Tennessee Wine and Spirits Retailers Ass’n v. Blair

CONFLICT BETWEEN THE TWENTY-FIRST AMENDMENT AND THE DORMANT COMMERCE CLAUSE: WHICH CONTROLS?

Tennessee Wine and Spirits Retailers Association (“The Association”) argues that the Twenty-first Amendment grants the States broad power to regulate the sale of alcohol within their borders. The Association explains that this power derives from the second section of the Twenty-first Amendment, which reads: “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 Association acknowledges that this broad power is limited by the dormant Commerce Clause, which prohibits states from obstructing the flow of interstate commerce. However, the Association claims, a state does not contravene the dormant Commerce Clause if the state exercises its “core” Twenty-first Amendment power—i.e., the power to regulate the sale, distribution, and use of alcohol within its borders. On the other hand, the Association continues, if a state exercises “non-core” Twenty-first Amendment power by, for example, regulating activity outside of the state’s borders or discriminating against out-of-state products, the state violates the dormant Commerce Clause.

Here, the Association argues, Tennessee exercised its core Twenty-first Amendment power when it enacted the durational-residency requirement for obtaining a liquor license. The Association notes that a state exercising its core Twenty-first Amendment power has virtually complete control over whether to permit the importation or sale of alcohol, as well as how to structure its alcohol distribution system. Tennessee uses a three-tier alcohol distribution system, which, the Association explains, the U.S. Supreme Court has recognized as “unquestionably legitimate.” The Association maintains that, in using the three-tier system, a state may require that all alcohol sold for use in the state be purchased from an in-state retailer. Further, the Association claims, a state may impose a residency requirement on retailers, since the residency requirement directly regulates the sale of alcohol within state borders and treats alcohol produced out of state the same as alcohol produced in-state. The Association contends that the power to impose a retailer residency requirement necessarily entails the power to determine the duration of said requirement. Even if Tennessee’s durational-residency requirements are “protectionist,” the Association explains, the Court has never generally prohibited protectionist alcohol laws. Doing so, the Association continues, would require the Court to undermine the principle that states may regulate alcohol under the Twenty-first Amendment. Indeed, the Association claims that a bar on protectionist laws would require courts to balance the principles underlying the Twenty-first Amendment against the principles underlying the dormant Commerce Clause. The result, according to the Association, would be to clutter courts with lengthy policy disputes and to undermine the states’ confidence in the validity of their alcohol laws.

Tennessee Fine Wines and Spirts, LLC (“Fine Wines”) counters that the durational-residency requirement discriminates against interstate commerce in violation of the dormant Commerce Clause. Fine Wines contends that the dormant Commerce Clause prohibits a state from engaging in economic favoritism—i.e., enacting laws that differentiate between in-state and out-of-state economic interests to the benefit of in-state parties. Fine Wines explains that the Court has held that discriminatory requirements are nearly per se invalid. Moreover, Fine Wines maintains that there are many forms of discrimination under the dormant Commerce Clause. For example, Fine Wines notes, the dormant Commerce Clause prohibits a state from excluding out-of-state entities from competing in its local markets and provides that a state may not disadvantage out-of-state goods through discriminatory regulations. Fine Wines argues that Tennessee’s durational-residency requirement is discriminatory because it distinguishes between in-state and out-of-state residents by making it harder for out-of-state residents to obtain and maintain a liquor license to the benefit of in-state retailers. Indeed, Fine Wine claims that the interplay between the durational requirements effectively requires that a person be a Tennessee resident for at least nine years to legally operate an alcohol retail shop.

Further, Fine Wines argues that the Twenty-first Amendment does not shield Tennessee’s facially discriminatory durational-residency requirement from the dormant Commerce Clause. Indeed, Fine Wines maintains that a state’s discriminatory efforts to promote local economic interests are not insulated from dormant Commerce Clause scrutiny simply because the state is regulating the sale of alcohol. Like the Association, Fine Wines points out that the Twenty-first Amendment is limited by the nondiscrimination principle of the dormant Commerce Clause. However, Fine Wines notes that this principle is broadly defined; a state law is discriminatory “when its effect is to favor in-state economic interests over out-of-state interests.” Additionally, Fine Wines claims that the nondiscrimination principle is not limited to discrimination against out-of-state products; it also extends to discrimination against out-of-state business interests, which are at issue in this case.

Regarding the Association’s “core” versus “non-core” distinction, Fine Wines acknowledges that a state generally has broad power under the Twenty-first Amendment to regulate alcohol sales within its borders. But, Fine Wines contends, a state’s alcohol laws must be judged by whether the laws promote a core purpose of the Twenty-first Amendment and whether that purpose outweighs the Commerce Clause interest at stake. Furthermore, Fine Wine argues that, by the Association’s logic, the ten-year durational-residency requirement for license renewals should also be insulated from dormant Commerce Clause scrutiny, because it too is an exercise of Tennessee’s “core” Twenty-first Amendment power. That the Association has elected to pursue only the durational-residency requirement for obtaining a license, Fine Wine claims, undermines the strength of the Association’s “core” verses “non-core” distinction.

PROMOTING FEDERALISM VERSUS PREVENTING ECONOMIC BALKANIZATION

The Association argues that because Tennessee’s durational-residency requirements are consistent with the principles underlying the Twenty-first Amendment, the requirements are constitutional. The Association claims that understanding the history and policy behind the Twenty-first Amendment is crucial to understanding the Association’s legal argument. The Association explains that Congress enacted the Eighteenth Amendment to federally regulate the manufacture and transportation of alcohol. This centralized regulation, the Association notes, resulted in a black market for illegal alcohol and precipitated the rise of organized crime. After the failure of centralized regulation, the Association argues, the Twenty-first Amendment was enacted to decentralize decision-making and restore power to the States. The Association maintains that the Amendment’s adoption was fundamentally a federalist act, in that Congress recognized first that community tolerance for alcohol varies from state to state, and second that local officials are best positioned to effectively respond to their community’s needs. Therefore, the Association continues, if a state’s alcohol laws treats alcohol produced out of state on equal terms with alcohol produced in state, the state’s alcohol laws are exempt from dormant Commerce Clause scrutiny. The Association acknowledges that no state’s solution is perfect, but claims that, “it is far better to have ‘fifty-one imperfect solutions rather than one imperfect solution.’” Accordingly, the Association argues, the Court must allow Tennessee to decide which regime best fits its needs, because Tennessee’s decision exemplifies the federalist principles underpinning the Twenty-first Amendment.

On the other hand, Fine Wines argues that Tennessee’s durational-residency requirement is unconstitutional because it violates the principles underlying the dormant Commerce Clause. Fine Wines does not dispute the important principles advanced by the Twenty-first Amendment. Rather, Fine Wines contends that the Court, in performing its constitutional analysis, must balance these principles against the principles underlying the dormant Commerce Clause. Fine Wines claims that the dormant Commerce clause’s fundamental purpose is to prevent economic favoritism. By preventing economic favoritism, Fine Wines continues, the dormant Commerce Clause can help states avoid trade rivalries of the kind that negatively impacted the Colonies and the States under the Articles of Confederation. Therefore, although the Twenty-first Amendment reserves broad power to the States to regulate alcohol, Fine Wines maintains that courts should be wary of regulations that tend to promote economic favoritism. Here, Fine Wines asserts that Tennessee’s durational-residency requirement effectively excludes out-of-state businesses from entering the Tennessee market. Fine Wines contends that this is a form of economic favoritism that violates the dormant Commerce Clause. Fine Wines argues that although the boundary between Twenty-first Amendment principles and dormant Commerce Clause principles may be blurry, regulations that amount to economic favoritism are impermissible because they result in the “economic Balkanization” that the dormant Commerce Clause seeks to prevent.