US Supreme Court Rules Against Local Protectionism

On June 26, 2019, the United States Supreme Court issued a 7-2 decision in, Tennessee Wine & Spirits Retailers Association v. Thomas , that invalidated Tennessee’s 2 year residency requirement for obtaining a liquor store license as an unconstitutional violation of the interstate commerce clause. The Court ruled that although Section 2 the Twenty-First amendment entitles States to regulate alcohol within their borders, such regulation cannot override earlier guarantees in the Constitution.

The key plaintiff in Tennessee Wine Retailers, was the DMV’s own Total Wine, who challenged the constitutionality of several residency requirements in the State of Tennessee, namely that a person must be a resident of the State for two years before they can initially apply to get a retail alcohol license, that upon renewal of the license they demonstrate continuous residency of ten years, and that all corporate officers and owners of the company fulfil the first two requirements. Interestingly, the Attorney General of Tennessee had issued an opinion as early as 2012 that these residency requirements were unconstitutional and stopped enforcing them against new applicants. In 2016, when Total Wine applied for the license it was actually the trade association representing incumbent Tennessee retailers, i.e. the Tennessee Wine & Spirits Retailers Association, that filed the objection to the approval of Total Wine’s license. When the State of Tennessee declined to appeal the case after the residency requirement was initially ruled unconstitutional in District Court, it was the Association that pursued the matter through a loss in the Court of Appeals for the Sixth Circuit Court and up to the U.S. Supreme Court.

At the Supreme Court, the majority examined three issues. First, whether residency requirements to obtain a retail license violate the Interstate Commerce Clause of the Constitution. Two, whether Section II of the 21st Amendment supersedes earlier provisions of the Constitution and grants States an unrestricted right to regulate the importation of and sale of alcohol within their borders. Third, whether residency requirements, such as those in Tennessee, fall within the legitimate regulatory authority of a State under the 21st Amendment.

Under Article I Section 8 of the Constitution, Congress is given the “Power...to regulate Commerce with Foreign Nations, and among the several States, and with Indian Tribes.” Following a string of cases dating back to the 1820’s, the Supreme Court has long held that this provision, in addition to granting the Federal government the authority to regulate interstate commerce, by its nature also impedes the ability of State governments to restrict interstate commerce. This is known as the doctrine of the Dormant Commerce Clause. Following these cases, in Tennessee Wine Retailers, the Court once again ruled that a key goal of the Framers of the Constitution was to promote the ease of interstate commerce and therefore State protectionism must be curbed. Since Tennessee’s residency requirements blatantly discriminated against out of State economic actors, and the Association based their defence of the requirement entirely on the 21st amendment, the Court ruled that in-state residency requirements for obtaining a license are an invalid violation of the Dormant Commerce Clause.

Having determined that residency requirements violate the Dormant Commerce Clause, the Court then considered whether the authority granted to States to regulate alcohol under Section II of 21st amendment, superseded earlier provisions of the Constitution. Section II states that “the transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” The Association, and dissent, argued that the plain wording of the Amendment contains no limit on the authority of States to regulate alcohol. Furthermore, there is a traditional rule of interpretation that a later enacted provision will take precedence over an earlier provision, if the two are in apparent conflict.

However, the majority disagreed. Justice Alito pointed out that under that construction the Court would reach an absurd result, such as allowing a State to pass an alcohol related law that blatantly discriminated against people on the basis of race, or their religion or sex (the 21st amendment coming after the 14th). It would also allow States to ban the importation into their borders of an alcoholic product made overseas or punish people for actions that were not a crime at the time they were committed. Instead, the majority ruled that “§2 must be viewed as one part of a unified constitutional scheme,” and that its purpose was to restore to the Constitution the same relationship between federal and state alcohol regulation as existed prior to the passage of prohibition in the 18th Amendment.

The Court then traced the long history of pre-prohibition alcohol regulation, and relying heavily on their analysis in Granholm v. Heald , determined that the 21st Amendment did not give States carte blanche authority to violate the Dormant Commerce Clause. In Granholm v. Heald, the Court examined whether provisions of Michigan and New York State law that allowed in-state wineries to direct ship to consumers, but either prohibited or made it incredibly difficult for out-of-state producers to do so, violated the Dormant Commerce Clause in a way that went beyond the authority of the 21st Amendment. In that case, the Court held that States were limited in their regulation of alcohol to legitimate State purposes and the protection of in-state producers was not a legitimate purpose for an alcohol regulation.

This decision was reaffirmed in Tennessee Wine Retailers, and the Court ruled that alcohol regulations which have as their primary purpose the protection in-state alcohol retailers are an unconstitutional exercise of Section II of the 21st Amendment. Lastly, the Court examined whether the residency requirements of Tennessee could be justified under a legitimate State purpose, namely protecting the health and safety of its residents. The Association argued that the residency requirements promoted health and safety by (1) allowing easier service of process on retailers, (2) easier investigation of applicants, and (3) enable easier oversight of the retail liquor store. The Court rejected each of these arguments in turn by pointing out that (1) Tennessee could require an out-of-state licensee to designate an agent in-state for service of process, as is done in many other contexts for alien corporations; (2) the same background check process could be enabled for in-state and out-of-state persons, or at any rate one that provides a lesser burden than actual residency; (3) that the presence of a physical store and local record keeping, whether that store is owned by in-state or out-of-state persons, allows for the same level of ongoing oversight and enforcement. The final point is especially important. Prior to the issuance of the decision, there was some concern that the Court would strike down residency requirements in such a way as to allow online retailers like Amazon to begin selling alcohol across state lines. However, the opinion of the Court specifically relied on the presence of a physical store with staff and documentation to demonstrate that the residency requirement does not further the legitimate State interest of promoting of health and safety. Given that language, it is unlikely that entirely online retailers will, for now, be able to make in roads into markets that do not expressly allow their type of business. In conclusion, the Court ruled that residency requirements for obtaining a retail liquor license violated the Dormant Commerce Clause, and because the requirement either had no connection to a legitimate State interest or there were less discriminatory means to promote that legitimate interest, such provisions are an unconstitutional use of State power under the 21st Amendment. Any similar protectionist provisions of State law would presumably also be considered unconstitutional.

Going forward, there are still a number of outstanding questions. In both Granholm and Tennessee Wine Retailers, the Court suggests that even when a provision of State alcohol law does not intend to discriminate against out-of-state businesses, and doesn’t facially discriminate against out-of-state business, it can still violate the Dormant Commerce Clause if it has a discriminatory effect. However, the parameters for determining when a discriminatory effect raises a constitutional issue is unclear. Additionally, in States such as Maryland or Virginia, there are often requirements that a person applying for an alcohol retail license be a resident of a particular county for a certain number of years. Under Tennessee Wine Retailers, that kind of provision is now unconstitutional as against out-of-state residents. However, if a person is a resident of one county in Maryland and wishes to obtain a retail alcohol license in another county in the State, the issuing county may still be allowed to discriminate against them. Such a scenario could also happen if DC were to pass Ward residency requirements. This would be a rather absurd situation and one that respective State Guilds should consider lobbying against.

By way of disclaimer, this article does not constitute legal advise and creates no attorney-client relationship between the author and the reader. As always please consult with legal counsel prior to making any decision.

Gregory Parnas, is a local alcoholic beverage attorney specializing in working with craft breweries in the DMV area. If you have any further questions about this article, or any other matter, please reach out to him at Greg.Parnas@dcbeveragelaw.com