Constitutional mixologists: muddling the analysis of protectionist alcoholic beverage laws after Granholm v. Heald.

Author:Knettel, Paul
 
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ABSTRACT

In its 2005 decision in Granholm v. Heald, the U.S. Supreme Court declared that state alcoholic beverage laws that discriminate against out-of-state entities are unconstitutional restrictions of interstate trade under the dormant Commerce Clause. Despite this holding, lower courts have split in their analyses and conclusions regarding protectionist alcoholic beverage laws. Specifically, the Eighth Circuit recently upheld Missouri's residency requirements for alcoholic beverage distributors. Meanwhile, a district court in Michigan has found that a similar law imposing residency requirements on alcoholic beverage retailers was an unconstitutional restriction of interstate commerce. This confusion adversely affects both consumers and smaller producers of alcoholic beverages. Therefore, this Note argues the Supreme Court should, in the appropriate case, clarify that Granholm applies to residency requirements for wholesalers and retailers, thereby subjecting these restrictions to heightened Commerce Clause scrutiny.

Introduction

Many smaller breweries, wineries, cideries, and distilleries (hereinafter referred to collectively as "producers") limit their distribution within the United States, making their products available in one or more states but not in others. (1) Producers do so for a variety of reasons, including limits on their level of production, quality control concerns, low sales potential in particular markets, and expensive infrastructure requirements. (2) But there is another possible reason that these smaller producers do not distribute to a particular state. If the state's alcoholic beverage laws discriminate against out-of-state entities that produce, distribute, or sell alcohol, it may be difficult, if not impossible, for consumers to get these products imported. (3)

The US Supreme Court held in Granholm v. Heald that such laws are unconstitutional, and thus opened the market for out-of-state producers to directly ship to consumers in states that allow their in-state producers to do so. (4) Despite this holding, the lower courts are still fragmented in their analyses and conclusions regarding protectionist alcoholic beverage laws. (5) For example, the Eighth Circuit recently held that Missouri's residency requirements for alcoholic beverage distributors are constitutional. (6) Meanwhile, a district court in Michigan found the state's residency requirement for retailers to be an unconstitutional restriction of interstate commerce. (7) This split contributes to the bewildering disarray of alcoholic beverage laws in the United States, a particularly troubling situation in light of the increasing market for craft producers. (8) Many of these producers are considering expanding distribution, (9) yet may be unable to reach markets with smaller demand because of the costly multi-tier distribution systems many states mandate for the importation of alcohol from other states. (10)

Part I of this Note will address the ways in which the courts, Congress, and the states have historically struggled with the treatment of alcoholic beverages under the dormant Commerce Clause. Part II will explain the Supreme Court's most recent pronouncement on the subject, the 2005 case of Granholm v. Heald. Part III will examine post-Granholm decisions in which lower courts have split in their interpretation of Granholm and its applicability to laws that impose residency requirements on alcoholic beverage retailers or distributors, and will particularly focus on the most recent circuit court decision in this area, the Eighth Circuit's 2013 decision in Southern Wine & Spirits of America, Inc. v. Division of Alcohol & Tobacco Control. Finally, Part IV will argue that the Supreme Court should clarify that the heightened scrutiny analysis of Granholm applies to discriminatory state alcoholic beverage laws that impose residency restrictions. This Note contends that under such scrutiny, states would be hard pressed to justify their residency requirements as anything more than unconstitutional economic protectionism.

  1. HISTORICAL INTERPRETATIONS OF THE INTERPLAY OF THE DORMANT COMMERCE CLAUSE AND THE REGULATION OF ALCOHOLIC BEVERAGES

    The Commerce Clause of the Constitution states that Congress has the power to "regulate Commerce ... among the several States." (11) The Commerce Clause also has a "dormant" aspect, which forbids states from unfairly protecting in-state interests at the expense of out-of-state entities. (12) In other words, "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." (13) Generally, courts utilize two types of scrutiny to determine if these laws are constitutional. For statutes that "burden interstate transactions only incidentally," courts use a less-searching scrutiny in which parties challenging the laws must show that "the burdens they impose on interstate trade are 'clearly excessive in relation to the putative local benefits.'" (14) For statutes that "affirmatively discriminate" against interstate commerce either on their face or in practical effect, courts apply a "more demanding scrutiny" in which "the burden falls on the State to demonstrate both that the statute 'serves a legitimate local purpose,' and that this purpose could not be served as well by available nondiscriminatory means." (15)

    The rationale behind states' desire to provide competitive advantages to in-state alcoholic beverage entities stems from the alcoholic beverage industry's tax revenue potential. (16) Courts, Congress, and the states have a long history, even prior to Prohibition, of grappling with how the regulation of alcohol should be examined pursuant to the dormant Commerce Clause. (17) This Part will briefly examine that history.

    Congress passed two major laws in the pre-Prohibition era that attempted to delineate the amount of power states have over alcoholic beverages. The first, the Wilson Act, was passed in 1890 and allowed states to "regulate imported liquor on the same terms as domestic liquor." (18) The second, the Webb-Kenyon Act, (19) was passed in 1913 to close some Wilson Act loopholes (20) by giving states the authority to regulate the direct shipment of liquor from interstate sources. (21) But useful experience with Webb-Kenyon was short lived. In 1919, the states ratified the Eighteenth Amendment to the Constitution, (22) which rendered Webb-Kenyon pointless by prohibiting "the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all the territory subject to the jurisdiction thereof for beverage purposes." (23)

    Fourteen years of Prohibition failed to curb alcohol consumption and sparked a crime wave revolving around illegal manufacturing and distribution of alcoholic beverages. (24) In the wake of this largely unsuccessful national experiment, and motivated by the economic pressures of the Great Depression, (25) the states ratified the Twenty-First Amendment in 1933 to repeal the Eighteenth Amendment. (26) However, Congress wanted to allow each state to choose whether liquor would be allowed for sale within that state. (27) To that end, section two of the Twenty- First Amendment prohibits "[t]he 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." (28) Each state was left to manage the social responsibility element of alcoholic beverage consumption within its borders and shut down the criminal network of illegal trade in alcohol that had developed during Prohibition. (29)

    States responded to these problems in a variety of ways. (30) Some states initially chose to remain dry. (31) Others passed the responsibility onto localities by allowing for a "local option," wherein counties or municipalities could decide whether to legalize alcohol. (32) When a state did choose to legalize alcoholic beverages, it needed a system to control the legal distribution and taxation of the product. This was generally accomplished in one of two ways: the state either enacted a three-tier system (33) to create a competitive market for alcoholic beverages under strict state control of the state, or it enacted a control system in which the state government would have a legal monopoly over the wholesale tier--and sometimes the retail tier--of the distribution system. (34) In a control system, the state effectively substitutes itself for the private marketplace by retaining the exclusive right to sell alcohol through government-operated enterprises at the wholesale or retail level. (35) In a three-tier system, the state turns the sale of alcohol over to the private marketplace, maintaining control by funneling alcohol through a system of strictly licensed producers, wholesalers, and retailers. (36)

    Three-tier systems were enacted primarily to prohibit so-called "tied-house" arrangements, common before Prohibition, (37) wherein alcoholic beverage producers (particularly breweries) would also own retail establishments such as saloons or taverns that only sold their own beverages. (38) States were particularly concerned with two dangers of the tied-house arrangements: "the ability and potentiality of large firms to dominate local markets through vertical and horizontal integration and the excessive sales of alcoholic beverages produced by the overly aggressive marketing techniques of larger alcoholic beverage concerns." (39) By separating alcoholic beverage distribution into three tiers and prohibiting entities from holding a license for more than one tier, the three-tier system was meant to prevent these tied-house arrangements and the saloons they produced.

    Since the Twenty-First Amendment's ratification, courts--including the Supreme Court--have struggled to interpret the states' "virtually...

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