Seventh Circuit Oral Argument
Last Friday, oral arguments took place before the 7th Circuit, in Chicago Wine Company v. Holcomb, which challenges Indiana’s ban on out-of-state retailers delivering wine into the state or using common carriers to ship product. The delivery challenge is based on a facially discriminatory statute, which allows Indiana retailers to deliver to consumers, but does not allow an out-of-state retailer the same privilege. The ban on the common carrier shipping challenge is a discriminatory in effect challenge. Indiana, unlike the delivery statute, does not allow its in-state retailers to ship, however, the ban on shipping acts to keep retailers from places like California and New York from entering the market place.
Aaron Craft from Indiana Attorney General’s Office argued on behalf of the state, Alex Tanford argued for Chicago Wine Company.
The 7th Circuit panel consisted of Easterbrook, Scudder, and Kanne. A little historical background, Judge Easterbrook wrote the decision in Bridenbaugh v. Freeman-Wilson, which upheld Indiana’s discriminatory winery shipping law (Pre-Granholm) and wrote the decision in Baude v. Heath that upheld Indiana’s law that the state could require customers to visit a winery before the wine could be shipped to consumers in Indiana. Clearly, from Easterbrook’s history he has a strong propensity to favor the 21st Amendment over the Commerce Clause.
Judge Kanne was on the panel in Lebamoff v. Rauner, which reversed and remanded a decision upholding Illinois’ discriminatory wine retailer shipping law.
Judge Scudder was appointed in 2018 and has not been involved in any Commerce Clause/21st Amendment cases.
Important Themes of the oral argument
- How will the circuit court conflict resolve itself? Tanford argued that the 6th and 8th Circuit are already at odds with the 7th Circuit. He reeled off a list of 7th Circuit cases that conflict with the 6th and 8th, specifically, he mentioned the Lebamoff v. Rauner case. In Lebamoff, the 7th Circuit reversed and remanded an Illinois case, which upheld Illinois’ discriminatory wine retailer shipping law. In this oral argument, the 7th Circuit seemed to treat Lebamoff as controlling precedent, even though the Lebamoff case was not decided at the lower court level on remand.
- Judge Easterbook wrote two decisions, Bridenbaugh v. Freeman-Wilson and Baude v. Heath, which ruled in favor of the 21st Amendment when it conflicted with the Commerce Clause. He seemed to concede that the Supreme Court didn’t buy his argument and that also the 7th Circuit in Lebamoff v. Rauner, goes against his theories. Is a Judge that wrote two opinions favoring the 21st Amendment over the Commerce Clause, conceding that his path to repeat this line of opinions is severely limited or next to impossible?
- The lower court decision applied the Pike balancing test to the Indiana law. In oral argument the Pike standard never came up and the panel focused on the Tennessee Wine standard. I found it interesting that the Pike balancing test, the main part of the District Court’s decision, did not receive a mention in oral argument.
- The wholesaler/government’s brief focused on if you let a retailer ship or deliver from out-of-state, you allow them to bypass the three-tier system, which creates a major hole in the three-tier system. It is the typically argument that if the court rules this way, there could be major damage to the three-tier system. When confronted with this theory, the Indiana Attorney General seemed to walk back the doomsday scenario argument.
- Does Judge Easterbrook seem only focused on the delivery aspect? May be he already made up his mind on shipping. In response to the state’s administrative burden of regulating 400,000 retailers position. He stated that if delivery is opened up to out-of-state retailers, New York City retailers are not going to enter the market. He skipped the shipping part of the analysis altogether.
- Easterbrook asked Tanford for an estimate on the amount of wine going through the three-tier system, which Tanford remarked was over 90%. Did Easterbrook ask this question to demonstrate that shipping did not create a major hole in the three-tier system?
Tanford’s oral argument
To no one’s surprise the first question came from Judge Easterbrook, who asked whether Indiana’s law prevents Chicago Wine Company from obtaining an Indiana license and hence delivery privileges. This line of question made me wonder whether Easterbrook could utilize this proposition to uphold Indiana’s law?
Tanford focused on the common carrier ban and the practical effect of shutting out New York and California retailers from the marketplace. He indicated that the common carrier ban is discriminatory in effect and there is no feasible way for an out-of-state retailer get their product to market. If the laws are discriminatory, how one balances the Commerce Clause and 21st Amendment is set out in Granholm and Tennessee Wine and Lebamoff v. Rauner and Buade v. Heath, a 7th Circuit case. As Tanford was pushing his legal argument, Judge Scudder asked Tanford about the 6th and 8th Circuit court decisions. Scudder wanted Tanford’s opinion on where these decisions went wrong in their Tennessee Wine legal analysis.
Tanford indicated that the 6th Circuit decision was different based on the concurring opinion, which held that based on the specific facts of the Michigan system, Michigan’s regulatory system needed discrimination to meet state interest.
However, Tanford clearly stated that the 6th and 8th were legally in error because, the 6th and 8th decided that the 21st Amendment trumps the Commerce Clause, and it rejected the skeptical level of scrutiny, which goes against the 7th circuit’s precedent.
Easterbrook, next seemed to tease out of Tanford whether there exists a conflict between the 7th and the 6th and 8th Circuits.
Responding to Easterbrook’s question, Tanford listed off a line of 7th Circuit cases, where there was a level of strict scrutiny in Commerce Clause cases, which included the Lebamoff v. Rauner, and Baude v. Heath. He indicated that these cases were in direct conflict with the 6th and 8th Circuits, which did not apply a strict level of scrutiny.
Tanford’s conflict position drew a response from Scudder. Scudder found it hard to believe, the 8th and 6th ignored Tennessee Wine. Maybe they misapplied Tennessee Wine, but Scudder wanted to know where Tanford believed the 6th and 8th Circuit went wrong?
Tanford stated that Tennessee Wine & Granholm, held that to justify a law, it had to advance a state interest and the law was necessary because there were no reasonable nondiscriminatory alternatives that would be workable. The state under the Commerce Clause is not allowed to pick the most discriminatory option. Tanford reiterated that neither the 6th or 8th Circuit discussed nondiscriminatory alternatives, that is the core of argument, which is why these opinions differ from Tennessee Wine and Granholm.
Craft’s oral argument
Craft started with the typical state refrain that the out-of-state retailer wants to sell wine without participating in the system. It seeks preferential treatment in two aspects, it wants to sell wine that doesn’t come from Indiana wholesalers, Indiana retailers can’t do that, and it wants to ship wine, which Indiana retailer can’t do either.
Easterbrook jumped in early and stated that he understood the three-tier system argument, but that this argument does not square with the Illinois Lebamoff case. Craft indicated that the Illinois case was distinguishable because Illinois allowed common carrier.
Easterbrook not impressed, stated, forget about common carrier, let’s talk delivery. One issue in Lebamoff is whether allowing shipping would cost the three-tier system. The court was not impressed with that, and the plaintiff says the three tier system is already compromised by allowing direct shipping from wineries. Craft answered by stating Lebamoff was different because Lebamoff stressed that allowing common carrier and doing away with the face to face requirement is what undermined the physical presence requirement.
Easterbrook countered again and asked the question, the 7th Circuit in Lebamoff didn’t think purchasing from the three-tier system was fatal, so why is it fatal here? Craft attempted to get out of the predicament by stating that the record was never fully developed in Lebamoff, and it would be difficult to square that product doesn’t have to come from three tier system with Supreme Court endorsing the three tier system.
Scudder shot back that the state found a way to make it work at the producer level, and obligated wineries get licensed and remit taxes. So, why can’t it work at the retail level?
Craft’s position was volume limits and product segmentation, were the difference between wineries and retailers. Wineries could only ship their own product; retailers have many products.
Easterbrook counter that volume limits is Indiana’s choice, is there any reason Indiana could not enact volume limits? Craft stated that volume limitations, strips away from the states their flexibility to design their systems. Easterbrook took on the flexibility issue and stated that is what the Supreme Court has been about, every time the state engages in flexibility, flexibility to engage in discrimination against out of state interest is not allowed.
Craft switching strategies went towards Bridenbaugh, a decision Easterbrook wrote, that stood for the proposition that the Webb Kenyon Act allows states the ability to structure their three-tier system, and regulate imports.
Easterbrook in an interesting and potentially telling moment, indicated that Bridenbaugh pits 21st Amendment which is in the Constitution versus the Dormant Commerce Clause which is not. But that didn’t persuade the Supreme Court. He stated that he hoped “we are not back to flipping the burden to the justices”. In this exchange it seems Easterbrook is minimizing the legal impact of his own opinions, based on subsequent Supreme Court precedent.
Scudder next questioned how allowing retailers to access the market would make the three-tier system topple, given the reality of what is allowed for producers, he didn’t understand how the state couldn’t respond legislatively with a volume limitation, and couldn’t setup excise tax collection, licensing, permitting, and remittance obligations.
Craft answered that he is not suggesting the sky is falling in situation, what he is suggesting is the 21st Amendment is supposed to give states flexibility.
Interestingly, Craft’s answer seems to go against the briefs written in this case which explicitly stated that allowing retailer delivery or shipping would create a huge whole in the three-tier system. In this moment, he walked back this position.
Scudder then stated to Craft, that in two opinions hadn’t the Supreme Court focused in depth on the availability of alternatives.
Craft tried to differentiate by stating that in those cases the protectionist intent was clear, which is not the case with Indiana’s law.
Scudder firing back, indicated that in Tennessee Wine, the Supreme Court wrote an extensive opinion about evidence and alternatives, he asked Craft, aren’t they (SCOUTS) going on and on to show lower courts how to approach these questions, wasn’t Tennessee Wine written, so we have this dialogue and hold the states to these burdens?
Craft focused on defending the 6th and the 8th Circuits, and pushed back on the idea that Indiana did not produce sufficient evidence. He then took a shot at Chicago Wine’s position that 16 states allow wine retailer shipping and don’t have a problem. Craft indicated if that’s the standard, then a group of states that can do something without any problems to control Indiana system.
Craft focused on the administrative burden of 400,000 wine retailers shipping in, as a state interest in protecting Indiana’s market.
Easterbrook asked Craft, why doesn’t Indiana look at this as an opportunity, they can collect application fees. The reason Easterbrook asked the question, is the Supreme Court has no bright line test, the Dormant Commerce Clause is an implication of the Commerce Clause and 21st Amendment is real, we have to balance. Easterbrook opined that if the state says 400,000 are a lot of retailers, I don’t understand why they can’t say, they can be charged a lot of fees. If we want to figure out what the states tools are, we need to think about that.
Craft, answered that with 400,000 retailers, the state is worried about the oversaturation of alcohol.
Easterbrook indicated that the 400,000 number does not reflect reality, because we won’t have massive deliveries from New York City. This answer makes one wonder whether Easterbrook is focusing his thoughts on delivery and will jettisoned the shipping issue, as it is not facially discriminatory?
Tanford took aim at the 400,000 retailers issue, by stating that fewer than 1,200 engage in shipping, even fewer would engage from Chicago or Cincinnati to drive wine deliveries across to Indiana.
Second on the nondiscriminatory alternatives issue, Tanford reminded the panel of the statement in Baude v. Heath, “once a state allows any direct shipment, it has agreed that the wholesaler maybe bypassed.” Tanford stated that this is at the core of this case, Indiana allows home delivery by an in-state retailer, allows the three-tier system to be bypassed by wineries, they allow common carrier shipping by wineries, and trust common carrier employees to check ids. They don’t require out-of-state wineries have a physical presence, they don’t require the three-tier system for some wineries, brew pub, and craft distillers, Indiana does not have a three-tier system,
Easterbrook then asked Tanford a question, if we had to estimate, what percentage of product goes through wholesalers in Indiana?
Tanford answered for spirits, very high, for wine, I think it is 90% plus.
Scudder seemed surprised; the number was this high.
Tanford indicated that 50% of wine is foreign wine, they don’t have wineries in U.S. and hence are not allowed to direct ship.