NCSLA 2018, Hawaii: Part II, Aloha from Elvis and I

This includes my commentary on the rest of the conference. Enjoy the Elvis music while reading, compliments of me 🙂

LEGAL UPDATE

Valerie Haber of Gray Robinson did an excellent job of reviewing some of the most important cases. The people of this fine firm always deliver top quality and Valerie Haber follows the norm.

Direct Shipment Case

A federal district court in Missouri granted summary judgment on behalf of the state and upheld the state’s statute which bans out of state retailers from shipping to Missouri customers. Sarasota Wine Market v. Parson, no. 4:17-CV-2792-HEA (decided on June 15, 2018, Eastern District of Missouri)

The court found there was no discrimination between in-state and out-of-state producers or products as the law requires both parties to adhere to the three-tier system. Further, the court held that allowing out of state retailers to ship directly to Missouri residents would allow out-of-state retailers to circumvent the Missouri regulatory system.

In my humble opinion, the summary judgment on behalf of the state does not provide finality to this issue. In the Illinois case, Lebamoff, before the 7^th circuit, which came by way of a summary judgment in district court, one of the justices went after and cast serious doubt on the concept of non-discrimination which the states often times utilize for their position.  Lebamoff Enterprises, Inc., et al v. Bruce Rauner, et al, No. 17-2495 (7^th Cir. 2018)

If another judge on the 7^th Circuit panel does not buy the nondiscrimination argument and Lebamoff is remanded or overturned, then the Lebamoff case may start a trend of casting doubt on the states’ bedrock position.

Residency requirement

The 6^th circuit affirmed the decision of a federal district court which struck down a Tennessee residency licensing requirement. Tennessee required a licensee to be a bona-fide resident of Tennessee two years prior to the date of the application and further imposed a 10-year residency requirement to renew the license.  Byrd v. Tennessee Wine & Spirits Retailers Association, No. 17-5552 (6^th Cir. 2018)

This case was brought by the Tennessee representative of Total Wines, which sought a Tennessee retail license and was denied based on not being a bona-fide resident two years prior to the date of the application.

The district court’s opinion held that these requirements were facially discriminatory, and that state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.

Further, it concluded that nondiscriminatory alternatives could achieve the durational-residency requirements’ purpose and found that the requirements violated the dormant Commerce Clause. The 6^th Circuit affirmed and found the unconstitutional provisions were severable from the rest of the statute.

This is an important point because the courts reiterate its power to eliminate parts of the statute while keeping the rest of the statute in place.

Important points of this decision

The 6^th Circuit relied on a 5^th Circuit’s decision in Cooper (820 F.3d 730, 743 (5^th Cir. 2016) which reconciled the Bacchus and Granholm cases, but more importantly spelled out some important principles when looking at 21^st Amendment issues when they conflict with the Commerce Clause.

Some of these important principles espouses by the 6^th circuit include but are not limited to the following: the Supreme Court reiterated Bacchus’s concern about the protection of economic interests across state lines, suggesting that the Twenty-first Amendment does not automatically immunize a state’s alcoholic-beverages law regarding wholesalers or retailers; Second, the Supreme Court held that that the Twenty-first Amendment does not permit a state to discriminate on the basis of citizenship; accordingly, the flow of products across state lines is not the sole concern under the dormant Commerce Clause; Third, the Supreme Court held that the Commerce Clause limits the Twenty-first Amendment; Fourth, the Supreme Court stated that the three-tier system is invalid at times; and Fifth, that Granholm did not limit applying the Commerce Clause solely to producers.

These last two points are of utmost importance when analyzing the liquor world as a whole.

Finally, when a state regulator looks at drafting laws or regulations, it should look at making its restrictions based on the most non-discriminatory principles.

Free Speech v. Tied House

In the Retail Digital Network case against the State of California, a 9^th Circuit en blanc panel ruled that a California restriction on payment from a distributor/supplier to a retailer for advertising was not a 1^st Amendment violation and that California’s interest in preventing tied-house violations trumped the 1^st amendment right. Retail Digital Network, LLC v. Prieto, No 13-56069 (9^th Cir. 2017)

The important takeaway is that tied-house violations may usurp 1^st Amendment claims. If the court holds a tied-house violation exist, it may deem speech as not legally protected and not subject to 1^st Amendment protections.

Important Takeaways from cases

The biggest takeaway is how will courts apply Granholm? It seems many courts including the court in the Sarasota Wine Market case will state that Granholm does not apply to retailers. However, the 6^th circuit seems to believe it does. Which leads to an interesting question, where do the chips fall in this debate and will there be a final answer?

CANNABIS AND ALCOHOL

Cannabis is on the rise and will cut into alcohol’s marketplace, that is the conventional wisdom. And the evidence shows that many players are looking to get into this field. Southern Glazer has invested in the cannabis field, Constellation is selling cannabis products in Canada, and the former head brewer of Blue Moon has left to create cannabis drinks.

What seems like a fast-moving trend may be headed for a slow down that we all can’t see. Cannabis has obstacles alcohol does not face. The main obstacle is that it has no federal legal recognition. This fact has very negative consequences for its ability to grow market share. Without federal legal recognition a cannabis entrepreneur cannot obtain funding through traditional sources, namely by banks. In addition to the lack of funds, it can not get the required federal label approval for cannabis influenced alcohol drinks.

So yes, cannabis is on the rise and it will cut into alcohol’s market share. However, rumors of its meteoric rise are greatly exaggerated!

PRIVATE LABELS

The cult around Kirkland Scotch shows that private labels are more than just a quasi-generic cheap grade product. Private brands are growing at the expense of more established brands.

With this growth comes controversy, many competitors believe that private labels are ripe with tied-house violations that hurt the competitive market place.

Pertaining to shelf space, the private labels create a distinct advantage for itself at the expense of its competitors. When the retailer’s private label obtains the marquee shelf placement at the expense of more established brands, a distinct and somewhat insurmountable advantage is created.

Further, to some the name of the retailer on a package creates the idea that they are no longer just a retailer and are also becoming a manufacturer. This leads to a blurring of the line between the tiers in the system.

Although not a tied house concern, private labels are sometimes mimicking the look of more establish brands leading some to purchase an item based on another products reputation and good will.

So, with all these issues and blurring of lines, will regulators step in to stem the tide or let the market runs its course.

The answer is it depends!

The boundaries

The state often times fights the relationship between the manufacturer and retailer, mainly when it pertains to beer labeling. In Texas the state appeals court ruled that a relationship between a manufacturer that produced a private label brand on behalf of a retailer, T.G.I.F. Friday’s, created a tied-house relationship. Because this relationship was unlawful, the 1^st Amendment would not protect this unlawful speech. Texas Alcoholic Beverage Commission v. Mark Anthony Brewing, Inc., No. 03-16-00039-CV (Texas Appellate Court 3^rd District 2017).

The states have drawn an interesting line in allowing private labels for wine and spirits but have not allowed private labels for beer. Although the line seems arbitrary, it has nevertheless been clearly drawn!

CONSTITUTIONAL CHALLENGES TO STATE ALCOHOLIC BEVERAGE LAWS

The main themes of constitutional challenges are that temperance arguments by the states are not very convincing, the courts are hesitant in granting a decision based on equal protection grounds, free speech rights are trumped by tied-house concerns, and that the best chance to beat the state rest on commerce clause challenges.

Plaintiff’s lost three convincing equal protection challenges in the Cadena (Cadena v. TABC, No. 14-0819 (Texas Supreme Court 2017)) and Deep Ellum cases out of Texas (Deep Ellum Brewing LLC v. TABC, 1:15-cv-821-RP (Western District of Texas 2018)) and the Maxwell (Maxwell Pic-Pac, Inc. v. Kentucky ABC, No 12-6056 (6^th Cir. 2014)) case out of Kentucky. The courts uphold the states’ right against equal protection claims by indicating that they have a rational basis for disparate treatment. Even in a case, Retail Services and Systems, d/b/a Total Wine & More, where the plaintiff challenged and won, in South Carolina, the court granted victory by indicating that the statute was facially unconstitutional and decided not to wade deeply into the equal protection argument. Retail Services & Systems, Inc. d/b/a Total Wine & More v. South Carolina Department of Revenue and ABC Stores of South Carolina, No. 2014-002728 (S.C. Supreme Court 2017)

The Walmart case in Texas provides some interesting constitutional issues and I’m sure we haven’t heard the last of it! Walmart challenged the Texas statute that precludes public ownership of a liquor retailer and the provision that limits ownership to five stores unless there is a consanguinity exemption. The judge found that the public ownership provision violates the dormant Commerce Clause because it has a discriminatory intent.  Walmart Stores, Inc v. TABC, 1:15-cv-134-RP (Western District of Texas 2018))

Surprisingly, the Court held that the consanguinity exemption violated the Equal Protection clause because those with the exemption have unfettered power to consolidate in excess of the five-store limit.

This equal protection decision is rare and should not be relied upon as standard precedent.

IN CONCLUSION

Many state statutes allow privileges to one industry member that is not allowed to others. In Illinois craft distillers do not enjoy parody with craft brewers and wineries. In Texas, often times beer producers are on the short end of privileges. Precedent has shown that any equal protection challenge faces an uphill battle. The courts provide great deference to a state’s rational basis for making a law. Unless discriminatory intent via the dormant Commerce Clause is proven, the state’s statute will be upheld.

Also, free speech challenges versus a tied-house violation are hard to win. The 1^st Amendment protects lawful speech; a violation of a tied-house provision takes away these protections. The key to winning is to poke holes in the tied-house violation along with making a 1^st Amendment challenge.

THAT’S ALL FOLKS!

A renowned cartoon rabbit repeated this phrase after every show. So, I sign off from the NCSLA conference. I couldn’t cover everything but I tried to get what was most important. Some of the case names were abbreviated and don’t reflect the whole name and the cites are usually to the original record of the case.

Contact me with any question.

A couple of quick comments. Thank you, Keith Burt and Pam Frantz, for a great conference, thank you Adam Chafetz for your moments of entertainment, after long days and jet lag, your humor is always welcomed! And finally, congratulations to my hometown lawyer Jim Webster on a much-deserved induction into the Hall of Fame!

See you all in Louisville!

Baby Brendan O’Leary pondering one of Adam Chafetz’s jokes.