Does the Twenty-first Amendment permit states to require that alcohol retail license applicants reside in-state for a specified length of time prior to obtaining a license?
This case asks the Supreme Court to determine the scope of power granted to the States under the Twenty-first Amendment and to explain when exercises of that power infringe upon the dormant Commerce Clause. Tennessee requires that a person must be a Tennessee resident for two years before they may receive a retail or wholesale liquor license and for ten years before they may re-apply for a retail or liquor license. Clayton Byrd, Tennessee Fine Wines and Spirits, LLC, and Affluere Investments, Inc. argue that Tennessee’s requirements amount to discrimination against out-of-state economic interests in violation of the dormant Commerce Clause. Tennessee Wine and Spirits Retailers Association counters that the Twenty-first Amendment grants the States broad power to regulate the in-state distribution of alcohol, and that a state does not violate the dormant Commerce Clause if the state treats alcohol produced out-of-state the same as alcohol produced in-state. The outcome of this case will help determine how the power to regulate the sale, use, and distribution of alcohol is divided between the federal government and the States.
Questions as Framed for the Court by the Parties
Whether the Twenty-first Amendment empowers states, consistent with the dormant Commerce Clause, to regulate liquor sales by granting retail or wholesale licenses only to individuals or entities that have resided in-state for a specified time.
In order to sell alcoholic beverages in Tennessee, a retailer must obtain a license from the Tennessee Alcoholic Beverage Commission (“the TABC”). To obtain a license, applicants must meet the durational-residency requirements set forth in the Tennessee Code. Specifically, an individual must have “been a bona fide resident of [Tennessee] during the two-year period immediately preceding” the application date. In addition, an individual must reside in-state for ten years in order to renew a license. Corporate applicants are subject to similar durational-residency requirements. First, all corporate officers, directors, and stockholders must satisfy the above residency requirement for individuals. In addition, each owner of the corporation’s capital stock must have resided in-state for at least two years. Finally, corporations must also meet a ten-year residency requirement prior to renewing a license.
Respondents Tennessee Fine Wines and Spirits, LLC (“Fine Wines”) and Affluere Investments, Inc. (“Affluere”) applied for Tennessee retail licenses, but did not satisfy Tennessee’s durational-residency requirements. Consequently, the TABC declined to process the Respondents’ applications. Petitioner Tennessee Wine and Spirits Retailers Association (“The Association”), a private body representing Tennessee’s independent alcohol retailers, then threatened the TABC with litigation. Tennessee’s Attorney General acting on behalf of the TABC’s then-Executive Director Clayton Byrd subsequently filed suit against the Association in Tennessee state court. The Attorney General sought a declaratory judgment regarding the constitutionality of Tennessee’s durational-residency requirements. The Association then removed the case to the United States District Court for the Middle District of Tennessee. Named respondent Zackary W. Blair is the Interim Executive Director of the TABC.
The district court granted Respondents’ motion for summary judgment, holding that the durational-residency requirements violated the dormant Commerce Clause. On appeal, the Sixth Circuit affirmed the summary judgment and severed the durational-residency requirements from the Tennessee statute. In affirming the district court, the Sixth Circuit first explained that the Twenty-first Amendment, which empowers the States to regulate alcoholic beverages, does not automatically insulate state alcohol regulations from application of the dormant Commerce Clause. In addition, the Sixth Circuit refused to interpret the United States Supreme Court’s decision in Granholm v. Heald as limiting the dormant Commerce Clause’s application to alcohol producers only. The Sixth Circuit reasoned instead that the dormant Commerce Clause’s restrictions extend to alcohol wholesalers and retailers as well.
The Sixth Circuit then held the Tennessee statute to be facially discriminatory against out-of-state alcohol retailershttps://www.law.cornell.edu/wex/interstate_commerce. The court reasoned that the durational-residency requirements functioned as “barriers to competition” and thereby granted preferential treatment to in-state retailers. The court noted that the principle behind the dormant Commerce Clause is to guard against the sort of “economic protectionism” in which a state favors local interests by “burdening out-of-state economic interests.” Although the Sixth Circuit recognized that a discriminatory state statute might nevertheless be constitutional if it is the only means available to protect a legitimate state interest, the court refused to recognize such a legitimizing interest in Tennessee’s durational-residency requirements.
The United States Supreme Court granted certiorari on September 27, 2018.
CONFLICT BETWEEN THE TWENTY-FIRST AMENDMENT AND THE DORMANT COMMERCE CLAUSE: WHICH CONTROLS?
Tennessee Wine and Spirits Retailers Association (“The Association”) argues that the Twenty-first Amendment grants the States broad power to regulate the sale of alcohol within their borders. The Association explains that this power derives from the second section of the Twenty-first Amendment, which reads: “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 acknowledges that this broad power is limited by the dormant Commerce Clause, which prohibits states from obstructing the flow of interstate commerce. However, the Association claims, a state does not contravene the dormant Commerce Clause if the state exercises its “core” Twenty-first Amendment power—i.e., the power to regulate the sale, distribution, and use of alcohol within its borders. On the other hand, the Association continues, if a state exercises “non-core” Twenty-first Amendment power by, for example, regulating activity outside of the state’s borders or discriminating against out-of-state products, the state violates the dormant Commerce Clause.
Here, the Association argues, Tennessee exercised its core Twenty-first Amendment power when it enacted the durational-residency requirement for obtaining a liquor license. The Association notes that a state exercising its core Twenty-first Amendment power has virtually complete control over whether to permit the importation or sale of alcohol, as well as how to structure its alcohol distribution system. Tennessee uses a three-tier alcohol distribution system, which, the Association explains, the U.S. Supreme Court has recognized as “unquestionably legitimate.” The Association maintains that, in using the three-tier system, a state may require that all alcohol sold for use in the state be purchased from an in-state retailer. Further, the Association claims, a state may impose a residency requirement on retailers, since the residency requirement directly regulates the sale of alcohol within state borders and treats alcohol produced out of state the same as alcohol produced in-state. The Association contends that the power to impose a retailer residency requirement necessarily entails the power to determine the duration of said requirement. Even if Tennessee’s durational-residency requirements are “protectionist,” the Association explains, the Court has never generally prohibited protectionist alcohol laws. Doing so, the Association continues, would require the Court to undermine the principle that states may regulate alcohol under the Twenty-first Amendment. Indeed, the Association claims that a bar on protectionist laws would require courts to balance the principles underlying the Twenty-first Amendment against the principles underlying the dormant Commerce Clause. The result, according to the Association, would be to clutter courts with lengthy policy disputes and to undermine the states’ confidence in the validity of their alcohol laws.
Tennessee Fine Wines and Spirts, LLC (“Fine Wines”) counters that the durational-residency requirement discriminates against interstate commerce in violation of the dormant Commerce Clause. Fine Wines contends that the dormant Commerce Clause prohibits a state from engaging in economic favoritism—i.e., enacting laws that differentiate between in-state and out-of-state economic interests to the benefit of in-state parties. Fine Wines explains that the Court has held that discriminatory requirements are nearly per se invalid. Moreover, Fine Wines maintains that there are many forms of discrimination under the dormant Commerce Clause. For example, Fine Wines notes, the dormant Commerce Clause prohibits a state from excluding out-of-state entities from competing in its local markets and provides that a state may not disadvantage out-of-state goods through discriminatory regulations. Fine Wines argues that Tennessee’s durational-residency requirement is discriminatory because it distinguishes between in-state and out-of-state residents by making it harder for out-of-state residents to obtain and maintain a liquor license to the benefit of in-state retailers. Indeed, Fine Wine claims that the interplay between the durational requirements effectively requires that a person be a Tennessee resident for at least nine years to legally operate an alcohol retail shop.
Further, Fine Wines argues that the Twenty-first Amendment does not shield Tennessee’s facially discriminatory durational-residency requirement from the dormant Commerce Clause. Indeed, Fine Wines maintains that a state’s discriminatory efforts to promote local economic interests are not insulated from dormant Commerce Clause scrutiny simply because the state is regulating the sale of alcohol. Like the Association, Fine Wines points out that the Twenty-first Amendment is limited by the nondiscrimination principle of the dormant Commerce Clause. However, Fine Wines notes that this principle is broadly defined; a state law is discriminatory “when its effect is to favor in-state economic interests over out-of-state interests.” Additionally, Fine Wines claims that the nondiscrimination principle is not limited to discrimination against out-of-state products; it also extends to discrimination against out-of-state business interests, which are at issue in this case.
Regarding the Association’s “core” versus “non-core” distinction, Fine Wines acknowledges that a state generally has broad power under the Twenty-first Amendment to regulate alcohol sales within its borders. But, Fine Wines contends, a state’s alcohol laws must be judged by whether the laws promote a core purpose of the Twenty-first Amendment and whether that purpose outweighs the Commerce Clause interest at stake. Furthermore, Fine Wine argues that, by the Association’s logic, the ten-year durational-residency requirement for license renewals should also be insulated from dormant Commerce Clause scrutiny, because it too is an exercise of Tennessee’s “core” Twenty-first Amendment power. That the Association has elected to pursue only the durational-residency requirement for obtaining a license, Fine Wine claims, undermines the strength of the Association’s “core” verses “non-core” distinction.
PROMOTING FEDERALISM VERSUS PREVENTING ECONOMIC BALKANIZATION
The Association argues that because Tennessee’s durational-residency requirements are consistent with the principles underlying the Twenty-first Amendment, the requirements are constitutional. The Association claims that understanding the history and policy behind the Twenty-first Amendment is crucial to understanding the Association’s legal argument. The Association explains that Congress enacted the Eighteenth Amendment to federally regulate the manufacture and transportation of alcohol. This centralized regulation, the Association notes, resulted in a black market for illegal alcohol and precipitated the rise of organized crime. After the failure of centralized regulation, the Association argues, the Twenty-first Amendment was enacted to decentralize decision-making and restore power to the States. The Association maintains that the Amendment’s adoption was fundamentally a federalist act, in that Congress recognized first that community tolerance for alcohol varies from state to state, and second that local officials are best positioned to effectively respond to their community’s needs. Therefore, the Association continues, if a state’s alcohol laws treats alcohol produced out of state on equal terms with alcohol produced in state, the state’s alcohol laws are exempt from dormant Commerce Clause scrutiny. The Association acknowledges that no state’s solution is perfect, but claims that, “it is far better to have ‘fifty-one imperfect solutions rather than one imperfect solution.’” Accordingly, the Association argues, the Court must allow Tennessee to decide which regime best fits its needs, because Tennessee’s decision exemplifies the federalist principles underpinning the Twenty-first Amendment.
On the other hand, Fine Wines argues that Tennessee’s durational-residency requirement is unconstitutional because it violates the principles underlying the dormant Commerce Clause. Fine Wines does not dispute the important principles advanced by the Twenty-first Amendment. Rather, Fine Wines contends that the Court, in performing its constitutional analysis, must balance these principles against the principles underlying the dormant Commerce Clause. Fine Wines claims that the dormant Commerce clause’s fundamental purpose is to prevent economic favoritism. By preventing economic favoritism, Fine Wines continues, the dormant Commerce Clause can help states avoid trade rivalries of the kind that negatively impacted the Colonies and the States under the Articles of Confederation. Therefore, although the Twenty-first Amendment reserves broad power to the States to regulate alcohol, Fine Wines maintains that courts should be wary of regulations that tend to promote economic favoritism. Here, Fine Wines asserts that Tennessee’s durational-residency requirement effectively excludes out-of-state businesses from entering the Tennessee market. Fine Wines contends that this is a form of economic favoritism that violates the dormant Commerce Clause. Fine Wines argues that although the boundary between Twenty-first Amendment principles and dormant Commerce Clause principles may be blurry, regulations that amount to economic favoritism are impermissible because they result in the “economic Balkanization” that the dormant Commerce Clause seeks to prevent.
THE SCOPE OF THE TWENTY-FIRST AMENDMENT
In support of The Association, KHBC Partners II, Ltd. (“KHBC”) argues that the Twenty-first Amendment reflects a separation of powers policy whereby the States wield uniquely broad regulatory power over alcohol. KHBC points out that the Twenty-first Amendment is the only constitutional provision that explicitly grants power to the States, as well as the only Amendment that the people passed directly, via state conventions. Congress delegated this extensive regulatory power to the States, KHBC points out, rather than ratify a draft of the Amendment that would have granted Congress power to regulate alcohol. KHBC claims that Congress thereby relinquished its authority over state alcohol licenses. Accordingly, KHBC concludes, there is no federal policy regarding who can receive a state alcohol license. As a result, KHBC continues, Tennessee’s durational-residency requirements can never violate the dormant Commerce Clause. The Wine and Spirits Wholesalers of Tennessee, Inc. (“Wine Wholesalers”) agree, reasoning that the Twenty-first Amendment thus immunizes state alcohol regulations from the dormant Commerce Clause’s restrictions. While acknowledging that some courts have applied the dormant Commerce Clause to state alcohol regulations, Wine Wholesalers contends that these cases concerned discrimination against interstate alcohol products or producers—not the residency of alcohol retailers.
Arguing in support of Fine Wines, Alan B. Morrison (“Morrison”) questions the extent to which the Twenty-first Amendment insulates state alcohol regulations. Morrison claims that even if Tennessee’s durational-residency requirements are immune from the dormant Commerce Clause, the requirements are still prohibitively discriminatory under the Privileges and Immunities Clause. Morrison contends that Tennessee’s durational-residency requirements undermine the central tenet of the Privileges and Immunities Clause, i.e. that non-resident citizens enjoy the same privileges as a state’s resident citizens. For support, Morrison points to analogous state laws that have been held to violate the Privileges and Immunities Clause, including laws preventing non-resident citizens from obtaining a law license, and laws imposing higher fees on non-resident citizens applying for certain retail licenses. Morrison also argues that the Supreme Court has not expressed any policy suggesting that the Twenty-first Amendment insulates state alcohol regulations from any constitutional provisions apart from the dormant Commerce Clause. In particular, Morrison claims that the Court has declined to find any Twenty-first Amendment exceptions to the Equal Protection Clause. Although Morrison recognizes that discriminatory state laws may nevertheless survive a Privileges and Immunities challenge if non-resident citizens present “a peculiar source of evil,” Morrison contends that no such anomalies inhere in Tennessee’s durational residency requirements.
LEGITIMATE STATE REGULATORY INTERESTS?
In support of The Association, Wine Wholesalers claims that Tennessee’s durational-residency requirement furthers legitimate state regulatory interests. Wine Wholesalers contends that a durational-residency requirement better enables a local community to screen the “character and good faith” of the potential licensees who would be operating in the community. Wine Wholesalers therefore concludes that a durational-residency requirement goes hand in hand with the Twenty-first Amendment’s “core concerns,” which include preventing underage drinking and encouraging temperance. Furthermore, argues Wine Wholesalers, Tennessee law requires state agents to inspect a licensee’s operations, and a durational-residency requirement would facilitate potential examinations of a licensee’s records. The Center for Alcohol Policy (“The Center”) agrees, contending that the Twenty-first Amendment’s underlying goal is temperance, which is achieved by endowing the States with broad regulatory power over alcohol. Limiting the issuance of licenses via a durational-residency requirement, The Center continues, is a legitimate means of curbing alcohol consumption. While acknowledging that restricting the supply of alcohol inflates retail prices, The Center argues that high retail prices are justified because they likewise discourage alcohol consumption.
Morrison counters that the durational-residency requirement does not further any state interest that is strong enough to overcome the requirement’s discriminatory effect. In addition, claims Morrison, Tennessee could address any state regulatory interest without imposing a durational-residency requirement. Fine Wines also contends that Tennessee has not articulated any legitimate state interest, noting that Tennessee’s previous Attorney General issued two separate opinions stating that the durational-residency requirement did not advance any regulatory or public safety interest. When also considering that Tennessee has not enforced its durational-residency requirements for the past six years, Fine Wines concludes that Tennessee has no justification for its durational-residency requirement. In support of Fine Wines, a group of 81 Wine Consumers (“Wine Consumers”) points out that, by limiting consumers to purchasing wine from in-state retailers only, the durational-residency requirement restricts consumer choice and inflates prices. The National Association of Wine Retailers (“Wine Retailers”) echoes these concerns, contending that smaller wineries depend on internet-based specialty retailers to market their wines to out-of-state consumers.
- Supreme Court Sets Oral Argument in the Tennessee Retailers Case for January 16, 2019, Alcohol Law Review (Nov. 29, 2018).
- Liza B. Zimmerman, Supreme Court to Revisit Case of Interstate Wine and Spirits Shipping, Forbes (Oct. 11, 2018).