Wisconsin Lawyer: On Our Radar Alcohol Sales: Can Online Retailers Sell Directly to Consumers?:

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    On Our Radar
    Alcohol Sales: Can Online Retailers Sell Directly to Consumers?

    By June 2019, the U.S. Supreme Court might determine whether the Constitution guarantees online retailers such as Amazon the right to sell alcohol directly to consumers. The effects on Wisconsin’s alcohol distribution system could be significant.

    Aaron Richard Gary

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    On Jan. 16, 2019, the U.S. Supreme Court heard argument in the case of Tennessee Wine & Spirits Retailers Ass’n v. Blair, a case sometimes referred to as Granholm II. Although the issue in the case is narrow, the Court’s decision could potentially have a significant impact on Wisconsin’s alcohol distribution system.

    Like Granholm,1 the Blair case requires the U.S. Supreme Court to demarcate the boundaries of state regulatory authority when the 21st Amendment and the dormant Commerce Clause collide. At oral argument, the Justices were clearly thinking beyond the narrow issue in the case, contemplating whether the Court’s decision could ultimately lead to the conclusion that states lack authority to stop Amazon and other online retailers from selling alcohol directly to consumers.

    Wisconsin’s Local Control of Alcohol Distribution

    Like most states, Wisconsin has adopted a three-tier system for alcohol distribution. Subject to various exceptions, alcohol beverages (beer, wine, and spirits) must be sold by the producer to a licensed, independent, in-state wholesaler and then sold by the wholesaler to a licensed, independent, in-state retailer. Only a licensed retailer can then sell the product to the public. An applicant for a retail license (or a wholesaler’s permit) must have been a Wisconsin resident for at least 90 days before the application.2

    Retail sales of alcohol must be made in a face-to-face transaction on retail licensed premises. Online sales of alcohol to a consumer, whether as part of an interstate transaction or an order for local delivery, are generally not legal in Wisconsin. The Wisconsin Department of Revenue and local law enforcement agencies have authority to inspect retail licensed premises to ensure compliance with Wisconsin’s alcohol beverage laws.3

    Regulators have generally favored the three-tier system. Arguments in support of the three-tier system are that it facilitates effective and efficient tax collection, aids in the enforcement of alcohol beverage laws such as underage drinking prohibitions, and promotes orderly market conditions.

    Tennessee Wine & Spirits Retailers Ass’n v. Blair at the Sixth Circuit

    The appeal in Blair arose from the attempt by a national alcohol retailer operating under the trade name Total Wine Spirits Beer & More (Total Wine) to obtain a retail liquor license in Tennessee. Tennessee, like most states, has a residency or in-state presence requirement for retailers. Tennessee requires an applicant for a retail license to be a Tennessee resident for at least two years immediately preceding the application. However, to renew a license, Tennessee requires the licensee to have been (at some point) a Tennessee resident for at least 10 consecutive years. Tennessee further imposes similar residency requirements on the officers, directors, and shareholders of corporate applicants.4

    Aaron R. GaryAaron R. Gary, U.C.–Davis School of Law 1992, is senior attorney for the Wisconsin Legislative Reference Bureau, Madison.

    Along with another retailer, Total Wine challenged this “durational residency” requirement as a facially discriminatory attempt by the state to favor local business interests by excluding out-of-state competitors, in violation of the dormant Commerce Clause. Relying on Granholm and Bacchus Imports,5 the Sixth Circuit Court of Appeals agreed, concluding that the 21st Amendment does not immunize Tennessee’s durational residency requirement from scrutiny under the dormant Commerce Clause.6

    Instead, the court must determine whether the interests implicated by the state regulation are so closely related to the powers reserved to the states by the 21st Amendment that the regulation prevails. The court recognized that imposing a residency or physical presence requirement on retailers or wholesalers may be legitimate and an essential aspect of the three-tier system, but a two-year durational residency requirement is not.7

    The court further rejected any argument that the state’s interest in maintaining a high degree of oversight, control, and accountability over persons operating licensed premises justified the requirement, because no showing had been made that a reasonable, nondiscriminatory alternative could not achieve Tennessee’s goals. For example, one available alternative might be requiring the retailer’s general manager to be a resident of the state.8 In dicta, the court also stated that “a state’s alcoholic-beverages laws ‘cannot deprive citizens of their right to have access to the markets of other States on equal terms.’”9

    U.S. Supreme Court Precedent: Granholm v. Heald

    The Granholm case involved a challenge to Michigan and New York laws that created an exception to the state’s three-tier system to favor local wine producers. These laws, in effect, allowed in-state wineries to ship their wine directly to consumers but prevented out-of-state wineries from doing the same on equal terms. The U.S. Supreme Court struck down these laws as violative of the dormant Commerce Clause, finding that the 21st Amendment was not intended to supersede the dormant Commerce Clause.10

    “States have broad power to regulate liquor under § 2 of the Twenty-first Amendment. This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms.”11

    When state laws discriminate against interstate commerce or favor in-state economic interests over out-of-state interests, they face “a virtually per se rule of invalidity” and will be struck down unless the state can meet a high standard of justification – that the law advances a legitimate state purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.12 The justifications offered by Michigan and New York for their discriminatory direct-shipping laws – to keep alcohol out of the hands of minors and to facilitate tax collection and orderly market conditions – were insufficient.13

    While finding the state laws unconstitutional, the Supreme Court simultaneously expressed support for broad state authority to regulate alcohol. The 21st Amendment gives states broad authority to regulate the importation, distribution, and use of alcohol beverages.14 The 21st Amendment grants the states “virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system.”15 A state’s adoption of a three-tier distribution system is “unquestionably legitimate.”16

    Online sales of alcohol to a consumer, whether as part of an interstate transaction or an order for local delivery, are generally not legal in Wisconsin.

    Granholm’s History Review. In Granholm, the majority and two dissenting opinions extensively reviewed the history of the 21st Amendment, and while agreeing on the basic chronology and background facts, they relied on this history to reach contrary conclusions.17

    The majority’s historical argument seems thin.18 The majority overruled the foundational 21st Amendment case, Young’s Market19 (authored in 1936 by Justice Brandeis, just three years after ratification of the 21st Amendment) based in part on the assertion that the Young’s Market decision “did not take account of this history” of the 21st Amendment.20 The majority’s understanding of “this history” also runs contrary to the understanding of Justice Hugo Black, who participated in passage of the 21st Amendment when he was a U.S. senator and who believed the 21st Amendment was meant to give “absolute control” of regulatory authority for alcohol beverages to the states, free of all restrictions under the federal Commerce Clause.21

    It is not surprising that the Justices reached different conclusions in Granholm as to the meaning of the historical record. The majority in Bacchus Imports stated that “more recently we have recognized the obscurity of the legislative history of § 2 [of the 21st Amendment]. No clear consensus concerning the meaning of the provision is apparent.”22 In an earlier case, the Court noted its preference for focusing on the language of the 21st Amendment and its “wise reluctance to wade into the complex currents beneath the congressional proposal of the [21st] Amendment and its ratification in the state conventions.”23

    Discussion of Bacchus Imports. In addition to examining the historical record, the majority in Granholm relied on Bacchus Imports, a case in which Hawaii, to help local producers, created excise tax exceptions for two uniquely local products, brandy called okolehao and pineapple wine. In rejecting Hawaii’s argument that the tax preference was within its authority under the 21st Amendment, the Court balanced the state’s 21st Amendment interests against the federal Commerce Clause interests:

    “The question in this case is thus whether the principles underlying the Twenty-first Amendment are sufficiently implicated by the exemption for okolehao and pineapple wine to outweigh the Commerce Clause principles that would otherwise be offended. Or as we recently asked in a slightly different way, ‘whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies.’”24

    The Court held that this tax preference violated the Commerce Clause “because it had both the purpose and effect of discriminating in favor of local products.”25 The Court further stated that “the central purpose of the provision [§ 2 of the 21st Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition. … State laws that constitute mere economic protectionism are … not entitled to the same deference as laws enacted to combat the perceived evils of an unrestricted traffic in liquor. Here, the State does not seek to justify its tax on the ground that it was designed to promote temperance or to carry out any other purpose of the Twenty-first Amendment, but instead acknowledges that the purpose was ‘to promote a local industry.’ Consequently, because the tax violates a central tenet of the Commerce Clause but is not supported by any clear concern of the Twenty-first Amendment, we reject the State’s … claim based on the [21st] Amendment.”26

    Learn More About Alcohol Regulation

    Whether you represent retailers, distributors, producers, or others who need to conform to the regulatory system, you’ll appreciate the clear, concise, yet comprehensive review of Wisconsin law in the State Bar of Wisconsin PINNACLE® Alcohol Beverages Regulation in Wisconsin, by Aaron Gary.

    Inside you’ll find an examination of the laws affecting alcohol beverages in Wisconsin, from manufacture through taxation, transport, storage, and sale, including details regarding who can buy alcohol, how, and when.

    Alcohol Beverages Regulation in Wisconsin is available in print and Books Unbound subscription. Learn more by visiting www.wisbar.org/marketplaceand search AK0363.

    Attend the State Bar of Wisconsin PINNACLE seminar, Alcohol Beverage Law in Wisconsin, presented by Aaron Gary. Gain the experienced guidance you need to advise your clients, including information on

    • Identifying which license type may (or may not) be necessary

    • The roles of suppliers, wholesalers, and retailers

    • Inspection and enforcement by the Wisconsin Department of Revenue

    • What to do about license suspensions, revocations, and non-renewals

    • Real estate and business transactions involving liquor licenses

    Webcast replays begin April 30 and run through June 19. Click here to view listings.

    Retreat from Granholm or Extend It?

    At oral argument on Jan. 16, 2019, in Blair,27 counsel for the states (including Tennessee and Illinois, as amici curiae) and counsel for the Tennessee retailers association (whose members benefit from excluding national retail competitors such as Total Wine) aligned in favor of the Tennessee durational residency requirement and state authority under the 21st Amendment to impose requirements that disadvantage out-of-state interests, and counsel for Total Wine argued the contrary.

    The apparent strategy of the association and the states was to seek a retreat from Granholm. Denying that they sought to have Granholm overruled,28 the association’s counsel and states’ counsel asked the Court to give the narrowest of readings to Granholm – to limit its scope to products (like okolehao). That is, a state must only treat in-state products and out-of-state products the same.29 Espousing a “historical analysis” or “historical test,”30 counsel for the association and the states made arguments that had been considered and generally rejected by the majority in Granholm, including that the 21st Amendment restored to the states pre-Prohibition power to override the dormant Commerce Clause and was “designed to supplant or displace dormant Commerce Clause analysis” to foreclose court scrutiny.31

    In summary, according to the states’ counsel, “States have virtually complete control over intrastate distribution and sale.”32 The association’s counsel further argued that because the 21st Amendment restored to the states pre-Prohibition powers, and most states at that time had laws imposing residency requirements that were considered legitimate, such requirements must necessarily be valid under the 21st Amendment.33

    Granholm was a 5-4 decision, and only three of the nine Justices who decided Granholm are still on the Court. The association and the states are clearly inviting the six new Justices to chart a different course.

    At the oral argument, all counsel agreed that a retailer’s in-state residency or physical presence was a constitutionally permissible requirement legitimately advancing a state’s regulatory interests.34 Physical presence in the state allows the state to inspect and monitor activities on the licensed premises and supervise persons who are in control of the licensed premises, facilitating effective enforcement of the state’s alcohol beverage laws. But how long a period of residency is necessary to meet the state’s regulatory needs? One day? Ninety days? Two years? Ten years? What standard would the Justices use to draw such a line on what is constitutional and what is not?

    Justice Sotomayor stated, “[W]e understand that having someone there who’s responsible to the community is necessary. That was inherent in the three-tier system. But why is it inherent in the three-tier system that you have to have someone who’s only a local do it?”35 Justice Kagan inquired at what point in the continuum from a simple residency requirement to, for example, a 12-year residency requirement, a statute becomes clearly protectionist, with Justice Sotomayor echoing this query.36

    Counsel for the association and the states argued that the very purpose of the 21st Amendment was to stop courts from even asking the question of how long is too long, that this “approach … would still embroil the courts in the kind of line drawing that the Twenty-First Amendment was designed to relieve them of by creating what this Court has called an exception to the normal operation of the dormant Commerce Clause. It would be at odds with the broad regulatory discretion that’s conferred by the Twenty-First Amendment.”37

    Granholm was a 5-4 decision, and only three of the nine Justices who decided Granholm are still on the Court. The association and the states are clearly inviting the six new Justices to chart a different course.

    Counsel for Total Wine suggested that the Court need not worry about drawing a line in this case because the durations at issue (two years and 10 years) are so clearly unreasonable and protectionist of local industry, and lacking any asserted justification by the state of Tennessee, that Tennessee’s law must be found to be an unconstitutional attempt to create barriers for out-of-state economic interests.38

    Justice Gorsuch took the inquiry one step further. The substance of his point is that, in an age when so much commerce is conducted online, it might be unrealistic to believe that states cannot adequately control online business and that brick-and-mortar operations are actually necessary for a state to be able to enforce its laws. Justice Kavanaugh pointed out that the three-tier system necessarily entails favoritism of in-state interests, like requiring liquor to be sold by an in-state wholesaler.39

    Justice Gorsuch: “I would think that the next case would be … that the next lawsuit would be that, yes, this three-tier system is, in fact, discriminatory by requiring some sort of physical presence in state. And under the dormant Commerce Clause jurisprudence, you have a point. You have a good point. So I – why isn’t this just the camel’s nose under the tent?”

    Mr. Phillips (counsel for Total Wine): “[I]t is fundamentally at odds with my client’s business model to be looking to undo the three-tier principle.”

    Justice Gorsuch: “But isn’t the next business model just to – to try and operate as the Amazon of – of liquor?”40

    Counsel for Total Wine responded that his client operates a “brick-and-mortar business model” and is asking only to not be discriminated against as an in-state operator,41 but Justice Kagan followed up on the Amazon question:

    Justice Kagan: “But, to go back to Justice Gorsuch’s question, I mean, I’m trying to figure out what kind of opinion we could write, Mr. Phillips, that says you win, but then, when the next case comes along and the next case is somebody that says we don’t like this brick-and-mortar stuff, we don’t want to have any physical presence at all, and the state is preventing that, and in doing so, the state is discriminating against out-of-state companies. And, you know, you’ve said that that’s not valid, so we’re entitled to do what we want to do too. … [W]hat I’m asking you for is why would some kinds of discrimination be permissible and other kinds of discrimination not be permissible?”42

    To which Justice Gorsuch followed up again:

    Justice Gorsuch: “Isn’t that exactly where you want us to go? Not today, of course, but tomorrow or next year. … And we’ll see you again. And – and, surely, you know, the state can achieve all the regulatory interests it wants to achieve through virtually – dealing with virtual sellers from out of state, just as easily as it can with the physical presence sellers in state. I mean, surely that’s tomorrow’s argument, isn’t it? … This is just like … just like milk, just like books.”43

    Counsel for Total Wine responded that it would then be the state’s job to demonstrate to the court why it cannot effectively regulate online sellers. At that point the state would say, “This is why we can’t regulate effectively. This is why we won’t have the orderly market. This is why we need this restriction.”44 But to counsel for the association, this is exactly the kind of examination the 21st Amendment was intended to stop the courts from undertaking.45

    Conclusion

    Police officers and Department of Revenue agents inspect retail premises for legal violations. For example, certain drip markings on liquor bottles in a tavern may be a sign that the proprietor has refilled liquor bottles with cheaper brands. An inspection of invoices may reveal that a retailer has illegally purchased beer from Costco instead of going through the exclusive wholesaler in the sales territory. In package stores, where alcohol is sold in original, sealed containers, the enforcement issues are less numerous, typically involving sales to underage or intoxicated persons, hours of operation, supervision by an authorized individual (for example, a person with a “bartender’s” license), and ensuring the seller has a valid retail license.

    It is difficult to see how Wisconsin officials can effectively enforce these provisions against a retailer located in Seattle that ships products directly to consumers in Wisconsin. However, if a court were to determine that there is an effective way to monitor out-of-state retailers and enforce their compliance with Wisconsin laws (or that the laws exceed state authority), the U.S. Supreme Court decision in Blair could potentially conclude that Amazon has a constitutional right to ship alcohol directly to consumers in Wisconsin. A decision in Blair is expected in June.

    Meet Our Contributors

    What is your most memorable experience as a lawyer?

    Aaron R. GaryI had just started my first “real job” in Boise after two years of judicial clerkships when the lead partner on the case walked into my office and announced, “Steve’s having back surgery. You’re coming with me to California.” The five-week trial in California that followed was the most stressful, exhilarating, and educational experience of my legal career.

    The case involved a lumber mill that burned down in a small mountain town. My firm had taken on the $20 million subrogation claim of the insurer that covered the fire loss, asserting the security company hired to make regular rounds and guard against fire risk neglected to do so. There were rumors of a romantic entanglement between employees on the night watch that resulted in other priorities for their time.

    Opposing counsel, who chided us that he would win this case 9 out of 10 times, expected to home-town the out-of-state Idaho lawyers. But in this remote mountain county, the jury showed greater affinity for the Gerry Spence-like partner leading our case than the Armani-clad lawyers from one of the Bay Area’s largest firms.

    Every day of that trial I learned something about strategy, tactics, witness prep, and especially resilience, all from a master. Five grueling and amazing weeks later, the jury returned the unlikely plaintiff’s verdict.

    Aaron R. Gary, Wisconsin Legislative Reference Bureau, Madison.

    Become a contributor! Are you working on an interesting case? Have a practice tip to share? There are several ways to contribute to Wisconsin Lawyer. To discuss a topic idea, contact Managing Editor Karlé Lester at (800) 444-9404, ext. 6127, or email org klester wisbar wisbar klester org. Check out our writing and submission guidelines.

    Endnotes

    1 Granholm v. Heald, 544 U.S. 460 (2005).

    2 See Wis. Stat. §§ 125.04(1), (5)(a) 2., 125.25(2)(a), 125.26(2)(a), 125.28(2)(a), 125.30(1), 125.33(9), 125.51(2)(b), (3)(c), 125.54(2), 125.58(1), 125.69(6).

    3 See Wis. Stat. §§ 125.272, 125.51(6), 139.08(3), (4).

    4 Byrd v. Tennessee Wine & Spirits Retailers Ass’n, 883 F.3d 608, 612-13 (6th Cir. 2018). The petitioner in this case, Clayton Byrd, was the executive director of the Tennessee Alcoholic Beverage Commission when the action was filed. While the appeal was pending before the U.S. Supreme Court, Zackary Blair replaced Mr. Clayton and the case caption before the U.S. Supreme Court reflects this change.

    5 Bacchus Imports Ltd. v. Dias, 468 U.S. 263 (1984).

    6 Byrd, 883 F.3d at 614, 618-19, 621, 624-25, 628.

    7 Id. at 621, 623.

    8 Id. at 625-26.

    9 Id. at 623 (quoting Granholm, 544 U.S. at 473).

    10 Granholm, 544 U.S. at 469-71, 474-76. Section 2 of the 21st Amendment primarily created an exception to the normal operation of the dormant Commerce Clause, to permit states to prohibit commerce in, or delivery or use of, alcohol beverages within the state. 44 Liquormart Inc. v. Rhode Island, 517 U.S. 484, 516 (1996). The 21st Amendment reserves to the states power to impose burdens on interstate commerce in intoxicating liquor that, absent the amendment, would be invalid under the Commerce Clause. Capital Cities Cable Inc. v. Crisp, 467 U.S. 691, 712-13 (1984). Although intended to create an exception to the normal operation of the dormant Commerce Clause, the 21st Amendment did not entirely remove state regulation of alcohol beverages from the reach of the Commerce Clause. Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 331-32 (1964). The 21st Amendment was not intended to supersede the dormant Commerce Clause and does not abrogate Congress’s Commerce Clause powers with regard to liquor. Granholm, 544 U.S. at 486-87; Capital Cities, 467 U.S. at 712-13.

    11 Granholm, 544 U.S. at 493; see also id. at 481, 483, 489.

    12 Id. at 475, 487, 489.

    13 Id. at 489-93.

    14 Id. at 476, 484-88, 493.

    15 Id. at 488-89 (quoting California Retail Liquor Dealers Ass’n v. Midcal Aluminum Inc., 445 U.S. 97, 110 (1980)).

    16 Granholm, 544 U.S. at 489 (quoting North Dakota v. United States, 495 U.S. 423, 431-32 (1990)).

    17 See Granholm, 544 U.S. at 476-84; id. at 498-514 (Thomas, J., dissenting); id. at 497 (Thomas, J., dissenting) (criticizing the majority’s “questionable reading of history”); id. at 494-95 & n.1 (Stevens, J., dissenting) (offering a more general assault on the majority’s historical reconstruction).

    18 The history of the 21st Amendment, Prohibition, the original package doctrine, the Wilson Act, the Webb-Kenyon Act, Justice Hugo Black’s pronouncements, and numerous other U.S. Supreme Court decisions interpreting the 21st Amendment are all discussed in significant detail in 1 Aaron R. Gary, Alcohol Beverages Regulation in Wisconsin 2-8 to 2-33 (State Bar of Wis. 2d ed. 2016). The Granholm case is also discussed in more detail in Aaron R. Gary, Treating All Grapes Equally: Interstate Alcohol Shipping After Granholm, Wisconsin Lawyer (March 2010).

    19 State Board of Equalization v. Young’s Market Co., 299 U.S. 59 (1936).

    20 Granholm, 544 U.S. at 485.

    21 Hostetter, 377 U.S. at 336-40 (Black, J., dissenting).

    22 Bacchus Imports, 468 U.S. at 274 (citation omitted).

    23 Midcal Aluminum, 445 U.S. at 106-07 & n.10.

    24 Bacchus Imports, 468 U.S. at 275-76 (quoting Capital Cities, 467 U.S. at 714).

    25 Id. at 273; see also id. at 265-66, 270-72, 274-75.

    26 Id. at 276 (citation omitted).

    27 The transcript of the oral argument on Jan. 16, 2019 (hereinafter Transcript) is available on the U.S. Supreme Court’s website at www.supremecourt.gov/oral_arguments/argument_transcripts/2018/18-96_09m1.pdf.

    28 Transcript, pp. 6-7.

    29 Id. at 7, 10-13, 31-32. In contrast to counsel for the association, Total Wine’s counsel framed the issue not as equal treatment of in-state products and out-of-state products but as equal treatment of in-state operators and out-of-state operators. Transcript, p. 44.

    30 Id. at 7, 12, 31-32.

    31 Id. at 4-5, 8-9, 13-16, 22-25, 30.

    32 Id. at 34.

    33 Id. at 4-9.

    34 Id. at 17, 39-42, 49, 53, 58.

    35 Id. at 16.

    36 Id. at 25, 40-42.

    37 Id. at 30; see also id. at 25, 59-60.

    38 Id. at 36, 40-42, 57.

    39 Id. at 48-49.

    40 Id. at 49-50.

    41 Id. at 50-51, 54.

    42 Id. at 53, 55.

    43 Id. at 56, 57.

    44 Id. at 57.

    45 Id. at 59-60.




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