6th Circuit Wine Retailer Shipping Case: Part II: Summary of the Oral Argument

Intro

In this post we provide a detailed summary of the oral argument at the 6th Circuit.

As an amicus party and being at the table with Professor Tanford during oral arguments, I had a nice front row seat at the 6^th Circuit Oral Argument.

It was an engaging panel and the attorneys were challenged at every moment. Definitely, high drama in the court room!

Oral Argument

This is a summary of the oral argument and not a transcript, think of it as exhaustive highlights of the blow by blow.

1. State of Michigan

Mark Sands of the Michigan Attorney General’s Office led off and went down the road of the predominant effect argument, and how the predominant effect of Michigan’s retailer wine shipping law is to protect the health and safety of its residents.

Judge McKeague asked whether if the law is designed for health and safety reasons does it inoculate any portion of the whole scheme.

Mr. Sands indicated that the law would need to be non-protectionist.

Judge McKeague switched the argument to the issue of consumer choice, and how Michigan consumers sometimes can’t get the product they want and that the bottleneck is created by the wholesalers in the three-tier system.

Mr. Sands indicated that the wholesalers are not the reason and often times wineries will not sell through the Michigan three-tier system. And that the system is not protectionist and does not keep wines out of the system.

Judge Sutton asked whether there are wineries that wanted to sell in Michigan and could not because wholesalers could not take them. Further, Judge Sutton posited that maybe wines were not selling into Michigan because it is less expensive to sell them into Michigan.

Judge McKeague expressing his skepticism with the state, focused on the present wine shipping regime which allows out-of-state wine producers to ship into Michigan but does not allow out-of-state wine retailers to ship into the state. The Judge asked Mr. Sands, how do Michigan’s laws promote health and safety, when you already allow wine to be delivered to a house?

Sands indicated that they know where the wine is coming from when it comes from a producer.

Judge McKeague reminded Sands that wine producers can sell direct to consumers (DTC) at any price. So how does it promote health and safety to have wholesaler’s bottleneck product, when Michigan already allows producers to sell below cost wine directly to the house?

Sands answered because we know where the wine comes from.

Judge McKeague next focused on contaminated product and whether there was evidence of contaminated product.

Sands discussed how this was more of a foreign country problem and discussed how the Koch Brothers bought a counterfeit collector’s wine.

Judge McKeague did not find the argument convincing.

Throughout the questioning, the wholesalers and the state could not provide evidence for health safety justifications.

Judge McKeague then shifted to whether the 21^st Amendment should be reconsidered in light of the new global internet economy? And that 21^st Amendment jurisprudence often times predates this new economic reality.

Sands answered that he didn’t think so, because the 21^st Amendment doesn’t require Michigan to allow everyone to ship in.

Judge Sutton shifted the focus and posed a different scenario. Could a store have employee delivery across state lines? Any problems with deliveries?

Sands answered that there were no problems with delivery but there were problems with shipping, because if there were unlawful shipments, they can’t take the license away.

Judge Sutton asked whether there existed evidence of problems with cross border shipping. And why does Michigan need a limitation on Lebamoff?

Sands went back to the familiar theme that Michigan does not know what retailers are selling.

Judge McKegaue seemed unconvinced and asked whether Michigan knows what out of state wineries are selling, and whether they test product.

Sands answered that they do control buy.

Judge Sutton stated that the real argument is if you allow shipping, a retailer is getting around the three-tier system. And the bad product argument is improbable.

Judge Sutton further stated this is not an issue of tainted product or selling to minors. It is probably about lower price and how Indiana has lower taxes. He asked, Sands why he is not defending on that ground.

Sands stated that lower price is important but it is not a protectionism point.

Judge McKeague shifted the argument and wanted Sands to admit that it is a protectionist aspect of the three-tier system to protect the retailer because you are freeing them from competition from out-of-state retailers.

Sands indicated that the law is not motivated by protectionism but the law may have an incidental effect of protectionism.

2. Wholesalers

The wholesaler’s argument was made by Deborah Skakel of Blank Rome.

Skakel started out the oral argument by stating that physical presence is the lynchpin for obtaining a retail liquor license in Michigan and this was endorsed by the Tennessee Wine decision in the Supreme Court and the Sixth Circuit.

Judge Sutton stop the argument and indicated that their case seems flimsy when you state that the law protects public health and safety because it stops minors for drinking and protects against tainted alcohol. It seems the argument is Lebamoff is doing an end run around the three-tier system and it could send Indiana liquor into the system which could be cheaper than Michigan liquor.

Then it becomes an issue where we are asked to protect the three-tier system based on price point and this starts to look like a dormant Commerce Clause issue.

Skakel responded that the complaint is not just about price point because then it becomes a Sherman Act issue.

Skakel fully embraced that price control pertained to maintaining orderly markets, which is another legitimate ground for the presence requirements.

Judge McKeague brought up that wine producers can sell below cost.

Skakel retorted that there is a big difference between wineries and retailers, and wineries are an exception to the three-tier system and can go around the three-tier system.

Judge McKeague then asked whether this is a situation where the exception invalidates the rationale for the three-tier system.

Skakel answered that there are significant differences between a winery and retailer. A winery is going around the three-tier system. The retailer because of the link from wholesaler to retailer, goes through the three-tier system. And the link between wholesaler to retailer, has been approved time and time again and is part of the legitimate three tier system.

Judge McKeague noted to Skakel that there has never been a direct shipper challenge to these rules.

Judge Sutton brought the issue back to price and it seems that shipping could be an end run around the three-tier system.

Skakel indicated that if Lebamoff is allowed an exception to the three-tier system and allowed to ship wine, the retailers could get around Michigan requirements like post and hold and minimum pricing. It turns the three-tier system that the District Court judge blessed, on its head.

On a rebuttal argument that Judge Sutton was not sure Skakel even had, Skakel reiterated that the system was discriminatory and not protectionist.

Judge McKeague did not seem convinced.

Judge Donald inquired about when does a law go from discriminatory to protectionist? Where is the line?

Skakel provide examples of Granholm, Bacchus, and Tennessee Wine where the state readily admitted protectionism as the law’s main purpose, and some of this language could be found in legislative history.

Judge Donald then stated that it can’t evolve to the use of the label.

Shakel then channeling her best Mitt Romeny indicated that unlike these cases, they had a whole binder full of affidavits, to show the predominant effect is the protection of public health and safety.

3. Lebamoff

Alex Tanford argued for Lebamoff and started by stating that physical presence is not required based on Granholm, and Tennessee Wine extended Granholm’s holding to retailers.

Note: Under Granholm the Supreme Court held that a state could not require physical presence as a condition for doing business. In Tennessee Wine, the Supreme indicated that Granholm, which dealt with out-of-state wine producers, also extended to retailers.

Judge Sutton inquired about whether the entities, a Michigan and Indiana retailer were similarly situated. Judge Sutton posed the question whether victory could lead to favoritism for an Indiana retailer, who could sell into the same system as a Michigan retailer, but with less restrictive rules. In Judge Sutton’s scenario, this could create a situation where we are creating two non-similarly situated parties.

Tanford answered that except for the rule that everything needs to come through a Michigan wholesaler, Michigan could apply all its other rules to the Indiana retailer.

Judge Sutton indicated that because Lebamoff is buying from a different regime and different system, it makes them different from an Indiana retailer.

Tanford in a further exchange noted that it is differently situated but not in a relevant way. The retailers are selling the same product which makes them similarly situated. Further, the Commerce Clause guarantees residents of other states, access to markets in other states.

Judge Sutton posed a hypothetical of Utah which has a lot of regulations, dealing with a Nevada retailer which does not have as many restrictions as in the Utah system. Judge Sutton asked Tanford, do you want a retailer in Nevada, which has no obligations to follow Utah rules, to do a complete run around their system, and violate their scheme to have less alcohol sold in the state?

The 21^st amendment allows Utah to set up this regulatory scheme, but under Lebamoff’s theory this breaks down and allows the retailer to do an end around the scheme.

Tanford answered that if Utah open its market to internet shipping, then it would need to allow the Nevada retailer access to the market.

Judge Sutton asked if they got rid of delivery and had a presence requirement would there be no problem?

Tanford answered yes but that a presence requirement as a precondition for direct shipping is unconstitutional.

Judge McKeague brought up the point that if state retailers can direct ship and a producer can ship DTC, the health and safety argument falls apart

Tanford noted that states get the opportunity to prove with concrete evidence that direct shipping is harmful and that their alternatives are narrowly tailored to meet the interest in preventing harm.

Judge Sutton and Tanford then went through what is permissible in terms of delivering alcohol to customers. Cross border delivery was the scenario that could lead to discrimination if Michigan allowed their retailers to partake in this activity, but did not allow out-of-state retailers the same privilege. In other scenarios such as delivery within small geographic areas, Tanford concluded that the state could allow this without offering this right to out-of-state retailers.

Judge Sutton indicated that the whole three-tier system is discriminatory and leads to economic balkanization.

Tanford indicated that it’s a discriminatory system and the state has to justify discrimination. It needs to provide legitimate reasons and evidence to justify discrimination, and that the discrimination advances a legitimate state purpose. Lack of evidence is the key element missing from the state’s case.

The panel next discussed consumer choice, Tanford indicated that Courts have said, that discrimination is presumed when the state prevents a consumer from having access to products in another market.

Why should a person in Indiana have access to wine that a person in Michigan can’t obtain?

The frustration for consumer is there is this whole internet marketplace out there and the consumer can’t access a greater selection of wine through this marketplace.

Judge Sutton came back to the point about the differences in the Michigan and Indiana systems. The issue pertains to whether the parties are similarly situated.

He stated that there are not many differences between an Indiana wholesaler and Michigan wholesaler except price. What this is about is a Northern Indiana retailer that wants to facilitate sales with Michigan consumers. Why do you think they are not different?

Tanford indicated that he doesn’t see the difference in wholesalers, there is no evidence of differences and burden is on the state. All wholesalers are licensed, and all wine is heavily regulated by the TTB.

Judge Sutton asked if you win, you end run the three-tier system with an Indiana retailer.

Tanford noted that it is an end run but it has no effect, underlining this assertion is somehow, Indiana and the federal government don’t properly regulate alcohol and this poses a danger to the public that only Michigan can fix.

Judge Donald questioned why Tanford believes Michigan’s law has no effect?

Tanford noted that Granholm, Tennessee Wine, and Cherry Hill Vineyards, all held that the state has to prove that its law which has a discriminatory effect, and promotes a public interest. It protects the health and safety of its residents, and that no nondiscriminatory alternative would advance its interest. In this case the state or wholesalers have yet to identify an actual public health effect, and provided no evidence for its theory.

Judge Donald asked Tanford again, you are saying they haven’t identified an effect, and there is nothing shown in the record.

Tanford that there is nothing in the record.

He also addressed the similarly situated concerns of the panel. He stated that if we worry about the wholesalers being different, we are disturbing commerce. Every good procured in other states goes through a different supply chain. This issue needs to deal with public health and safety.

The state must show that shipping wine is harmful and something different occurs when wine is moved through Indiana versus wine moved through Michigan three-tier system.

Judge Sutton went back to the pricing issue again, He indicated that he thought price control may be embedded in the three-tier system.

Tanford noted in some states, price control if nondiscriminatory, allows a state to set minimum pricing for retail sales into the state.

Judge Sutton finally concluded by stating maybe, I don’t get your argument, but it is not about all consumers,

Tanford indicated that it’s about similarly situated retailers v. retailers, shipping v. non-shipping, and relevant factors like the whether states looked at nondiscriminatory alternatives.

Conclusion

This was a lively oral argument and the panel was tough in its questioning. I think Lebamoff’s counsel was able to weather the storm better than the other side.

Precedent is on Lebamoff’s side and it makes one wonder why Michigan even brought this challenge!