Irishliquorlawyer.com this week tackles the issues surrounding the three-tier system. Many people have differing opinions about this matter. To some the three-tier system is a necessary system that helps the state regulate a dangerous and controlled substance. Without the three-tier system the alcohol industry would turn into chaos. Further, its proponents will state that the three-tier system provides great benefits to the local communities and makes major contributions to our society.
And then there is the other side, there are those that believe the three-tier system is unnecessary and raises the price of alcohol for absolutely no good apparent reason. The opponents of the three-tier system believe alcohol should be treated like any consumer good. And they further state that the only reason the three-tier system exist is because the rich and powerful owners control the present political system.
Irishliquorlawyer.com is honored to act as a platform for both sides to give their viewpoint.
Today’s post is an interview with Professor Alex Tanford. Professor Tanford has sued states numerous times to overturn liquor laws and is a major critic of the wholesale tier.
In next Monday’s post, I provided some questions to the Wine and Spirits Wholesalers of America (WSWA), they gave answers that will explain their advocacy for the three-tier system.
Personally, I don’t know how the readers will side or if anyone’s mind will change because of the post, nevertheless, these discussions are healthy so we are educated with respectable, intelligent, but differing viewpoints. Please feel free to share your comments on this blog.
I will guarantee one thing, neither Professor Tanford nor WSWA will be dance partners anytime soon.
Introduction to Alex Tanford
Professor Alex Tanford made his mark on the alcohol industry when he launched a Commerce Clause challenge to a Michigan statute that forbid the purchase of wine from an out-of-state manufacturer. In the Granholm decision, which was decided by the U.S. Supreme Court, Professor Tanford was successful and the states could no longer ban the purchase and shipment of wine from out-of-state manufacturers.
Professor Tanford has not rested on his laurels and has three cases active which challenge state statutes which ban the purchase and shipment of wine from out-of-state retailers. He challenged statutes in Illinois, Michigan, and Missouri.
A frequent critic of the wholesaler tier, Professor Tanford does not pull punches in his views about the wholesale tier. In this interview Professor Tanford provides his candid and colorful view of the liquor industry. He discussed everything from Granholm to his recent challenges to state liquor laws to his views on the three-tier system. Enjoy the read!
IrishLiquorLawyer: Are you surprised after you won the Granholm case that it has taken so long to chip away at the three tier system?
Tanford: No, in one sense I am not surprised, during prohibition the distribution of liquor was taken over by organized crime. There is no reason to think that organized crime would give it up. There is this wonderful line from the Godfather, where he says “in ten years we will all be legitimate” and that is what happened to all the organized crime after prohibition is repealed, they incorporated their wholesale distribution systems and their retailers, and their saloons and made them legitimate businesses. But there is a lot of money to be made, the highest caliber of alcohol cost only 50 cents to make. And yet it is so ridiculously expensive, because there are so many middlemen taking their cut. When there is that much money at stake, the people with the money have the influence of the legislators.
There is a lot of long time vested interest.
IrishLiquorLawyer: You recently sued California, tell me about the case?
Tanford: If you are an in state importer you can get a double license, that allows you to import and distribute and import within the state; if you are an out of state importer you can’t get that second license. They won’t give you the license in the state because its protectionist, they make you hire an in-state distributor to do the distribution for you. It is one of these straightforward cases where we have conflicting decisions that the states may use dictum in a 1990 case that the three tier system is a legitimate distribution system as an excuse for discrimination. So we approached that from several different types of plaintiffs and we will see where it goes.
IrishLiquorLawyer: Did you hear about the Missouri Broadcasters Association decision that came out?
Tanford: I did, I haven’t look at it.
IrishLiquorLawyer: The Judge did not consider a 21st Amendment analysis and indicated that it is hard to justify laws that curtail free speech based on maintaining the integrity of the three-tier system, when there are so many inconsistencies in the system. Is the holding in this decision limited to free speech or will it expand to other areas?
Tanford: Quirky constitutional issues, language of the constitution is invoked by judges when they want to, but the language of 21st amendment gave states the power to regulate importation and transportation, of alcohol, there have been suggestions at the edge of this stuff, since the 21st amendment mentions the movement of goods, to the extent the 21st amendment effects any other constitutional provisions, they are only the provisions having to do with the movement of goods, mainly the commerce clause and possibly the right to travel. And so that if you look at the cases they use slightly different language, whenever they do have a commerce clause case, they acknowledge at the beginning that the 21st amendment effected the commerce clause to some extent, the question being to what extent, but it does not effect other constitutional provisions.
There are other cases that state the 21st amendment does not give the state power over alcohol advertising. There is language out there to justify a judge saying it doesn’t apply to the 21st amendment and there is other language that says it does. So its impossible to say until the court starts to think about it.
IrishLiquorLawyer: Some believe that cases are starting to chip away at the 21st amendment, does the advent of ecommerce and a changing economy effect change in legal decisions like it did in the Wayfair case? (In Wayfair the Supreme Court overturned prior precedent and determined that a state could tax online sales)
Tanford: It does, the question is, how long it takes the legal system to catch up to the reality, there will come a time, for example, when the lobbying interest at the regulatory level, will switch from local businesses to the big national businesses, and so right now we are seeing it at the distribution level where Southern Wines acquired Glazer and moved aggressively to have distribution in all the states. In retail we have total wine and wine.com, wine.com is run as a subset of wholesalers.
Three things will happen to effect change. 1. The lobbying pressure will begin to switch from protecting local industries to protect the right of businesses located in the state to have a national market. 2. Judges and legislators every year get younger and younger, that is the old guard, the most astonishing opinion in Granholm, Justice Stevens wrote that he remembered his parents talking about prohibition at the dinner table, so he knew why the 21st amendment passed. It is fascinating departure for the reasons judges are suppose to decide cases.
Right now the field is dominated by judges and legislators that are old and who grew up in an era before the Internet in interstate commerce, they are the ones that still complain that main street mom and pop stores are gone and we have to go to Walmart. They are stuck in the generation that we don’t buy over the Internet, we buy locally. Protect local business, as the age groups get younger, this concepts seems weird.
What happened in Granholm is it hit at a time where articles were coming out about the benefits of red wine. Ordinary people were drinking wine and local wineries were spreading out all over the place with tasting rooms and tourist destination and cultural attitudes about wine were changing. The problem with the cases now is we are a little ahead of the curve. So it is hard to say where our cases will go, the progress is inevitable in that we switched to a Internet and home delivery economy.
IrishLiquorLawyer: In oral arguments for the Lebamoff case in front of the 7th Circuit, Judge Wood stated that Illinois’ restrictions on out of state retail sales hampers commerce and she took the state to task on this issue. (Tanford argued in the 7th Circuit on behalf of Lebamoff).
Tanford: The question is whether Judge Wood’s modern view can carry her colleagues on the panel, this is not a young panel, Kanee is about 80 years old.
IrishLiquorLawyer: Is the three tier system unquestionably legitimate?
Tanford: The answer is simple, the education system is legitimate but you can’t have discrimination, if the judges wrote down and read what they were saying, they would realize that the phrase does not answer the question. Legitimacy coincides with the view two generations ago that alcohol was evil and the state needed to control it.
IrishLiquorLawyer: What happens if you win in Lebamoff?
Tanford: There is also a Missouri case and one in Michigan. The most likely thing, in the 7th circuit, because it was dismissed on the pleadings, it will be remanded back to listen to evidence and the argument and then decide it.
IrishLiquorLawyer: If they remand will they write a full opinion on the merits?
Tanford: It depends. They could, but the district judge didn’t allow us to amend our complaint, which according to 7th circuit rules he must, that is independent grounds for reversal itself. There is a 35% chance of remand and full hearing, a 40% chance the Court will rule that on one or two counts there is enough of a constitutional issue that it has to go back for an evidentiary hearing.
A Commerce Clause violation balancing question of harm on commerce versus benefits to the state needs an evidentiary hearing. There is a 20% chance that they hold the three tier system can not be challenged and align themselves with the 8th Circuit.
Is there a middle ground on whether the three-tier system is legitimate? If so, it opens up to the reasoning in Granholm that there was an exception to the legitimacy of the three tier system. In Granholm , the creating of a new market through the popularity of wine, wine tasting shops and wineries as a tourist destination, created a new economy.
The argument for the traditional three tier system assumed a brick and mortar store in the local community where a buyer needed to show up in person and the shop keeper could control consumption, this was the age where liquor was a moral question. The store needed to be in the community so the sale and control of liquor would reflect the morality of the community. Once you create an Internet market, and can buy product without stepping into foot in the store, this does not make a difference. To preserve the fiction that the three-tier system is unquestionably legitimate, once Internet markets are created, you create exemptions, and it means you cant keep the three-tier system.
IrishLiquorLawyer: There is an argument that the distributors are necessary to maintain the health, safety, and welfare of the marketplace, what is your opinion?
Tanford: The New York solicitor general made the argument in Granholm, and a Supreme Court Justice asked “what exactly do you do when you regulate the safety of alcohol?” There was dead silence. They don’t do anything, they never sent an inspector to a warehouse to open bottles of Jim Beam to test them for posion. There isn’t a case, in fact there has never been a safety recall on wine and spirits. It is a lie, nobody is doing any inspection, the wholesalers serve no purpose whatsoever, other than to raise the price. The argument of course from the wholesaler is the fact that they raise the price is important because it lowers consumption.
Another argument is that if you don’t have the three tier system you have the manufacturers pushing consumption by mass marketing and advertising. However, the wholesalers are pushing consumption and want people to consume more. They are selling to make a profit.
The typical argument for the current system will say, we have been selling alcohol this way for 80 years and it is working, disrupt the current system and we don’t know what will happen. It is these fake fears about the illegal products coming into the state and tainted product coming into the state, and people deliberately targeting minors that drive this false narrative supporting the three-tier system.
IrishLiquorLawyer: Kentucky is allowing out of state distillers under certain circumstances to ship into the state, will this become a trend that will lead to the loosening of the three-tier system?
Tanford: I think it’s inevitable, but the system is protectionist and it protects the people with money who are politically astute.
IrishLiquorLawyer: What is the next issue that goes to the Supreme Court?
Tanford: Asked me a couple of years ago, I would have said Southern Glazer expanding into other states would be challenged by competing wholesalers. Southern settles and is litigation adverse. The issue is whether you can keep out a nonresident, can you exclude Southern from a state because they are a resident of Florida and not another state. A state could require them to incorporate, have an agent here, and even require them to have an office, but could they exclude them for not being a resident. That issue stabilized out.
What is next I would guess, that depends, we have three cases pending for retail online sales, even if those split badly, because there may be chaos among the circuits on how to interpret Granholm, we could have a split that could require the Supreme Court to hear the case. What would result is the intersection of the jurisprudence of the commerce clause and the 21st amendment that is incoherent because old angry judges disagree with the Supreme Court’s ruling.
The Supreme Court will look for a case, look at a case where circuits are all over the place on how they interpret Granholm. Granholm was a nice clean and simple question. We could say there are wineries in all 50 states and 21 states give advantages to their own wineries, nice clean and simple case.
The problem with the retail cases are that we casted Granholm as discrimination against interstate commerce and discrimination against nonresidents and to translate this to retailer cases, we have to find states that freely allow its own in-state retailers to sell over the Internet and allow them to ship in-state while not allowing these same privileges to out-of-state residents. So the problem is the retailer cases are not a national issue. I don’t know what the Supreme Court will do. It is possible they decide that the retail issue is clean enough because wineries in Granholm were selling at retail, and retailers are the final point of distribution in a three-tier system.
IrishLiquorLawyer: What happens at the state level if you are successful in Lebamoff?
Tanford: A state like Missouri will shut down the ability of its in-state businesses to partake. The wholesalers will say the old system was fine let’s go back. In Michigan the only way Upper Peninsula residents can get alcohol is to get it shipped. So Michigan can’t go back to the old system and Illinois probably won’t either.
People are waiting on the results, if we lose all three cases, people will ignore the issue. If we win, it will encourage other states to begin to expand their own markets. The Supreme Court holding that online retail sales are subject to sales tax may influence the issue. If the states can get money off retail sales, they may legalize retail shipments. At some point the pragmatist will deal with this issue, especially if there is an economic collapse.
Congress has never done anything even though commerce is a federal issue and it is a little bit fascinating. What may happen is that Congress says we are fed up with the states bickering, alcohol can ship legally and the post office can ship it. The Post Office is not allowed by law to deliver alcohol, and FedEx and UPS are making the money. If we allow the Post Office to deliver, this makes it more self supporting and self sufficient.
There is not a single argument of why we should continue the three-tier system as we have.
IrishLiquorLawyer: Can we require an out of state retailer to buy from an in state distributor?
Tanford: This violates antitrust laws, the state is entering the market as a market participant. Plus, that will be next point of resistance by the wholesalers. If it is illegal to discriminate against an out-of-state retailer, it is illegal to discriminate against an out-of-state wholesaler.
Regulate what, how many times has someone showed up in the state inspecting liquor. Physical presence v licensing, nobody has a problem with anybody being licensed, it goes beyond that in that you must have physical presence to be there. There is no reason for this as we move farther and farther away from mom and pop local stores and local warehouses, to stagnate in this economy is ridiculous. Economic realities about supply chains and interstate movement of goods is becoming so ubiquitous that at some point people have to say, the alcohol business is not different. Thirty years ago they had your part at the car dealer when you went in for service. Now they call a distribution center and it is delivered 3.5 hours later, often times from out of state, why should alcohol be different!
IrishLiquorLawyer: Will spirits be able to ship?
Tanford: Why not, the states already determined this is a legal product, alcohol is just as dangerous if it is coming from an in-state wholesaler or retailer as it is from out-of-state. The danger is not any different, it resonates with older judges and legislators, who think alcohol is evil and immoral.
(The End of Interview)