July 02, 2019
Last week, the Supreme Court issued its opinion in Tennessee Wine and Spirits Retailers Association v. Thomas, No. 18-96 (“Tennessee Retailers”). The full opinion can be read here, and our introduction to the case and issues can be found here. To recap, at issue in this case is the interplay between the Dormant Commerce Clause and the 21st Amendment. The Dormant Commerce Clause prohibits states from discriminating against interstate commerce, while the 21st Amendment grants to each state the authority to regulate alcohol within its borders. In Tennessee Retailers, the Court considered to what extent the 21st Amendment allows states to pass laws regulating the alcohol industry that would otherwise be prohibited by the Dormant Commerce Clause.
The Court last addressed this question in 2005, when the Court held in Granholm v. Heald that the 21st Amendment “does not immunize all [state alcohol] laws from Commerce Clause challenge.” In that case, the Court invalidated laws that favored in-state wineries over out-of-state wineries with respect to direct sales and shipments to consumers. Last week’s ruling in Tennessee Retailers confirmed a broad reading of the prior ruling in Granholm, as applied to a Tennessee law requiring applicants for retail liquor store licenses to live in the state for two years before being eligible for the license. The Court held that Tennessee’s discrimination against out-of-state individuals in the granting of retail licenses violates the Dormant Commerce Clause, and is not saved by the 21st Amendment. The Court ruled that the 21st Amendment “allows each State leeway to enact the measures that its citizens believe are appropriate to address the public health and safety effects of alcohol use and to serve other legitimate interests,” but that it does not “license the States to adopt protectionist measures with no demonstrable connection to those interests” in violation of the Dormant Commerce Clause. The Court also clarified that the prior ruling in Granholm was not limited to prohibiting discrimination against out-of-state products and producers, and that states are prohibited from discriminating against any out-of-state interests, including out-of-state individuals or retailers.
Much of the news coverage and discussion of this case has focused on the impact of the case on state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing the same. Some coverage implied that such laws were automatically invalidated by the Court’s ruling, but the retailer direct shipping issue was not in front of the Court. While the ruling in Tennessee Retailers does confirm that the principles in Granholm apply to all out-of-state interests, rather than just out-of-state producers, the ruling does not categorically prohibit all state alcohol laws that do not treat in-state and out-of-state businesses equally. The ruling is instead a continuation of the Granholm conversation. The ruling confirms that states “‘remain free to pursue’ their legitimate interests in the health and safety risks posed by the alcohol trade,” and that the 21st Amendment does confer additional regulatory authority to the states. However, when a discriminatory state law is “purely protectionist” and cannot be “justified as a public health or safety measure” or on some other “legitimate non-protectionist ground,” then the law will be found unconstitutional. Thus, state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing so, are not definitively unconstitutional following the ruling in Tennessee Retailers. These laws are only unconstitutional if the state cannot establish that the laws are necessary to advance a legitimate local purpose, such as protecting public health and safety, and that there are no reasonable nondiscriminatory alternatives that can adequately further that purpose.
So, what does this ruling really mean? First, the ruling is a victory for out-of-state individuals and entities that desire to apply for a retail liquor store license in Tennessee. Second, other states with burdensome retail residency requirements, such as Massachusetts and Maryland, are likely evaluating the legality of their laws in light of the ruling in Tennessee Retailers. Such states may opt to eliminate such requirements, or may decide to leave the residency requirements in place until challenged. Given the language in Tennessee Retailers analyzing the lack of connection between Tennessee’s residency requirements and advancing public health and safety interests, leaving burdensome residency requirements in place may be risky. But, the State of Tennessee did not attempt to defend its laws, and the public health and safety arguments put forth by the Tennessee Wine and Spirits Retailers Association were cursory, and thus other states may believe that they can do a better job defending their laws. If any states decide to leave retail residency requirements in place, it is likely that litigation will follow. Third, states with residency requirements for wholesaler licenses, such as Missouri, are also likely weighing whether to revise such laws or to leave the residency requirements in place until challenged. Missouri’s wholesaler residency requirements were upheld as constitutional by the 8th Circuit in 2013. However, the 8th Circuit ruling was based on a narrow reading of Granholm, and that interpretation was directly refuted by the Court in Tennessee Retailers. Accordingly, it would not be surprising to see litigation on this issue in the very near future, if such states do not remove wholesaler residency requirements. Finally, even less-burdensome residency requirements, such as requirements for licensees to have a resident manager, may be vulnerable to challenge.
While residency requirements will be most directly in the line of fire following Tennessee Retailers, the ruling has the potential to impact many other aspects of state alcohol regulation. Unlike Granholm, the Tennessee Retailers Court declined to describe the three-tier system as “unquestioningly legitimate.” The Court clarified that while the basic three-tier model may be sound, the 21st Amendment does not sanction “every discriminatory feature that a State may incorporate into its three-tiered scheme.” It is unclear to what extent Tennessee Retailers will spur states to act on their own to revise discriminatory aspects of the state’s alcohol regulatory scheme. We may see states make changes independently, but it may be that significant change will only be achieved through litigation. As the Court noted, “each variation [of three-tiered alcohol regulatory schemes] must be judged on its own features.” Because discriminatory alcohol laws are only unconstitutional if they are not reasonably necessary to advance a legitimate local purpose, states may leave discriminatory laws on the books in the hopes that they can justify those laws if challenged. Accordingly, the most direct outcome of Tennessee Retailers will likely be a considerable amount of litigation.
Which laws are the most likely targets of litigation? Any state alcohol laws that discriminate against “out-of-state economic interests” are vulnerable to challenge under Granholm and Tennessee Retailers. So, litigation could focus on laws that authorize only in-state retailers to deliver or ship to consumers, or it could target laws such as physical presence requirements, tied-house exceptions that allow only in-state producers to operate retail locations, laws that require retailers to purchase from in-state sources, laws that authorize only in-state suppliers to self-distribute products to retailers, at-rest laws, or franchise law exemptions that apply only to in-state suppliers. The recent ruling in Tennessee Retailers may also inspire further litigation and move the needle in the related area of alcohol laws that are facially neutral but potentially discriminatory in effect. For example, states such as New Jersey or Ohio with laws that have special privileges for certain “small” producers, where the definition of “small” may be designed to encompass most or all in-state producers while excluding many out-of-state producers.
While we noted above that some news coverage has overstated the immediate impact of Tennessee Retailers on out-of-state retailer direct to consumer shipping or delivery, the ruling will undoubtedly lead to more litigation regarding these laws. Some of that litigation may be successful in invalidating laws that allow in-state retailers to ship or deliver alcohol directly to consumers, but prohibit out-of-state retailers from doing so. However, each case will depend upon the specifics of the state’s regulatory scheme and the state’s public health and safety justifications for that scheme. While the justifications for Tennessee’s residency requirements were weak, states may have stronger public health and safety justifications for laws regulating delivery and direct shipping, such as preventing underage drinking or delivery of alcohol to intoxicated persons. Note, however, that this argument was held in Granholm to be insufficient justification for treating in-state and out-of-state wineries differently with respect to the shipment of wine to consumers. But, the strength of public health and safety justifications will likely be different in states that allow retailer hand delivery but not shipment by common carrier of alcohol, and these justifications may also be different with respect to beer or spirits as opposed to wine. Furthermore, states may have additional public health and safety justifications based on preventing counterfeit alcohol. An out-of-state retailer would not obtain its products from the same distribution system as an in-state retailer, and the state’s public health and safety justifications for its distribution system and requirements for alcohol sourcing may be persuasive. However, a state making this argument would likely also need to assert that there are no reasonable nondiscriminatory alternatives to accomplishing the goal of preventing counterfeit alcohol.
There are at least two cases already pending that challenge state laws with respect to alcohol shipping and delivery. In Missouri, Sarasota Wine Market v. Schmitt is on appeal to the 8th Circuit. The lower court held that Missouri’s laws permitting in-state retailers to ship wine directly to consumers, but prohibiting out-of-state retailers from doing the same, are valid under the 21st Amendment. However, this ruling was based on the 8th Circuit precedent mentioned above, which relied on a narrow interpretation of Granholm that was contradicted by the Court in Tennessee Retailers. Further, Lebamoff Enterprises v. Snyder, challenging Michigan’s wine shipping laws that treat in-state and out-of-state retailers differently, is pending before the 6th Circuit. In that case, the lower court held that Michigan’s laws are unconstitutional, as they impermissibly discriminate against out-of-state interests without sufficient justification in violation of the Dormant Commerce Clause. This ruling and appeal were stayed pending the outcome in Tennessee Retailers. These two cases will likely provide the earliest insight into how courts will apply the recent Supreme Court ruling.
Even if the outcome of these cases is that state laws are found invalid, it will not necessarily mean that these states will allow out-of-state retailer direct shipments. Upon a court ruling that a state’s laws are discriminatory and unconstitutional, the state could decide to rectify the issue by “leveling down” to prohibit all retailer alcohol shipments to consumers, from both in-state and out-of-state retailers. As such, the law would apply equally to all retailers regardless of location, so it would not be discriminatory. “Leveling down” to remove all retailer alcohol shipping privileges would likely be unpopular with consumers, but it may find support from some segments of the alcohol industry. Thus, this outcome remains a possibility even if litigation challenging laws prohibiting out-of-state retailer shipping is successful.
Overall, we will have to wait and see what the ruling in Tennessee Retailers will mean for the alcohol industry. But, if you have any questions regarding this ruling or how current laws affect your alcohol business, contact one of the attorneys at Strike & Techel.
July 01, 2019
Direct to consumer (“DTC”) wine shipping is a reoccurring topic on the Alcohol.law Digest. (Our most recent post on winery and retailer DTC shipping is located here.) This particular post addresses recent legislation in Connecticut, Senate Bill 647. Effective today, that legislation creates a new permit allowing out-of-state retailers to sell and ship wine directly to Connecticut consumers. The Connecticut Liquor Control Division has posted the application for this new permit, the Out-of-State Retailer Shipper’s Permit, as well as application instructions and guidance, here.
The compliance requirements for the new permit mirror the existing requirements for wineries to ship directly to Connecticut consumers. For example, out-of-state retailer shipper permittees must ensure that wine containers are conspicuously labeled: “CONTAINS ALCOHOL—SIGNATURE OF A PERSON AGE 21 OR OLDER REQUIRED FOR DELIVERY.” Further, the wine recipient must sign for the delivery and provide valid proof that he or she is at least twenty-one years of age. There are registration, reporting, and tax obligations. An out-of-state retailer shipper permittee may not ship more than five gallons of wine to the same Connecticut consumer in any two-month period. Additionally, there is also a new requirement, applicable to out-of-state retailer shipper permittees as well as out-of-state winery shipper permittees, that prohibits the sale of wine below cost. Finally, the Connecticut LCD guidance indicates that all wine brands that will be shipped to Connecticut consumers must be registered with the state.
If you have any questions about direct to consumer shipments of alcohol, contact one of the attorneys at Strike & Techel.
June 03, 2019
Oklahoma Governor Kevin Stitt recently signed Senate Bill 608 into law, mandating that as of August 29, 2019, suppliers of the top 25 wine and spirits brands must make their products available to all licensed Oklahoma distributors. The top 25 brands will be determined by total sales over the preceding twelve-month period.
Since October 2018, wine and spirits manufacturers have been allowed to enter exclusivity agreements with Oklahoma distributors. Prior to that time, wine and spirits manufacturers were required to make products available to all distributors in Oklahoma. The change was brought about by State Question Number 792, approved by voters in 2016, which amended the Oklahoma Constitution to permit the sale of cold, strong beer in liquor stores and to allow distributors to obtain sole distribution rights. Although the law allowing wine and spirits brands to be distributed exclusively by one Oklahoma distributor has been in effect for less than a year, smaller Oklahoma distributors and some Oklahoma retailers argued that the new distribution system was detrimental to their businesses. Senate Bill 608 purports to even the playing field and remedy the alleged business disadvantage to smaller distributors by mandating that top-selling products be made available to all distributors within the state. Opponents of Senate Bill 608 contend that the legislation runs afoul of the voter-approved constitutional amendment, because it is manufacturers’ right to choose their own distributors.
It is possible that the provisions of Senate Bill 608 will be challenged in the courts. But for now, it appears that suppliers of top wine and spirits brands in Oklahoma must again navigate a revised distribution system, beginning at the end of August.
May 28, 2019
Since the repeal of Prohibition in 1933, U.S. Supreme Court cases addressing the way alcohol is sold in the United States are not common. Most recently, the Court’s 2005 decision in Granholm v. Heald held that a state could not permit in-state wineries to sell and ship wine directly to consumers if the state precluded out-of-state wineries from enjoying the same right. In light of the ruling, many states revised their laws to allow direct-to-consumer sales and shipments from out-of-state wineries as well as in-state wineries. Retailers on the other hand, were more or less unaffected by the Granholm ruling and remain subject to various state prohibitions against out-of-state retailers shipping alcohol directly to in-state consumers.
In January, the Supreme Court heard oral argument on a new alcohol law case that will further delineate the states’ powers to regulate alcohol. Tennessee Wine and Spirits Retailers Association v. Blair, No. 18-96, (“Tennessee Retailers”) asks whether the 21st Amendment, which gives states broad discretion to govern alcohol, empowers Tennessee to regulate the sale of alcohol through strict residency requirements for alcohol retail license applicants. Or, whether the imposition of those residency requirements and the effect on out-of-state license applicants violates the Dormant Commerce Clause, which prohibits states from discriminating against interstate commerce. The Petitioner in Tennessee Retailers, Tennessee Wine and Spirits Retailers Association (“TWSRA”), contends that the 21st Amendment permits states to regulate the sale of alcohol within their own borders, so Tennessee may require alcohol retail license applicants to reside in the state for two years before a retail license may be granted. The Respondents, Total Wine and Doug and Mary Ketchum, claim that Tennessee’s residency requirements violate the Dormant Commerce Clause because they discriminate against non-residents. The case originated when the Tennessee Alcoholic Beverage Commission (“TABC “) asked a court to determine the legality of the subject restrictions. The district court and the Sixth Circuit held that Tennessee’s residency requirement is unconstitutional, as the law is facially discriminatory and there was no evidence that alternative non-discriminatory regulations could not achieve the same purpose of protecting the health and safety of Tennessee residents. TWSRA appealed the Sixth Circuit decision to the Supreme Court. The case is now fully-briefed, oral argument is over (the transcript from oral argument can be found here), and the parties await the Court’s opinion.
The Supreme Court has previously ruled that the Dormant Commerce Clause applies to prohibit states from discriminating against out-of-state alcohol products or producers, despite the 21st Amendment. The Tennessee Retailers case asks the Court to weigh the balance of the 21st Amendment and the Dormant Commerce Clause in the context of laws governing the issuance of in-state retail alcohol licenses. Advocates of retailer direct-to-consumer alcohol shipping hope that the Court will issue a broad ruling that holds that the Dormant Commerce Clause applies to limit states’ 21st Amendment powers to regulate alcohol retailers generally. The hope is that a broad ruling that applies the non-discrimination requirements of the Dormant Commerce Clause to alcohol retailers would require states to treat in-state and out-of-state retailers equally with respect to direct-to-consumer shipping privileges. However, even if the Court finds that the Dormant Commerce Clause limitsstates’ powers under the 21st Amendment with respect to the regulation of alcohol retailers, that would not automatically open up out-of-state retailer direct-to-consumer shipping. Under the Dormant Commerce Clause, a state is still permitted to enact discriminatory laws if the law advances a legitimate state purpose that cannot be adequately served by other reasonable nondiscriminatory alternatives. The Supreme Court has previously held that the three-tier system is “unquestionably legitimate,” and thus a state could still pass discriminatory laws that support the three-tier system, unless there are other reasonable nondiscriminatory alternatives.
We will have to wait to see whether the Court will rule broadly or narrowly. Regardless of how the Court rules, the case will have an impact on the regulation of alcohol by individual states. The Court could issue its opinion soon, and Strike & Techel will update the Alcohol.law Digest with further information when that happens.
January 10, 2019
We last covered winery and retailer direct to consumer (“DTC”) wine shipments on this blog one year ago. (For those prior posts, see the following links: winery DTC shipping, retailer DTC shipping.) This blog post summarizes the changes that occurred in 2018 with respect to winery and retailer DTC wine shipping.
Winery DTC Wine Shipping – Beginning on October 1, 2018, Oklahoma’s new law allowing wineries to ship wine directly to Oklahoma consumers became effective.
Retailer DTC Wine Shipping – There were no final changes in 2018 with respect to retailer DTC wine shipping; however, there are potentially some changes on the horizon. In August, the Florida Division of Alcoholic Beverages and Tobacco issued a Declaratory Ruling holding that it was enjoined by a prior court order from enforcing the laws prohibiting out-of-state retailers from selling wine into Florida.
However, this ruling has been appealed, and thus may be reversed. Further, in September, a federal district court held that Michigan’s prohibition against out-of-state retailer wine shipping was unconstitutional. However, the Michigan litigation is stayed pending the outcome of a case in front of the U.S. Supreme Court, which is set for hearing on January 16, 2019. There is also similar litigation pending relating to Illinois’ and Missouri’s prohibitions against out-of-state retailer wine shipments, and accordingly there is the potential for future changes in these states as well.
If you have any questions about direct to consumer shipments of alcohol, contact one of the attorneys at Strike & Techel.
January 09, 2019
The partners at Strike & Techel are pleased to announce Melani Johns’ advancement to Partner in the firm!
Melani joined the firm as an associate in 2015 after practicing litigation and then founding a small firm that focused on providing legal services to businesses in the hospitality industry. Upon joining Strike & Techel, Melani quickly took over management of the alcohol licensing practice and has become an integral part of the firm’s growing alcohol-regulatory mergers and acquisitions team. While making partner at Strike & Techel is her dream gig, it’s probably not nearly as cool as the time when she spent a winter “working” as mountain security at a ski resort. If you have questions about the areas in which she practices, or regarding current snow conditions, she’s probably got the answers.
December 11, 2018
Several new provisions of the California ABC Act were signed into law recently; below is an overview of the ones we find most relevant to our clients’ businesses. All statutory references are to the California Business & Professions Code. All of the laws described below take effect January 1, 2019.
Changes Affecting Craft Distillers (License Type 74)
Production Cap Increase – Craft distillers currently can produce no more than 100,000 gallons of distilled spirits per year (excluding brandy), and no owner, officer, director, etc., of a craft distiller can be affiliated with a producer of more than 100,000 gallons per year. Section 23502. Those limits will be increased to 150,000 gallons. (SB 1164)
Sales at the Distillery – Section 23504 is amended to eliminate the requirement that a person must attend a tasting before being able to purchase prepackaged containers of the craft distiller’s spirits at the licensed premises. The 2.25 liters per day restriction remains in place. (AB 1164)
Consumer Tastings – Current California law allows for tastings of spirits at on- and off-sale licensed premises, subject to various restrictions. Sections 25503.56, 25503.57. Those tastings can only be conducted by “authorized licensees,” which did not include craft distiller licensees. The definition of that term was expanded in the two cited statutes to include craft distiller licensees. (AB 1891)
Trade Tastings – Existing Section 25503.5(b) allows distilled spirits manufacturers, rectifiers, importers, and distilled spirits manufacturer’s agent licensees to conduct instructional tastings for licensees and their employees; it has now been amended to include craft distillers. (SB 1164) In addition, Section 25503.51 was added, which essentially does the same thing as the revision to 25503.5(b), except that the new section adds distilled spirits wholesalers, which can now also provide the instructional tastings. (AB 3264)
Changes Affecting Advertising by Suppliers
Advertising Consumer Tastings - Existing Section 25503.4 allows wineries and wine importers to conduct consumer tasting events at on-sale retailers’ premises. Existing Section 25503.56 allows consumer tastings of beer, wine or spirits at off-sale licensed premises, and 25503.57 allows consumer tastings of wine and spirits at on-sale licensed premises. All three statutes allow the supplier licensee conducting the tasting to advertise the event in advance, but restrict them from providing any information about the retailer beyond its name and address. Revisions to the three laws will allow the ads to also include still photos (no video) of the retailer’s “premises, personnel and customers,” and expanded contact info for the retailer, including its email and website addresses, and social media accounts. Suppliers also can re-post social media posts about the events, including posts by the retailer, as long as they comply with the content restrictions in the statutes. The references to the retailer still must be “relatively inconspicuous” in relation to the ad as a whole, and the supplier still cannot make laudatory references to the retailer. Note that the expanded ad content relates only to advertisements for the events allowed under the three statutes referenced above – it does not apply to supplier advertising in other contexts. (AB 2452, SB 1164)
Venue Advertising – The ABC Act prohibits supplier licensees from paying retailers for advertising rights at retail licensed premises. There are a number of exceptions to the prohibition, carving out allowances for supplier advertising at specific stadiums, parks, arenas, and other on-sale licensed venues. Section 25503.6 was revised to add three San Jose venues (San Jose Giants stadium, San Jose
Earthquakes stadium, SAP Center) and the San Diego Padres stadium (Petco Park). (AB 2000, AB 2146) Wine Institute and others have been working to pass an “Entertainment Venue Sponsorship” exception that would more broadly allow venue advertising, but it remains in legislative limbo.
Cannabis & Alcohol: You Gotta Keep ‘Em Separated New Sections 25621.5 and 26070.2 prohibit licensees from selling cannabis at their licensed premises, including alcoholic beverages that contain cannabis. The laws further clarify that no alcoholic beverage can be produced or sold that contains cannabis, tetrahydrocannabinol (THC), or cannabinoids (CBD). (AB 2914)
Free Rides – Existing law allows beer manufacturers to provide free or discounted rides to consumers “for the purpose of furthering public safety.” Section 25600(d). The law was amended to also allow certain distilled spirits supplier licensees, including craft distillers, to provide free or discounted rides. (AB 3264, SB 973)
– For-profit cemeteries in Los Angeles that are at least 100 years old and on the National Register of Historic Places can now get on-sale general licenses. Good news for visitors to the Hollywood Forever Cemetery, which seems to be the sole beneficiary of the new Section 24045.76. (AB 1217)
Notable Unsuccessful Bills
Free Glassware – AB 2573 would have allowed beer manufacturers to provide up to five cases of free, branded glassware annually to on-sale retailer licensees, had Governor Brown not vetoed the bill. Consistent with this anti-free-glassware sentiment, Bus & Prof code § 25600 was amended to clarify that glassware is not an allowable retailer advertising specialty item that could be given to retailers by wine and spirits suppliers. (AB 3264)
4 a.m. Last Call – SB 905 would have extended the hours of sale for alcohol from 2 a.m. to 4 a.m. in several California cities, including Los Angeles, San Francisco, Sacramento, and Coachella. Governor Brown vetoed the bill, noting that he believes “we have enough mischief from midnight to 2 without adding two more hours of mayhem.” We expect to see this bill resurrected in future legislative sessions. (SB 905)
Duplicate Winery Tasting Rooms – Existing law allows wineries to sell wine to consumers and to conduct tastings at their licensed premises and at one additional premises under a duplicate license. The proposed amendment to 23390.5 would allow consumer sales and tastings at two additional premises licensed with duplicate licenses. The bill did not make it to the governor’s desk but we don’t expect this to be the end of it.
December 05, 2018
The primary statute governing California brewpubs was recently amended by SB 1283, resulting in several changes for brewpubs that go into effect on January 1, 2019. The primary changes include heightened beer production requirements, the ability to sell beer produced by the brewpub for off-premises consumption, and the inclusion of brewpubs among on-sale licensees subject to quota restrictions beginning in 2020. The following are among the new provisions of California Business & Professions Code Section 23396.3 as a result of SB 1283:
Amendments to Section 23396.3 also expand the brewpub licensees’ privileges in a couple of beneficial ways:
Note that brewpub licensees are still required to sell canned, bottled and draft beer made by others and bought from a licensed wholesaler, but cannot sell those products to consumers for off-premises consumption. Similarly, the brewpub can (but is not required to) sell wine and
spirits bought from winegrowers or wholesalers for on-sale consumption only.
The license fee for a brewpub license is the same as for an on-sale general license, but the brewpub license is not currently subject to the license quota that limits the number of on-sale general licenses (ABC can only issue one such license in a county per every 2,000 inhabitants of that county). As a result, brewpub licenses have been significantly less expensive than on-sale general licenses, which must be purchased from an existing licensee in the event the county license limit has already been met. However, beginning with license applications submitted on or after December 31, 2019, the quota restrictions will apply to brewpub licenses.
SB 1283 brings significant operational and licensing changes for California brewpubs. If you have any questions about brewpub licensing or operations, contact Strike & Techel.
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