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Supreme Court Comes Down in Favor of Interstate Commerce Over State Regulation

Wine pundits are cheering a U.S. Supreme Court opinion handed down last week, with some going so far as to predict the death of the three-tier system because of it. The case did not involve any question about distribution. Rather, the Court ruled on Wednesday that Tennessee’s two-year residency requirement for retail liquor licensing is unconstitutional. The requirement impermissibly confers an economic advantage on the state’s own residents over those from elsewhere, the Court said.

But the 7-2 decision clearly spells out that states are subject to the same constitutional limits when they regulate alcohol as when they regulate other products. In particular, the 21st amendment, which lifted prohibition and granted states the right to regulate alcohol, does not grant authority to make rules that have no link to “public health and safety.” The ruling prompted optimism from advocates of direct shipments, some of whom hope to entirely overturn the three-tier system of distribution mandated in many states.

The now-settled residency question had vexed alcohol regulators in the state of Tennessee.The Tennessee Alcoholic Beverage Commission had stopped enforcing the requirement based on an opinion by its own state attorney general, when, in 2016, two entities with little in common applied for retail liquor licenses. Both landed in court because they relied on that opinion.

Maryland-based big box retailer Total Wine found itself named in a lawsuit along with a mom-and-pop from Utah, Doug and Mary Ketchum, who moved from Utah to Tennessee seeking a healthier climate for their disabled daughter. Both parties became ensnared in disputes with the Alcoholic Beverage Commission and the Tennessee Wine and Spirits Retailers Association.

“A lot of people think Total Wine and the Ketchums sued the state, but it was the exact opposite,” said attorney Michael Bindas, who represented the Ketchums. “They were sued for having the nerve to apply for a license.”

While the fight had nothing to do with distribution, many believe the Court’s decision has paved the way for other challenges to state regulations where interstate commerce is at issue, including prohibitions on direct shipping. Writing for the Court, Justice Samuel Alito drilled into history to review the relationship between alcohol regulation and interstate commerce. He wrote that for most of the nation’s history the Court has leaned toward commerce over state-level protectionism, and he asserted there is nothing in the package of basic constitutional rights that can be regulated away at the state level.

That assertion does seem to implicate aspects of the three-tier distribution system, which grew out of the 21st Amendment. However, Justice Alito specifically noted that the three-tier system is not at issue in the Tennessee case. In a further reference to the three-tier system, Wednesday’s decision recalls that the Court made favorable remarks about three-tier in Granholm v. Heald, the landmark interstate commerce case from 2005 that lifted a ban on out-of-state wine shipments to New York and Michigan. There has nonetheless been much optimism in the trade press from opponents of the three-tier system.

Wednesday’s ruling may also have application in the case filed by two Minnesota wineries challenging their state’s domestic grape quota. Attorneys in the Minnesota case immediately filed a notice advising the Eighth Circuit Court of Appeals, where it is currently under consideration. In that case, the wineries claim Minnesota’s requirement for wineries to use 51 percent fruit from inside the state is unconstitutional.

Plaintiffs in both cases are represented by the Institute for Justice, a nonprofit law firm that specializes in clearing government hurdles for small business.

CORRECTION ON JULY 2, 2019: This story originally reported that Total Wine is based in Connecticut. It is based in Bethesda, Maryland.

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