Florida importer with no place of business in California is “prohibited from importing, selling and delivering wine directly to California-licensed retailers.”

The Judge went onto to state that based on Orion’s counsel arguments at hearing, especially related to the public warehouse issue, which does not appear to be consistent with its Second Amended Complaint, that Orion has “not clearly advanced a coherent claim regarding the alleged discriminatory economic burden imposed by section 23661.”

Finally, the Judge indicated that there were inconsistencies between and among the “pleadings, briefing, and arguments in this case regarding whether and to what extent plaintiffs must establish a physical presence in California to obtain the licenses they seek precludes the court’s reasoned evaluation of plaintiffs’ claim, such as it is, and determination of its viability.” And that the “plaintiffs’ barebones pleading exposes the absence of a full understanding of the regulatory structure and where there is a possibility of obtaining licenses after leasing public warehouse space.”

Based on these reasons, the Judge granted the state’s motion to dismiss the Commerce Clause claim, but with leave for plaintiffs to amend the claim.

 

Takeaways

A couple of things surprised me about this decision:

  1. The judge glossed over the economic barrier/cost argument set forth in many decisions since Granholm. I wish the Judge indicated why it doesn’t apply here.

The argument for many state statutes is that out-of-state residents who want to open a place of business in-state can obtain a permit, hence the law doesn’t discriminate. The economic barrier/cost argument has become the contra to this point.

I would have liked to see how the judge handled this issue, and whether she would differentiate how the economic barrier/cost argument differs in this case from past Commerce Clause cases.

Instead of addressing this issue, the judge decided to move on to a point on confusion about whether plaintiffs could obtain out-of-state licenses for leasing a California public warehouse and general statements about the plaintiffs’ threadbare allegations.

Maybe this point will get addressed if she decides to rehear the case.

 

  1. The Judge indicated that Tennessee Wine and Spirits Retailers Association v. Thomas doesn’t affect the decision.

In Tennessee Wine Justice Alito made the following statement:

“The Association resists this reading. Although it concedes (as it must under Granholm) that §2 does not give the States the power to discriminate against out-of-state alcohol products and producers, the Association presses the argument, echoed by the dissent, that a different rule applies to state laws that regulate in-state alcohol distribution. There is no sound basis for this distinction.”

The Judge missed an opportunity to inform us how she would apply Tennessee Wine to these facts.

She specifically stated that, “Moreover, the court does not rely on plaintiffs’ arguments in connection with their Notice, and so need not allow defendant the opportunity for a response. Assuming plaintiffs amend their complaint as provided by this order, the Tennessee Wine & Spirits Retailers Association decision may of course inform future motion practice before the court.”

It seems like the Judge is holding her fire for another day.

A Thought to ponder

In this decision the Judge ignored the effect of the Tennessee Wine decision.

Is she allowing the plaintiffs to replead so that she can have them make the argument for Tennessee Wine’s impact?

In other words, is she open to changing her mind with more perfect information?

Final thoughts

When I first saw the headlines, I thought this was a major decision that would move the needle in the liquor world.

The decision as I read further is a disappointment, the Judge went out on a limb and then she didn’t.

Every time a judge makes a decision and fails in the opportunity to add clarity to a developing field of law, it is truly disappointing ☹

 

 

 

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