A new lawsuit filed against Tennessee’s law that requires hemp derived products go through a three-tier system, similar to liquor, will test the wholesaler led march to dominate and take over the hemp industry.

Hemp infused beverages are a fast-growing industry and WSWA wants to corner the market through government mandates forcing hemp producers to utilize a mandated three-tier system. The goal is to treat hemp infused products exactly like alcohol. Through their political might the wholesalers got a bill passed in Tennessee, which required out-of-state hemp suppliers to utilize a government mandated Tennessee wholesaler or leave the market entirely.

The plaintiff, Cornbread Hemp, maintains a healthy DTC business in Tennessee with revenues of nearly $1 million. Under the wholesaler mandated law, sales of hemp products via DTC would be made illegal and an out-of-state business could only sell their products through the three-tier system.

A Tennessee hemp supplier similar to an out-of-state supplier can’t sell hemp products via DTC shipping, however, since they are in-state, they could manufacture and sell them to consumers on-site without going through the three-tier system. The plaintiff noted in their complaint that a Tennessee located hemp supplier can bypass the three-tier system, while an out-of-state supplier cannot. As such, the law violates the provisions of the Dormant Commerce Clause by mandating an in-state physical presence requirement as a condition for obtaining an economic benefit.

The plaintiff attacks the three-tier system mandate as “arbitrary and irrational restrictions on how its products are delivered to customers.” The complaint claims this restriction violates the Due Process Clause of the 14th Amendment. The complaint further claims that the three-tier system is a creature solely of the 21st Amendment, which may protect alcohol but does not protect state discrimination on other consumer goods.

Finally, the plaintiff challenges Tennessee’s restrictions on making health-based claims of hemp products as a violation of their First Amendment rights.

Takeaways

Tennessee imposed a liquor regime on hemp and moved hemp from the agricultural department to alcohol beverage control at the behest of the wholesaler lobby. The wholesaler’s goal is to mandate a three-tier system where they get a piece of the action.

Similar to liquor, the Tennessee law is discriminatory but the wholesalers do not seem to care, because they believe they can get away with discrimination.

I would be careful if I were them, because they don’t have Twenty-first Amendment protections. Why is this important? Because Twenty-first Amendment protections allow a state discriminatory law to face a lower level of Constitutional scrutiny, and the state without the Twenty-first Amendment protections, needs to prove that nondiscriminatory alternatives were not available and that discrimination was absolutely necessary. Whether a state needs to employ reasonable nondiscriminatory alternatives in the liquor space is a matter of controversy, for hemp the same controversy does not exist.

Without this added layer of Constitutional protection, Tennessee’s hemp law faces a tougher battle than their liquor statutes.

As for the First Amendment issue, I am not an expert on the First Amendment, but I find it interesting that a state, at the behest of the wholesalers mandates speech restrictions on a product that the federal government hasn’t even articulated an advertising standard on.

Can the claim succeed?

Playing Nostradamus in these cases is a fool’s errand, but instead I want to analyze the strengths and weaknesses of this case.

The first big question is whether the wholesaler industry’s words come back and bite them? The wholesalers make the argument that alcohol is the only consumer good mentioned in the Constitution and enjoys special protections under the 21st Amendment, which does not apply to other consumer goods. The wholesaler tier makes the argument that the three-tier system is unquestionably legitimate based on North Dakota v. U.S., and also makes the argument that Constitutional violations are acceptable because of the 21st Amendment, but how do they then take the logical step that setting up a system of discrimination for another consumer good is allowed by the Constitution? They would be asking a court to expand the Twenty-first Amendment beyond its original intent or for liquor to lose its uniqueness under the Twenty-first Amendment.    

The question for the court will be whether the state can impose a three-tier system, which acts as a restriction on how product is delivered based on some metaphysical state interest remains to be seen. The state will attempt to make the argument that physical presence is required for the sale of THC products based on the dangerous nature of the product and its intoxicating qualities are akin to liquor.

Problematically for the state, they will have difficulty pointing to a federal law that provides them the power to regulate on such grounds, nor do they have the evidence to prove that DTC sales of hemp beverages have caused grave damage to the state residents.

The state will inevitably make the same argument they make for alcohol, yes, we discriminate but we can for health and safety reasons. As much as the state will want to make this a Twenty-first Amendment case, it is not.

And that distinction is important because without Twenty-first Amendment protections, the state law is subject to a higher level of Constitutional scrutiny, which makes it harder for the state to justify discrimination.

Whereas in Twenty-Amendment cases there is a controversy on whether the state is required to employ reasonable non-discriminatory alternatives to discrimination, Tennessee’s discriminatory law should not maintain the same protections.

Not only will Tennessee need to prove that the discriminatory law served a public health interest, they will also need to prove that there are no non-discriminatory alternatives available to it.

1st Amendment rights

Cornbread Hemp challenges the Tennessee statutory section, Tenn. Code Ann. § 57-7-110(e), which forbids hemp companies from making health related claims about their products. Cornbread claims that Tennessee’s statutory restrictions are not narrowly tailored to advance a compelling interest and hence violate protected speech under the First Amendment.

Conclusion

This case is a major challenge to the ambitions of wholesalers to take over the hemp space. As many legislatures and some state regulatory officials walk lock step with the wholesalers, I would expect that the hemp industry will be taken over by the wholesaler cabal equating hemp infused products with liquor. This complaint challenges this strategy and limits the framework of the Twenty-first Amendment to liquor. If this legal challenge is successful, it could limit the power of the wholesaler tier to dominate the hemp industry.