The conventional wisdom is that the Tennessee Wine and Spirits Retailers Association v. Byrd (Byrd) case would decide the most important constitutional issue facing the liquor world, whether Granholm extends to retailers.

The U.S. Supreme Court granted cert and should decide whether out-of-state retailers can ship into a state, or whether the states have complete power over what retailers can sell with inside their borders.

Nobody doubts the importance of Byrd and what could result from it. However, there is another legal issue brewing in lower courts that could bubble up to the surface very soon. And only time will tell whether the Supreme Court will need to step in to clear up potentially murky waters.

 

The new bubbling issue

Lately lower federal courts have called into question a state’s 21st Amendment power to regulate. Specifically, they have negated state regulations and statutes that restricted interstate commerce and 1st Amendment rights.

The states justified these regulations and statutes as necessary to protect the integrity of the three-tier system. The courts did not find this rational convincing and maintained the state specific three-tier system is riddled with so many inconsistencies and exceptions that it results in the states relinquishing their 21st Amendment powers.

Problematically for state regulators, these decisions that call into question the powers to regulate under the 21st Amednment are not limited to a narrow and specific fact pattern or area of law. Hence, one wonders if these courts are setting a new precedent, one in which the smallest inconsistency or exception will result in a state relinquishing their 21st Amendment powers.

 

Commerce Clause Ruling

In Lebamoff Enterprises v. Snyder, Case No. 17-10191, (E.D. Mich. Sept. 28, 2018), the court struck down a Michigan law which did not allow out-of-state retailers to ship into the state, while in-state retailers were allowed this privilege. The Court indicated that Michigan holds 21st Amendment powers when it maintains a closed three-tier system, however, when Michigan allows wine retailers to join the digital marketplace and engage in direct to consumer shipping it “departed from a hermetically-sealed three-tier system”. The court further held that when the state “starts carving exceptions out of that system, it must do so without resorting to economic protectionism. The State’s 21st Amendment powers do not extend so far as to spare protectionist laws from the Commerce Clause.”

In the court’s view this legally created exception to the three-tier system strayed too far from the 21st Amendment protection, resulting in the law needing to withstand a Commerce Clause challenge on its merits.

The law could not withstand a Commerce Clause challenge and was overturned.

 

1st Amendment Ruling

In Missouri Broadcasters Association v. Taylor, no. 2:13-CV-2792-MDH (decided on June 28, 2018, Western District of Missouri), the state justified its statute which did not allow a manufacturer or wholesaler to pay advertising dollars to a single retailer, as a way to keep these tiers from dominating the retail tier. Missouri posited that this statutory prohibition would maintain an orderly marketplace by not allowing wholesalers or manufacturers to co-mingle with or favor certain retailers.

The court did not agree with this position, because the state’s three-tier system had so many inconsistencies and exceptions that the three-tier system has become blurred if not wholly abandoned. The court cited examples of Missouri wineries being able to operate on every tier and out-of-state wineries being able to ship into the state.

Further, the court found that manufacturers and wholesalers could already commingle with retailers by providing them glassware and other financial benefits.

The court concluded that the state could not prove that its statute directly advances a substantial interest, and that the “infringement of plaintiffs’ first amendment rights clearly exceeds any direct benefit to maintaining what is left of the the three-tier regulatory system.”

 

What does this mean going forward

The Missouri Broadcasters Association and the Lebamoff  Michigan decisions stand for the proposition that legal exceptions to the three-tier system weaken a state’s power to regulate under the 21st Amendment.

The interesting thing about a new idea or concept, whether good or bad, is that once it is out there, it takes on a life of its own.

What has surprised some in the industry is that in the Lebamoff decision, allowing an in-state retailer to ship become a powerful exception to the three-tier system that usurps the state’s 21st Amendment protection.

The big question is how does this play out going forward?  Maybe the 6th Circuit for Lebamoff and the 8th Circuit for Missouri Broadcasters Association overturns these decisions and restores each state’s 21st Amendment powers.

Or maybe they let them stand and we are at the whim of every federal court to decide whether a state’s exception upsurps their 21st Amendment powers?

And keep in mind there are other cases out there that may strengthen the positions in Lebamoff and Missouri Broadcasters Association. The 7th Circuit heard oral argument in the Lebamoff case out of Illinois. It contains the same fact pattern as the Michigan case.

Illinois, like Missouri and Michigan, created exceptions to the three-tier system by allowing some manufacturers to retail and retailers to manufacturer. These exceptions pertain to the craft brewers, wineries and distilleries. However, Illinois in recently proposed “of value” regulations also created a custom label program where a retailer, that does not manufacture product, (like a craft brewer, distiller, or winery) can become involved in the manufacturing process and select the product that will be produced.

So it begs the question, has Illinois gone a step too far and basically sacrificed its 21st Amendment powers?

Now some believe that a decision in the Illinois Lebamoff case may be halted based on Byrd. Nevertheless, the 7th Circuit may render a decision.

 

Concluding thought

In the end, the waters may become very murky on this issue and we as practitioners are playing a guessing game on how a judge will decide.

Let’s hope higher courts provide some certainty on whether this is a new legal principle, or whether it’s just a simple whim of a lower court judge.

Either way, we need to know the answer as practitioners and as state regulators.