Supreme Court Agrees to Hear Tennessee Case Many Are Calling “Granholm 2”

On Thursday September 27, the United States Supreme Court agreed to hear Tennessee Wine and Spirits Retailers Assn. v. Byrd (herein, just Byrd), which caused a tizzy to break out among those who follow beverage alcohol regulations. This is big news because for one, Byrd will be the first beverage alcohol case heard by the Court in over a decade. That last case, Granholm v. Heald, sparked big changes for the industry, including the development of the modern DtC shipping market.

But more than that, Byrd presents the opportunity for the Court to clarify many questions left unsettled after Granholm. Indeed, within hours of the Court granting cert, many were already proclaiming Byrd to be Granholm 2.

On its face, Byrd seems to revolve around a simple question: are Tennessee’s residency requirements for holders of an off-premises package retail license valid? Within that question, though, are deeper, major questions for the regulation of beverage alcohol, including the broader validity of residency requirements, and whether the ruling from Granholm — that the power the 21st Amendment grants to the states to regulate beverage alcohol can be abrogated by the Commerce Clause — apply to retailers and wholesalers as much as it applies to suppliers?

This later question has been an ongoing issue ever since Granholm was decided in 2005, with courts divided. This confusion have been problematic for retailers and wholesalers, though, as their efforts to enjoy the same legal standing that suppliers have had since Granholm have been stymied. In particular, access to the interstate direct-to-consumer (DtC) market that has exploded over the last decade has been greatly limited. (For more on how Granholm has been applied to retailers in the past, please read this post from our blog.)

However, it is far from certain that the Court will make a major ruling in Byrd. Not only is it notoriously difficult to predict how the Court will rule on a case, but there are many ways that the Court could issue a narrow decision and not get at the thorny issues that have excited so many of the boozeratti. Nevertheless, the Court taking up Byrd is still big news, even if the ruling does not provide satisfactory resolution to the unsettled Granholm issues.

 

What Is Byrd About?

Byrd looks at existing rules in Tennessee requiring all retail liquor store licensees (i.e. off-premises consumption package stores) to have maintained residency in the state for at least two years prior to applying for a new license, and for ten years prior to applying to a renewed license (and yes, the weirdness of these durations has been remarked on a lot). In addition, for corporations, these residency requirements apply to every director, officer, and shareholder.

For many years, the national chain retailer Total Wine and More looked to enter the Tennessee market, but had been impeded by these residency rules. Nevertheless, the Tennessee ABC got word that Total Wine and More was going to apply anyway, which would likely lead to a legal challenge. To head off that challenge, the Tennessee Attorney General filed suit to obtain a declaratory judgment regarding the constitutionality of the residency requirements. The Tennessee Wine and Spirits Retailers Association joined that suit as a defendant, arguing that the residency rules were valid.

The District Court for the Middle District of Tennessee ruled that the residency rules were unconstitutional, as they were discriminatory on their face against out-of-state businesses in a way that the plaintiffs could not justify under the state’s 21st Amendment powers. The District Court reasoned, following the U.S. Supreme Court’s ruling in Bacchus Imports v. Dias (1984), that beverage alcohol regulations that are based purely on economic protectionism are not granted the same deference as laws related to combating the perceived evils of the beverage alcohol market.

The 5th Circuit Court of Appeals upheld this ruling this past February, leading to the petition that the U.S. Supreme Court accepted.

 

What’s Really At Issue?

While the immediate issue seems to just be whether a business like Total Wine and Spirits can enter the Tennessee market, Byrd has the potential to drastically change 21st Amendment jurisprudence going forward.

For most of its history, the 21st Amendment (specifically clause 2) has been deemed to grant near carte blanche to states to regulate the beverage alcohol market in their borders. However, over the past few decades, the Supreme Court has been increasingly open to limiting states’ regulatory powers, particularly when those regulations appear to inhibit interstate commerce.

The last time the Court looked at the 21st Amendment was Granholm, in which the Court determined that rules in Michigan and New York permitting instate wineries, but not out-of-state wineries, to ship directly to their residents were invalid as discriminatory. But because Granholm primarily dealt with the rights of wineries, the case has often been narrowly applied only to suppliers (though there have been exceptions, which are again discussed here).

The Court in Byrd, therefore, could make a major splash in beverage alcohol regulatory jurisprudence by applying its Granholm ruling to retailers. If that were to happen, then all manner of state regulations could come into question. A wave of litigation could arise, as rules that appear to discriminate against out-of-state businesses get challenged under a new legal environment.

State liquor regulators would need to figure out ways to incorporate many more non-local businesses into their systems — or take away rights enjoyed by local businesses (to remove the stain of discrimination). As states act to further enable local businesses to operate in the modern economy (such as granting more rights to make DtC shipments), they will be faced with having to similarly enable out-of-state businesses. Indeed, there is good reason for people to call Byrd a potential Granholm 2.

 

What Might Happen Now?

The reigning scuttlebutt is all about the chance that Byrd will lead to a complete overhaul of the three-tier system and beverage alcohol regulations. And it is true that Byrd brings this possibility. But focussing on this one outcome can cloud one to the larger realm of rulings the Court could issue.

There is the one extreme outcome, that the Court will issue the major ruling that has caught the imagination of so many in the industry. It could determine that Granholm applies equally to all members of the beverage alcohol industry, meaning that regulations discriminating against out-of-state businesses will have to be reviewed, and those that cannot be justified under some reasoning related to preventing a perceived “evil” will be invalidated. (In this age, so far removed from the days of tied-house saloons and Prohibition, demonstrating those evils is also increasingly difficult.)

States with residency requirements, or those that grant only in-state businesses certain rights (or those that provide certain licenses only to in-state businesses), will need to amend or get rid of those restrictions. This could have major implications for the three-tier system writ large, as most of the original intent behind establishing this regulatory scheme was to privilege local operators (particularly the wholesaler and retailer tiers).

However, the other extreme is retrenchment and a reversion to the view that states’ 21st Amendment powers are unrestricted by Commerce Clause arguments. While overturning Granholm is extremely unlikely, the Court might at least rule that Granholm does not apply to any tier besides suppliers, enabling states to more freely discriminate against out-of-state wholesalers and retailers. This outcome may be unlikely, even outlandish, but it should not be overlooked as possibility.

In between these extremes, though, there is a sea of narrower rulings it could issue instead. Indeed, given the history of the Court and its generally cautious approach means a narrow ruling is more likely than a major one. One possibility is that Court could rule that, while the 2-year term is invalid, a state could still require some kind of residency for a license holder. Indeed, the fact that Total Wine and Spirits is looking to establish an in-state package store should dampen the argument by the Tennessee Retailers Association that the state needs to have proximate control over sellers of alcohol. In this way, the Court could remove barriers for retailers to establish themselves in Tennessee without also establishing a borderless market for retail sales of beverage alcohol.

And even if the Court does rule that Granholm does apply to retailers, that does not inherently mean that retailers will suddenly have the right to ship everywhere. Indeed, when courts have ruled in the past that a state has to grant retailer-DtC shipping rights equally to in-state and out-of-state retailers, those rights have often been taken away for everyone in order to remove their discriminatory effect. Similarly, even 13 years after Granholm, several states continue to prohibit DtC shipping even by wineries.

Predicting the actions of the Supreme Court is generally a fool’s errand. The Court is notorious for upsetting expectations and finding ways to narrow arguments so as to avoid making major decisions.

However, there are still reasons to be cautiously excited about the possibilities of Byrd. For one, the Court would not have taken up this case unless it saw there was an issue to resolve, and not just on a ticky-tacky issue like the proper time frame for establishing residency. For another, the Court on a broad level is moving to get a better handle of what might be called the new, modern economy.

Earlier this year, the Court made a major ruling in South Dakota v. Wayfair, upending decades of sales tax rules in an attempt to provide a tax regulatory scheme for the eCommerce world. Byrd, therefore, could be another chance for the Court to wrench a hidebound industry into the modern economy, by acknowledging that state borders are increasingly less relevant to the ways people buy goods these days.

At the time of publication, the Court has not set a date for the hearings in Byrd. It could be months before arguments are made, with months more before the ruling is issued. And even once that ruling is issued, there will be many more weeks, months, and years for its fallout to be worked out. So no one should hold their breath waiting for things to change. For now, it should be enough to know that the potential for change is out there.

Stayed tuned to this blog for further developments in this case, and other regulatory and market changes that affect the beverage alcohol industry.

 

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