For full disclosure, I am co-counsel on this case with Gillian Garrett, an outstanding attorney from the Bay Area.

California wanted to dismiss a Commerce Clause challenge to a discriminatory law, which allows its own wineries to sell direct to retailer but denies this same privilege to out-of-state wineries.

In Blue Sky Vineyard, LLC v. Tupy Federal Judge John A. Mendez denied California’s motion to dismiss.

California’s Position: There Is No Constitutional Problem

California’s position was essentially that the plaintiffs were attempting to dismantle a legitimate three-tier alcohol regulatory system through a federal constitutional lawsuit.

The State argued that California law does not discriminate against out-of-state wineries simply because they are located outside California.

California pointed to its licensing structure and argued that an out-of-state winery can obtain a California winegrower’s license. At the same time, however, California argued that wine produced outside California remains subject to the state’s importer requirements, so even if a winery wanted to sell through to a retailer, it would not be feasible because they need to utilize an in-state importer first.

The State’s position was that these requirements are part of a comprehensive regulatory system—not economic protectionism.

In the State’s view, the plaintiffs were trying to take isolated provisions of California’s Alcoholic Beverage Control Act and characterize them as unconstitutional without adequately accounting for the larger regulatory system in which those provisions operate.

The State’s Redressability Argument

The State argued that even if the plaintiffs prevailed on the statutes they challenged, they still could not obtain the relief they were seeking because other provisions of California law would continue to stand in the way. Namely, California’s statute which requires all wine brought into California be sold to an importer.

California relied on Ninth Circuit precedent, including Day v. Henry and Orion Wine Imports v. Appelsmith, in support of its argument.

The State contended that the plaintiffs therefore could not establish that a federal court judgment would actually redress their alleged injury.

That is not a trivial argument. If another independent California statute would continue to prohibit the plaintiffs’ desired conduct, a declaration concerning one provision might accomplish nothing.

Judge Mendez Was Not Persuaded

Judge Mendez rejected the State’s redressability argument.

The Court concluded that the plaintiffs had sufficiently alleged an injury that could be redressed by judicial relief.

Importantly, the Court relied on the Ninth Circuit’s broad approach to standing and redressability and concluded that the plaintiffs did not have to establish at the outset that every obstacle in California’s regulatory scheme would necessarily disappear.

That allowed the Commerce Clause claim to survive the State’s jurisdictional attack. California also argued that the complaint failed to state a viable dormant Commerce Clause claim.

And that brings us to the most important part of the decision.

The Court Would Not Resolve the Constitutional Question on a Motion to Dismiss

The State’s position was that California’s laws do not discriminate against interstate commerce and, in any event, are justified by the state’s legitimate interest in maintaining its three-tier system.

But Judge Mendez concluded that those arguments could not be resolved on a motion to dismiss. Because the constitutional analysis requires a factual record.

The Court observed that many of the cases California relied upon in defending three-tier systems were decided at the summary-judgment stage, rather than on a motion to dismiss.

At the motion-to-dismiss stage, the Court generally accepts well-pleaded factual allegations as true and asks whether the plaintiff has stated a legally cognizable claim.

California was essentially asking the Court to accept its description of the three-tier system—and the justification for the challenged provisions—before the plaintiffs had an opportunity to develop the evidence. Judge Mendez declined to do that.

The Three-Tier System Will Now Have to Be Tested Against the Facts

This is where the case gets interesting.

California says its laws are part of a legitimate three-tier regulatory system.

The plaintiffs say California is treating out-of-state wine differently from wine produced inside California in a manner that violates the dormant Commerce Clause.

Those competing positions cannot simply be resolved by pointing to the existence of a three-tier system.

The question is how the system actually operates and whether the challenged distinctions are constitutionally permissible.

That requires evidence.

California Did Win One Point

The ruling was not a complete victory for the plaintiffs.

Judge Mendez dismissed the plaintiffs’ separate Privileges and Immunities Clause claim.

That claim was based upon Article IV of the Constitution.

The Court concluded that the Privileges and Immunities Clause protects citizens of the states and does not provide the same protection to corporations.

Because the plaintiffs were corporate entities, that claim could not proceed in its current form.

The Court dismissed that count without prejudice and gave the plaintiffs an opportunity to amend.

But the principal Commerce Clause claim survived.

California attempted to end the case before discovery and before the parties developed the factual record.

That effort failed.

The State’s three-tier defense will now have to be tested against the actual operation of California’s regulatory system.

The Next Stage Is Where the Case Gets Interesting

For years, the three-tier system has been treated in alcohol-law litigation as something of a constitutional safe harbor.

But the Supreme Court’s dormant Commerce Clause jurisprudence has repeatedly made clear that states cannot simply invoke alcohol regulation as a magic phrase that ends the constitutional inquiry.

The question is not merely whether California has a three-tier system.

The question is whether the particular regulatory distinctions being challenged are constitutionally permissible.

Judge Mendez has now allowed that question to proceed.

And that means the next battle will not be fought exclusively over statutory interpretation.

It will be fought over the facts.

For wineries operating across state lines, distributors, retailers, and anyone following the continuing constitutional battle over America’s three-tier alcohol system, this is a case worth watching.

The motion to dismiss is over. Now the evidence begins.