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
The Durational Residency requirements will not survive
The three-tier system is endorsed
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.
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!