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United States Supreme Court Rules on Residency Requirement Regarding Interstate Commerce

Tennessee
September 12, 2019
July 1, 2019
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The United States Supreme Court has released the opinion in the matter of Tennessee Wine and Spirits Retailers Association vs. Zachery Blair, et al., which is the biggest case involving wine heard by the highest court in the land since Granhold v. Heald in 2005.  Granhold struck down bans against out of state direct shipping by wineries to consumers.  The case presently before the Supreme Court deals with Tennessee’s residency requirement for alcohol retailers—Tennessee has both two-year and 10-year residency requirements imposed upon retailers of alcohol within the state, purportedly under the state’s allowance to govern the safety, health and welfare of its citizens. 

The ruling by the Supreme Court, written by Justice Alito for the 7-2 majority (Gorsuch and Thomas dissenting), holds that state residency requirements violate the interstate commerce clause.  More specifically, residency requirements imposed upon retailers of alcohol, which result in prohibition of the retailer selling to out of state residents, violate the interstate commerce clause.  Section 2 of the 21st Amendment does provide States the power to violate the nondiscrimination principle of the Interstate Commerce Clause, but Section 2 is applied narrowly.  When applied to the facts of this case, the Court held that Section 2 does not allow States to discriminate against these out-of-state interests (i.e. the interests of out-of-state retailers).

There are a number of interesting explanations for the Court’s majority ruling:

1. “the proposition that the Commerce Clause by its own force restricts state protectionism is deeply rooted in our case law. And without the dormant Commerce Clause, we would be left with a constitutional scheme that those who framed and ratified the Constitution would surely find surprising. . . . That is so because removing state trade barriers was a principal reason for the adoption of the Constitution. Under the Articles of Confederation, States notoriously obstructed the interstate shipment of goods. “Interference with the arteries of commerce was cutting off the very lifeblood of the nation.” At that Convention, discussion of the power to regulate interstate commerce was almost uniformly linked to the removal of state trade barriers, see Abel, The Commerce Clause in the Constitutional Convention and in Contemporary Comment, 25 Minn. L. Rev. 432, 470–471 (1941), and when the Constitution was sent to the state conventions, fostering free trade among the States was prominently cited as a reason for ratification.”

2. "the developments leading to the adoption of the Twenty-first Amendment have convinced us that the aim of §2 [of the Twenty-first Amendment] was not to give States a free hand to restrict the importation of alcohol for purely protectionist purposes . . . §2 grants States latitude with respect to the regulation of alcohol, but the Court has repeatedly declined to read §2 as allowing the States to violate the “nondiscrimination principle” that was a central feature of the regulatory regime that the provision was meant to constitutionalize.”  This is particularly interesting because the Tennessee Association resists this reading.  The Court acknowledges that the Association concedes (as its must under Granholm) that Section 2 does not give the States the power to discriminate against out of state products and producers, the Association presses the argument, echoed by the dissent, that a different rule applies to state laws that regulate in-state alcohol distribution versus other non-alcohol products.  The Court finds this very troubling and states “There is no sound basis for this distinction.” 

3. The Court further elaborates on the contrary positions taken by the Association: “The Association’s argument encounters a problem at the outset. The argument concedes that §2 does not shield state laws that discriminate against interstate commerce with respect to the very activity that the provision explicitly addresses—the importation of alcohol. But at the same time, the Association claims that §2 protects something that §2’s text, if read literally, does not cover—laws restricting the licensing of domestic retail alcohol stores. That reading is implausible. Surely if §2 granted States the power to discriminate in the field of alcohol regulation, that power would be at its apex when it comes to regulating the activity to which the provision expressly refers"

4. As the Court has done in other matters relating to the dormant Commerce Clause (milk and garbage come to mind), the Court found that there must be a real substance to the safety, health and welfare interest of the State; it cannot be a manufactured interest to conceal an otherwise protectionist intent.  “As for the dormant Commerce Clause, the developments leading to the adoption of the Twenty-first Amendment have convinced us that the aim of §2 was not to give States a free hand to restrict the importation of alcohol for purely protectionist purposes”.

This passage from Alito’s opinion suggest that this opinion as well as the Granholm case striking down bans against out of state direct shipping by wineries to consumers is a wide, rather than a narrow decision: “The Association and the dissent point out that Granholm repeatedly spoke of discrimination against out-of-state products and producers, but there is an obvious explanation: The state laws at issue in Granholm discriminated against out-of-state producers. See 883 F.3d, at 621. And Granholm never said that its reading of history or its Commerce Clause analysis was limited to discrimination against products or producers. On the contrary, the Court stated that the Clause prohibits state discrimination against all “‘out-of-state economic interests,’” Granholm, 544 U.S., at 472 (emphasis added), and noted that the direct-shipment laws in question “contradict[ed]” dormant Commerce Clause principles because they “deprive[d] citizens of their right to have access to the markets of other States on equal terms.” Id., at 473 (emphasis added). Granholm also described its analysis as consistent with the rule set forth in Bacchus, Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573 (1986), and Healy that “‘[w]hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry.’” Granholm, supra, at 487 (quoting Brown-Forman, supra, at 579; emphasis added).”

After reading the opinion, the inevitable question is “What happens next?”  The holding by the Supreme Court strikes down an existing regulation within Tennessee; it does not affirmatively allow action to occur across the entire United States.  There are roughly 20 states that have regulations in place disallowing some type of conduct relating to shipment of alcohol.  Will certain nationwide retailers take up the proverbial torch and undertake further litigation to affirmatively add additional rights?  Will retailers simply begin/continue to ship alcohol across state lines without concern for whether the state laws implicated expressly allow for such conduct to occur?  What of the receiving state’s rights concerning the safety, health and welfare of its citizens vis-à-vis the receiving state being deprived of any opportunity to inspect and regulate the out-of-state entity manufacturing and/or shipping the alcohol? Will the pendulum swing the other direction with wholesalers and large 1-state-retailers taking action to prohibit both in-state and out-of-state shipping so that such legislation is not concerned discriminatory (i.e. “purely protectionist”) under the 21st Amendment?  Will tax implications from out-of-state sales enter the fray as States jockey for revenue?

The answers to the above questions remain unknown even in the face of Justice Alito’s opinion.  What can be said with certainty is that more litigation will occur.