In 8th Circuit liquor case, 21st Amendment beats Commerce Clause

September 25, 2013

The 21st Amendment of the U.S. Constitution, which repealed Prohibition but also gave states the right to enact laws regulating the import and distribution of liquor within their borders, was ratified in December 1933. Within three years, the U.S. Supreme Court was confronted for the first time with a constitutional dilemma that courts are still trying to resolve a full 80 years after the amendment took effect: Since the Commerce Clause prohibits discrimination against out-of-state businesses, how can the 21st Amendment permit states to treat in-state liquor companies differently from those outside of their borders? On Wednesday, the 8th Circuit Court of Appeals issued the latest installment in this long-running saga, upholding the constitutionality of Missouri’s requirement that officers and directors of licensed liquor wholesalers reside in Missouri.

That’s the second big federal circuit win for state liquor regulators since the Supreme Court last considered the intersection of the Commerce Clause and the 21st Amendment, in the 2005 case of Granholm v. Heald. Ironically, the high court’s Granholm opinion held that New York and Michigan restrictions on sales by out-of-state wineries violate the Commerce Clause because they distinguish between in-state and out-of-state alcohol producers. But the court also said in dicta that the states’ tiered systems of regulation, which separately address alcohol producers, importers and wholesalers, are not unconstitutional. The court drew a distinction between state laws involving alcohol production and those involving alcohol distribution, concluding that problems arise when state policies enacted under the 21st Amendment interfere with out-of-state alcohol producers protected by the Commerce Clause. “State policies are protected under the 21st Amendment when they treat liquor produced out of state the same as its domestic equivalent,” the Supreme Court said. “In contrast, the instant cases involve straightforward attempts to discriminate in favor of local producers.”

In 2009, the 2nd Circuit Court of Appeals underlined Granholm’s language on states’ rights to regulate alcohol distribution when it ruled in Arnold’s Wine v. Boyle that New York may bar out-of-state wine distributors from selling directly to New York residents. The appeals court said that New York’s system includes no favoritism for alcohol produced in New York over alcohol produced in other states – all liquor can be distributed only by licensed sellers – so it complies with the Supreme Court ruling. “Granholm validates evenhanded state policies regulating the importation and distribution of alcoholic beverages under the 21st Amendment,” the appeals court said. “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.”

The Missouri case also involved state restrictions on out-of-state distributors. Missouri’s multitiered system of alcohol regulation requires that wholesalers be Missouri-resident corporations, which includes a requirement that corporate officers have resided in the state for three years. A Florida-based liquor distributor called Southern Wine and Spirits of America, whose wholly-owned subsidiary in Missouri was denied a license on residency grounds, challenged the residency requirement as unconstitutional because its sole intention is to disadvantage out-of-state businesses and because the requirement isn’t “inherent” to Missouri’s tiered system of regulating alcohol.

The state Division of Alcohol and Tobacco Control and its supporters from the Missouri Wine and Spirits Association didn’t dispute that the residency requirement would be impermissible under the Commerce Clause were it not for the 21st Amendment. But they argued that the Supreme Court’s most recent interpretation of the 21st Amendment permits states to regulate alcohol distribution so long as they treat in-state and out-of-state producers evenhandedly.

The 8th Circuit panel – Judge Steven Colloton and Bobby Shepherd and U.S. District Judge Stephanie Rose of Des Moines, Iowa, sitting by designation – agreed with Missouri, its amicus and the 2nd Circuit that Supreme Court precedent permits states to discriminate against out-of-state liquor distributors, though not producers. “Granholm’s guidance applies readily to the residency requirement at issue in this case,” wrote Colloton in the court’s opinion. “The residency requirement defines the extent of in-state presence required to qualify as a wholesaler in the three-tier system. The rule does not discriminate against out-of-state liquor products or producers. If it is beyond question that states may require wholesalers to be ‘in-state’ without running afoul of the Commerce Clause, then we think states have flexibility to define the requisite degree of ‘in-state’ presence to include the in-state residence of wholesalers’ directors and officers, and a super-majority of their shareholders.”

Arguments at the 8th Circuit were an impressive match-up between former acting U.S. Solicitor General Neal Katyal of Hogan Lovells, challenging the residency requirement on behalf of Southern Wine and Spirits, and former assistant to the SG Kannon Shanmugam of Williams & Connolly, arguing for the Missouri Wine and Spirits Association as amicus. Shanmugam declined to comment on the decision and Katyal was unavailable.

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