In its 2005 watershed opinion in Granholm v. Heald, the U.S. Supreme Court declared a state alcohol law that discriminates against out-of-state producers in favor of in-state producers to be a violation of the dormant commerce clause of the U.S. Constitution. Following the opinion, states have hastened to amend their respective alcohol statutes and liquor codes to conform to the Granholm decision.
In Pennsylvania, however, the commonwealth’s Liquor Code remains vulnerable to a Granholm attack, as it allows in-state brewers to distribute their products directly to retailers while requiring out-of-state brewers to first supply their products to licensed importing distributors, who in turn sell to retailers. In light of this conflict, this article focuses on the Granholm decision and its implications for the current system of beer distribution in the commonwealth. As part of the analysis I also discuss the successful efforts undertaken in other jurisdictions as well as recently proposed legislation by state representatives to help identify potential legislative solutions to the commonwealth’s current conundrum.
Before delving into the Granholm decision, it is important to understand the way alcohol is primarily distributed throughout the nation. Known as the “three-tiered system,” alcohol is brought to market through a series of licensed entities. At the top of the tier stands the manufacturer who makes the product. The second tier is the licensed distributor or wholesaler who receives the product from the manufacturer and then warehouses and sells the product to retail accounts (the third tier). While the three-tiered system has been recognized by the Supreme Court to be “unquestionably legitimate,” states have developed certain exceptions to this general structure. One such example, and the one at issue in Granholm, is the direct shipment of alcohol from a wine manufacturer to a consumer, which necessarily bypasses both the wholesale and retail tier of the three-tiered system.
In Granholm, the U.S. Supreme Court considered the constitutional legality of Michigan statutes that prohibited out-of-state wineries from shipping directly to in-state consumers while permitting in-state wineries to do so, as well as New York statutes that imposed additional burdens on out-of-state wineries seeking to ship wine directly to New York consumers. After analyzing the facts, as well as the defendant states’ arguments that the 21st Amendment permitted such distinctions, the court held that “in all but the narrowest circumstances, state laws violate the commerce clause if they mandate differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” In particular, the court held such laws to be per se invalid unless the state demonstrates through concrete record evidence that the discrimination advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminary alternatives. Local purposes the court found insufficient to justify the laws’ discriminate treatment included proffered justifications of keeping alcohol out of the hands of minors, facilitating tax collection, facilitating orderly market conditions, protecting public health and safety, as well as ensuring regulatory accountability. In this regard, the court exemplified its warning to all states that their burden of justification is so heavy that facial discrimination by itself may be a fatal defect.
As currently written, the Pennsylvania Liquor Code imposes different requirements regarding the distribution of beer within its borders depending on whether the brewer is an in-state or out-of-state producer. In particular, Section 4-431 of the code provides that each out-of-state manufacturer must grant distributing rights for their products to specific importing distributors (Pennsylvania’s licensed middle-tier wholesalers) who may then sell the manufacturer’s product to retail licensees. In contrast, there is no such requirement for in-state breweries. Therefore, as it stands, D.G. Yuengling & Son, who manufacturers its beer in Pottsville, Pa., can act as its own distributor, while Dogfish Head Brewery, who brews its beer in Delaware, cannot. This different treatment, on its face, violates the dormant commerce clause as set forth in Granholm.
In fact, a very similar statutory scheme was recently struck down in Illinois after the court found that the Illinois Liquor Control Act’s prohibition against out-of-state brewers holding distributor licenses violated the commerce clause. Like Pennsylvania’s prohibition on the self-distribution of out-of-state manufacturers, the facts at issue in Anheuser-Busch v. Schnorf centered on the ability of Illinois brewers to distribute their own products to retail while prohibiting out-of-state brewers (such as Anheuser-Busch) from doing so. Reviewing the Granholm decision, the court had no difficulty determining that the act’s one-sided prohibition was unconstitutional. The struggle, however, was the remedy. As the court noted, there were essentially two options. The first, characterized as “extension,” would encompass extending self-distribution rights to out-of-state brewers on the same terms granted to in-state brewers. The other option, “nullification,” would go in the opposition direction and prevent all brewers (whether in-state or out-of-state) from self-distributing. While the court originally determined that nullification was the best course of action, it stayed the matter in the hope that the Illinois General Assembly would step in. On June 1, 2011, the Illinois General Assembly acted by passing SB 754, which extended the right of self-distribution to all brewers under certain limited conditions. The first condition was that the brewer had to be a “craft brewer,” which the statute defines as a brewer that manufacturers up to 465,000 gallons (15,000 barrels, or bbl) of beer per year. The second condition developed under the act limits the craft brewer to self-distributing up to 232,500 gallons (7,500 bbl) of beer per year to retail licensees. Together, these limitations addressed the court’s holding in Anheuser-Busch as they applied equally to in-state and out-of-state beer manufacturers.
Pennsylvania’s current predicament regarding the distribution rights of in-state as opposed to out-of state brewers has not gone unnoticed. Specifically, on August 29, state Representatives Mike Tobash, R-Schuylkill, and Mike Vereb, R-Montgomery, introduced legislation (HB 1666) to comply with Granholm’s holding that in-state alcohol manufacturers and out-of-state alcohol manufacturers receive equal treatment. Presently before the Committee on Liquor Control, HB 1666 seeks an “extension” of brewery self-distribution rights rather than“nullification.” In particular, HB 1666 seeks to amend Pennsylvania’s Liquor Code to allow all beer manufacturers, regardless of size or state of manufacture, to self-distribute up to 75,000 bbl of beer each year. An important step forward, if passed, HB 1666 would ensure that Pennsylvania’s laws regarding the distribution of beer within its borders does not violate the dormant commerce clause of the U.S. Constitution.
Alva Mather is a business litigator and environmental attorney with Hangley Aronchick Segal Pudlin & Schiller who dedicates a substantial portion of her practice to representing beer industry members. Follow her on Twitter @AlcoholLawyer.