This summary does not reflect my personal viewpoint but merely predicts what I think will occur based on the oral argument before the 7th Circuit.
The 7th Circuit Court of Appeals will not let stand the District Court’s ruling granting summary judgment in favor of Illinois. Ironically, if they remand the case, the original judge retired, throwing another monkey wrench in predictably. But hey that is liquor!
Lebamoff Enterprises, Inc. (Lebamoff), an Indiana retailer, sued Illinois because it could not ship directly from its Indiana retail location to customers in Illinois. Illinois law allows an Illinois retailer to ship directly to Illinois customers, however, it does not afford the same rights to out-of-state retailers. Lebamoff filed a suit in the Northern District of Illinois claiming that Illinois laws prohibiting interstate shipments are unconstitutional and violated the commerce clause and the privileges and immunities clause.
My case analysis will only focus on the commerce clause issue, as it is the major issue involved and the privileges and immunities clause challenge is really of no consequence.
District Court Case
The Northern District of Illinois issued a summary judgment on behalf of the state and denied Lebamoff’s constitutional challenge.
The Court’s underpinnings of its decision were based on the legitimacy of the state’s power under the 21st Amendment to regulate its own system to protect the health, safety, and welfare of its citizens. Using its power under the 21st Amendment, the state chose to regulate by mandating that alcoholic liquor product pass through the three-tier system. Because it would require both out-of-state and in-state liquor product to go through this system, there was no facial discrimination. In order words, everyone who sent products into the stream of commerce was required to go through the three-tier system and everybody was treated the same.
Further, the Court held that allowing the out-of-state retailer to ship product without going through the three-tier system, provides it an unfair advantage over an Illinois retailer, which is contrary to the commerce clause.
Lebamoff appealed the decision.
7th Circuit Case
A three-judge panel of Chief Judge Diane Wood, Michael Kanne, and Ilana Rovner heard the oral argument on February 16, 2018.
Judge Wood’s scathing criticism of the State’s position cast doubt on its sustainability
Judge Wood scathingly criticized the state’s position that its system was nondiscriminatory and that the 21st Amendment allowed the state to restrict shipments from out-of-state retailers.
In Judge Wood’s view Illinois was having it both ways by favoring those with an in-state presence and disfavoring those with an out-of-state presence. She viewed the statute as explicitly discriminatory because the statute does not allow an out-of-state retailer to perform the same functions as an in-state retailer.
The Illinois Attorney General’s representative (State’s AG) stated that Lebamoff, the out-of-state retailer, was forbidden from performing the same functions because they didn’t want to receive their alcohol from the in-state distribution system. The State’s AG argued for the importance of the three-tier system and that the product is required to go through a distributor to be inspected and be at rest in Illinois. A further important argument presented was that the three-tier system ensures safe regulation and ensures that the product is not traveling back and forth across state lines.
Judge Wood rejected the state’s argument on several grounds. 1. Because of Illinois law, Lebamoff wasn’t even afforded the opportunity to purchase product from an Illinois distributor and thus was forbidden to participate in the three-tier system. 2. Illinois law already allows direct shipments from a wine manufacturer to come into this state and not go through the three-tier system, so how would it be different for shipments from an out-of-state retailer? 3. The state indicates that the three-tier system along with ensuring health and safety of the product delivered, also protects against the potential danger of unaccounted for product moving back and forth between state lines. Judge Wood noted that in this specific situation, the out-of-state retailer wasn’t moving product back and forth between states but was shipping directly into the state.
In Judge Wood’s view, the system was pure protectionism built into the 21st Amendment.
How do we read Granholm?
Judge Wood posed the dispositive question, how broadly do we want to read Granholm? In her view Granholm stated that if we let the in-state wine manufacturers ship, then we should allow the out-of- state wine manufacturers to ship. But it was her next statement that was groundbreaking for this case. She stated that “if you are letting the in-state retailers ship, you should be required and they conceded with appropriate licensing and tax payments and all the rest, you should allow the out of state retailers to ship.”
Judge Wood went onto further endorse the view of an expansive reading of Granholm when she stated, “As I read Granholm if a state is going to allow in-state people to do something, it has to allow out-of- state people to do it as well.”
The New Economy view on alcohol shipping
Stepping outside of the technical legal world and into the real world of modern commerce for a moment, what concerned Judge Wood is how the law applies to the modern-day economy. Remember, Granholm was decided in 2005 and 13 years later e-commerce transactions have risen expediently. She posed an important question, in a modern economy with many individuals ordering their clothes, food, and liquor on-line and rarely going into a bricks and mortars locations, what is the effect on banning out of state shipments for this single and specific product?
In Judge Wood’s view by banning the shipment of this product (wine) by an out-of-state retailer, “what Illinois is trying to do is put a huge damper on modern commerce.”
The State’s AG came back to the point of how the out-of-state retailer would be discriminated in favor of because they wouldn’t have to go through an in-state distributor, whereas the in-state retailer would. Judge Wood indicated that an out-of-state retail license could be designed to require them to purchase from an in-state distributor. This license could also require the out-of-state retailer to comply with all taxing and other legal requirements.
Public health argument
Finally, the State’s AG mentioned the public health aspect of the law, but Judge Wood indicated that the public health argument was suspect because: 1. Product coming in from Indiana is not going to be product that is commonly repugnant; and 2. The amount of wine one can order from an in-state retailer is not limited, so there is no cap on consumption, which cast doubt on the health and safety argument.
Was there another alternative?
A very important question in these types of cases is, was there an alternative to the discriminatory law? In this case, was there an alternative to discriminating against the out-of-state retailer? Judge Wood indicated that an out-of-state retailer could be issued a license that would require them to comply with the tax and other legal requirements that an in-state retailer is required to follow.
The question of whether the out-of-state retailer is required to purchase from an in-state distributor was a little murky. Again, this could be a condition for being a retailer, but there was no definite principle laid down on this.
Nevertheless, Judge Wood believed that there was a potential alternative to the present law.
What will occur?
The basis for overturning most state liquor statutes is facial discrimination of the statute. Judge Wood explicitly stated numerous times that she thought the statute explicitly discriminated in favor of in-state retailers at the expense of out-of-state retailers. She was not convinced of the state’s justifications and objected to each one specifically. Further, she believed that there were alternative options available to the state and that the present statute was not the best avenue for addressing commerce clause concerns. She will rule against the state and hold that the statute is facially discriminatory.
One glimmer of hope for the state is that Judge Kanne indicated during oral argument that the three-tier system has been recognized many times as legitimate. This statement would lead one to believe that he is partial to the state’s position.
Judge Rovner in oral argument did not make her choice obvious. She will be the deciding vote. I think she will break with Wood. Unlike Kanne she did not mention anything that would buttress the state’s argument, or raise questions on Wood’s statements about expanding Granholm, or object to Wood’s statements on discrimination.
In conclusion, state liquor statutes are often overturned for being facially discriminatory. Judge Wood in oral argument came down strongly in favor of facial discrimination in the statute. Judge Rovner did not offer any counterpoint to Judge Wood, hence I predict they land on the same side.
The District Court’s granting of summary judgement will no longer stand by a 2-1 vote. Professor Tanford gets another notch in his belt.
One final note, Illinois Assistant Attorney General Sarah Hunger in my opinion did a fantastic job and represented the state very well. She faced tough questioning from Judge Wood and possessed amazing poise!
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