Alva Mather, DLA Piper

On Sept. 27, the U.S. Supreme Court granted certiorari in the matter Byrd v. Tennessee Wine and Spirits Retailers Association setting up the next major round of constitutional challenges based on the interplay between states’ rights to regulate alcohol within their borders pursuant to the 21st Amendment and the commerce clause’s restrictions on states’ power to discriminate against interstate commerce. While the tension between the 21st Amendment and the dormant commerce clause is not new, how the Supreme Court decides this landmark case will have a significant impact on not only the constitutionally of alcohol beverage laws across the United States, but also on how and who can sell alcohol within each individual state.

Originally brought by the executive director of the Tennessee Alcoholic Beverage Commission as a declaratory judgment action, Byrd v. Tennessee Wine, 259 F. Supp. 3d 786 (2017) (Bryd I)centers on the constitutionality of Tennessee’s residency requirement for retail liquor licenses. More specifically, Tenn. Code Ann. Section 57-3-204(b)(2)(A), like many similar regulations across the country, restricts the issuance of retail package store licenses to individuals or corporations with owners that have been a “bona fide resident of the state during the two-year period immediately preceding the date upon which the application is made” and with respect to any license renewals been a resident of Tennessee for at least 10 consecutive years.

To assess the constitutionality of the residency restriction, the U.S. District Court for the Middle District of Tennessee began with the traditional analysis of dormant commerce clause challenges to determine “whether ‘a state statute directly regulates or discriminates against interstate commerce, or whether its effect is to favor in-state economic interests over out-of-state interests’” and, if so, whether the law advantages a “legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives” to save the statute’s otherwise “per se invalidity” Here, when this framework was applied to the residency requirement for Tennessee retailers, the legal analysis centered on whether the U.S. Supreme Court’s prior decision in Granholm v. Heald—which held unconstitutional state statutes in New York and Michigan for favoring the ability for in-state producers (wineries, in particular) to ship directly to consumers but restricted the ability for out-of-state producers to do the same—was limited to instances in which the “liquor producers or products” were at issue, rather than the rights of alcohol wholesalers or retailers, see also Granholm v. Heald, 544 U.S. 460 (2005). Indeed, in focusing on the question of Granholm’s limitation, or lack thereof, to the production or supplier tier the district court had to navigate its way through contrary holdings between the U.S. Court of Appeals for the Second and Eighth Circuits on the one hand, and the Fifth Circuit on the other.

More specifically, in a similar residency challenge to New York’s restriction on allowing out-of-state retailers without an in-state operation to obtain an off-premises license and the related privilege to deliver alcohol to New York consumers, the U.S. Court of Appeals for the Second Circuit upheld the statute because there was no distinction made between liquor produced in New York versus outside of the state, as in Arnold’s Wines v. Boyle, 571 F.3d 185 (2d Cir. 2009). Following the language in Granholm which found that the three-tiered system of alcohol distribution (i.e., supplier (in or out-of-state) to in-state wholesaler, in-state wholesaler to in-state retailer) to be “unquestionably legitimate” the court in Arnold’s concluded that “it is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the commerce clause.” Therefore, because “New York requires that all liquor-whether originating in the state or out of state-pass through the three-tier system” the laws were constitutionally valid despite the particular in-state privileges for New York licensed retailers as opposed to out-of-state retailers.

Likewise, the Eighth Circuit came to a similar conclusion in Southern Wine & Spirits of America v. Division of Alcohol and Tobacco Control, 731 F.3d 799 (2013). In Southern Wine, plaintiffs challenged Missouri’s wholesale license restrictions to in-state residents for the prior three years and, like the court in Arnold’s, the Eight Circuit determined that the statute was not unconstitutional because “state policies that define the structure of the liquor distribution system while giving equal treatment to in-state and out-of-state liquor products and producers are ‘protected under the 21st Amendment.’”

After reviewing the holdings in Arnold’s and Southern Wine, the district court in Byrd I rejected this reasoning in favor of the analysis of the Fifth Circuit in Cooper v. Texas Alcoholic Beverage Commission which refused to limit the commerce clause’s reach, or alternatively, the 21st Amendment’s protection, to only those instances in which the alleged discriminatory conduct focused on producers and products, see Byrd I, 259 F. Supp. 3d at 793 (reviewing Cooper v. Texas Alcoholic Beverage Commission, 820 F.3d 730 (5th Cir. 2016). In contrast to Arnold’s and Southern Wine, the court in Cooper’s found that “state regulations of the retailer and wholesaler tiers are not immune from commerce clause scrutiny just because they do not discriminate against out-of-state liquor” and that while states may impose a physical residency requirement on retailers and wholesalers, a durational residency requirement on the owners of these license types was impermissible. Following this reasoning, the district court in Bryd I determined that the residency requirement was unconstitutional on the grounds that the durational residency requirement created a barrier to entering the Tennessee retail liquor market in ways that “impermissibly favor Tennessee interests at the expense of interstate commerce,” (quoting Jelovsek v. Bredesen, 545 D.3d 431, 433 (6th Cir. 2008)). And, because the state failed to put forward any evidence of a legitimate purpose that could not be adequately served by reasonable nondiscriminatory alternatives, the court determined that the requirement did not survive a commerce clause challenge.

On appeal, the U.S. Court of Appeals for the Sixth Circuit agreed with the district court affirming the unconstitutionality of Tennessee’s residency requirement and severing those provisions from the Tennessee statute, see Bryd v. Tennessee Wine & Spirits Retailers Association, 883 F.3d 608, 612 (6th Cir. 2018) (Bryd II). Reviewing the lower court’s determination of constitutionality de novo, the court noted that when assessing the interplay between the 21st Amendment and the commerce clause, a court still needs to determine “whether the interests implicated by a state regulation are so closely related to the powers reserved by the 21st Amendment that the regulation may prevail” against a commerce clause challenge, (quoting Bacchus Imports V. Dias, 468 U.S. 263, 275-76 (1984)). In particular, the court found the Fifth Circuit’s reasoning to be persuasive over the holdings in the Second and Eighth Circuits for six reasons, including the continued importance of protecting economic interests across state lines, even with regard to alcohol beverage laws, the Supreme Court’s emphasis that the 21st Amendment does not allow a state to discriminate on the basis of citizenship, the Supreme Court’s emphasis that the commerce clause does limit the 21st Amendment, the related recognition by the Supreme Court that there are times when the three-tier system is invalid, and the view Granholm did not limit its application only to products and products. Accordingly, because “the central purpose of the 21st Amendment was not to empower states to favor local liquor industries by erecting barriers to competition” and Tennessee’s restrictions do discriminate between “who can and cannot engage in economic activities” within the state, the court found that Tennessee’s statute is unconstitutional for “preventing out-of-state residents from obtaining retail licenses while protecting in-state residents who are retailers.”

In accepting certiorari, the U.S. Supreme Court will now be tasked with weighing in and resolving the circuit split on the important question of “Whether the 21st Amendment empower states, consistent with the dormant commerce clause, to regulate liquor sales by granting retail or wholesale licenses only to individuals or entities that have resided in-state for a specified time.” How it decides will have a far-reaching impact on the sovereignty and protection of the 21st Amendment against other constitutional challenges.

Alva C. Mathera partner at DLA Piper, is a business lawyer, litigator and first-chair trial attorney. Her areas of concentration include complex commercial litigation and regulatory counseling of clients in the food and beverage, particularly alcoholic beverages, and franchise and distribution industries.