What’s next for three-tier after the Supreme Court’s Tennessee retailer decision?

Tennessee retailer decisionDon’t make too many bets three-tier will open up after the Tennessee retailer decision; we’ve been down that road before

The cyber-ether has been awash with confident pronouncements since the U.S. Supreme Court’s Tennessee retailer decision, which struck down a law that limited who could own a liquor store in that state. Many predicted the beginning of the end of the antiquated and restrictive three-tier system that regulates alcohol sales in the U.S.: “Consumers could benefit from Supreme Court ruling,” “Supreme Court hands retailers a big win,” and so on. One of the smartest people in the wine business even said we should see these pro-consumer changes quickly.

Don’t bet on it.

I’ve spent the three weeks since the Tennessee retailer decision interviewing attorneys who practice liquor law, analysts, and other knowledgeable people. And their consensus, almost to the syllable: The Tennessee retailer decision may be a big deal at the moment, but don’t expect much to change about three-tier — and it’s not going to get easier for us to buy wine.

“I don’t see this ruling going much farther,” says Tucker Herndon, an attorney in Nashville who is the office managing partner of Burr & Forman LLP. “I don’t think it’s going to open the floodgates, and I don’t think it’s going to give us a regulatory system without a lot of limitations.”

The Supreme Court ruling said Tennessee couldn’t impose a residency requirement on liquor store owners because such a requirement didn’t promote the public health and safety. All it did, said the ruling, was shield local retailers from competition from national and regional chains. In fact, residency laws are common in in the retail booze business for just that reason, and we’ve had one in Texas in one form or another for years.

The 21st Amendment, which repealed Prohibition, allows the states to regulate alcohol sales as long as the states are promoting the public health and safety. Hence, the Tennessee law ran afoul of the Constitution’s Commerce Clause, which says states can’t favor their residents ahead of people from other states unless there is a very good reason, like public health and safety.

Nothing new about this test

Hence, what seems to a litmus test for the three-tier system. But the attorneys I talked to said that public health and safety has always been a litmus test, and it’s a long way from the Tennessee retailer decision to Internet wine sales. That’s what many analysts are predicting in the wake of the decision: That we will be able to buy wine from any retailer anywhere in the country with the click of a computer mouse.

The attorneys and analysts cited three reasons for their pessimism:

First, the decision didn’t really do anything but overturn a bad law that even the state of Tennessee didn’t think much of. The state attorney general didn’t appeal the lower court ruling; the state’s liquor retailer trade group did because the attorney general didn’t think the law was defensible.

Second, says Herndon, the decision is about retailer residency – nothing more. That someone doesn’t need to be a Tennessee resident to get a retail liquor license to open a store in Tennessee doesn’t mean that someone who doesn’t live in Tennessee can get a license to open a store outside of Tennessee. It’s a subtle difference, perhaps, but an important one. He says the state can almost certainly show that it’s protecting the public health and safety by requiring anyone who has a Tennessee retail license to use that license for a store in Tennessee.

Third, says Lou Bright, the former generral counsel for the Texas Alcoholic Beverage Commission, it’s a long legal journey from this ruling to Internet wine sales. Three-tier mandates that consumers can only buy from retailers and restaurants, while retailers and restaurants must buy from wholesalers and they can’t buy from producers. And producers must, save for one small exception, sell only to wholesalers.

Bright says Tennessee was about who can get a retail license, and not about retailers selling wine directly to consumers. When the court carved out the small, direct shipping exception in 2005, it didn’t address the mechanics of the three-tier system and the role of wholesalers. And, he says, this ruling didn’t, either.

Photo: “Moot Courtroom” by College of William & Mary Law Library is licensed under CC BY-NC-ND 2.0 

5 thoughts on “What’s next for three-tier after the Supreme Court’s Tennessee retailer decision?

  • By Tom Wark - Reply

    With respect to the attorneys you have spoken with, I think it’s crystal clear that the Supreme Court decision WILL change how wine is purchased. What the Supreme Court said is that the 2005 Granholm decision does and always has applied to retailers with equal force as it applies to wineries. To quote:

    “Granholm repeatedly spoke of discrimination against outof-state products and producers, but there is an obvious explanation: The state laws at issue in Granholm discriminated against out-of-state producers. 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,’”

    There it is. And we know what Granholm led to when states thought it applied only to wineries. It led to the opening of state after state from shipments from out-of-state retailers, giving consumers access to hundreds of thousands of wines that were not distributed in their state.

    Now that we know that the non-discrimination and anti-protectionist principles of the Granholm decision did and do apply to retailers, we can expect states to adjust their many discriminatory and protectionist laws. This will, in turn, lead consumers in numerous states to have access to hundreds of thousands of wines not currently available in their states.

  • By William Baker - Reply

    Tom:
    I sincerely hope your analysis of this ruling is correct, because that would be welcome news indeed. The three-tier system can and does restrict commerce – that can be easily proven. It also adds two layers of mark-up to the cost of every product sold thru the system.
    Online retailers should be making distribution agreements with producers, post-haste, JIC.

  • By Lou Bright - Reply

    Well, here we are again. I never understood Granholm to apply only to manufacturing tier members, nor do I believe courts did post-Granholm, although some members of our industry said it did. Wine Country Gift Baskets/Siesta Village v TABC was the post-Granholm case charging that Texas law discriminated against out-of-state wine retailers in favor of in-state package stores. That argument failed at trial and on appeal, not because Granholm or the Commerce Clause did not apply but because, in the opinion of those courts, no discrimination was present. That remains the law in Texas and nothing in Tennessee Retailers stands in opposition to that reasoning or holding, regardless of how criticizable it may be. This point may well present some difficulties in the recently filed new retailer’s case in Texas.
    There is something in Tennessee Retailers that, to me at least, bids the possibility of change. Post-Granholm many members of our industry and, depressingly enough, many regulators took the dicta in U.S. v North Dacota and Granholm to the effect that the three tiered system is “unquestionably legitimate” to mean that preservation of that system was of itself a legitimate state policy goal, useful in justifying protectionist laws. This was what I understood to be at the heart of the reasoning of Arnold’s Fine Wines, the New York retailer’s case. That was never true and Justice Alito has made that point clearly in Tennessee Retailers. Thus, states may not point to maintenance of the three tiered system as justification for their protectionist laws but must prove that those laws advance the legitimate policy interests behind alcoholic beverage regulation. Of course, as everyone in our little world knows, states have been shockingly unable to do that in case after case, decade after decade.
    I have not gone back to re-read any of these cases but have relied on my increasingly sclerotic memory and so am open to correction by more recent scholarship. And, as always, these opinions don’t express the views of anyone else, maybe not even, on more sober reflection, me. Whereupon deponent sayeth not further.

  • By Paul Tincknell - Reply

    The 21st Amendment and the Commerce Clause do not clash but complement each other. Together they add up to the requirement that states must have regulations that treat in-state and out-of-state wineries (and likely wine retailers at some point) roughly the same. It’s an all-or-nothing equation, with the reality that it can go to nothing; a state can ban all internet wine retail, or all consumer-direct shipping, as long as it applies it to both in-state and out-of-state businesses equally. The state gets to decide per the 21st Amendment.

    Granholm has had the effect of slowly – so very slowly – opening states for winery direct sales and shipments. Anyone involved in alcohol shipping compliance knows that it is a mountain of bureaucratic red tape and cost to do business in all of the reciprocal states; most producers will never make that effort to be in all of them, much less a majority of them.

    I expect to see a similar evolution in wine retailer sales; as more of these blatantly protectionist laws fall, then states will change their laws to either allow or ban consumer-direct shipments by wine retailers. Frankly, it will be more of the latter than the former, as most wine retailers don’t ship that much wine. The wholesalers will work to ban wine retailer shipments to keep their oligopolies intact. In the end, the effort for most small and mid-size wine retailers will be same as for small and mid-size wineries, that it is too complicated and expensive to bother to do more than open a few out-of-state markets and call it a day. But even that reality is many years, lawsuits, and legislative sessions down the road.

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