Will the 4th Circuit foreshadow a draw in North Carolina’s wine retailer shipping case?

Will the 4^th Circuit foreshadow a draw in North Carolina’s wine retailer shipping case?

In sports nobody likes a tie, overtime rules have been implemented in about every major sport to avoid a tie.

In the 4^th Circuit oral arguments, the main voice on the panel, made it be known that a tie was the way to go. In this case there were three judges on the panel: Quattlebaum; Wilkinson; and King.  As there was only audio, I am making an inference on the judge that was speaking because there was no video available.

This case revolved around the constitutionality of a North Carolina statute which permits in-state retailers to ship to North Carolina consumers, but bans an out-of-state retailer from enjoying these same privileges.

Takeaways

A judge on the panel believes he could find the state law discriminatory and yet rule in favor of the state’s interest based on a remedy banning all shipping.

A big issue is what is an essential element of the three-tier system? Is physical presence and banning shipping, an essential element of the three-tier system, when 16 states can operate a regulatory system, while allowing out-of-state wine retailer shipping?

Will the panel buy the North Carolina AG’s argument that the state shouldn’t be punished for the winery shipping exception to the three-tier system?

Is the Court going to buy the AG’s argument that discrimination is inherent in the three-tier system, or that Granholm endorsed an in-state physical presence requirement?

The AG’s assumption is questionable and not supported by Granholm’s language

Further, The AG responded by taking the position that in Tennessee Wine, the Supreme Court held that physical presence is a valid non-discriminatory alternative.

Whether the Court took this position is not certain and no specific language supports the AG’s conclusion.

Panel Discussion

The strangest part of this panel’s discussion is Judge Wilkinson’s view that there is a balance between finding discrimination against the state, which would make the statute unconstitutional, yet providing a remedy of shutting down all retail shipping, which would preserve the state’s 21^st Amendment regulatory interest.

Alex Tanford started off presenting his side of the oral argument. He delved into the view that the Courts engage in a balancing test between the 21^st Amendment and the Commerce Clause, and it’s a balancing test set by Granholm, Beskind, and Tennessee Wine. The panel asked Tanford whether there was a per se violation of the Commerce Clause. He answered there was no per se violation, but suggested that the 21^st Amendment’s power to regulate alcohol, is limited by the nondiscrimination principle of the Commerce Clause.

After answering an inquiry about the text of Section 2 of the 21^st Amendment, which was easily handled, the discussion changed when Judge Wilkinson asked Tanford to tell him about Granholm and how it supports Tanford’s argument.

Tanford stated that the Supreme Court said quite clearly, that the 21^st Amendment was limited by the nondiscrimination principle of the Commerce Clause. And if a state allows DTC wine shipping, it must do so evenhandedly. If a state outlaws out-of-state dtc shipments, it can’t permit in-state shipments.

Wilkinson then made a major shift in the case and posed the question, let’s suppose we agree on the constitutional violation, the real question is what the remedy should be? The Judge wanted to know, how come we can’t get give effect to the Commerce Clause and the 21^st Amendment.

The Judge indicated we can engage in a balancing test, where we give effect to Commerce Clause in Granholm and notice stark differences in treatment between in and out-of-state retailers, and yet give effect to the 21^st Amendment and the state’s interest in regulating their three-tier system.

The Judge indicated, is it possible to agree with Tanford on the violation and agree with North Carolina on remedy. The remedy being that the if the law is found unconstitutional that the state requested that wine retailer shipping be banned for in and out-of-state retailers.

The Judge stated that Tanford made good points on the Commerce Clause violation, but North Carolina under the 21^st Amendment, has a very strong case point to make under the remedial aspect of the case. As the Judge stated, to paraphrase, what I am looking at, is 2 strong interests here, the 21^st Amendment on part of the state and the Commerce Clause on part of the union. This law gives in-state enterprises an advantage. You could win on a violation, but don’t you have a problem with respect to the remedy?

Tanford replied that is exactly what happened in Beskind, which overturned North Carolina’s discriminatory winery shipping law and sent it back to the legislature to decide.

The Judge went on to indicate to Tanford that his suggestion to remedy the situation by allowing in-state and out-of-state DTC shipping, would achieve evenhandedness but would also carve up North Carolina’s interest in its three-tier system, and it would undercut the state’s interest to regulate under the 21^st Amendment. The Judge stated that there is a balance between the Federal Union, which has a Commerce Clause interest that cases like Granholm underscore, against the state’s interest in the 21^st Amendment regulation.

The judge suggested his remedy would reconcile in a manner that gives effect to both the Commerce Clause and the 21^st Amendment.

Tanford answered that the North Carolina legislature already decided it wants to allow in-state retailers to ship, it already passed the statute and has another statute that doesn’t allow out-of-state retailers to ship, it has to strike one or the other.

The Judge answered that if the only remedy is to allow out-of-state retailers to ship, if we allow all out-of-state to ship directly, it’s very hard to regulate and tax. There is a way to vindicate both constitutional provisions, and it affords protections to a state’s substantial interest.

Judge Quattlebaum changed the discussion to pose a question to Tanford, didn’t the Supreme Court endorse the three-tier system and doesn’t the three-tier system by itself discriminate against out-of-state retailers?  He also indicated that isn’t the basic notion of the three-tier system that the three-tier system divides production, retail, and wholesale?

Tanford answered that North Carolina does not have a three-tier system.

Quattlebaum indicated that there is a  good argument as far as producers, but for retailers, the three-tier system already discriminates against out-of-state retailers, it seems to me if the Court allows that as a general proposition, how is it more problematic? Tanford indicated that it is protectionist, which the Judge replied that, I know but the three-tier system has some protectionist benefit. And Court says it has got some public health benefits.

Tanford relying on Tennessee Wine to answer this point, indicated that a total ban requires proof that nondiscriminatory alternatives were not available. Tennessee Wine spent 7 paragraphs talking about alternatives. Beskind and Granholm talk about the state can’t just say it is important, there must be evidence why.

Quattlebaum opined that Tennessee is talking about something that is a nonessential element, a 2 year residency requirement, but isn’t limiting retail an essential element of the three-tier system? Isn’t it essential to the three-tier system that retailers are in state?

In an interesting exchange that could influence this case, Tanford responded to the fact that in-state physical presence is not an essential element of the three-tier system, which justifies a ban on out-of-state  retailer shipping.

Tanford shot down the essential element test by indicating that 16 states allow out-of-state wine retailer shipping and don’t require physical presence. That is exactly the test the court used in Tennessee Wine, whether a state regulatory system could operate without a requirement. Clearly, a number of states operate a regulatory three-tier system without a residency requirement for wine retail shippers.

The Judge asked Tanford what are the essential parts of the three-tier system?

Tanford opined the essential parts of three-tier system, are a manufacture must distribute to a wholesaler. He indicated that North Carolina doesn’t require that, so they don’t have a three-tier system. Wholesaler must distribute to a retailer to prevent vertical integration among the tiers.

North Carolina then proceeded with their oral argument.

The NC AG began by stating that the Supreme Court has found that discrimination is inherent in the three-tier system and is an essential element of three-tier system which is unquestionably legitimate. The AG claimed that Granholm held that requiring retailers to purchase their alcohol from in-state wholesalers is an inherent aspect of three-tier system, as is in-state physical presence requirement.

When Judge Wilkinson asked about the shipping exception in Granholm, the AG claimed it was a narrow slice of the three-tier system. Which the Judge stated why not ban shipping then if it conflicts with the Commerce Clause.

Judge Wilkinson stated that he was troubled by these carve outs in the three-tier system that conflict with the Commerce Clause.

He sees it as a way to have freedom to vary from three-tier system in a way that disadvantages out-of-state retailers.

The AG made the point to separate out DTC winery and retailer shipping, and that out-of-state retailers have an all out prohibition from selling to North Carolina consumers. The AG indicated that shipping is merely an adjunct to the three-tier system.

The AG further opined that Granholm validates the three-tier system. If there is an exception to the three-tier system it needs to be fair, if within the three-tier system it doesn’t. Discrimination which is inherent in the three-tier system, it is authorized by 21^st amendment.

Judge Quattlebaum indicated he finds Tennessee Wine and Granholm hard, what this comes down to is what is essential to the three-tier system? Does essential mean that a retailer requires a physical presence, or does the fact that 16 states allowing retail shipping and still run a three-tier system, take the physical presence requirement out of the essential category?

The AG responded by taking the position that in Tennessee Wine the Supreme Court held that physical presence is a valid non-discriminatory alternative.

Judge Wilkinson came back to the argument that the carve out is discriminatory but that the remedy suggested by the state could allow a discriminatory law to be overturned and still maintain the state’s interest.

The AG indicated that this scenario would not be okay, it is alternative argument on remedy. The AG didn’t believe there is no relevant discrimination not authorized by the 21^st Amendment.

He also believed there would be discrimination if one entity has to go through the three-tier system and the other does not. Further, he pointed to North Carolina’s sovereign interest in restraining the flow of free alcohol coming into the state.

The AG then went into shipping being an adjunct part of the sale, and that all out-of-state retailers are barred from making sales, and if you allow out-of-state shipping, you start to chip away at North Carolina’s three-tier system.

Judge Quattlebaum then stated that Granholm and Tennessee Wine analyzed and looked at whether there was concrete evidence for a public health justification. He asked, is it North Carolina’s position that concrete evidence is not required, because we are protecting an essential part of the three-tier system, or is its law subject to the concrete evidence standard and has it satisfied this standard?

The AG responded that there is a 2 part test, whether there is discrimination which is barred, the 8^th circuit, said there was no discrimination at all, the 6^th circuit indicated we are going to reserve judgement on discrimination and go onto the 2^nd part, on the concrete evidence standard which we satisfy, there is stronger evidence that the three-tier system reduces the flow of alcohol.

Judge Wilkinson responded with his argument that the state can retain its interest in protecting the system through the remedy to ban all shipments, yet the law allowing in-shipping can’t stay because it differentiates between in and out-of-state retailers.

The AG went back to his position that shipping is a fundamental byproduct of allowing retailers to make a sale.

The Judge indicated that it depends on how the shipping is done, lot of states don’t have a carve out for in-state retailers.

The AG indicated there are 24 states, which allow in-state shipping and don’t allow out-of-state shipping. The Judge indicated a whole lot of states treat retailers on even terms. The AG indicated that the State’s sovereign authority under the 21^st Amendment allows the state to adjust the details of its regulatory system.

The concrete evidence used by the AG to justify shipping bans was maintaining a higher price of alcohol and its alleged positive effects, and he pointed to a tax increase in Illinois which he claims led to a reduction in STDs and traffic fatalities.

The Judge pushed back on the allowance of winery shipping, which the AG argued was only a niche sliver of the market.

Judge Wilkinson coming back to his main point indicated that the balance of interest, is differentiating against an out-of-state interest. The balancing of interest favors in-state concerns, that is what the Commerce Clause protects against. We are surrendering to parochialism and that is what concerns me.

The AG indicated that the in state versus out-state terminology is misleading.

The Judge stated emphatically that it is not misleading at all, that is how the law is framed.

The AG made the claim that the largest liquor retailers are out-of-state businesses which comply with the North Carolina three-tier system, and they can be retailers and be in market.

On rebuttal, Tanford indicated that the out-of-state retailers want a license and to be part of the regulatory scheme.

Judge Quattlebaum asked Tanford, without a Supreme Court case, North Carolina is not saying we are ignoring the Constitution, winery shipping is just a small sliver, we have the sovereign prerogative to do that, and still maintain our interest. A question is if you kind of make, an exception to the three-tier system, do you give up the benefits of it? Or do you say 21^st Amendment is a unique animal; do we have the benefit to question North Carolina for carving out a little exception?

Tanford stated that principle 1 is, the 21^st Amendment did not constitutionalize the three-tier system because it didn’t exist, it constitutionalized the law prior to prohibition that and the Webb Kenyon Act limits a state’s authority and it stops with discrimination. The boundary of the state’s power is discrimination unless, state proves discrimination is necessary, because there is no reasonable alternative. North Carolina admits there is a reasonable alternative, they allow out-of-state wineries to bypass their three-tier system and sell to consumers as long as they get a permit, remit taxes comply with a set of regulations, and report to state. There is a reasonable alternative, every prior case said there must be some evidence that the alternative will not work.