Last week, the Supreme Court issued its opinion in Tennessee Wine and Spirits Retailers Association v. Thomas, No. 18-96 (“Tennessee Retailers”). The full opinion can be read here, and our introduction to the case and issues can be found here. To recap, at issue in this case is the interplay between the Dormant Commerce Clause and the 21^st Amendment. The Dormant Commerce Clause prohibits states from discriminating against interstate commerce, while the 21^st Amendment grants to each state the authority to regulate alcohol within its borders. In Tennessee Retailers, the Court considered to what extent the 21^st Amendment allows states to pass laws regulating the alcohol industry that would otherwise be prohibited by the Dormant Commerce Clause.

The Court last addressed this question in 2005, when the Court held in Granholm v. Heald that the 21^st Amendment “does not immunize all [state alcohol] laws from Commerce Clause challenge.” In that case, the Court invalidated laws that favored in-state wineries over out-of-state wineries with respect to direct sales and shipments to consumers. Last week’s ruling in Tennessee Retailers confirmed a broad reading of the prior ruling in Granholm, as applied to a Tennessee law requiring applicants for retail liquor store licenses to live in the state for two years before being eligible for the license. The Court held that Tennessee’s discrimination against out-of-state individuals in the granting of retail licenses violates the Dormant Commerce Clause, and is not saved by the 21^st Amendment. The Court ruled that the 21^st Amendment “allows each State leeway to enact the measures that its citizens believe are appropriate to address the public health and safety effects of alcohol use and to serve other legitimate interests,” but that it does not “license the States to adopt protectionist measures with no demonstrable connection to those interests” in violation of the Dormant Commerce Clause. The Court also clarified that the prior ruling in Granholm was not limited to prohibiting discrimination against out-of-state products and producers, and that states are prohibited from discriminating against any out-of-state interests, including out-of-state individuals or retailers.

Much of the news coverage and discussion of this case has focused on the impact of the case on state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing the same. Some coverage implied that such laws were automatically invalidated by the Court’s ruling, but the retailer direct shipping issue was not in front of the Court. While the ruling in Tennessee Retailers does confirm that the principles in Granholm apply to all out-of-state interests, rather than just out-of-state producers, the ruling does not categorically prohibit all state alcohol laws that do not treat in-state and out-of-state businesses equally. The ruling is instead a continuation of the Granholm conversation. The ruling confirms that states “‘remain free to pursue’ their legitimate interests in the health and safety risks posed by the alcohol trade,” and that the 21^st Amendment does confer additional regulatory authority to the states. However, when a discriminatory state law is “purely protectionist” and cannot be “justified as a public health or safety measure” or on some other “legitimate non-protectionist ground,” then the law will be found unconstitutional. Thus, state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing so, are not definitively unconstitutional following the ruling in Tennessee Retailers. These laws are only unconstitutional if the state cannot establish that the laws are necessary to advance a legitimate local purpose, such as protecting public health and safety, and that there are no reasonable nondiscriminatory alternatives that can adequately further that purpose.

So, what does this ruling really mean? First, the ruling is a victory for out-of-state individuals and entities that desire to apply for a retail liquor store license in Tennessee. Second, other states with burdensome retail residency requirements, such as Massachusetts and Maryland, are likely evaluating the legality of their laws in light of the ruling in Tennessee Retailers. Such states may opt to eliminate such requirements, or may decide to leave the residency requirements in place until challenged. Given the language in Tennessee Retailers analyzing the lack of connection between Tennessee’s residency requirements and advancing public health and safety interests, leaving burdensome residency requirements in place may be risky. But, the State of Tennessee did not attempt to defend its laws, and the public health and safety arguments put forth by the Tennessee Wine and Spirits Retailers Association were cursory, and thus other states may believe that they can do a better job defending their laws. If any states decide to leave retail residency requirements in place, it is likely that litigation will follow. Third, states with residency requirements for wholesaler licenses, such as Missouri, are also likely weighing whether to revise such laws or to leave the residency requirements in place until challenged. Missouri’s wholesaler residency requirements were upheld as constitutional by the 8^th Circuit in 2013. However, the 8^th Circuit ruling was based on a narrow reading of Granholm, and that interpretation was directly refuted by the Court in Tennessee Retailers. Accordingly, it would not be surprising to see litigation on this issue in the very near future, if such states do not remove wholesaler residency requirements. Finally, even less-burdensome residency requirements, such as requirements for licensees to have a resident manager, may be vulnerable to challenge.

While residency requirements will be most directly in the line of fire following Tennessee Retailers, the ruling has the potential to impact many other aspects of state alcohol regulation. Unlike Granholm, the Tennessee Retailers Court declined to describe the three-tier system as “unquestioningly legitimate.” The Court clarified that while the basic three-tier model may be sound, the 21^st Amendment does not sanction “every discriminatory feature that a State may incorporate into its three-tiered scheme.” It is unclear to what extent Tennessee Retailers will spur states to act on their own to revise discriminatory aspects of the state’s alcohol regulatory scheme. We may see states make changes independently, but it may be that significant change will only be achieved through litigation. As the Court noted, “each variation [of three-tiered alcohol regulatory schemes] must be judged on its own features.” Because discriminatory alcohol laws are only unconstitutional if they are not reasonably necessary to advance a legitimate local purpose, states may leave discriminatory laws on the books in the hopes that they can justify those laws if challenged. Accordingly, the most direct outcome of Tennessee Retailers will likely be a considerable amount of litigation.

Which laws are the most likely targets of litigation? Any state alcohol laws that discriminate against “out-of-state economic interests” are vulnerable to challenge under Granholm and Tennessee Retailers. So, litigation could focus on laws that authorize only in-state retailers to deliver or ship to consumers, or it could target laws such as physical presence requirements, tied-house exceptions that allow only in-state producers to operate retail locations, laws that require retailers to purchase from in-state sources, laws that authorize only in-state suppliers to self-distribute products to retailers, at-rest laws, or franchise law exemptions that apply only to in-state suppliers. The recent ruling in Tennessee Retailers may also inspire further litigation and move the needle in the related area of alcohol laws that are facially neutral but potentially discriminatory in effect. For example, states such as New Jersey or Ohio with laws that have special privileges for certain “small” producers, where the definition of “small” may be designed to encompass most or all in-state producers while excluding many out-of-state producers.

While we noted above that some news coverage has overstated the immediate impact of Tennessee Retailers on out-of-state retailer direct to consumer shipping or delivery, the ruling will undoubtedly lead to more litigation regarding these laws. Some of that litigation may be successful in invalidating laws that allow in-state retailers to ship or deliver alcohol directly to consumers, but prohibit out-of-state retailers from doing so. However, each case will depend upon the specifics of the state’s regulatory scheme and the state’s public health and safety justifications for that scheme. While the justifications for Tennessee’s residency requirements were weak, states may have stronger public health and safety justifications for laws regulating delivery and direct shipping, such as preventing underage drinking or delivery of alcohol to intoxicated persons. Note, however, that this argument was held in Granholm to be insufficient justification for treating in-state and out-of-state wineries differently with respect to the shipment of wine to consumers. But, the strength of public health and safety justifications will likely be different in states that allow retailer hand delivery but not shipment by common carrier of alcohol, and these justifications may also be different with respect to beer or spirits as opposed to wine. Furthermore, states may have additional public health and safety justifications based on preventing counterfeit alcohol. An out-of-state retailer would not obtain its products from the same distribution system as an in-state retailer, and the state’s public health and safety justifications for its distribution system and requirements for alcohol sourcing may be persuasive. However, a state making this argument would likely also need to assert that there are no reasonable nondiscriminatory alternatives to accomplishing the goal of preventing counterfeit alcohol.

There are at least two cases already pending that challenge state laws with respect to alcohol shipping and delivery. In Missouri, Sarasota Wine Market v. Schmitt is on appeal to the 8^th Circuit. The lower court held that Missouri’s laws permitting in-state retailers to ship wine directly to consumers, but prohibiting out-of-state retailers from doing the same, are valid under the 21^st Amendment. However, this ruling was based on the 8^th Circuit precedent mentioned above, which relied on a narrow interpretation of Granholm that was contradicted by the Court in Tennessee Retailers. Further, Lebamoff Enterprises v. Snyder, challenging Michigan’s wine shipping laws that treat in-state and out-of-state retailers differently, is pending before the 6^th Circuit. In that case, the lower court held that Michigan’s laws are unconstitutional, as they impermissibly discriminate against out-of-state interests without sufficient justification in violation of the Dormant Commerce Clause. This ruling and appeal were stayed pending the outcome in Tennessee Retailers. These two cases will likely provide the earliest insight into how courts will apply the recent Supreme Court ruling.

Even if the outcome of these cases is that state laws are found invalid, it will not necessarily mean that these states will allow out-of-state retailer direct shipments. Upon a court ruling that a state’s laws are discriminatory and unconstitutional, the state could decide to rectify the issue by “leveling down” to prohibit all retailer alcohol shipments to consumers, from both in-state and out-of-state retailers. As such, the law would apply equally to all retailers regardless of location, so it would not be discriminatory. “Leveling down” to remove all retailer alcohol shipping privileges would likely be unpopular with consumers, but it may find support from some segments of the alcohol industry. Thus, this outcome remains a possibility even if litigation challenging laws prohibiting out-of-state retailer shipping is successful.

Overall, we will have to wait and see what the ruling in Tennessee Retailers will mean for the alcohol industry. But, if you have any questions regarding this ruling or how current laws affect your alcohol business, contact one of the attorneys at Strike Kerr & Johns.

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