Supreme Court Examines Liquor Retail Regulations

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The Court’s decision will weigh states’ regulatory powers against concerns of economic protectionism.

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Nearly 85 years after Prohibition, the U.S. Supreme Court this term will revisit the meaning of the 21st Amendment, the provision that ended the United States’ constitutional ban on alcohol.

In Tennessee Wine & Spirits Retailers Association v. Blair, the Court will decide whether Tennessee’s state residency requirements for liquor retailers fall within its powers to regulate the sale of alcohol, or if these regulations excessively discriminate and interfere with interstate commerce.

Like many states, Tennessee has a three-tier system for distributing alcoholic beverages, separately licensing alcohol manufacturers, wholesalers, and retailers to operate in the state. The Tennessee Alcoholic Beverage Commission permits manufacturers to sell only to wholesalers, wholesalers to sell only to retailers or other wholesalers, and retailers to sell only directly to consumers.

Tennessee, however, requires that individuals and corporations reside in the state for at least two years prior to applying for a license to sell liquor as a retailer. State law also requires retailers to reside in the state for at least ten years before renewing their license.

The plaintiffs in Blair, two liquor retailers that did not meet the residency requirements, challenged the regulations as violations of the so-called dormant Commerce Clause. Under the non-dormant Commerce Clause of the U.S. Constitution, Congress has the power to regulate interstate economic activity. But the Court has held that this grant of power creates a “dormant” constraint on states’ authority to adopt regulations affecting interstate commerce. Under the dormant Commerce Clause, states cannot engage in economic protectionism or “unjustifiably… discriminate against or burden the interstate flow of articles of commerce.”

The plaintiffs in the current case challenging Tennessee’s liquor laws allege that they were subject to a state policy that unconstitutionally discriminates against out-of-state residents.

Pivotal to the plaintiffs’ case is the meaning of the 21st Amendment to the U.S. Constitution. In addition to revoking the 18th Amendment’s outright ban on alcohol, the 21st Amendment recognizes the role of states in regulating alcohol. The amendment provides that “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.”

During oral argument before the Supreme Court, the plaintiffs argued that, by ending nationwide prohibition, the 21st Amendment delegated to the states “virtually complete control over how to structure the liquor distribution system” within their borders.

Both at trial and on appeal, federal courts rejected this argument, finding that Tennessee’s requirements were unconstitutional because they discriminated against out-of-state businesses.

The appeals court tackled two key questions in the case: first, whether the dormant Commerce Clause applies to durational residency requirements like Tennessee’s, and, second, if it does, whether the durational requirements violated anti-discrimination principles.

The appeals court noted that although the Supreme Court has previously read the 21st Amendment to grant states broad powers to regulate alcohol, by the mid-20th century the Court started to limit states’ regulatory powers over alcohol as that authority came into greater conflict with interstate commerce.

That said, the appeals court acknowledged that some forms of alcohol regulation fall squarely within the scope of the 21st Amendment, without violating any dormant Commerce Clause restrictions. For example, states may ban alcohol, distribute liquor through government-operated monopolies, and require retailers to reside in-state. The Supreme Court has found, moreover, that a three-tier system like the one in Tennessee is “unquestionably legitimate,” as states retain the power to set up their own liquor distribution systems.

But the appeals court held that the fact that Tennessee has a three-tier system does not insulate its residency requirements from dormant Commerce Clause challenges. The appeals court acknowledged that requiring wholesalers and retailers to be located within the state might be necessary for the three-tier system to function, but it found that the durational requirements were not. The requirements simply did not relate closely enough to the regulatory powers recognized in the 21st Amendment.

Instead, the durational residency requirements go a step further and “regulate the flow of individuals who can and cannot engage in economic activities,” according to the court of appeals. It reasoned that “the 21st Amendment gives a state the power to oversee the alcoholic-beverages business, but it does not give a state the power to dictate where individuals live.”

The appeals court next determined that the durational requirements, on their face, discriminate against out-of-state residents by making it more difficult for out-of-state residents to obtain licenses, therefore giving a competitive advantage to in-state resident retailers.

Moreover, the court held that Tennessee could achieve the goals of the durational residency requirements—namely, more oversight and control over alcohol retailers—with a nondiscriminatory alternative. The court acknowledged that Tennessee had several such alternatives available, including requiring the general manager of a liquor store to be a resident of the state or posting a bond before receiving a license.

The Supreme Court held oral arguments in Blair in January and is expected to issue its decision in the case by the end of June.