Discarding the North Dakota dictum: an argument for strict scrutiny of the three-tier distribution system.

• Author: Murphy, Amy
• Position: NOTE

In Granholm v. Heald, the Supreme Court held that states must treat instate and out-of-state alcoholic' beverages equally under the dormant Commerce Clause and established a heightened standard of review for state alcohol laws. Yet in dictum the Court acknowledged that the three-tier distribution system--a regime that imposes a physical presence requirement on alcoholic beverage wholesalers and retailers--was "unquestionably legitimate." Though the system's physical presence requirement should trigger strict scrutiny, lower courts have placed special emphasis on Granholm's dictum, refusing to subject the three-tier distribution system to Granholm's heightened standard of review. This Note argues that the dictum should be discarded and that courts should carefully scrutinize the three-tier distribution system. Under Granholm's heightened standard of review, the three-tier distribution system would be found unconstitutional.

TABLE OF CONTENTS INTRODUCTION I. GRANHOLM V. HEALD: THE HOLDING AND THE DICTUM A. The Three-Tier System B. The Interaction between the Twenty-First Amendment and the Dormant Commerce Clause C. Retailer Challenges to the Three-Tier System II. THE ORIGINS OF THE NORTH DAKOTA DICTUM A. The Constitutional Challenge in North Dakota v. United States B. Abrogated Law Underlying the North Dakota Dictum C. The Fifth Circuit's Counterargument: A Caveat to Granholm III. DISCARDING THE DICTUM: HEIGHTENED JUDICIAL REVIEW UNDER GRANHOLM . A. Two Dormant Commerce Clause Tests B. Strict Scrutiny Should Be Applied to the Three-Tier System 1. Strict Scrutiny Applies 2. Challenges to the Satellite Tax: A Helpful Analogy 3. Arnold's Wines: A Misguided Analysis . C. The Three-Tier System Fails under Strict Scrutiny CONCLUSION INTRODUCTION

From 1920 until 1933, the United States prohibited the manufacture, transportation, and sale of alcohol. In spite of this constitutional mandate, people went to great lengths to obtain alcohol. In turn, the federal government went to even greater lengths to enforce Prohibition. In one memorable example, the Coolidge Administration initiated a poisoning program, aimed at deterring citizens from drinking) Soon after Prohibition began, criminal syndicates started stealing industrial alcohol, which is not intended for human consumption, and selling it to American citizens. The federal government ordered manufacturers to incorporate toxic chemicals such as methyl in the alcohol to render it undrinkable. Undeterred, the syndicates hired chemists to "renature" the alcohol, returning it to its semi-potable, and thus marketable, state? The government again upped the ante, adding more potent levels of chemicals, such as gasoline, mercury salts, ether, and formaldehyde, to the alcohol. The problem with this poisoning program, which lasted through the repeal of Prohibition in 1933, was that it failed to achieve its purpose: people kept drinking the alcohol, even when it made them fatally ill. By Prohibition's end, an estimated 10,000 people had died from poisoned industrial alcohol?

Prohibition era stories such as the federal poisoning program reveal our country's uneasy approach to alcohol regulation. Though the failed experiment of Prohibition is one of the United States' distant memories, vestiges of that era persist in alcohol laws around the country that make the retail sale of alcohol an overly complicated and burdensome process. The three-tier distribution system, which is the most common regulatory system in the United States, is a prime example of the country's rigorous approach to alcohol regulation.

Because the three-tier system was a reaction to Prohibition, (4) a brief background on the Prohibition Amendment and its repeal is important to understanding the current state of alcohol regulation. In 1919, Congress ratified the Eighteenth Amendment to the United States Constitution, prohibiting the manufacture, sale, or transportation of "intoxicating liquors." (5) By 1933, thirteen years of syndicate-dominated bootlegging, bathtub gin, and speakeasies had led one outspoken proponent of Prohibition, John D. Rockefeller, Jr., to abandon his position. In a letter to the president of Columbia University, which was subsequently published by the New York Times on June 7, 1932, Rockefeller acknowledged, "[Prohibition's] benefits, important and far reaching as they are, are more than outweighed by the evils that have developed and flourished since its adoption...." (6) Congress agreed and enacted the Twenty-First Amendment on December 5, 1933.

The first section of the Twenty-First Amendment ("Section One") accomplished

the goal of erasing the Eighteenth Amendment. (7) The lesser-known, second section of the Twenty-First Amendment ("Section Two") prohibits the transportation of alcohol into a state in violation of that state's laws. (8) Section Two represents a compromise. Proponents of Prohibition's repeal aimed to diminish organized crime, which had flourished during Prohibition, and to generate new tax revenue, which would aid states that were experiencing diminished revenues during the Great Depression. (9) Meanwhile, Congress wanted to grant states the power to structure orderly markets for the sale of alcohol while preserving the option for states to be dry. (10)

The majority of states have used their Section Two powers to impose the three-tier system as their regulatory scheme. (11) This system organizes the actors involved in alcohol's distribution (producers, wholesalers, and retailers) into three tiers and imposes different licensing requirements on them. (12) The three-tier system also requires that wholesalers and retailers have a physical presence in the state in order to sell in state. (13)

Some courts have found that state alcohol laws within the three-tier system discriminate against interstate commerce, violating the dormant Commerce Clause. (14) The latest word from the Supreme Court came in Granholm v. Heald, in which the Court announced that state alcohol regulations are constitutional when they treat in-state and out-of-state alcoholic beverages equally. (15) Yet in that same decision the Court stated in dictum that it had "previously recognized that the three-tier system itself is 'unquestionably legitimate.'" (16) This assertion seemingly contradicts Granholm's rule because the three-tier system necessarily excludes out-of-state wholesalers and retailers from participating in a state's alcoholic beverage market. (17)

Lower courts have reiterated this dictum, which this Note calls "the North Dakota dictum" (18) in recognition of the case from which it was quoted, in a number of cases in which out-of-state retailers have contended that they should be able to ship to consumers just as their in-state counterparts can. All courts but one have used the North Dakota dictum to dispose of these retailer challenges, shielding the three-tier system from the judicial review mandated in Granholm. (19) Relying on the dictum, courts treat the three-tier system as sacrosanct.

This Note argues that the North Dakota dictum should not shield the three-tier system from the heightened judicial review mandated in Granholm. Part I outlines the structure of the three-tier system and explains the interplay of the Twenty-First Amendment and the dormant Commerce Clause in the Granholm decision. Part I also introduces the cases that have relied on the North Dakota dictum to foreclose judicial review of the three-tier system, as well as the one district court decision that discarded the dictum to reach a different conclusion. Part II argues that the application of the North Dakota dictum to retailers' dormant Commerce Clause challenges is amiss because North Dakota relied on abrogated Supreme Court opinions, which held that the Twenty-First Amendment immunized state alcohol regulations from the limitations of the Commerce Clause. Part III predicts that if the three-tier system were subjected to more rigorous scrutiny, courts would likely find that the three-tier system violates the dormant Commerce Clause and Granholm's mandate that states treat in-state and out-of-state alcoholic beverages equally.

1. GRANHOLM V. HEALD: THE HOLDING AND THE DICTUM

   This Part analyzes Granholm's essential mandate and the operation of the North Dakota dictum. Section I.A presents the structure of the three-tier system. Section I.B then outlines the conflicting treatment of state alcohol laws under dormant Commerce Clause challenges, which led the Granholm Court to clarify that the Twenty-First Amendment does not shield discriminatory state laws from constitutional challenge. Finally, Section I.C introduces the cases involving retailer challenges to the three-tier system, which illustrate the shielding function of the North Dakota dictum.

   1. The Three-Tier System

      In order to understand Granholm's mandate, it is crucial first to outline the structure of the three-tier system. States that regulate their alcoholic beverage markets through the three-tier system allow private retailers and distributors to sell alcohol to consumers. By contrast, a minority of states follow a "control model," in which the state monopolizes the retail sale and, in some cases, the distribution of alcohol. (20) This Note focuses only on those states that rely on the three-tier system. (21)

      Through a "complex set of overlapping state and federal regulations," (22) the three-tier system excludes out-of-state wholesalers and retailers from participating in a state's alcoholic beverage market. (23) The first tier of the system consists of the producers of alcohol--wineries, distilleries, and breweries. (24) Any individual or entity wishing to sell alcohol in the United States must apply for a basic permit from the Alcohol and Tobacco Tax and Trade Bureau. (25) After obtaining the permit, the producer may sell its products to any wholesaler that is located in the state and has obtained a state license to distribute alcohol. (26)...