Supreme Court Hears Oral Arguments in Tennessee Residency Case

Daniel Kostrzewa | January 18, 2019

Ever since the U.S. Supreme Court agreed last fall to review Tennessee Wine & Spirits Retailers Association v. Blair (originally v. Byrd, but personnel adjustments in Tennessee have resulted in a name change), speculation on its implications has taken over the beverage alcohol industry. To be sure, any time the highest court hears a case, there is a lot to speculate on, but some of the speculation (say, that it would lead to the end of the three-tier system) seemed a bit premature.

With oral arguments having been made on January 16, 2019, we now at least have something more to base our speculations on. A transcript is available here, for anyone with the inclination to take a crack at.

I’ve said it before and will say it again: predicting how the Court will rule is a fool’s errand. And so we will not be trying to second guess what the result will be. Nonetheless, here are some of the highlights that came through from the arguments.

But first, a brief review:

The case arose from a rule in Tennessee requiring all applicants for an off-premises liquor license to meet certain durational residency requirements: 1) all new applicants must have lived in the state for at least 2 years; 2) all renewal applicants have lived in the state for at least 10 years; and 3) these requirements apply to all owners, directors, shareholders, managers, etc. of a corporation.

Several years ago, the Tennessee Alcoholic Beverage Commission (ABC) sought a ruling from the state attorney general on the legitimacy of these requirements. When the AG was unable to provide justification, the ABC determined not to enforce them. This decision empowered the retail giant Total Wine & More (“Total Wine”) to get licensed in the state and open up a couple stores.

However, Total Wine’s actions were met with resistance from the state’s retailers, who initiated a lawsuit against Tennessee to get it to enforce the durational residency requirements, which would result in Total Wine having to shut its operations. (Though Total Wine would not be the only party whose interests would suffer.)

The case proceeded to the 6th Circuit Court of Appeals, which ruled last February that Tennessee’s durational residency rules were in fact improper discrimination against out-of-state parties, and were not justified by the state’s 21st Amendment rights to control its internal alcohol market. Notably, the 6th Circuit applied the finding from the Supreme Court in the 2005 Granholm decision to the retailer tier. (This was the source of a lot of speculation that the Court would be poised in Tennessee Wine to open up interstate direct-to-consumer shipping of alcohol by retailers, as it had for producers.)

The Tennessee Retailers Association then appealed the 6th Circuit ruling, which the Supreme Court agreed to take up.

What came out through oral arguments?

The Court is notoriously hard to predict, with the Justices generally playing the cards close to the chest. As such, it’s not our place to say how the Court will rule (though it might be ventured that perhaps a more limited ruling is to be expected than a broad-ranging decision that upends current regulatory policies). Instead, we will limit ourselves to merely pointing out some of the more interesting and salient issues that were brought up.

History matters — but what history is uncertain.

The oral arguments — particularly that of the petitioner (that is, Tennessee Wine and Spirits Retailers Association, and their amici) — spent a lot of time delving into the history of beverage alcohol regulation.

A leading argument made by the petitioner was that when enacted, the 21st Amendment sought to restore to states the power they had over the alcohol industry that they had enjoyed pre-Prohibition. Per this argument, those powers, originally set out in the turn-of-the-century Wilson and Webb-Kenyon Acts, set down a total abrogation of the Dormant Commerce Clause when it comes to sales of alcohol.

The Dormant Commerce Clause is a Constitutional principle that prohibits states from discriminating against out-of-state interests in favor of in-state parties in commerce. As the petitioner stated, under the 21st Amendment, states were excused from Dormant Commerce Clause issues, with no exception for any form of economic protectionism that a state might enable.

Notably, the petitioner’s attorney stated that this was the only Constitutional exception set out by the 21st Amendment, and other Constitutional exceptions — like the First Amendment — were not allowed under the 21st Amendment. This might be a surprising claim for anyone who has had to contend with the many restrictions on advertising by alcohol retailers and producers that exist among state regulations.

The respondent also discussed the historical legacy of alcohol regulation and pre-Prohibition restrictions. However, they used this history more to point out the public health and safety concerns that underscored the 19th-Century Temperance Movement. As they noted, because public policy over health and safety played such a vital role early in alcohol regulations, modern regulations should continue to reflect that policy, and as such a state law would need to be justified by more than the “it’s economic protectionism, which states have near virtual authority to impose under the 21st Amendment” argument put forth by the petitioners. (And since Tennessee did not have any health and safety justifications for the durational residency requirements, they should be found invalid.)

The respondent further posited that the legacy of the Wilson and Webb-Kenyon Acts, along with the 21st Amendment, was merely to permit states to be dry and then prohibit all importation of alcohol from out-of-state, which otherwise would be impermissible under the Dormant Commerce Clause. This more limited view would mean that states do not have the “virtually complete authority” to control sales of alcohol that the petitioner claimed they had.

Granholm clearly applies — just how it does isn’t clear.

Both petitioner and respondent made clear that they considered the 2005 Granholm case to be controlling in this case. But just as with the historical legacy, their opinions on what Granholm meant differed.

The petitioner asserted that Granholm set out the standard that, when reviewing beverage alcohol regulations under the 21st Amendment, a court needed to look at the historical powers granted to states pre-Prohibition. This set up their argument that any economic protectionist policies enacted would be valid, as per their view of the history, pre-Prohibition laws allowed states “virtually complete authority” over the sale of alcohol.

Interestingly, at one point the petitioner stated that Granholm was concerned with disparate taxation of out-of-state products compared with in-state products. Speaking before the Court can be an incredibly stressful experience, and the statement included a mention of a separate case, Bacchus, which did deal with different taxation of in-state and out-of-state products, so perhaps we can excuse the error.

The respondent, instead, used Granholm to support their argument that state regulations of alcohol that discriminate against out-of-state interests (and notably, not just out-of-state products, which was the petitioner’s position) are invalid if they are purely protectionist and not justified by any other public policy.

Since Tennessee did not provide any other justification for the durational residency requirements, the respondent asserted that they should be invalidated. This argument seems to be a bit more in line with a historical reading of Granholm, and so might help sway the opinions.

Really, that Tennessee refrained from joining the case at all was in itself rather notably, and could skew the Justices’ sense of the necessity of maintaining the laws as written.

How will this case affect future Litigation?

While the Court as a whole seemed largely skeptical of both the petitioner’s position that Tennessee had an interest in maintaining the durational residency requirements (again, not something that Tennessee itself bothered to argue) and that the 21st Amendment completely overrode any Dormant Commerce Clause issues, Justices Kagan and Gorsuch were vocal in their concern that ruling for the respondents would usher in a massive wave of litigation to overturn all kinds of beverage alcohol regulations.

The respondent attempted to allay those fears by stating that this case merely had to do with the immediate issue of equal access to Tennessee licenses for brick-and-mortar stores, and would not in itself enable an “Amazon of liquor.” (Notably, no one mentioned that Amazon is currently in the alcohol business, through its ownership of Whole Foods — and had to shut down its online marketplace for wine because of the apparent conflicts of interest.)

However, the respondent’s focus on the immediate issue did not seem to placate the Justices’ concerns about future litigation and whether their decision today might lead to the repeal of state authority in alcohol regulation tomorrow. As such, it seems likely that, if the Court rules in favor of the respondents, it will seek a rather narrow finding that just touches on the durational residency requirements without otherwise invalidating the states’ authority.

What does this all mean?

An opinion is expected from the Court in the coming months — perhaps as early as April, but at least no later than June. Until then, expect a second wave of speculation as court watchers and beverage alcohol experts throw bones and read tea leaves.

The reliance that both sides put on Granholm seems to be a relief — there was some wild-haired concern that the Court might do something rash and reverse its ruling in that case (finding that, indeed, states have total authority in the control of sales of alcohol, and as such could prohibit out-of-state shipping while permitting it in-state). But those concerns seem to be put to rest now.

The fears that the Justices presented for future litigation do seem to point to them trying to find a narrow opinion here that maybe just invalidates the inane and unsupported-by-the-state parts of the Tennessee durational residency requirements (such as the 10-year renewal and the 100 percent in-state presence requirements), while still supporting a state’s authority to control its internal beverage alcohol market.

While this would not in itself forestall future litigation, it could perhaps set out more of a standard for lower courts when evaluating the legitimacy of a state rule that would be completely invalid if it regulated anything besides alcohol.

Notably, such an opinion also likely would not settle the brewing issue of interstate direct-to-consumer shipping by retailers. Several lower courts have recently issued rulings on this issue, providing mixed opinions. If the Supreme Court cannot find a way to address that issue in its opinion in Tennessee Wine, it could be setting itself up to hear another beverage alcohol case sooner than later.

For now, though, there is not much for us in the beverage alcohol regulation business to do but wait for the Court’s opinion. On our part, we are looking into the possibility of hosting a webinar on this case, or posting further analyses of the arguments. Make sure to stay tuned to this blog for more updates on Tennessee Wine and many other regulatory issues affecting the beverage alcohol industry.