Constitutional Requirements For Distribution Of Alcohol
By Mark Arnold
October 15, 2018
The Supreme Court recently granted certiorari to review an opinion of the Sixth Circuit on constitutional limits on states’ ability to regulate the distribution of alcohol beverages. Tennessee Wine & Spirits Retailers Ass’n v. Byrd, No. 18-96.
With the advent of the 21st Amendment in 1933, which turned control of alcohol beverage regulation over to the states, temperance groups insisted on a rigid, three-tier system for the distribution of alcohol. Typically, under state laws a manufacturer of alcohol beverages can only sell to a distributor and it may not have any ownership interest in the distributor. The distributor in turn sells to retailers who sell to the general public. Neither the manufacturer nor the distributor may have any ownership interest in the retailer. Consumers can only purchase alcohol beverages from retailers.
The rise of the internet and direct delivery companies such as Amazon has undermined this rigid distribution system. The State of Michigan amended its statute to permit wineries located in Michigan to sell directly to consumers. Out-of-state wineries, however, could only sell to Michigan distributors. In Granholm v. Heald, 544 U.S. 460 (2005), a surprisingly divided Supreme Court held, 5-4, that its anti-discrimination holdings under the Commerce Clause trumped the states’ residual authority under the 21st Amendment. It also held that the direct-sale statute impermissibly discriminated in favor of in-state wineries.
Granholm settled the question of whether states could discriminate against out-of-state manufacturers. It left open the question of whether the Commerce Clause also protected wholesalers and retailers and the lower courts are divided on that point. Granholm clearly held that the three-tier system is not a per se violation of the Commerce Clause. Based on that holding, the Second, Fourth and Eighth Circuits have all held that Granholm does not apply to wholesalers and retailers. The Fifth and Sixth Circuits have reached the opposite result.
Byrd challenged Tennessee’s residency requirements for a license to sell alcohol at retail. The statute requires two years of residency to obtain a license, which must be renewed every year. But it also required ten years of residency to obtain that renewal. If a corporation seeks a license, all of its owners must satisfy the same residency requirements. The majority opinion in Byrd held that the statute facially discriminated against out-of-state retailers and their owners and hence violated the Commerce Clause.
Judge Sutton dissented in part. He agreed that the ten-year residency rule to renew a license served no legitimate purpose and that the requirement of 100% Tennessee owners of corporations was pure protectionism. But he argued that § 2 of the 21st Amendment, which prohibits the sale of alcohol in violation of state law, carves out an exception from normal Commerce Clause analysis.
In Lebamoff Enterprises v. Snyder, 2018 WL 4679612 (E.D. Mich. 2018), the District Court extended Byrd to an out-of-state retailer. Michigan allowed in-state retailers to ship directly to customers but denied the same rights to out-of-state retailers. In-state retailers had acquired their supplies through the standard three-tier system. Out-of-state retailers may have acquired supplies under a three-tier system, but not under Michigan’s.
The Snyder Court held that Michigan was free to adopt a traditional three-tier system in which no retailer was free to ship to consumers, just as – after Granholm – it could have imposed the same ban on all direct sales by manufacturers. If it chose to carve out exceptions to that system, however, it could not resort to economic protectionism.
We fully expect Michigan to appeal and would be surprised if the Sixth Circuit did not stay the appeal pending the Supreme Court’s disposition of Byrd.