YESTERDAY’S ORAL ARGUMENTS AT THE SUPREME COURT ON A CASE THAT COULD SHAKE UP THE ENTIRE ALCOHOL INDUSTRY

Yesterday, we looked at the background of an important case at the Supreme CourtTennessee Retailers Association v. Byrd, et. al. Oral arguments were held January 16, 2019 at the United States Supreme Court.   A link to the transcript can be found here. A decision will be made by the time the court adjourns in June.

The oral arguments seemed to focus on whether the 21st Amendment meant that regulation of alcohol was different than other products and that states could regulate it under their inherent powers. Could it be discriminatory as long as it did not violate other Constitutional principles and federal laws? Was economic protectionism justified as a state interest or was more required to show a legitimate state interest?

Below are some extracts from 67 page transcript of the oral arguments that give a flavor of the banter between the Supreme Court Justices and the attorneys arguing the appeal:

JUSTICE ALITO: Can I come back . . . and ask you just very simply, can a state enact a 10-year residency requirement and, if not, why not?

[ATTORNEY FOR TENNESSEE STATE RETAILERS:] There would not be a dormant Commerce Clause problem with a 10-year residency requirement. There might be some other constitutional challenge to that, but it would be immune from dormant Commerce Clause scrutiny as long as it treated in-state and out-of-state products the same.

* * *

JUSTICE SOTOMAYOR: All right. . . I do understand that the Twenty-First Amendment was geared towards giving states greater freedom in controlling the distribution and sale of liquor in their jurisdiction. But I’m having a hard time understanding how the residency requirement does when it comes to a person’s pre-existing residency. So, yes, we understand that having someone there who’s responsible to the community is necessary. That was inherent in the three-tier system. But why is it inherent in the three-tier system that you have to have someone who’s only a local do it? There are many states whose three-tier system doesn’t require that. They function fairly well. I — I don’t understand the necessity of that.

 

[ATTORNEY FOR TENNESSEE STATE RETAILERS:] So, first, I don’t think the question is whether it’s necessary or not. The point of the Twenty-First Amendment is the courts aren’t supposed to impose that kind of scrutiny. States get to decide what distribution system works within their state. And the durational component of a residency requirement serves very much the same interests. For example, residency requirements are important because they allow states to conduct background checks. Having somebody be a — a resident for a longer period of time allows the — those who decide whether to issue licenses to actually observe the person and to observe the person’s character and give the — the state a better ability to decide whether to issue a license and to conduct the background check.

 

* * *

 

[ATTORNEY FOR STATE ATTORNEY GENERALS]: — the statute here, Your Honor, goes to the question of who can sell to whom and on what terms. That’s always been at the heartland of what the Twenty-First Amendment was meant to protect, the state’s ability to structure the intra-state sale of its product.

JUSTICE KAGAN: . . wouldn’t it be a better idea if we said the dormant Commerce Clause does apply? And then let the state come back and say we can meet that test; we have real health and safety concerns here, and our law is well tailored to address those concerns. And so it’s not a dormant Commerce Clause violation.

 

* * *

 

[ATTORNEY FOR STATE ATTORNEY GENERALS]: Think about the three-tier system for a moment. This Court described it in Granholm not only as unquestionably legitimate but also as involving sales to and purchases from an in-state wholesaler. Now that arrangement disadvantages out-of-state business interests. It wouldn’t fly if we were talking about milk or trash. But this Court has treated it as unquestionably legitimate because it’s part of the state’s choice about how to structure the in-state sale of this particularly dangerous product that has distinctive constitutional treatment under the Twenty-First Amendment.. . In the end, Respondents are asking this Court to treat alcohol like any other article of commerce. But it’s not. It was actually 100 years ago today that the Eighteenth Amendment was — was finally ratified. And 14 years after that failed experiment, the Twenty-First Amendment restored to the individual states their broad police powers over delivery and sale of this product within their borders so long as they treated out-of-state and in-state products the same.

 

[ATTORNEY FOR TENNESSEE ABC]:. . And unless you’re going to limit it just to producers, which is an irrational limitation this Court’s never adopted with respect to any Commerce Clause analysis, we are being discriminated against. And, therefore, it’s the state’s burden to come forward and to justify that discrimination. There is no rational basis for the two-year ban that they’ve put in place here.

 

JUSTICE GORSUCH: But isn’t the next business model just to . .  try and operate as the Amazon of . . liquor?

[ATTORNEY FOR TENNESSEE ABC]: . . . No, my client operates on a more — on a brick-and-mortar business model that says we’re perfectly comfortable operating within the sphere of regulation that the state imposes on every in-state operator. And all we are seeking to have is not to be discriminated against.

JUSTICE BREYER: All right. That’s totally rational to me.

 

[ATTORNEY FOR TENNESSEE STATE RETAILERS:] . . . First, Respondents concede a residency requirement. A durational residency requirement follows from that. First, because states get to define what residency is, and, second, because the same interests that serve a presence requirement also serve a durational — durational residency requirement. Duration facilitates background checks. It facilitates investigation and enforcement of the law because somebody who’s been there for a while is more likely to have substantial assets that can be enforced — that can be seized, and is less likely to flee at the first sign of trouble. . . And how do we draw a line about whether 30 days is protectionist, a year is protectionist, two years is protectionist? At that point the inquiry just becomes the same as any other dormant Commerce Clause challenge. And the one thing we know from the Twenty-first Amendment is that alcohol was to be treated differently for dormant Commerce Clause purposes. Respondents rule allow no room for that.

The Supreme Court Justices were concerned that the legal theory offered by the Respondents (Tennessee ABC) would open up a perpetual Pandora’s box of additional litigation against state alcohol regulation. First it would be a challenge against residency or presence. Then a challenge by online retailers over virtual presence. It is a slippery slope.

What does it all mean for the industry? We will look at that in the next post.

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