Tennessee Wine Case: Will the Supreme Court take the Checkerboard Challenge?

 

The Supreme Court oral arguments have passed and the liquor community looks at the argument the same way a fan looks at a draw in a big soccer game. There is a big buildup to the game, we don’t know what the impact will be, we go to oral argument and go away not unhappy but unsatisfied.

However, the liquor community should not discount that this event may become bigger than they think!

Takeaways from the Tennessee Wine case
  1. The Durational Residency requirements will not survive
  2. The three-tier system is endorsed
  3. The threat of checkerboard justice could lead the court to a sweeping decision?

 

Durational residency requirements will not survive

The Tennessee Wine and Spirits Retailers (Tennessee Wine) did not provide the most complete argument for the two-year durational residency requirement. Their argument focused on the 21st Amendment making state regulations that were discriminatory and protectionist immune from Dormant Commerce Clause scrutiny.

The point of Tennessee Wine’s attorney is that drawing any line on permissibility whether its two years or thirty days, does not make a difference, because any durational residency requirement is protected by the 21st Amendment from any Commerce Clause challenge.

Tennessee Wine made a plausible argument that durational residency requirements were required to perform important function such as background checks. However, they never opined on why two years was needed as opposed to only thirty-days. There was never an argument of certainty to their position other than the 21st Amendment blocks them from Commerce Clause scrutiny. Unless, one buys that argument hook, line, and sinker, the principle will probably not sway the Court.

Further, Tennessee Wine did not make a compelling argument that the durational residency requirements were an integral part of the three-tier system.

 

Justices skepticism towards the 21st Amendment’s power over the Commerce Clause

Several members of the Court were hostile to this argument, notably Justices Kavanaugh and Sotomayor with Justice Alito not entirely convinced by the argument either.

Specifically, Justice Kavanaugh questioned Tennessee Wine’s position that the 21st Amendment enshrined two Pre-Prohibition statutes which allowed states to control how to structure their alcohol system and provided them the power enact laws immune from Commerce Clause scrutiny.

“I don’t see that in the Webb-Kenyon Act that the things that led up to that were not the Act was not, as I understood it, enacted to enable states to enshrine protectionist legislation into state law.” Said Justice Kavanaugh.

Further, Justice Kavanaugh pushed back on the position that the 21st Amendment enabled a state’s liquor system to be completely immune from a Dormant Commerce Clause challenge.

“When you say virtually complete authority, and you’ve said several times the point of the Twenty-First Amendment, the purpose of the Twenty-First Amendment, the problem that I’m having in thinking about this is the text — the text of the Twenty-First Amendment does not support that, as I read it.”

Justice Sotomayor, another fellow skeptic of unlimited power over the Commerce Clause, opined that “I don’t actually see in that any reference to the Commerce Clause or to any other limiting principle. Yet we have cases that have found limiting principles.”

In discussions with the attorney representing Tennessee Wine, Justice Alito made the point that he believed the 21st Amendment was setup to allow the states to regulate public health and safety and not setup to allow economic protectionism. Specifically, he stated:

“And I thought the purpose of the Twenty-First Amendment and Section 2 of the Twenty-First Amendment was to say this is a determination, the public health and safety determination is not going to be made on the national level. It’s going to be made by the states. But none of that seems to me to have anything to do with economic protectionism.”

 

Total Wine’s argument seems rational

Total Wine made the argument that the Tennessee durational residency requirements were discriminatory and protectionist and violated the Dormant Commerce Clause. Yet, Total Wine stated that they respected the three-tier system and wanted to adhere to Tennessee’s regulatory system.

In response to a question asked by Justice Gorsuch on whether the next business model was to be the Amazon of liquor, Total Wine’s attorney responded “No, my client operates on a more — on a brick-and-mortar business model that says we’re perfectly comfortable operating within the sphere of regulation that the state imposes on every in-state operator. And all we are seeking to have is not to be discriminated against.”

By arguing that they did not want to utilize this case to threaten the three-tier but merely to participate and open themselves up to state regulatory rules such as premises inspections, Total Wine’s narrow position was looked on favorably by the Court.

In response to Total’s answer to Justice Gorsuch’s Amazon inquiry, Justice Breyer provided an endorsement of Total Wine’s view: “All right. That’s totally rational to me.”

 

Why the durational residency requirement will fail?

Based on the oral argument, the durational residency requirements should fail. Tennessee’s law suffers because its durational residency requirement is used to block someone from participating in commerce that wants to follow the state rules and open itself up to the state’s enforcement and inspection regime.

Its one thing for the state to take the position that the 21st Amendment allows us to discriminate against a retailer that does not become part of the state regulatory system and inspection regime or reside in our state, it’s another to discriminate against a retailer that wants to fully comply.

Total Wine has several favorable factors going for them: 1. The Court has at least three skeptics for Tennessee Wine’s position that the 21st Amendment allows for state laws being immune from Commerce Clause scrutiny; 2. Total Wine’s position seems rational according to at least one Justice; and 3. Tennessee Wine has not provided good evidence for why the durational residency requirements are necessary or sound and has not provided a convincing rational basis.

 

The three-tier system is endorsed

The Court much to the delight of the wholesaler community endorsed the three-tier system.  Justice Breyer opined and confirmed the view that the three-tier system was unquestionably legitimate. Further, Total Wine’s attorney agreed with this position.

Breyer stated to the agreement of Total Wine’s attorney “That is, yes, of course, but to have — to be able to have what is called the three-tier system is unquestionably legitimate.”

Further, Breyer stated that law and precedent allows that the states “virtually complete control over how to structure liquor distribution”.

Throughout the oral argument the Court never questioned the legitimacy of the three-tier system and endorsed the view that the states have the right to structure their system as they see fit.

Although some of the Court disagreed with the position that the 21st Amendment makes state laws immune from the Commerce Clause, the legitimacy of the three-tier system was never challenged in this oral argument.

As Breyer further stated:

“We have previously recognized that the three-tier structure is unquestionably legitimate. And then we go back into the history.”  “And so this amendment was enacted against a history. This Court has several times say we honor that history.”

 

Could the Court live with checkerboard justice?

We could and probably will be back in a couple of years and the Justices admitted as much, unless, something influences the Justices to make a bold move!

With splits in the 6th and 7th  which will allow interstate wine shipments (this is based on the 6th Circuit following the Byrd precedent as indicated in the Lebamoff v. Michigan case which extends Granholm to retailers, and in the 7th it’s based on Judge Wood’s strong opinion against  Illinois’ wine shipping law) while the  2nd and 8th will not permit interstate wine shipments, the Court will be forced to press the nuclear button eventually.

If not, there will exist checkerboard justice in the liquor world where interstate wine shipping is legal or illegal based on what geographic circuit the state is located. Checkerboard justice is not something anyone wants to see prevail. Further, the permissibility of wine shipping will not be decided by state legislature but by federal judges.

Justice Kagan admitted she is wrestling with how the Court could decide on Tennessee Wine without continuing the mess.

“But, to go back to Justice Gorsuch’s question, I mean, I’m trying to figure out what kind of opinion we could write, Mr. Phillips, that says you win, but then, when the next case comes along and the next case is somebody that says we don’t like this brick-and-mortar stuff, we don’t want to have any physical presence at all, and the state is preventing that, and in doing so, the state is discriminating against out-of-state companies. And, you know, you’ve said that that’s not valid, so we’re entitled to do what we want to do too.”

When Total Wine’s attorney told her, she could essentially decide the issue narrowly, and leave the rest of the issues for another day. Justice Kagan answered that “Well, we’re leaving a lot of things for another day, but they all seem to be demanded by the principles that you’re asking us to adopt.”

Additionally, Justice Gorsuch felt perplexed on where the Dormant Commerce Clause scrutiny would lead to. “Mr. Phillips, I’d agree with you on that, but I would think that the next case would be — much as we’ve reexamined Quill, for example, and the requirement of physical presence in state, that the next lawsuit would be that, yes, this three-tier system is, in fact, discriminatory by requiring some sort of physical presence in state. And under the dormant Commerce Clause jurisprudence, you have a point. You have a good point. So I — why isn’t this just the camel’s nose under the tent?”

The Court has come to the position that a narrow decision will decide this case but its power will become negligible. So, the question becomes, does the Court want to make a decision with limited force, or do they want to set the legal standard on this issue?

In the end the Court has several invitations: 1. Rule on the facts of this case specifically and provide a limited decision; or 2. Wait until we obtain checkerboard justice and then go nuclear.

 

A quick note on standing

I mentioned in my previous write-ups that the Court could dismiss this case based on a lack of standing. A state law was challenged and a private party and not the state sued to defend this law. In Hollingworth v. Perry, the State of California refused to defend its law and a private party stood in its shoes. The Court indicated that this party lacked standing.

In Tennessee Wine, even though there are parallels between this case and Hollingworth, there is one distinct difference. The State of Tennessee wrote a two-page letter supporting the private party’s position, Tennessee indicated that the party is representing its interest, and that this letter is filed in lieu of an amicus brief. In Hollingsworth, the State did not support the private party’s position.

I don’t know if this difference is a proper justification for allowing standing, but I think it’s the reason why standing did not come up.

I would have loved to hear the standing issue brought up and the Court’s view on it. Maybe we will get this in the written opinion instead! The Court should provide some clarity on this issue.

Conclusion

I participated on a constitutional law panel at a liquor conference back in October, all four members believed that the Supreme Court would not grant cert in this case. We all believed that the messy durational residency requirements were not something the Court wanted to deal with and that they would wait to take a much cleaner case. Clearly, we were wrong!

After oral arguments, my view and the consensus view shared by those in the liquor industry were that the durational residency requirements would fail and that this decision would not decide whether Granholm applies to retailers.  Could we be wrong again?!

After thinking about the concept of checkerboard justice and the Court acknowledging they will be back in the future talking about the same principles to a different problem, I think there is a distinct possibility that the Court will shock the consensus and go for a far-reaching ruling!

1 thought on “Tennessee Wine Case: Will the Supreme Court take the Checkerboard Challenge?”

  1. In reply to Vlad.

    Before starting to answer your objections, I want to cover a couple of things. I have answered you before by email so no I didn’t ignore you. After a certain time of you not making sense and being rude, I chose to stop wasting my time.

    Let’s be honest on who you are, you are going around bullying people and trying to intimidate them behind some anonymous name. I am here, people know who I am, you are hiding behind a fake name and spouting off.

    Second, your knowledge is questionable and anyone that knows anything about these cases can see, you are way off base. Somehow you read Illinois’ law in a way that would create no legal controversy yet they are at the 7th Circuit on a case. So, in some way you know more than every legal scholar in America and the 7th Circuit. May be in your mind this exist but in nobody else’s mind.

    I don’t mind if people disagree with my analysis but an intelligent analysis is what I ask for.

    By you going after people writing on liquor issues (he has gone after numerous people) and being rude about it and badgering them numerous times through a fake identity, you are engaging in questionable activity. Be brave enough to reveal your true identity!

    On this blog, I have people from all sides of the industry and have earned the respect from every from Alex Tandford to my friends of WSWA. Why because I am fair to them and provide a chance for them to explain their point of view.

    I would expect some degree of equity.
    In the end I feel sorry for you, I know deep down you are hurting.

    I am done answering you, I provided answers to your statements.

    1. Illinois law does not prohibit to out-of-state retailers to ship liquor to Illinois residents. Instead, Illinois law by its text prohibits to in-state retailers to ship liquor from out-of-state for sale or resale in Illinois.
    Answer: First, I would ask you to get a retail license and ship into Illinois and notify the state that you shipped into the state and challenge them on his presumption.
    Illinois’ makes it illegal to transport from outside the state into this state for sale or resale. An out-of-state retailer is transporting from outside the state to sell into the state. The only time we allow this is for a licensed party which is a wine-shipper. If the party transporting into the state, retailer, exceed a certain amount it is subject to a Class 4 Felony. Here is the law.
    235 5/6-29.1(b) Any person manufacturing, distributing, or selling alcoholic liquor who knowingly ships or transports or causes the shipping or transportation of any alcoholic liquor from a point outside this State to a person in this State who does not hold a manufacturer’s, distributor’s, importing distributor’s, or non-resident dealer’s license issued by the Liquor Control Commission, other than a shipment of sacramental wine to a bona fide religious organization, a shipment authorized by Section 6-29, subparagraph (17) of Section 3-12, or any other shipment authorized by this Act, is in violation of this Act.
    235 ILCS 5/10-1
    Any person who manufactures, imports for distribution, transports from outside this State into this State for sale or resale in this State, or distributes or sells less than 108 liters (28.53 gallons) of wine, less than 45 liters (11.88 gallons) of distilled spirits, or less than 118 liters (31.17 gallons) of beer at any place within the State without having first obtained a valid license to do so under the provisions of this Act shall be guilty of a business offense and fined not more than $1,000 for the first such offense and shall be guilty of a Class 4 felony for each subsequent offense
    Moreover, and simply put, if the Illinois law did not effectively prohibit the out-of-state retailers shipping to consumers in Illinois, then the Seventh Circuit decision in Lebamoff Enterprises would have ended the discussion with that point. Instead it proceeded with that understanding and evaluated whether the Illinois law can with stand a constitutional challenge.
    So yes Vlad, you see something that the 7th Circuit and every other constitutional scholar does not see.
    2. Granholm cannot be extended to retailers because wineries’ business is to produce, not to retail. Wineries by many States laws are not allowed to sell off-premise to consumers. Retailers are.
    Answer: Nobody has ever said it was, this case, Tennessee Wine may decide whether Granholm can be extended to retailers. I don’t understand your point because we never indicated what you assume.
    Granholm only had facts involving wineries so it did not mention retailers. The questions is whether the legal rationale of Granholm should be applied to out of state retailers when compared to in-state retailers. Similarly, Granholm was comparing out-of-state wineries with in-state wineries.
    3. In the oral argument in Supreme Court all parties attempted to restore pre-Prohibition power to the States. The power of Webb-Kenyon law was:
    The Act by its terms applies only where the intoxicating liquors are intended to be “received, possessed, sold, or in any manner used” in violation of any law of the state into which they are transported. In such cases, the shipment is declared to be unlawful and the bar against state regulation of such commerce is removed.
    But in all cases where the intoxicating liquor is not intended to be “used, etc.,” in violation of the state law, the protection afforded by interstate commerce remains.
    So, where liquor was purchased for the personal use of a consignee and his family, which use was permitted by the laws of Tennessee, (Palmer v. So. Exp. Co. (Tenn.)), it was held that the Webb-Kenyon law did not apply and that any attempt by the state to regulate the quantity to be shipped in interstate commerce was void.
    The court held that the Webb-Kenyon law did not apply to the case of intoxicating liquors intended by the consignees for personal use, such use being lawful in Kentucky (Adams Exp. Co. v. Ky.), and that therefore a statute of Kentucky forbidding carriers to bring intoxicating liquors into or deliver them in “dry” territory, was invalid as applied to interstate commerce.
    The Webb-Kenyon law did not prohibit transportation of liquors in violation of the law of the state. So, a state law prohibiting the transportation of intoxicating liquor by any common carrier, unless the person to whom it is consigned has a permit, is not valid as applied to interstate shipments.
    (Source: Washington University School of Law)
    The 21st Amendment neither gained any additional power nor gave any additional power to the States (The 21st Amendment Enforcement Act, Sec.2004).
    Answer: Several parties before the Court were asserting that the 21st Amendment gave the States the degree of authority over alcohol beverages at least to the same degree as Congress had given the States prior to Prohibition. They were not advocating that the 21st Amendment only did that; if they had, then that argument would fail because the Court has consistently recognized that the States have core powers given to them by the 21st Amendment (and not simply by the 10th Amendment police powers), such as (1) promoting temperance, (2) ensuring an orderly marketplace, and (3) collecting tax revenue.
    What did Total achieve in this case if its store in Tennessee will be limited to products of poorly developed distribution tier in Tennessee?
    Answer: Total Wine at first could obtain a TN retail license when it first tried to enter the TN market because of the durational residency requirement. It challenged this law and was eventually able to obtain a license. TN wine and spirits retailers challenged to protect durational residency requirements, if they win, then Total could potentially lose its license.
    Total’s fight was to enter the TN market and sell to TN customers from a brick and mortar store. So what Total is achieving is the right to expand retail stores and revenue.
    Further, if the three-tier regulatory system is unquestionably legitimate then what question may arise when third-tier retailer sells and ships to consumer?
    Answer: There are other states that allow shipping, you should speak with them on what effects it has on their three-tier system.
    This comment mixes apples and oranges. The question is not whether retailers (as the third tier) sell and ship to consumers; of course, they do. Rather the question is whether out-of-state retailers can sell and ship to a consumer in another state. The three-tier system is premised on the State having control over who is distributing alcohol beverages to consumers in that State.

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