There are three sales channels in the liquor world, direct-to-consumer (often times one-tier involved), direct-to-retail (two-tiers involved), and sales through the traditional three-tier system.

A recent federal district Court decision in Iowa dealt with a state permitting in-state wineries to sell direct-to-retailer but not permitting these same privileges for out-of-state wineries.

Iowa unsuccessfully sought to make this a case about the three-tier system, while the Court concluded this case pertained to direct to retail sales and a two-tier system.

Takeaways

The main takeaway from this case is the court distinguished between the two sales channels, two-tier, and three-tier, and this determination leads to a different legal standard applying to each channel. The Judge distinguished this decision from the Sarasota Wine case (8th Circuit decision upholding Missouri’s discriminatory wine retailer shipping law) and enhanced the chances that the decision successfully survives an appeal to the 8th Circuit.

Granholm reigns supreme and any state challenged on a law that allows its manufacturers an advantage over out-of-state manufacturers, will need to overcome a difficult Granholm burden. In other words, any state law that allows your supplier to bypass the wholesale tier, but denies the out-of-state retailer this same privilege and requires them to incur an added cost, stands very little chance of surviving.

This Court also looked skeptically on maintaining the three-tier system justification, because the direct-to-retailer channel is a two-tier system. The arguments the states used in fighting wine retailer shipping cases in the 4th and 8th Circuit are effectively shut off.

To win the states will need concrete evidence to justify discrimination, which seems very unlikely.

The state’s attempt to maneuver around the Tennessee Wine concrete evidence standard by invoking a newly created alternative “essential feature” test was soundly rejected by the Court.

Finally, the judge makes a bizarre comparison between the difference between a retailer and manufacturer for Commerce Clause purposes. Tennessee Wine settled the question whether the non-discrimination principle in Granholm extended to retailers. The judge seems to turn back the clock to the Pre-Tennessee Wine standard of ambiguity.

Facts

Buckel Family Wine LLC (Buckel), a Colorado Winery, wants to sell product directly to retailers in Iowa. To gain these privileges, it needs a Class A wine permit. However, these permits are only available to in-state Iowa wineries. Under the Class A wine permit, a winery is permitted to sell at wholesale.

Legal Discussion

  1. Issues challenged

The Court held that based on Iowa allowing in-state wineries to obtain a Class A permit and be able to sell direct-to-retail, and not allowing out-of-state wineries this same privilege, the Iowa law constitutes a violation of the dormant Commerce Clause.

In addition to the Commerce Clause claim, Buckel requested an injunction prohibiting Iowa from enforcing residency restrictions. The State claimed that because Buckel is an LLC and is not a partnership or sole proprietor, it lacks the standing to challenge the residency provisions. Because Buckel did not contest this point, the Court held it conceded its requests for injunction and granted the states motion for summary judgment on the residency issue.

  1. Standing

Iowa challenged Buckel’s standing because as a Colorado winery Buckel was not permitted to wholesale wine and licensing them to wholesale in Iowa would not make a difference.

Iowa permits a winery obtaining a Class A permit to manufacture and sell at wholesale, it denies a Class A permit to out-of-state wineries.

The Court rejected the argument that Buckel lacks standing on these grounds. Buckel is not asking the Court to enjoin or strike down Colorado law but is asking to enjoin Iowa “from enforcing Iowa’s law requiring in-state premises for persons seeking a class “A” wine permit, thus putting Buckel on equal footing with in-state Iowa wine manufacturers.” Even if it could cause problems in Colorado, it does not prohibit Buckel from having standing to bring a suit.

  1. Legal standard

The state took the position that the concrete evidence standard from the U.S. Supreme Court decision in Tennessee Wine does not apply when the law applies to “essential features of the three-tier system”. If the law applies to an “essential feature” of the three-tier system, then the “rational review” standard is applied to the law as opposed to a strict or heightened scrutiny standard that is applied to the typical Commerce Clause discrimination case. The state cited to Tennessee Wine and the 8th Circuit’s decision in Sarasota Wine, which upheld Missouri’s discriminatory wine retailer shipping law.

The Court found this argument unpersuasive when it stated: “neither the Supreme Court nor the Eighth Circuit set forth a new analysis for determining the appropriate standard based on whether a law was an “essential feature” of a State’s three-tiered system.”

The Court through an analysis of Granholm and Tennessee Wine concluded that the mention of the term “essential feature” did not create a new test or analysis but was merely a response to an argument. The proper analysis centers around a law’s justifiable public health or safety measure or other legitimate non-protectionist grounds. The Court concluded that the state required more than mere speculation to uphold a discriminatory law and required concrete evidence to support their assertions and that nondiscriminatory alternatives were insufficient to further these interests.

It distinguished the case at hand from the 8th Circuit’s Sarasota Wine decision when it concluded that in Sarasota Wine, the 8th Circuit held the Missouri law was not discriminatory, whereas Iowa’s in-state presence requirement is discriminatory.

Interesting enough, the Court draws another distinction between the two cases when it states that Sarasota Wine applies to retailers and the Iowa case applies to manufacturers, and that a state can’t discriminate against the origin of alcohol but could discriminate for alcohol that passes through its wholesale or retail tier. Somehow, they forgot that Tennessee Wine ended this distinction between retailers and manufacturers that clouded Granholm’s nondiscrimination principle for so many years.

  1. The three-tier system that isn’t

Even if the “essential feature” standard was applied and there was a rational review of the law, the Court would still find that Iowa’s in state presence mandate is still not an “essential feature” of the three-tier system.

The reason being is because Iowa’s Class A permit creates a two-tier system where the manufacturer is permitted to act as a wholesaler. In the three-tier system the primary purpose is to create three separately licensed tiers. The Class A permit allows in-state wineries to bypass a tier but does not provide this privilege to out-of-state wineries. Either Iowa’s Class A permit fosters a two-tier and not a three-tier system, or it provides an approach rejected by the Supreme Court in Granholm.

  1. Discrimination

The parties come to vastly different legal conclusions on the law. Buckel argues “Iowa’s laws violate the dormant Commerce Clause because they discriminate against interstate commerce by allowing in-state wine manufacturers to sell directly to retailers but prohibit out-of-state wine manufacturers from doing so.”

Iowa claims its law is not discriminatory because “they apply “evenhandedly” and require “all wine” intended for resale by retailers “to flow through Iowa’s three-tier distribution system” which is subject to the “same system of regulation, inspection, and taxation.”

The Court sided with Buckel for numerous reasons. First, the Iowa law does not apply evenhandedly, it grants in-state wineries access to retailers on preferential terms and requires an out-of-state winery to go through a wholesaler, something an in-state winery is not required to do. Second, the state can’t set up a three-tier system and then deviate from it in order to discriminate against out-of-state wineries.

  1. Lack of legitimate purpose

The final step of the analysis was determining whether the state could provide concrete evidence that the discriminatory law was necessary for public health and safety measures or some other legitimate non-protectionist purpose.

The state offered numerous interests for the discriminatory law that all failed. First, the law promotes effective law enforcement that cuts down on illegal importation and ensuring the proper reporting and payment of taxes. The Court concluded there was no concrete evidence backing up this assertion and that as concluded in Granholm improvements in technology ease the burden on out-of-state monitoring and that argument is stronger nearly twenty years later. Further, Iowa effectively runs a DTC winery program and that monitoring a direct-to-retailer program would be easier as the sales go to a licensed member of the tiered system.

The State also argues that the retailer in Iowa has a connection to the community in Iowa and the out-of-state retailer doesn’t. This was rejected for the same reason it was rejected in Tennessee Wine.

Iowa argues that they lack resources and that increasing the number of shippers would strain resources. This argument fails like the rest because Iowa does not provide concrete evidence for this claim.

Finally, the Court concluded that Iowa has not shown that nondiscriminatory alternatives would be insufficient.