6th Circuit Lebamoff Michigan Wine Retailer Decision: Judge Sutton gets nostalgic for the old days
Judge Sutton must be one for nostalgia. In this decision he chooses to turn back the clock to a day where the late 20s rules and the dangers of alcohol flowing into the state must be stopped.
Judge Sutton resurrects the temporarily dead temperance argument and takes us back to a time when the heavy hand of government working to severely restrict alcohol consumption was en vogue.
I find several faults with this decision including Judge Sutton’s peculiar notion that the Constitution protects a state’s ability to maintain high alcohol prices.
His decision ignores several important legal principles established in Granholm and Tennessee Wine and relies on precedents that are not very noteworthy including Bridenbaugh v. Freeman-Wilson from the 7th Circuit and Arnold’s Wine from the 2nd Circuit.
Most notably, he ignores the evidentiary standards set down in Tennessee Wine and allows the state to justify laws based on unsupported assertions. Further, he discusses the evidence that Lebamoff did not provide and does not discuss the lack of evidence on the state side.
His decision turns back the clock where justifications were enough and evidence did not matter. One would have thought Tennessee Wine changed that, obviously Judge Sutton had something else in mind.
I want to provide my analysis of the decision. I will admit I am a biased party as my name is on the opinion as an amicus party. Further, I was at the oral argument and can add some color to this issue.
I am sure there are those that will disagree with me and that is why it is great to live in a free country!
Judge Sutton’s introductory thesis and roadmap
Judge Sutton started by stating that because the Twenty-first Amendment permits Michigan to treat in-state retailers (who operate within the three-tier system) differently from out-of-state retailers (who do not), Michigan’s law is Constitutional.
Before answering the major question in the case, Judge Sutton introduces some important criteria that will go into the decision.
Judge Sutton peculiarly early on in his opinion starts rehashing old prohibition argument as a way to foreshadow his later views. He notes that prohibition led to a system where the state, can control the amount of alcohol sold through price controls, taxation, and other regulations.
He then starts looking at the standard of review. Interesting enough he seems to play with the standard of review set down in a long line of Commerce Clause cases, the latest being the U.S. Supreme Court’s Tennessee Wine and Spirits v. Thomas case. To quote him directly.
“When faced with a dormant Commerce Clause challenge to an alcohol regulation, as a result, we apply a “different” test. Tenn. Wine & Spirits, 139 S. Ct. at 2474. Rather than skeptical review, we ask whether the law “can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground.” Id. But if the “predominant effect of the law is protectionism,” rather than the promotion of legitimate state interests, the Twenty-first Amendment does not “shield” it. Id.”
What Judge Sutton leaves out in this analysis is that the state needs hard evidence to back up their statute’s justification. As the Supreme Court stated in Tennessee Wine, “”mere speculation” or “unsupported assertions” are insufficient to sustain a law that would otherwise violate the Commerce Clause.” 544 U.S. at 490, 492, 125 S.Ct. 1885. He attempts to take the strict scrutiny standard in Tennessee Wine and change it by forgetting about the evidence requirement.
His next major point is that the middle tier of the liquor system is unquestionably legitimate because the Twenty-first Amendment permits a three-tier system of alcohol distribution, and the Commerce Clause does not prohibit it. He goes onto to state that the states can properly utilize the middle tier as a way to control the volume of alcohol sold in the state. It is interesting because unlike producers there are no state caps on how much volume a wholesaler can sell in Michigan. So how the state can utilize the middle tier to restrict alcohol sales, is questionable?
Finally, he discusses the physical presence requirement. He states that:
“The federal courts also have permitted States, like Michigan, to require retailers to be physically based in the State” Byrd v. Tenn. Wine & Spirits Retailers Ass’n, 883 F.3d 608, 616, 623 (6th Cir. 2018); Cooper v. Tex. Alcoholic Beverage Comm’n, 820 F.3d 730, 743 (5th Cir. 2016). Again, what’s interesting is that he failed to look at the Granholm treatment of physical presence, which made it unconstitutional to require physical presence as a condition of doing business. Further, Byrd indicated that a state may require a physical presence, but the decision did not take a strong stand on this issue one way or another, because it was not the dispositive issue in the case.
The Major Question
Judge Sutton posed the major question in this case. “If Michigan may have a three-tier system that requires all alcohol sales to run through its in-state wholesalers, and if it may require retailers to locate within the State, may it limit the delivery options created by the new law to in-state retailers? The answer is yes.”
He runs through the test that a state law or regulation must pass when meeting a Commerce Clause challenge. He noted that Tennessee Wine stated it was a different test. Quoting from Tennessee Wine he states that we ask whether the law “can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground.” Tenn. Wine & Spirits, 139 S. Ct. at 2474. In the same page of the Tennessee Wine opinion cited by Judge Sutton, he also fails to mention that the Supreme Court stated: “Section 2 gives the States regulatory authority that they would not otherwise enjoy, but as we pointed out in Granholm, “mere speculation” or “unsupported assertions” are insufficient to sustain a law that would otherwise violate the Commerce Clause.” Id.
Unlike other cases recently that focused on a lack of the state’s hard evidence, Judge Sutton seemed to pass this by.
Judge Sutton then states that the legitimate interests of the state are promoting temperance and controlling the distribution of alcohol. First, the temperance argument has been dusted off and brought back to life and this justification for a state regulation has been rejected in recent cases like Retail Digital Network from the 9th Circuit and the Missouri Broadcaster’s decision out of the 8th Circuit. Second, he never does a detailed analysis of whether there are alternatives to discriminating against commerce, like cutting off sales to in-state retailers and limiting what a shipper could sell into a state. A mere limitation could serve the state’s interest in the absence of a complete discriminatory ban.
When going into his use of minor cases such as the 7th Circuit’s Bridenbaugh case, he opines that one needs to consider the inequities of a situation that if Michigan’s law is overturned an Indiana retailer could access a Michigan market, yet a Michigan retailer could not access the Indiana market. This maybe a great argument for a Constitutional challenge for a reciprocity issue, but I still can’t see how this principle can be utilized to uphold Commerce Clause discrimination.
The Constitution justifies higher prices
Judge Sutton goes into turbo drive on his temperance argument by essentially arguing that higher pricing provides a justification for discriminating. He worries that opening up the state to out-of-state retailers would mean opening it up “to alcohol that passes through out-of-state wholesalers or for that matter no wholesaler at all.” Which essentially eliminates the role of Michigan’s wholesalers for these sales. And according to Judge Sutton creates “a sizeable hole in the three-tier system.”
Because Michigan imposes heavy tax at the wholesale level, Judge believes this leaves “too much room for out-of-state retailers to undercut local prices and to escape the State’s interests in limiting consumption.” He believes that states like Indiana that permit wholesalers to sell to retailers below cost and offer volume discounts, would undercut the market.
Again, Judge Sutton’s theory fails to provide any evidence from the sixteen wine retailer shipping states where this is a problem. Ignoring Tennessee Wine’s warning about unsupported assertions being insufficient to sustain a law that discriminates in violation of the Commerce Clause, Judge Sutton finds a theory but not the evidence to reach his conclusion.
The main concern Judge Sutton has with price is that lower price will lead to increased alcohol consumption. But problematically, this is an argument with no evidence.
Further, as I watched the oral argument, Judge Sutton noted that he thinks price undercutting is only an issue with border states because shipping from California is so expense that it undermines any cost savings. Specifically, Judge Sutton mentioned the potential price difference between Indiana and Michigan being a problem. But reality may shed light on Judge Sutton’s theory. First, the excise tax for a gallon of wine in Indiana and Michigan is very similar, a 4-cent difference. Second, yes Indiana does not have a minimum pricing statute. But let’s think logically, can a retailer survive flooding the market with product sold under cost. Hence, why there is no evidence available for this in other states, why because it does not happen!
Judge Sutton stated that essentially Granholm does not apply. Sutton stated that Granholm dealt with a discriminatory exception to a three-tier system. Sutton believed that Granholm was different because “In-state wineries could avoid instate wholesalers and retailers and thus deliver directly to consumers, while out-of-state wineries could not.” Which was the “explicit discrimination” in Granholm, not the delivery privileges issue.
Again, Judge Sutton’s analysis is not completely on point. An out-of-state winery going through extra cost by going through the three-tier system, while the out-of-state winery did not, was not the main reason for the Supreme Court’s holding in Granholm. It was one of several factors which demonstrated the burdens out-of-state wineries incurred based on the discriminatory law. Interesting enough, one of the other burdens that Granholm mentioned was physical presence. In Granholm the Court held that a state could not require physical presence as a condition of doing business. It made the cost of doing business higher for the out-of-state business than the in-state business.
But because Judge Sutton already set sail based on an incomplete physical presence legal theory, he could not bring it into this discussion.
What Judge Sutton fails to see is that Granholm was decided because there was a discriminatory wine shipping law. It was not decided solely based on the increased incurred single cost by an out-of-state party. This cost was a contributing factor but did not represent the conclusion.
Like a lot of this decision, Judge Sutton lays out evidence that is not supported by precedent.
I can’t cover everything in this analysis, so I tried to touch on the important issues. It is one thing for the decision to go against you, it is another when the reasoning is questionable. After Tennessee Wine, one would believe that the state needed hard evidence to support its conclusion. And one would think that temperance could not be used as a justification for discriminating, unless there was evidence of course! None existed!
It looks like Judge Sutton has dialed it back to another time.