Supreme Court Report

Liquor store war: Should a giant wine and spirits retailer be subject to state residency requirements?

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Judge Jeffrey S. Sutton, dissenting over the two-year residency requirement, wrote that “state regulations of in-state distribution, even if facially discriminatory, are constitutional unless a challenger can show that they serve no purpose besides ‘economic protectionism.’ ”

All three members of the panel agreed that the 10-year residency requirement for license renewals and the corporate ownership provision did not pass muster, and the Tennessee retailers’ association did not appeal that part of the ruling.

‘Family-Owned Businesses’

Just as the Granholm case was driven by changes in the economy that led to wineries seeking to sell directly to consumers, the Tennessee case reflects the rise in recent years of large chains of liquor superstores.

“This is really one of the last industries still dominated by family-owned businesses,” says Michael D. Madigan, a Minneapolis lawyer who has practiced alcohol-related law for more than 30 years. He acknowledges that chains such as Total Wine are making their mark, but he says local mom-and-pop retailers are more likely to be rooted in their communities, to be sensitive to local norms, and to be vulnerable to effective enforcement.

Madigan filed an amicus brief in support of the Tennessee requirements for the National Beer Wholesalers Association. The brief argues that without the three-tier structure that includes resident wholesalers, “small suppliers would be unable to compete with multinational suppliers,” and consumers would not “enjoy the unprecedented choice and variety offered by the current regulatory system.”

Scott A. Keller, a Washington, D.C., lawyer who filed an amicus brief for American Beverage Licensees, a national association of package liquor stores, bars and taverns that also backs Tennessee’s residency rules, argues that in-state residency requirements allow states to better enforce all their liquor regulations.

“Can a state say that you must be an in-state wholesaler and retailer?” Keller asks. “If the court were to say otherwise, that would eviscerate the three-tier system we’ve had in place for decades.”

Finding the Proper Boundary

Carter G. Phillips, a veteran Supreme Court litigator with Sidley Austin who represents Total Wine in the case, says: “The core principle of the dormant commerce clause is that you shouldn’t balkanize the states. You should allow the free flow of commerce.”

He characterized the scope of the question before the court as modest.

“The consequences would be more severe if the court were to offer a holding that casts doubt on the three-tier system,” Phillips says. “But we’re not challenging the three-tier system.”

The Institute for Justice, an Arlington, Virginia-based public interest legal group that for years has been fighting certain state liquor regulations it views as economic protectionism, is representing the mom-and-pop Kimbrough liquor store, which a Utah couple, Douglas and Mary Ketchum, acquired. They originally sought to be licensed as out-of-state owners.

“The 21st Amendment does not trump the commerce clause,” says Michael Bindas, a senior attorney with the institute. The Ketchums moved to Tennessee two years ago, but Bindas says there are enough questions about how Tennessee’s residency requirements will shake out to leave uncertainty about the couple’s right to a retailer’s license over the long term.

“The more the court recognizes the nondiscrimination principle of the commerce clause, and the more it protects the rights of newly arrived residents of a state—like the Ketchums—to operate a business, the better it will be because consumers will have more choices.”

One thing seems clear: Some 85 years after the 21st Amendment was ratified, lower courts are still eager to get further guidance from the Supreme Court.

This past November, the Chicago-based 7th U.S. Circuit Court of Appeals revived a lawsuit over Illinois restrictions on shipping alcohol to consumers in that state from out-of-state retailers.

The court acknowledged that the type of alcohol regulation at issue in Lebamoff Enterprises Inc. v. Rauner was different than the residency requirements in the Tennessee case, but it said the Supreme Court’s decision in the latter may provide some relevant guidance.

“In recent years, there has been considerable litigation over the proper boundary between lawful exercise of 21st Amendment powers and unlawful economic protectionism,” the 7th Circuit said, adding that the lines the Supreme Court has drawn thus far “are sometimes difficult to follow.”


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