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The Alcohol Beverage Legal Environment Post-Granholm

This article gives rise by suggestion of Tom Wark of Fermentation. It explores the legal environment, post-Granholm, relative to the constitutionality of the several state liquor regulatory laws and the underlying effect of the Supreme Court’s holding in Granholm. These three cases include Siesta Village Market LLC v. Steen, 595 F.3d 249 (5th Cir. 2010), Arnold’s Wines v. Boyle, 573 F.3d 185 (2nd Cir. 2009), and Siesta Village Market LLC v. Granholm, 596 F. Supp. 2d 1035 (E. D. Mich. 2008).

Siesta Village Market LLC v. Steen (2010)

In Siesta Village Market LLC v. Steen, an out-of-state wine retailer and Texas consumers challenged the constitutionality of the Texas Alcohol Beverage Code §§ 6.01, 11.01, 22.01, 22.03, 24.01, 24.03, 37.01, 37.03, 41.01, 43.04, 54.12, 107.05(a), and 107.07(a) and (f), alleging same violated the dormant Commerce Clause of the United States Constitution, on appeal in the United States Court of Appeals for the Fifth Circuit. The out-of-state retailers wanted to ship to consumers within Texas and argued that the state’s prohibition of such was unconstitutional because Texas allowed local retailers to deliver within their counties. The law did, however, allow out-of-state retailers to use common carriers licensed under the Texas Alcohol Beverage Code, such as Federal Express, to deliver wine and liquor products to consumers. The Court of Appeals for the Fifth Circuit held that such state laws were not unconstitutional with respect to the dormant Commerce Clause, reasoning that a state’s regulation of retailers is a constitutional exercise of its power.

In its discussion, the Court of Appeals examined the recent Supreme Court case Granholm v. Heald, reaffirming that although the Twenty-first Amendment appears to grant states absolute authority to regulate alcohol, such power is actually limited by the extent of the Commerce Clause. However, in the discussion, the Court of Appeals recognized that “at least to producers, the Court held that the ‘Amendment does not supersede other provisions of the Constitution and, in particular, does not displace the rule that States may not give a discriminatory preference to their own producers.’” Siesta Village Market LLC v. Steen, 595 F.3d 249, 254 (5th Cir. 2010).

The Court of Appeals also went on to examine how other courts analyzed the Granholm decision, recognizing that the issue at hand dealt with wine retailers as opposed to wine producers in Granholm. The first case, Brooks v. Vassar, 462 F.3d 341 (4th Cir. 2006), dealt with a Virginia statute that limited the amount of alcohol that consumers could personally carry into the State for their own use. The Fourth Circuit indicated that this was a clear question pertaining to the three-tier system and held the statute constitutional, citing that Granholm affirmed same as “unquestionably legitimate.” Granholm v. Heald, 544, 489 U.S. 460 (2005). The second case, Arnold’s Wines v. Boyle, 573 F.3d 185 (2d Cir. 2009), discussed infra., held that products and producers are the limit in terms of the Granholm decision and that a New York law that permitted only in-state retailers to ship directly to consumers was different from those laws debated in Granholm. The third case, Siesta Village Market LLC v. Granholm, 596 F. Supp. 2d 1035, (E. D. Mich. 2008), also discussed infra., considered a Michigan law that allowed some in-state retailers to ship wine directly to consumers but prohibited those out-of-state retailers without physical presence in Michigan from directly shipping to consumers. The court in this case found that such regulations created a burden on out-of-state wine retailers and was not a constitutional exercise of state regulation, even under the Twenty-first Amendment.

It its analysis of the dormant Commerce Clause, the Court of Appeals recognized that the Supreme Court in Granholm cited precedent from a prior case entailing a three-tier distribution system that the Court found constitutional. Relying on this logic, the Fifth Circuit reasoned that the Texas three-tier distribution system was similar to that analyzed in the precedent as it allowed “producers [to] sell to state-licensed wholesalers, who sell to state-licensed retailers.” 595 F.3d at 258. However, the court also identified with the majority opinion of Arnold’s Wines v. Boyle, recognizing that uncertainty does exist as to the direction of future Supreme Court interpretations with respect to the Twenty-first Amendment.

In conclusion, the Fifth Circuit recognized that the Twenty-first Amendment does give states broad power to regulate alcoholic beverages, but the dormant Commerce Clause “. . . applies differently than it does to products whose regulation is not authorized by a specific constitutional amendment. Regulating alcoholic beverage retailing is largely a State’s prerogative.” 595 F.3d at 259-260.

Arnold’s Wines v. Boyle (2009)

In Arnold’s Wines v. Boyle, an out-of-state wine retailer and New York residents challenged the constitutionality of N.Y. Alcohol Beverage Control Law §§ 100(1), 102(1)(a), and 102(1)(b) on appeal in the United States Court of Appeals for the Second Circuit, alleging that same violated the Commerce Clause, U.S. Const. art. I, § 8, cl. 3. Arnold’s Wines v. Boyle, 573 F.3d 185 (2nd Cir. 2009). Appellants argued the New York State law was unconstitutional because it prohibited out-of-state wine retailers from selling and delivering wine directly to New York State consumers, while permitting New York-licensed retailers to deliver liquor directly to New York residents, and instead required all liquor sold, delivered, shipped, or transported to pass through an entity licensed by the State of New York. (Out-of-state retailers without an operation within the state of New York could not obtain a New York retail off-premises license.) The Court of Appeals ruled the law constitutional, reasoning that the three-tier system of New York did not discriminate against out-of-state producers or products and mandated that both in-state and out-of-state liquor pass through the same three-tier distribution system.

N.Y. Alcohol Beverage Control Law § 100(1) reads as follows:

“No person shall manufacture for sale or sell at wholesale or retail any alcoholic beverage within the state without obtaining the appropriate license therefore required by this chapter.” N.Y. Aloc. Bev. Cont. Law § 100(1)

The other two provisions of the New York law prohibit shipping alcoholic beverages to an unlicensed entity, such as a consumer, within the state.

In its reasoning, the Court of Appeals stated that appellants’ allegations were a frontal attack on the constitutionality of the three-tier distribution system, which the Supreme Court addressed as fully constitutional and “specifically acknowledged the vital role of the three-tier system in the exercise of states’” section 2 powers under the Twenty-first Amendment in Granholm. Additionally, the Court in Granholm asserted that the three-tier system is an “‘unquestionably legitimate’ exercise of the states’ power under the Twenty-first Amendment . . .” 573 F.3d at 190.

Finally, the Court of Appeals differentiated the appellants’ allegations of unconstitutionality from that in Granholm because the New York law requires both in-state and out-of-state liquor to pass through the three-tier system before delivery through the consumer. Alternatively, the state laws questioned in Granholm favored in-state producers over out-of-state producers. “While the Twenty-first Amendment grants the states broad powers to regulate the transportation, sale, and use of alcohol within their borders, it simply does not immunize attempts to discriminate in favor of local products and producers.” 573 F.3d at 191. The Court of Appeals argued that the appellants’ challenges were “evenhanded and permissibly aimed” as opposed to the sort of economic protectionism of the laws seen in Granholm. Id.

Siesta Village Market LLC v. Granholm (2008)

In this case, plaintiffs, a Florida-based retailer of alcoholic beverages and a Michigan resident alleged that Michigan statutes that prohibited out-of-state retailers form shipping directly to Michigan consumers, unless physically present in the state, violated the dormant Commerce Clause and the Granholm decision. The Governor and officials of Michigan argued that this system allowed for random, on-site inspections to be conducted, verifying that the sale of alcohol was not made to minors. The United States District Court for the Eastern District of Michigan, Southern Division, held that the Michigan statute was unconstitutional because the Twenty-first Amendment did not grant states the authority to pass non-uniform laws to discriminate against out-of-state products, and that the Michigan government could not meet its burden of showing that alternative methods were not effective.

In its analysis, the District Court examined both the Twenty-first Amendment and the Commerce Clause. The court identified that, although Granholm recognized that the three-tier distribution system was an appropriate system for alcoholic beverages, the Supreme Court did not authorize for discrimination against out-of-state products, which the court asserted was the present issue. In its dormant Commerce Clause analysis, the court recognized that differential treatment between out-of-state and in-state businesses have been found to violate the Commerce Clause “in instances where it creates a higher overhead cost for doing business in a particular state for out-of-state businesses than for in-state businesses . . .” Siesta Village Market LLC v. Granholm, 596 F. Supp. 2d 1035, 1039 (E. D. Mich. 2008). The court also recognized that prior Supreme Court decisions looked unfavorably upon statutes that required out-of-state business operations to have an outlet within the state.

The court allowed a lengthy discussion pertaining to the local interest (or the state interest) in enacting such a law, but ultimately ruled that Michigan failed to withhold its burden. In its conclusion, the District Court was quite vehement in striking the Michigan statute’s constitutionality, positing that the Granholm decision does not support statutes that discriminate against out-of-state wine retailers.

Commentary: Michigan has since passed a law that outlaws both in-state and out-of-state retailers from shipping alcoholic beveages to consumers.

What is next on the docket? Where to draw the line?

There is a range of differing viewpoints throughout the courts, clearly, pertaining to whether the holding of the Granholm Court extends to state regulation of out-of-state retailers and wholesalers in addition to producers. One might pose the argument that reading Granholm to cover only alcoholic beverage producersand thus leaving out-of-state wholesalers and retails from constitutional protectionwithout proving an alternative means is ineffective, is a clear violation of the dormant Commerce Clause; after all, out-of-state wholesalers and retailers affect interstate commerce. On the other hand, one must always remember the background of alcoholic beverage regulation in the United States, and that is a history of temperance. Since Europeans came to this country, the social wave has always purported to curtail intemperance, initially through local regulations and later through statewide and federal regulations, because the belief was that abuse of consumption lead to impropriety and indolence. This rich history, despite the repeal of Prohibition in 1933 by the Twenty-first Amendment, is unlikely to die hard and state legislators and governments are unlikely to become fearless with respect to minor access to alcohol. Perhaps such regulation, by means of differential treatment to out-of-state wholesalers and retailers, is a weighty pretext for maintaining such statutes. And, perhaps such regulation truly is indicative of the three-tier alcoholic beverage distribution system and is the exact means SCOTUS contemplated in Granholm when reasoning that said system is vital.

Another issue that is yet to be considered by the Court is wineries that do directly ship to consumers in certain states are in a sense acting as a retailer to consumers. In that sense, the Granholm decision would protect out-of-state wineries in the position as a retailer from discriminatory statutes, but the same statutes may be applied to out-of-state retailers. However, this argument may be curtailed by the reasoning that wine producers that directly ship to customers bypass the markup prices ingrained in the three-tier distribution system and, in some sense, do not take the position of a traditional retailer.

(One might also note that the decision of the Second Circuit is also the same circuit that was overruled by the Supreme Court in Granholm in 2005.)

One thing is certain, however: the Court in Granholm did not specifically address the issue of state alcoholic beverage regulation pertaining to out-of-state wholesalers or retailers and clearly focused on two state laws that discriminated against or severely burdened out-of-state producers. It is conceivable that the issue of state regulation of out-of-state wholesalers and retailers under the three-tier distribution system will reach the dockets of the Supreme Court in due time.

DISCLAIMER: This blog post is not intended as legal advice, and no attorney-client relationship results. Please consult your own attorney for legal advice.

 

lazahn 9 The Alcohol Beverage Legal Environment Post Granholm

About 

Lindsey is the founder and author of On Reserve: A Wine Law Blog. She is an alcohol beverage and food attorney and is admitted to the New York State Bar.

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