In a decision with major implications for fans of wine, liquor, or free trade, the Supreme Court has affirmed a ruling that struck down a Tennessee law, which imposed certain residency requirements to operate retail liquor stores, as impermissibly violating the Commerce Clause. Tennessee Wine and Spirits Retailers Assn. v. Thomas. Justice Alito, writing for the majority in the 7-to-2 decision, said that the 21st Amendment, which ended Prohibition in 1933, did not authorize states to discriminate against new residents. Because the law “blatantly favors the state’s residents and has little relationship to public health and safety,” the opinion explains, “it is unconstitutional.”

Background

The case began when the Tennessee Wine and Spirits Retailers Association (the “Association”) opposed the issuance of licenses to Doug and Mary Ketchum, who moved to Tennessee in hopes that the weather would benefit their daughter’s health and now run a mom-and-pop liquor store in Memphis, and Total Wine, a national chain with nearly 200 stores, including a new superstore in Knoxville.

Tennessee law imposes 2-year residency requirements as a prerequisite for applying for an initial retail liquor store license, requires an applicant for renewal of such a license to show continuous residency in the State for 10 consecutive years; and further provides that a corporation cannot obtain a license unless all of its stockholders are residents. (As the Court noted, “In practice, this means that no corporation whose stock is publicly traded may operate a liquor store in the State.”)

After a federal district court found the residency requirement unconstitutional in a declaratory judgment action, the Association appealed the case to the Sixth Circuit. It affirmed, concluding that the provisions violated the Commerce Clause. The Association petitioned for certiorari only with respect to the Sixth Circuit’s decision to invalidate the 2-year residency requirement applicable to initial liquor store license applicants.

21^st Amendment

Because the residency requirement applies to the sale of alcohol, it had to be evaluated in light of the 21^stAmendment, which says that “the transportation or importation into any state, territory or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”

The last time the Supreme Court interpreted that amendment was in 2005 in Granholm v. Heald.  There, the Court struck down state laws in Michigan and New York that allowed only in-state winemakers to ship directly to consumers within each state’s borders, but prohibited out-of-state winemakers from doing the same, holding that such laws discriminated against interstate commerce in violation of the Commerce Clause, and that the discrimination was neither authorized nor permitted by the 21^st Amendment.

Holding

Granholm found it impermissible for states “to discriminate against out-of-state alcohol products and producers.”  The same non-discrimination principles laid out in Granholm, according to the majority in this case, also apply to state laws that regulate in-state alcohol distribution.  Since “removing state trade barriers was a principal reason for the adoption of the Constitution,” under the dormant Commerce Clause cases, a state law that discriminates against out-of-state goods or nonresidents can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose.  

While states may legitimately regulate “the health and safety risks posed by the alcohol trade,” the Court found the residency requirement “ill suited to promote responsible sales and consumption practices.” The two-year residency requirement, Justice Alito wrote, “poorly serves the goal of enabling the state to ensure that only law-abiding and responsible applicants receive licenses.” Since the chief effect of the law is protectionism (“not the protection of public health or safety”), its purpose is not legitimate.

Bottom Line

At minimum, state alcohol laws that discriminate against out-of-state retailers for the purposes of protecting in-state interests are unconstitutional and not protected by the 21^st Amendment.

The immediate effect of the decision will be to allow more newcomers and big-box competitors like Total Wine to set up shop in Tennessee.

Additionally, the constitutionality of numerous state laws, from residency requirements to shipping restrictions, will doubtlessly be challenged. If the amicus briefs in this case are any indication, such challenges may come from free trade advocates, wine consumers, or proponents of retailer direct shipping.

Time will tell how states and lower courts will apply the principles articled in this decision, but this ruling is sure to shake up distribution practices in the industry.