Arizona rehearing petition, there is reason for optimism

Counsel for the Plaintiff in Day v. Henry, which challenges Arizona’s discriminatory wine retailer shipping law, filed a petition for rehearing. There is optimism to believe the petition will be granted.

The 9^th circuit panel ruled in a 2-1 vote to uphold Arizona’s discriminatory wine retailer shipping law. What makes this decision different is the analysis by the majority is without precedent and the dissenting opinion is well reasoned.

Majority’s wayward opinion

The majority’s opinion unprecedentedly goes off the rails from legal norms, because it finds that Arizona’s wine retailer shipping law, which permits in-state retailers to ship direct-to-consumer (DTC) but does not allow the same privileges for out-of-state retailers, is not discriminatory.

In the post-Tennessee Wine world, the circuit courts in the 4^th, 6^th, and 8^th Circuits all upheld laws similar to Arizona’s ban. However, in each decision it was acknowledged that laws treating out-of-state retailers differently from in-state retailers were discriminatory.

The Judge, Milan Smith, turns the precedential analysis onto its head. He finds that Arizona’s requirement that retailers be physically present in the state is not discriminatory because out-of-state companies could get an Arizona physical retail location and enter the marketplace. Judge Smith concludes that the law is applied evenhandedly, because both in-state and out-of-state retailers could obtain an Arizona license if they are ready to make an investment in a physical infrastructure in Arizona.

Judge Smith runs his conclusion through a Granholm and Tennessee Wine analysis and finds these cases do not contradict his legal premises. Although Granholm held that an “in-state presence requirement runs contrary to our admonition that States cannot require an out-of-state firm to become a resident in order to compete on equal terms,” the Judge ruled out Arizona’s physical presence as discriminatory, because Granholm’s analysis was limited to a discriminatory exception to the three-tier system.

Under Tennessee Wine Judge Smith concludes the residency requirement was onerous because of the durational residency requirement. Under Arizona’s law there is no durational residency requirement, hence the Arizona residency requirement does not run afoul of Tennessee Wine.

Why the 9^th Circuit will grant a rehearing

This opinion strikes out on new legal ground that is not very steady. The other circuits all found the laws were discriminatory but then went through an analysis of why discrimination was permitted. The 9^th Circuit has become the Lone Ranger in finding discrimination does not exist.

But it is not only their conclusion that is troubling, it is also the method for reaching their conclusion.

Judge Smith cast aside Granholm’s strong legal principle that requiring an in-state presence to compete on equal terms is unconstitutional. In his drawing a distinction from Granholm, he relies on pre-Tennessee Wine cases such as Arnold’s Wine, which ruled that Granholm was limited to suppliers.

Ruling as such on Granholm’s physical presence issue, Judge Smith makes new law without legal precedent, which I think will entice the 9^th Circuit panel to revisit.

Further, Judge Smith pontificates on the depth of Tennessee Wine’s treatment of residency issues. He distinguished between Arizona and Tennessee in that Tennessee had a durational residency requirement where Arizona did not.

However, he does not state where the bright line for durational residency lies and whether there is a de minimis threshold.

Judge Smith appears again to be issuing precedent by creating a new law, which I think will make the 9^th Circuit curious enough to define the legal parameters of these issues before it becomes final 9^th Circuit precedent.

Powerful Dissent

Without a dissent there is basically zero chance of a rehearing getting issued. In this case a powerful dissent exists. Judge Danielle Forrest writes a powerful dissent requesting a remand and that the district court perform an evidentiary inquiry on how its discriminatory law promotes a legitimate non-protectionist interest.

She states essentially that the majority’s Commerce Clause analysis is flawed. Judge Forrest believes first you look to see whether the law is discriminatory under normal Commerce Clause analysis, and then you look to, because of the 21^st Amendment, whether the state presents concrete evidence that “its discriminatory regime advances public health, safety, or another legitimate non-protectionist interest that could not be served by nondiscriminatory measures.”

Judge Forrest started by analyzing the majority’s reasoning on the non-existence of discrimination. She rejected their view on Granholm and determined that their analysis on non-discrimination misapplied the legal test in 21^st Amendment/Commerce Cases. Specifically, she found that the discriminatory laws relationship to the three-tier system is part of the second test on whether a discriminatory law can be justified for non-discriminatory reasons.

The majority instead utilized the three-tier system as a justification for finding that Arizona’s law was not discriminatory. This ran contrary to the post-Tennessee Wine cases where the wine retailer shipping laws were found discriminatory but justified by some state interests.

As it pertains to the majority’s residency test requirement, Judge Forrest admonishes the majority for distinguishing the Arizona residency test as different from Tennessee’s and hence constitutionally permissible. She notes that the U.S. Supreme Court did not establish a floor for residency requirements and that Arizona’s requirement, although less onerous may still be as unconstitutional as Tennessee’s.

Judge Forrest next takes aim at the majority and previous circuit court precedents methodology for upholding discriminatory wine retailer shipping laws.

She concludes that their methodology is based on: one finding discrimination; and if yes, then advancing to step 2; is something essential to the three-tier system that it needs to be maintained, if yes, the inquiry stops and the law is upheld; if no, we go to the third step in the analysis examining “whether concrete evidence shows that the regulation advances legitimate health or safety interests.”

In her view, there should be a two-step analysis instead and admonishes the majority and prior circuit court decisions for reading the middle step into the Commerce Clause analysis. Under her test maintaining the three-tier system should not become the requisite standard and was not a standard utilized by the Supreme Court in Granholm and Tennessee Wine. As she states:

“But the three-tier system is ultimately a means to promote the public welfare, not an end in itself. The inquiry remains whether, based on “concrete evidence” rather than “speculation,” a regulation promotes public health, safety, or another non-protectionist goal in a way that a nondiscriminatory regulation could not.”

Judge Forrest requested a remand and for the lower court to get through the concrete evidence and determine whether there were non-discriminatory alternatives available to utilize.

Conclusion

In the end, there are a lot of issues in this case. The majority seems to be making groundbreaking law by destroying Granholm’s prohibition on in-state residency requirements as a condition for doing business in a state and making moves on what is a permissible residency requirement under Tennessee Wine, while at the same time not committing to a clear standard.

With the dissent making a strong argument about whether the Commerce Clause test is being applied properly, I think the 9^th Circuit has many legal issues to clarify before it sets a precedent for future cases.