Reading the tea leaves on the Lebamoff decision: 7th Circuit says no to Illinois law

Introduction

The Lebamoff  case out of the 7th Circuit was a strongly written opinion by Chief Judge Diane Wood to influence the Supreme Court’s direction in the upcoming Tennessee Wine case.

It reversed and remanded a Federal District Court’s decision that dismissed with prejudice a Commerce Clause and Privilege Immunities Clause challenge to Illinois’ law that bans out-of-state retailers from shipping to Illinois customers, while allowing Illinois retailers to exercise this privilege.

Although the case resulted in a reverse and remand, her decision was so strongly worded that it’s inconceivable that any district court judge could not overturn Illinois’ law. Chief Judge Wood went to great lengths to show that Illinois’ law was discriminatory against out-of-state businesses and that Illinois engaged in economic protectionism.

Facts

The crucial facts in this case pertain to direct to consumer shipping. In Illinois an in-state retailer can ship directly to Illinois customers, and an out-of-state retailer is prohibited from doing so. Illinois conditions its shipping law on whether the retailer has a physical presence in the state.  

Court’s legal analysis

With basically all liquor legal cases that contest state laws limiting commerce to in-state entities, the legal dispositive issue is whether the state’s law violates the Commerce Clause and if it does, does the21st Amendment save a law that would otherwise be deemed unconstitutional?

Does Illinois’ law violate the Commerce Clause?

Illinois’ law allows an in-state retailer a license which permits them to ship their product to Illinois customers, while denying the same privilege to out-of-state retailers. The 7th Circuit views this as the type of discrimination against an out-of-state entity that a court generally strikes down.

Illinois defended its law by stating that it does not facially discriminate against out-of-state retailers. Under the law, an out-of-state retailer with a branch in Illinois could ship to Illinois customers, while an in-state retailer could not utilize an out-of-state branch to ship into the state.

The Court rejected this argument and stated that on the face of the statute Illinois distinguishes between in-state and out-of-state retailers. The Court analogizes this situation to an Indiana wine shipping case where it upheld a wine shipping ban. In this case, Indiana allowed shipping from wineries in-state and out-of-state, if the customer visited the winery. If there was no in person visit, the shipments were illegal. The Indiana laws does not draw a distinction between in-state v. out-of-state wineries, but whether the Indiana resident visited the winery. Baude v. Health  538 F.3d 608 (7th Cir. 2008).

The Court next took aim at Illinois’ licensing requirement.Even if the shipping ban is facially even-handed, the licensing requirementsare not even handed. In the Court’s view limiting licenses to Illinois storefronts might make sense if there was an in-person requirement, however, when Illinois started to allow retailers to ship product, without extending the privilege to out-of-state retailers, the statute became facially discriminatory.

Through its analysis, the Court concluded that Illinois’ law discriminates against interstate commerce.

Does the 21st Amendment save this law?

After providing a Commerce Clause analysis and determining the law violated the Commerce Clause, the Court looked at whether the 21st Amendmentsaves this law from being deemed unconstitutional.

Utilizing Supreme Court precedent, the Court laid down standards for determining whether a state law can sustain a Commerce Clause challenge. Relying on Bacchus and Brown-Forman , the Court held that laws that combat unrestricted traffic of alcoholic liquor are worthy of deference to 21st Amendment powers, while laws that constitute mere economic protectionism are not worthy of deference. In the Court’s view, the 21stAmendment “can save an otherwise discriminatory regulation only if it”is demonstrably justified by a valid factor unrelated to economic protectionism.”

Deconstructing Granholm

The court indicated that “the present case requires us to deconstruct Granholm and see what light it may shed on the Illinois law.”

In Illinois view’s Granholm stands for the proposition that the Supreme Court recognized the three-tier system as”unquestionably legitimate” and that any challenge to the three-tier system should fail based on the 21st Amendment.

The state sees Granholm’s non-discrimination principle as limited to producers, while the plaintiff sees it expanding to retailers and wholesalers.

The major debate is whether the 21st Amendment overrides the Commerce Clause and permits states to treat in-state retailers and wholesalers differently from out-of-state equivalents, or whether the non-discrimination principle of Granholm applies to the retailer and wholesaler tier?

 The Court went through an analysis of the Circuit splits on this issue. The Court mentions how Circuits have split over this issue with some Circuits taking the view that the 21st Amendment overrides the Commerce Clauseand allows states to treat in-state retailers and wholesalers different from their out-of-state counterparts. The Circuits that follow this principle include the 2nd, 4th, and 8th.

While other Circuits interpret the non-discrimination principle in Granholm to apply beyond the producer tier to retailers and wholesalers. The Circuits that follow this principle include the 5th and 6thCircuits.

 Similar to the 2nd and 8th Circuits, Illinois focused on two principles in Granholm to conclude that the non-discrimination principle is limited to producers. The first principle was that “state policies are protected under the 21st Amendment when they treat liquor produced out of state the same as its domestic equivalent.” The second statement they focused on is the Supreme Court’s comment that the “three-tier system is unquestionably legitimate.”

 Court’s statements in light of the whole opinion and cherry picked statements to fit their point of view.

 The 7th Circuit further noted that these statements did notflush out the principles in Granholm. In Granholm the Supreme Court extracted three principles from 21st Amendment case law: (1) The 21st Amendment does not save state laws that violate other provisions of the Constitution, (2)The Amendment does not abrogate Congress’ Commerce Clause powers with regard to liquor and (3) state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause. Granholm 544 U.S. at 486.

 The Supreme Court in Granholm rejected the argument thatthe third principle is limited to the facts in the Bacchus case and could be applied widely. (In Bacchus a Hawaii law which exempted certain Hawaiian liquors from tax that was imposed on other non-local liquors was ruled unconstitutional). Bacchus Imports, Ltd. v. Dias, 486 U.S. 263(1984)

 Finally after running through this stringent test, theSupreme Court made the statement that the “three tier system itself was unquestionably legitimate.” In other words, the 7th Circuit viewed this statement as an afterthought to meeting the important three part test.

With regards to the three part test, the 7th Circuit noted to there is no statement limiting the three part test to the producer tier. And that the Supreme Court drawing a bright-line rule limited to producers would be inconsistent with the general principles of the Granholm three part test and the Supreme Court’s precedent in Healy  and Brown-Forman, which established the”nondiscrimination principle of the Commerce Clause”.

Healy  involved importers and shippers, while Brown-Forman states that “economic protectionism is not limited to attempts to convey advantages on local merchants; it may include attempts to give local consumers an advantage over consumers in other states. 476 U.S. at 580. Healy v. Beer Inst., 491U.S. 324 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Auth.,476 U.S. 573 (1986).

 In the 7th Circuit’s view, Healy, Brown-Forman, andGranholm read together contradict a producer only view. In their view, Granholm was limited to producers because the case did not deal with the other tiers.

The 7th Circuit’s other issues with the case

The 7th Circuit took umbrage with Illinois interpreting Granholm”to protect against discrimination only in the parts of the three-tier system that are not “inherent” or “integral” to its existence.” In the 7th Circuit’s view drawing such a line is fuzzy and impractical,because “there is no archetypal three-tier system from which the ‘integral’ or ‘inherent’ elements of the system may be gleaned.”

For example, states vary on how they develop their three-tier systems, with some states adding a fourth tier. And even in Illinois it is difficult to determine what is “integral” when there are 30different types of licenses and permits.

But even putting aside the administrative problems with this method, the Court indicated that it is hard to see that the 21st Amendment provides privilege to only one form of state regulation over another.

How past precedent should be read

The 7th Circuit stated that past Supreme Court precedents in Bacchus and Granholm should be read to stand for the principle that states can regulate the transportation, importation, and use of alcoholic liquor. However, these precedents do not allow for states to implement economic protectionist laws.  

Exceptions to the system

The Court stated that the individual states have the right to require licenses and regulate the system to promote temperance or carry out the21st Amendment’s purposes. However, when they create exceptions to these licenses or the system, they must do so without offending the Commerce Clause.

By modifying the system to allow statewide shipments,Illinois showed it is not concerned with face to face sales. Further, it made its business environment more attractive to out-of state retailers, while at the same time barring them from obtaining a license solely based on residency.

Residency became a less crucial factor when an exception was created that did not require a customer to visit a physical retail location.  

District court’s lack of diligence

The 7th Circuit chided the district court for their lack of diligence in looking at whether Illinois can justify in-state presence now that it allows shipment sales. In the 7th Circuit’s view, the district court did not fully vet the record and develop the facts. In doing so, the district court failed to look at key facts and answer important factual questions.

In the 7th Circuit’s view, the District Court failed to answer important questions such as why the 21st Amendment powers were necessitated to stop an out-of-state shipment 25 miles from Chicago (Hammond, Indiana is roughly 25 miles from downtown Chicago) yet permit an in-state shipment from 370miles (rough distance from downtown Chicago to Cairo, Illinois).

Illinois’ law deemed protectionist

Judge Wood pulled no punches in labeling Illinois’ law as protectionist. She indicated that Illinois statute, 235 ILCS 5/6-29, states that “direct marketing of liquor as a serious threat not only to the health of the state residents, but also to the economy of the state.”  The first reason touches the core of the 21stAmendment, while the second reason smacks of protectionism.”

She stated that Illinois must show why its restrictions are necessary for the first reason and not just the second.

Illinois claims further judicial review and factual development is not necessary

Illinois claimed that factual development is not necessary because lifting the ban on out-of-state residents would not give plaintiffs any relief. Illinois claims that it would be impossible for out-of-state retailers to ship into the state, even if there was no shipping ban. Under the Illinois system, the out-of-state retailers could not comply with other aspects of the regulatory system, mainly that it could not purchase from an Illinois wholesaler.

The state’s argument has legal precedent in the 2nd Circuit.In Arnold Wines  the 2nd Circuit found the impossibility argument plausible and persuasive when it judged on a similar New York law.

However, the 7th Circuit did not agree with this view. It heldthat the Supreme Court granting cert in Tennessee Wines shows that these restrictions are contestable and not absolute. Second, having a law with other regulatory burdens does not favor the state’s position. It also begs the question that if Illinois can limit shipping through other stringent requirements, then why does it need to discriminate against against interstate commerce and out-of-state retailers?

The 7th Circuit indicated that it was too early to answer these question, and that the district court needed to adequately address these issues further.

Finally, the Court addressed the issue of Granholm  being limited to a producer only exception. In the 7th Circuit’s view, the 2nd Circuit is the only Circuit which limited Granholmto a producer only exception.

 The Court dismissed that cases from the 5th and 8th Circuit which upheld certain protectionist laws could strengthen Illinois’ position.  The 5th Circuit’s case pertained to allowingretailers to make local deliveries, where an in-state presence is paramount (Wine Country Gift Basket.com v. Steen, 612 F.3d 809 (5th Cir. 2010)), and the8th Circuit decision dealt with a residency requirement for a wholesaler. Southern Wine and Spirits of Am., Inc. v. Division of Alcohol & Tobacco Control, 731F.3d 799 (8th Cir. 2013). The 7th Circuit noted that in this Southerncase, the plaintiff’s “protectionist intent argument” was waived.

The 7th Circuit distinguished this case by noting that”by contrast, this case involves state-wide deliveries and a statute that frankly admits some degree of protectionist intent.”

The 7th Circuit concluded that the plaintiffs “successfully alleged a violation of the dormant Commerce Clause and on the pleadings the21st Amendment does not bar this challenge.” And that the District Court erroneously dismissed their claim.

Conclusion

Officially this is a remand, but in reality this is a repudiation of Illinois’ law. The opinion calls the Illinois law protectionist and that violation of the Commerce Clause was successfully proven. Further, the 7thCircuit shoots holes in the 21st Amendment argument. As far as the 7thCircuit is concerned, Illinois’ shipping law is toast!

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